TRANSPORTATION

RESEARCH
PART E

Transportation Research Part E 35 (1999) 5975

Competitive responses to low cost carrier entry

Robert Windle *, Martin Dresner1
University of Maryland, Robert H. Smith School of Business, College Park, MD 20742, USA
Received 10 December 1997; received in revised form 28 June 1998; accepted 14 November 1998

Abstract
Recent research has found that the entrance of a low cost carrier leads to lower prices on routes it has
entered. This paper extends this analysis by examining the impact of route entry by a discount carrier,
ValuJet into an established carrier's hub, Delta, and by examining price changes on routes not entered by
the low cost carrier. We found that Delta lowered its fares on competitive routes terminating in Atlanta
and on routes owing through its Atlanta hub in response to competition by ValuJet. We did not nd
evidence that Delta increased fares on non-competitive routes (either those terminating in Atlanta or
owing through Atlanta) to compensate for lost revenues on the competitive routes. This nal result runs
counter to the conjectures of the DOT and supports the argument that rms practice rational economic
pricing in their hub-and-spoke networks. # 1999 Elsevier Science Ltd. All rights reserved.

1. Introduction
In the past year, American consumers have saved an estimated $6.3 billion in airline fares
because of the competition brought about by new low cost, low fare airlinesup from only
$1 billion in savings eight years ago. . . . Indeed, there has been a revolution going on in
American airline travel (Pena, 1996).2
Most research has suggested that ``low cost'' or ``discount'' air carriers have been instrumental
in substantially lowering prices on domestic air routes in the United States. Writers from Bailey

* Corresponding author. Tel.: +1-301-405-2187; e-mail: rwindle@rhsmith.umd.edu

1
Tel.: +1-301-405-2204; e-mail: mdresner@rhsmith.umd.edu
2
Based on 614.6 million passengers carried by US airlines in 1996, the $6.3 billion savings amounts to $10.25 per
passenger. For passenger totals, see Air Transport World, May 1997.
1366-5545/99/$ - see front matter # 1999 Elsevier Science Ltd. All rights reserved.
PII: S 1366-5545(9 8 ) 0 0 0 2 5 - 8

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R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

et al. (1985) and Strassmann (1990), with data from the early 1980s, to Windle and Dresner
(1995) and Dresner et al. (1996), using data from the 1990s, have consistently found low cost
carriers to signicantly lower air fares.3 As a result, researchers have concluded that the entry of
low cost carriers into markets results in increased consumer welfare.4
There are, however, at least two reasons why consumer welfare benets may be overstated.
First, the most recent studies of entry by low cost carriers have been dominated by the impact of
Southwest Airlines on fares. Southwest Airlines focuses on short haul routes into underutilized or
secondary airports, and as a result often does not directly compete with established carriers. In
addition Southwest enters markets with relatively high frequencies compared to other new
entrants. As a result Southwest may be atypical of low cost carriers. A second reason is advanced
in a study by the US Department of Transportation (1996). The study suggests that in short haul
markets where low cost carriers do not compete, established carriers signicantly increased prices
in the 19941995 time period. This raises the possibility that established carriers are balancing
price reductions on routes with low cost carrier competition with price increases on routes without competition from low cost carriers.5 In a hub and spoke system this alteration of the price
structure may be undertaken to pay for the costs of operating the hub.6 This result, however, runs
counter to rational economic theory. Economic theory would suggest that carriers attempt to
prot maximize on all routes at all times. Therefore, a rational carrier would not seek to raise
prices on route A to compensate for lost revenues on route B (due to the entrance of a low cost
carrier) since prices would already be at the optimal point on route A.
This paper addresses the conict between rational economic theory and the ndings suggested
by the DOT, and also investigates the impact of low cost competition, other than Southwest, on
prices into an established carrier's hub airport. The purpose of the paper is to provide at least
some preliminary evidence as to whether or not the consumer welfare benets of low cost carriers
have been overstated in previous research. Specically, the questions addressed in this paper are:
(1) Do established carriers signicantly lower their prices when faced with competition into their
hub airports by a low cost carrier, other than Southwest? and (2) Have established carriers been
able to increase prices on routes where the discount carriers do not compete, thereby reducing
welfare gains? Measurement of consumer benets from the entry of low cost carriers is important,
since it is these perceived benets that help guide policy on the facilitation of access by carriers
into crowded airports.7 We continue this discussion in Section 3 of the paper.
3
For example, Windle and Dresner (1995) found that the entry of low cost carrier Southwest Airlines onto a route
lowered fares by an average of 48%. Other studies that found low cost carriers substantially lowered fares include
Bennett and Craun (1993), Whinston and Collins (1993), and Morrison and Winston (1995).
4
For example, a recent study conducted by the US Department of Transportation (1996) compared fares in markets
served by low cost carriers to fares in markets without service by low cost carriers. The study found that fare dierences between the two market categories, combined with the very large number of passengers that now travel in markets with low cost service, mean that consumer savings are very large (p. 9).
5
An alternate explanation was that prices rose after the demise of Continental Airline's low cost unit, CaLite.
6
For example, US Airways president, Rakesh Gangwal, stated that the airlines's hub at Batimore lost $220 million
dollars between 1990 and 1997. The airline was in the process of reducing ights into its Baltimore hub and reducing its
Baltimore work force in order to make the hub protable (see Phillips, 1997).
7
For example, established carriers could be ordered to sell slots or gate space to low cost carriers in order to spur
competition.

