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Game Theory Analysis of Aircraft Manufacturer Innovation Strategies in the Face of Increasing Airline Fuel Costs

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dc.contributor.author Morrison, James
dc.contributor.author Sgouridis, Sgouris
dc.contributor.author Hansman, R. John
dc.date.accessioned 2011-05-20T14:38:08Z
dc.date.available 2011-05-20T14:38:08Z
dc.date.issued 2011-05-20
dc.identifier.uri http://hdl.handle.net/1721.1/62856
dc.description.abstract The air transportation system is a vital infrastructure that enables economic growth and provides significant social benefits. Future increases and volatility in crude oil prices, as well as environmental charges, are likely to increase the effective cost of fuel. We investigate the impacts of effective fuel cost increase on the US air transportation system historically and perform a game theory analysis of the impact of manufacturer competition on the introduction of new, more fuel efficient aircraft. The cost of jet fuel increased 244% between July 2004 and July 2008, providing a natural experiment to evaluate how fuel price increase affected continental US networks and fleets. It was found that non-hub airports serving small communities lost 12% of connections, compared to a system-wide average loss of 2.8%. Increased effective fuel costs will provide incentives for airlines to improve fleet fuel efficiency, reducing the environmental impacts of aviation, but may cause an uneven distribution of social and economic impacts if small communities suffer greater loss of mobility. Government action may be required to determine acceptable levels of access as the system transitions to higher fuel costs. Technology innovation may act as a long-term hedge against increasing effective fuel costs, enabling mobility to be maintained. The single aisle commercial aircraft market segment is the largest, but has the longest running product lines. We hypothesize that competition has important effects on manufacturers’ decisions to innovate that must be considered when designing policies to reduce fleet emissions. An aircraft program valuation model is developed to estimate expected payoffs to manufacturers under competitive scenarios. A game theory analysis demonstrates how the incentives to innovate may be altered by subsidies, technology forcing regulations, increased effective fuel costs, the threat of new entrants, and long-term competitive strategies. Increased competition may result in incumbent manufacturers producing re-engined aircraft while increased effective fuel costs may result in new aircraft programs. Incumbents’ optimal strategies may be to delay the entry of new single aisle aircraft until 2020-24, unless technology forcing regulations are implemented. en_US
dc.description.sponsorship This work was supported by the MIT/Masdar Institute of Science and Technology under grant number Mubadala Development Co. Agreement 12/1/06. The authors wish to thank PARTNER for access to the Piano-X software package and Robert M. Peterson from the Boeing Corporation for his valuable feedback on the aircraft program valuation model. Any errors are the authors’ alone. en_US
dc.language.iso en_US en_US
dc.relation.ispartofseries ICAT;2011-4
dc.rights An error occurred on the license name. en
dc.rights.uri An error occurred getting the license - uri. en
dc.subject air transportation en_US
dc.subject infrastructure en_US
dc.subject oil prices en_US
dc.subject game theory analysis en_US
dc.subject fuel efficient aircraft en_US
dc.title Game Theory Analysis of Aircraft Manufacturer Innovation Strategies in the Face of Increasing Airline Fuel Costs en_US
dc.type Technical Report en_US


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