research - Associated Student Government, Northwestern University

More documents

Recommendations

Info

RESEARCHcarriers, the company’s rapid expansion in the last decade has brought it into more markets in which the legacy carriershave large operations, such as Philadelphia (US Airways), Denver (United), Washington Dulles (United), andMinneapolis/St. Paul (Delta, previously Northwest). In addition, Chicago Midway is currently Southwest’s busiestairport in terms of airport departures, adding significant competition to American and United Airlines’ hub operationsat Chicago O’Hare. With Southwest’s increasing presence in markets traditionally dominated by the legacycarriers, this study explores the notion that the legacy carriers have experienced a decline in their hub premiums andSouthwest’s expansion into the hubbing carriers’ hub markets is the driving force behind this decline.Southwest’s operations at some airports have become so large that these airports could effectively be consideredhubs for Southwest. Thus, this <strong>research</strong> also attempts to look into the plausibility that Southwest commands hubpremiums of its own.Southwest, by operating at hubs of the legacy carriers, can follow the hubbing airlines by charging higher pricesinstead of imposing price-decreasing competition on flights with an endpoint at these hub airports. To explore thepossibility that Southwest may benefit from such an umbrella effect (Borenstein, 1989), this study further examinesthe nature of competition between Southwest Airlines and the legacy carriers within the hub networks of these carriers.In short, this <strong>research</strong>, in studying the pricing practices of Southwest, intends to address if a Southwest effectexits, if Southwest commands hub premiums of its own, and if Southwest benefits from hub operations of the legacycarriers.II. Data and methodologyDataThe original source of the data is the U.S. Department of Transportation’s Domestic Origin and Destination Survey,Databank 1B (OD1B), which represents a 10 percent sample of airline tickets from reporting carriers. Data usedin this study are for the second quarters of 2000 and 2010 of the HUBSup Low Level O&D Data provided by DataBase Products, Inc. The same quarters of each year are used in order to avoid seasonality effects.MethodologyThis paper employs a model similar to that used by Lee and Luengo-Prado (2005) and defines the hub premiumas the ability of an airline to charge higher fares for flights to or from a hub than for similar flights in its own networkthat do not originate or end at a hub airport. The natural log of price, lnprice, is regressed on key variables and a setof controls. The key variables are as follows:• Share: variable with values between zero and one, capturing the carrier’s market share of O&D passengers measuredas the total passengers on a route served by a given carrier divided by the total number of passengers flyingon the same route served by all carriers.• Lowcost2: dummy variable equal to one if low-cost carriers, excluding Southwest (JetBlue, Frontier, Tower,AirTran, Midway, Legend, National, Vanguard, Spirit, ProAir, ATA, Access Air, and Sun Country), have greaterthan a 1% share of O&D passengers in a market, zero otherwise.• Hub: A dummy variable with a value one if the origin or destination was a hub for the marketing carrier, zerootherwise. For Southwest, the hubs are identified as the top 10 airports based on percentage of passengers whoare making a connection.• WN (Southwest’s carrier code): A dummy variable with a value of one if the origin or destination airport was atop 20 Southwest airport or near a top 20 Southwest airport, as determined by the number of flights departingfrom an airport.• AA, CO, DL, NW, UA, and US: dummy variables for each legacy carrier that take on the value of one if the originor destination of the route is at or near a hub of the given legacy carrier, zero otherwise.Southwest Effect ModelIn an effort to recognize the possibility that any significant changes in the hub premiums of the legacy carriersfrom 2000 to 2010 may be attributed to the operations of Southwest, models used by Lee and Luengo-Prado (2005)are modified into Equation (1).lnprice=α+β1hub+β2WN+β3lowcost2+β4share+βicontrolsi+βjslotsj+ε 1where controls iis the set of control variables (lnmiles, lnmktpax, and owprop) and slots jis the set of dummies for theslot-restricted airports. The intent of the lowcost2 and WN dummies is to capture a Southwest effect without incurringthe risk of mistaking a general effect of lowcost carriers as a Southwest effect.34 NORTHWESTERN UNDERGRADUATE RESEARCH JOURNAL
RESEARCHSouthwest Carrier ModelsTo explore the existence of a Southwest hub premium and the possibility of Southwest to benefit from an umbrellaeffect from the legacy carriers, the study takes a close look at some of Southwest’s pricing practices. As a result,regression models expressed in Equations (2) and (3) are formed.lnprice=α+β1hub+β2lowcost2+β3share+βilegacy_carrieri+βjcontrolsj+ε 2lnprice=α+β1hub+β2lowcost2+β3share+βilegacy_carrier_hubi+βjcontrolsj+ε 3where legacy_carrier iis the set of dummy variables for each legacy carrier (AA, CO, DL, NW, UA, and US), legacy_carrier _hub iis a set of dummy variables for all the legacy carrier hub airports, and controls jis a set of control variables(lnmiles, lnmktpax, and owprop).As illustrated, both equations search for a hubbing effect on Southwest’s part. However, Equation (2) examinesan umbrella effect within the legacy carriers’ entire networks while Equation (3) checks the effect at each individualhub airport of the legacy carriers.III. Empirical ResultsSouthwest Effect ModelTable 1 reports empirical results generated from regressions performed for the