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61

The rest of the paper is structured as follows: Section 2 reviews research on airline entry and
outlines the basis for this research. Section 3 presents the model and describes the data used for
this paper. Section 4 presents our results. Finally, Section 5 draws conclusions from the research.
2. Literature review8
There has been considerable research on the determinants of prices and/or trac on US
domestic air routes, including how the presence of low cost carriers or new entrants aects prices
and trac.9 Three early studies used data from the rst few years following the deregulation of
the US air system. Bailey et al. (1985), using 19801981 data, and Strassmann (1990), using 1980
data, both found that newly certied carriers had a negative and signicant impact on US
domestic yields. Using data from the period 19801984, Whinston and Collins (1992) showed that
prices fell, on average, by 34% on 15 routes entered by the pioneer low cost carrier People Express.
Additional studies were conducted using data from the most successful low cost carrier,
Southwest Airlines, and from the surge of new low cost entrants in the 1990s. Bennett and Craun
(1993) presented graphs illustrating that when Southwest entered certain California markets,
there was a dramatic increase in trac and a signicant drop in yields. Windle and Dresner
(1995) found that the entry of Southwest Airlines onto a route decreased fares, on average, by
48% and resulted in increases in passengers of 200%. Morrison and Winston (1995) found that
when a low cost carrier (either Southwest or America West) exited from a route, fares increased.
The average magnitude of the fare increase was 8.5% when Southwest exited and 3.1% when
America West exited, measured 5 years after the exit.
Three recent papers explicitly addressed competitive eects arising from new entry. Dresner et
al. (1996) examined competitive eects from the entry of Southwest Airlines onto two routes, to
Cleveland and Chicago, from BaltimoreWashington International Airport (BWI). The authors
found that not only did prices decrease signicantly on the routes Southwest entered, but they
also fell on competitive routes to Cleveland and Chicago from the other two Washington/Baltimore area airports, and on routes to other destinations from BWI.10 Richards (1996) found that
pricing strategies diered between carriers operating on those routes which Southwest competed,
on those routes on which Southwest was a potential entrant (operated at one of the endpoints),
and on the routes in which Southwest was not deemed to be a potential entrant. Richards concluded that actual or potential entry by Southwest had a negative impact on yields. Finally, the
US Department of Transportation (1996), as part of a larger analysis of low cost carriers, examined the competitive responses of established carrier Delta Airlines to the entry of low cost carriers on routes from two of Delta's hubs, Atlanta and Salt Lake City. The study found that on the
Salt Lake City routes, Delta lowered fares to compete with low cost carriers and increased its
passenger totals as a result. Delta's fares, for example, fell 33% on the routes where it competed
8

This section draws material from Dresner et al. (1996).

