Trends in passenger demand and airline supply of top 25 long-haul U.S. dometic [sic] markets

Abstract

The thesis examines the effect of deregulation on passenger demand and airline supply of the top 25 long-haul U.S. domestic markets by measuring the annual and overall percentage changes in passenger traffic, airfare, nonstop flight frequency, total nonstop seat capacity, and average aircraft size over the time period between 1987 and 1995, and quantifying the relationships between these parameters. The correlations between these parameters are obtained by developing non-linear regression models. Within this time period, aggregate passenger demand of the total 25 markets increased by 3.5% annually and 30% overall. Inflation adjusted airfares of the majority of the top 25 markets decreased very slightly, only 0.03% annually and 2.32% overall. However, airfares tended to increase for the markets associated with hub airports because the dominant airline at that hub station has greater power to increase fare levels. Nonstop frequency increased at about the same rate as passenger demand across the nine-year period, given that there were approximately 1,000 more flights per week in 1995 than in 1987 in these markets. The total nonstop seat capacity of the total 25 markets increased by 90,000 seats per week since 1987, which represents 1.85% annually and 14.42% overall. Average aircraft size for the top 25 market decreased by 0.88% annually and 7% overall. From the results of the correlation analysis, passenger demand of the top 25 markets is priceelastic, especially of the vacation city-pair markets. On the contrary, passenger demand of the hub-related and business markets is rather insensitive to changes in airfare since both demand and fare increased over time. Interestingly, nonstop frequency has a strong impact on how airlines allocate seat capacity and aircraft size, not passenger demand. Because flight frequency increased at a faster rate than did total nonstop seat capacity in the nine-year period, the shift towards the usage of smaller aircraft is evident, which is consistent with the results of the percentage change analysis.