Airline strategies in the 1990s : frequent flyer programs, domestic and international partnerships, and entry by low-cost carriers

Abstract

This thesis investigates forms of non-price competition in the U.S. airline industry. The first two chapters focus on airlines' use of frequent flyer programs (FFPs) while the final chapter considers the entry strategies of "low-cost carriers". FFPs may alter the intensity of competition between firms. Increasing marginal benefits built into the reward schedules of FFPs give consumers an incentive to concentrate their flying with a single carrier. When selecting the airline with which to accumulate points, consumers will prefer the dominant carrier at an airport because it offers the best opportunities for earning and redeeming points. Prior research, however, has not disentangled the impact of FFPs from the other advantages possessed by dominant airlines. Chapter One develops an empirical approach that allows for the identification of the marginal effects of FFPs. In the mid 1990s, domestic airlines increasingly formed FFP partnerships with international carriers. While theseagreements had no direct impact on the quality of domestic flights, they did significantly change consumers' earning and redemption opportunities. Using earning and redemption opportunities as a measure of the value of an airline's FFP points, this chapter exploits time-series variation in the extent and scope of international partnerships to evaluate the economic impact of enhancements to FFPs. The results indicate that enhancements to an airline's FFP are associated with increases in an airline's market share, with the impact being larger on routes that depart from airports at which the airline is more dominant. Chapter Two examines the FFP partnerships formed between the major domestic carriers at the end of 1998. Unlike international partnerships, which involve airlines whose networks are largely non-overlapping, domestic partners both primarily operate within the U.S. While these partnerships may still expand earning and redemption opportunities, on routes on which the partners overlap,they may also increase substitutability between the airlines' flights. This chapter documents that the domestic partnerships did, in fact, expand the airlines' FFPs and that this expansion was associated with increases in an airline's market share. Chapter Three examines the entry strategies of low-cost carriers. One hypothesis for the recent success that LCCs have achieved is that they offer consumers a combination of quality and price not offered by the major network carriers. As a first step to investigating this hypothesis, this chapter examines the characteristics of routes entered by LCCs.