Papers in this eld not explicitly dealing with the price or trac eects of low cost carriers include: Moore (1986);
Borenstein (1989); Hurdle et al. (1989); Morrison and Winston (1989); Berry (1990); US General Accounting oce
(1991); and Peteraf and Reed (1994).
10
Prices to other cities from BWI may have declined due to limit pricing by existing carriers on those routes. It may
be that the existing carriers have lowered their prices on these routes to discourage entry by Southwest.
9

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R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

with low cost competitor Morris Air, but did not either rise or fall, on average, on routes where
Morris did not compete. On the other hand, the study found that Delta's fares and passenger
count changed only modestly on the Atlanta routes after the entry of low cost carrier ValuJet.
The study's authors attributed this more moderate response by Delta, in part, to the lower market
shares achieved by ValuJet on the Atlanta routes, as compared to those achieved by Morris on
the Salt Lake City routes. ValuJet, therefore, did not pose the same degree of competitive threat
to Delta in Atlanta as Morris posed in Salt Lake City.11
In summary, the substantial literature on new entry points strongly to the impact that low cost
carriers have on prices and trac on the routes that they enter. In recent years, the results of these
studies have been dominated by the entry and growth of Southwest Airlines. The DOT study
suggests that low cost entry may not always result in lower fares, particularly when entry occurs
at an established carrier's hub. Evidence on the eects of entry by low cost carriers on routes
other than those entered is not as substantial or as clear. There is some evidence indicating that
new entry by low cost carriers lowers prices on competing routes out of nearby airports and on
other routes from the same airport. Other evidence suggests that established carriers response to
entry depends on how signicant a threat is posed by the new entrant. This paper will attempt to
clarify these issues by examining the entry of ValuJet into the Atlanta market and its impact on
Delta's fares on routes where ValuJet competes directly and on other Delta routes utilizing the
Atlanta hub.
3. Model and data
The research to date, with three exceptions cited above, has focused on the eects of the presence of low cost carriers on the routes entered by the low cost carriers. None of the previous
research has focused on the potential network eects from low cost carrier entry. The established
carriers do not only operate point-to-point routes, but operate networks, often referred to as huband-spoke systems. It could be that the positive consumer benets experienced on the routes
entered by the low cost carriers may be partially oset by price increases on other routes in the
established carrier's network. If the established carriers increase prices on ``non-competitive''
routes in their system, this would provide evidence to support the DOT's (1996) ndings of price
increases on these type of routes.
As an example, refer to Fig. 1. An established carrier operates a hub-and-spoke network connecting four cities, A, B, C, and D, through the hub city H. Possible origin and destination routes
are as follows: AB, AC, AD, BC, BD, CD, AH, BH, CH, and DH.12 Carriers operate
11
A second partial explanation for these results could have been that the authors had a shorter time series of data to
assess the competitive eects in Atlanta, compared to Salt Lake City. Morris started operations in Salt Lake City in the
second quarter of 1993, while ValuJet began operations in Atlanta in the rst quarter of 1994. The authors were able to
examine the eects of new entry in Salt Lake City for 10 quarters and in Atlanta for only seven quarters.
12
The term ``route'' refers to an origindestination route; that is the entire journey of a passenger from an origin to a
destination. A route segment, on the other hand, is a single ight portion of a one-stop or multi-stop route. In Fig. 1,
AH is a route segment on the (origindestination) route AC, as well as being a route (also origindestination) unto
itself. Markets refer to origindestination combinations. Therefore, several carriers operating a route (e.g. AC) can
serve a market (e.g. AC).

