Non-stop versus connecting air services: Airfares, costs, and consumers’ willingness to pay

Abstract

Airlines provide both non-stop and connecting services. The airfare for each service type is determined largely by the willingness to pay (WTP) of passengers and the costs for airlines. This paper estimates the impact of itinerary characteristics such as number of stopovers, detour, layover time, and aircraft size on airfares using a novel demand and supply model. This model allows us to calculate both costs and markups for non-stop and connecting itineraries in U.S. domestic markets. We find that, on average, passengers have a higher WTP for nonstop flights and the WTP for connecting flights is driven particularly by the number of stopovers, in-flight time, and transfer time. As a result, we identify significant heterogeneity with regard to costs and mark-ups between markets. While in most U.S. domestic markets airlines incur higher costs for operating connecting routings, the indirect routing via a hub achieves lower costs in some markets, as the economies associated with the use of larger aircraft offset the costs of the stopover. Finally, we show that the presence of connecting services reduces fares for nonstop flights, in particular for itineraries with a longer market distance as detours and the significance of fixed costs associated with a stopover decrease.