exploration of a Southwest effect(Equation 1). In 2000, the legacy carriers all demonstrate a hub premium ranging from Northwest’s 11.4% toUS Airways’ 29.6%. The carrier regressions that showed significance for the Southwest dummy were Continental,Northwest, and United, with the largest negative effect for Continental at -13%.By 2010, the hub premium of all of the carriers decreased with a revised range from American’s 5.1% to Continental’s17.6%. As for the Southwest dummy, the variable remained insignificant for US Airways and the largerapparent Southwest effect for Continental seemed to have disappeared by 2010. While a Southwest effect for Unitedpersisted in 2010, it exhibited a notable decrease in magnitude of about 7%. In contrast, a Southwest effect seemsto have developed since 2000 for both American and Delta, although it is unclear if the change for Delta is from anincreased presence of Southwest in Delta’s original networks or a side effect of Delta’s merger with Northwest, whichalready experienced a Southwest effect in 2000. The latter explanation is more logical because Southwest does notserve Atlanta or Cincinnati, Delta’s two largest hubs before the merger.Compared with the Southwest effect on legacy carriers, the other low-cost carriers presented more uniform behavioras demonstrated by lowcost2 in Table 1. In fact, the variable displays a significantly negative impact at the 1%significance level on all legacy carriers in 2010. Compared with empirical results for 2000, this represents an increasingnegative influence for all legacy carriers except US Airways. For Continental, a negative effect has developedwhile for both American and United, the impact has transformed from insignificantly positive to significantly negative.In addition, the magnitudes of the other low-cost carriers’ negative influences on the legacy carrier fares uniformlyexceeded those of Southwest in 2010. Thus, it seems a larger presence of low-cost carriers as a whole is morepowerful in creating price-decreasing competition than the effect of Southwest alone.Considering the results and changes together, particularly those of American and Delta, a decreasing hub premiumsuggests that the development of a Southwest effect from 2000 to 2010 negatively influences other carriers’pricing. Although some illustrated empirical results are not in line with the notion of a Southwest effect, they arenot implausible. The disappearing Southwest effect for Continental could be a result of Southwest transitioning itslargest operations to different airports. For example, Southwest’s operations at Houston Hobby were third on the listof Southwest’s airports in 2000 but fell to eighth as Southwest started service in Denver and increased the scope ofits operations at Chicago Midway. The changes for US Airways and United are a little more puzzling, though, especiallyconsidering the fact that a Southwest effect for United has lessened while Southwest’s larger operations by 2010were at or near all of the United hubs, Chicago O’Hare, Denver, Los Angeles, San Francisco, and Washington Dulles.Looking more closely at Southwest’s own pricing practices may provide some insight into these otherwise puzzlingresults.Southwest Carrier ModelsTable 2 presents empirical results derived from performing regressions on Southwest with legacy carrier dummiesincluded as explanatory variables (Equation 2). The results for 2000 indicate that compared with the rest ofits network, Southwest was charging premiums of about 6% for flights originating or ending at one of its so-calledhubs. Moreover, Southwest is able to charge higher prices for its flights at the hub airports of three of the legacy carriers,American, Continental, and Northwest, with the highest premium of 9.4% at Northwest’s hubs. These findingsVOLUME 7, 2011-2012NORTHWESTERN UNDERGRADUATE RESEARCH JOURNAL35
Page 3 and 4: Volume 7 | 2011-2012Northwestern Un
Page 5 and 6: ACKNOWLEDGEMENTSThe staff of the No
Page 7 and 8: SUBMIT to theNORTHWESTERN UNDERGRAD
Page 9 and 10: RESEARCHthe indigenous population t
Page 11 and 12: RESEARCHunrest in neighboring count
Page 13 and 14: RESEARCHHealing More than aDISEASE:
Page 15 and 16: RESEARCHmedical treatment. Many exp
Page 17 and 18: RESEARCHgood end and the degree of
Page 19 and 20: ABSTRACTclaiming ties to the Capeti
Page 21 and 22: RESEARCHthe world have called for C
Page 23 and 24: RESEARCHconfidence. I chose to use
Page 25 and 26: RESEARCHRose, A. K. “Exchange Rat
Page 27 and 28: ABSTRACTRight and left lengths of t
Page 29 and 30: RESEARCHwell as a topic about which
Page 31 and 32: RESEARCHThough Shelley expresses mu
Page 33: RESEARCHSOUTHWESTTO THE RESCUE?An I
Page 37 and 38: RESEARCHnot be clearly attributed t
Page 39: ABSTRACTTargeting MircoRNA-21 forTh
Page 43 and 44: RESEARCHof the gardening process. E
Page 45 and 46: RESEARCHwith community building. Th
Page 47 and 48: ABSTRACTon twelve months of creativ
Page 49 and 50: RESEARCHTable 1a. Demographics (per
Page 51: RESEARCHthat weigh heavily on femal
Page 54 and 55: RESEARCHment can apply the principl
Page 56 and 57: RESEARCHcities. Presented as the
Page 58 and 59: RESEARCHMaster Frame: RightsThe Fre
Page 60 and 61: RESEARCH38 Op. cit. “Stasi Commis
Page 62 and 63: ABSTRACTWATCH WHAT YOU SAY:Spoken S
Page 64 and 65: RESEARCHby educational institutions
Page 66 and 67: RESEARCHas some of the other benefi
Page 68 and 69: RESEARCHFigure 3: Motive Distributi
Page 70 and 71: RESEARCHLeptin Levels inLean Adult
Page 72 and 73: RESEARCHAnalysis was done using ver
Page 74 and 75: RESEARCHZaharoffone third of a chil
Page 76 and 77: ABOUT THE CONTRIBUTORSShaon AhsanSh

research - Associated Student Government, Northwestern University

Create successful ePaper yourself

Delete template?

Save as template?