R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

63

Fig. 1. Hub-and-spoke network.

on route segments, but passengers y on origindestination (OD) routes, although the two can
coincide. Airlines charge prices on OD routes, not on route segments, and as a result the reaction of an incumbent will consist of changes in OD prices. Assume that a low cost carrier operates on two route segments into the hub city, AH and CH. In order to compete with the low
cost carrier on these O-D routes, the established carrier must lower its prices. To the extent that
OD passengers comprise a small portion of the passengers on this route segment (ow through
passengers ying on to other cities may dominate), the established carrier may or may not react
to the low cost competition. The established carrier also competes on the ow-through OD
route, AC, and may have to lower prices on this route, as well. In order to justify the operation
of the hub, H, the network through H must return revenues sucient to cover the hub's costs. As
a result of this loss in revenue, the established carrier may seek to raise prices on the other OD
routes not aected by the low cost entry. These routes include the ow-through OD routes AB,
AD, and BC (the low cost carrier operates on only one of the two route segments); the ow
through OD route BD (the low cost carrier operates on neither of the route segments); and the
OD routes BH and DH on which the low cost carrier does not compete.
Our primary focus in this paper will be to examine the impact of low cost entry on the OD
routes where entry occurs and on other routes where OD entry has not occurred. As illustrated
in Fig. 1, the OD routes of an established carrier operating a hub-and-spoke network in competition with a low cost carrier on some, but not all, route segments may be divided into ve
classications: (1) routes into the hub in competition with the low cost carrier; (2) routes into the
hub without low cost carrier competition; (3) routes that ow through the hub in competition
with the low cost carrier on both route segments; (4) routes that ow through the hub with the
low cost carrier operating on only one of the route segments; and, (5) routes that ow through the
hub in which the low cost carrier operates on neither of the route segments. In order to estimate
the eects of low cost carrier entry on all ve route classications, we propose the following
general model:

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R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

Yield f Route Classification; Other Exogenous Route Factors; Endogenous Route Factors
1
where Yield is the weighted average price on a route charged by the established carrier,13 Route
Classication refers to the ve types of routes described above, Other Exogenous Route Factors
refer to route characteristics likely to aect yields, such as the distance of the route, and Endogenous Route Factors refer to factors likely to aect the established carrier's yields, such as the
number of passengers on a route, directly controllable by the established carrier.
In order to estimate our model, we needed to choose a route network that had competition
between an established carrier and a low cost entrant. Given the data requirements, it was decided to analyze only one competitive network. In a number of hub cities, a low cost carrier and a
major carrier operate at dierent airports (e.g. Midway and O'Hare in Chicago), a situation we
felt could confound our analysis.14 We, therefore, chose to analyze the eects of low cost carrier
competition for a network where two carriers both hubbed at the same airport. We also did not
want to choose a competitive network where the low cost carrier was Southwest Airlines. Previous research (Windle and Dresner, 1995) found that Southwest may not be typical of discount
carriers, given that it tends to enter markets with greater densities and lower prices than other low
cost carriers.
The hub city chosen for the analysis was Atlanta, where established carrier Delta's network has
been competing with low cost carrier ValuJet's network since 1993, with the exception of a brief
period in 1996 when the operations of ValuJet were suspended by US regulatory authorities for
safety concerns.15 Data were gathered on all routes owing through Atlanta and terminating in
Atlanta where Delta averaged at least one passenger per day in the second quarter of 1996. All data
were based on US Department of Transportation Database 1a gures, processed for us by Database Products Inc. In total, data were gathered on 458 ow-through routes and 119 routes terminating in Atlanta on a quarterly basis from the fourth quarter of 1993 to the third quarter of 1996.
Table 1 indicates the cities served by ValuJet on routes from Atlanta for the period of our
analysis. For example, ValuJet operated on the PhiladelphiaAtlanta route from the second
quarter of 1994 until the second quarter of 1996 and on the BostonAtlanta route from the second quarter of 1995 until the second quarter of 1996. Note that ValuJet ceased operations during
the third quarter of 1996 due to US government actions based on safety concerns following a
fatal accident on 11 May 1996.16
The Atlanta hub was chosen for analysis despite the ndings (cited above) of the US Department of Transportation (1996) that Delta did not greatly alter its fares in response to competition
from ValuJet on routes in which it directly competed with ValuJet. The Department of Transportation's ndings were based on an analysis of data as of the third quarter of 1995. We found a
marked decline in Delta's prices on routes competitive with ValuJet, but only beginning in the
13

The weights used were number of passengers traveling at each price point.
For example, if Southwest entered a route between Midway in Chicago and Cleveland, this route might not be
considered to be directly competitive to United's route between Chicago O'Hare and Cleveland.
15
ValuJet was renamed AirTran on 24 September 1997, after a merger with Orlando Based AirTran Airways.
16
ValuJet was forced to shut down all operations on 18 June 1996. It did not resume operations until 30 September
1996, and therefore did not operate during the entire third quarter of 1996.
14

R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

65

Table 1
Cities served by ValuJet: 1993 4th quarter to 1996 3rd quarter
City

Ft. Lauderdale
Jacksonville
Orlando
Memphis
New Orleans
Louisville
Tampa
Nashville
Washington-Dulles
West Palm Beach
Ft. Myers
Savannah
Philadelphia
Dallas-Ft. Worth
Indianapolis
Hartford
Columbus
Detroit
Miami
Raleigh-Durham
Boston
Jackson
Kansas City
Charlotte
Pittsburgh
New York-La Guardia
Mobile
a
b

Quarters served
93.4

94.1

94.2

94.3

94.4

95.1

95.2

95.3

95.4

96.1

96.2

96.3

xa
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x

x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x

&b
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&
&

x, ValuJet on route in 4th quarter of 1993 or enters route in subsequent quarter.

&, ValuJet no longer on route.

fourth quarter of 1995, as shown in Fig. 2. Fig. 2 examines Delta's yields for ve categories of
routes for the period of our analysis, the fourth quarter of 1993 to the third quarter of 1996. The
route categories are based on whether or not ValuJet directly competed on a route with Delta as
of the second quarter of 1996.17 The rst two categories of routes in Fig. 2 are routes that terminate in Atlanta. Note that from the fourth quarter of 1993 until the rst quarter of 1996,
Delta's yields on routes that (as of the second quarter of 1996) faced competition from ValuJet
were higher than on those routes that ValuJet chose not to enter. After the rst quarter of 1996,
17

Direct competition is dened as operating on the same route as Delta and, for the ow through routes, having at
least a 4.5% market share on the route. The second quarter of 1996 was chosen for dening competition because
ValuJet was entering new routes throughout the time period of analysis up until the second quarter of 1996.

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R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

Fig. 2. Delta's yields.

Delta's yields on the ``competitive'' routes were lower than on the ``non-competitive'' routes.18 A
good way to interpret the graph is to simply compare the competitive and non-competitive yields
for two time periods, say the fourth quarter of 1993 and the second quarter of 1996. In the fourth
quarter of 1993, Delta had average yields of about 37 cents/mile on routes that ValuJet would ultimately enter compared to 29 cents/mile on routes that ValuJet never entered. By the second quarter
of 1996, Delta's yields on the routes now directly competitive with ValuJet had fallen from 37 to 30
cents/mile while yields on the non-competitive routes had increased from 29 to 31 cents/mile.
Delta's yields on three categories of ow-through routes are also shown in Fig. 2 over the
period of our analysis. A route is dened as ``competitive'' based on whether or not ValuJet was
competing with Delta as of the second quarter of 1996 with at least a 4.5% market share on the
ow-through route. The graph shows that for the competitive routes, Delta had higher yields
than for the non-competitive routes and the routes competitive on only one of two route segments, for almost the entire period of the data set. The yield dierential, however, was almost
completely gone by the second quarter of 1996, providing some indication to support our
hypothesis that Delta had to lower fares on one-stop routes to compete with ValuJet. The graph,
however, does not indicate that Delta raised rates on the non-competitive routes to compensate
for the decrease in yields on the competitive routes.
18

Note that the downward trend in Delta's yields on the ``competitive'' routes continued into the third quarter of
1996, even after ValuJet had exited from all of its routes. The continuation of this trend may have been at least partly
due to advanced booking of tickets for ights during the third quarter of 1996 by Delta at fares reecting competitive
conditions prior to the departure of ValuJet.

R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

67

Figs. 3 and 4, respectively, compare the trends in Delta's yields on routes terminating in
Atlanta, and owing through Atlanta, to national trends.19 All yields are indexed to 1.00 for the
fourth quarter of 1993. Fig. 3 clearly shows the decline in Delta's yields towards the latter quarters of our analysis on routes competitive with ValuJet. This decline runs counter to both national
trends and the trend on routes not competitive with ValuJet. Fig. 3, however, does not show any
upward trend in yields on the non-competitive routes. Fig. 4 provides similar results for the owthrough routes. The gure shows a signicant decline in Delta's yields following the rst quarter
of 1996 on routes competitive with ValuJet compared to the national trend and to Delta's yields
on non-competitive routes. However, again, there does not appear to be an increase in yields on
the non-competitive routes to compensate for lost revenues on the competitive routes.
In order to more formally investigate the eect of competition from ValuJet on Delta's yields,
an econometric model was estimated to account for route specic factors that could inuence
yields. The following two equations were proposed for each of the ve route categories:
Yield 0 1 Passengers 2 RouteDistance 3 RouteDistanceSquared
4 VacationRoute 5 SlotControlledRoute

T
X
t1

t Quartert

Fig. 3. Index of Delta's yields on Atlanta routes compared to national trends.

19
National trends were compiled from ``Form 41'' data submitted to the US Department of Transportation, Bureau
of Transportation Statistics, by US carriers for the period of our data set. The data were made available to us on line.

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R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

Fig. 4. Index of Delta's yields on Atlanta ow-through routes compared to national trends.

Passengers 0 1 RouteDistance 2 RouteDistanceSquared 3 VacationRoute

4 Population

T
X
t1

lt Quartert

where:
. Yield is Delta's yield on a bi-directional route either terminating or owing through Atlanta.
. Passengers is the number of passengers carried by Delta on that route and is endogenous to
the estimation of Yield; thus the need for Eq. (3).
. RouteDistance and RouteDistanceSquared are control variables to account for route cost
dierences that vary by route distance aecting both yields and passenger trac.20
. VacationRoute and SlotControlledRoute are control variables to account for exogenous
factors that might aect yields.21 Vacation routes have been dened as all those routes with
an origin or terminus in Florida, Las Vegas, or Myrtle Beach. It may be that these routes
have a mix of personal to business travelers dierent from other Delta routes, and that this
dierence may result in lower yields. Slot controlled routes are those originating or terminating
20

Route distances were derived using the ``Great Circle Distance Calculator'' found on the Internet at www.atlanticaero.com/aacalc.html.
21
VacationRoute is also a variable in the Passengers equation since, ceteris paribus, vacation routes would attract
more (leisure) passengers than non-vacation routes.

R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

69

at an airport with slot controls.22 It may be that slot controlled airports have higher yields,
after accounting for all other factors.
. Population is the product of the populations of the two endpoint cities on a route.23 The
greater the population at the endpoints, the higher the passenger trac.
. Quartert 's are time dummies that allow us to track yield and passenger trends within categories, after accounting for the eects of the other right-hand-side variables.
Given that our primary interest is in the signs of the time dummies (used to determine yield
changes in the ve route categories), and given that Passengers is an endogenous variable to the
estimation of Yield, it was thought best to estimate a reduced form equation. Therefore, the following equation was estimated:24
Yield 0 1 RouteDistance 2 RouteDistanceSquared 3 Population
4 VacationRoute 5 SlotControlledRoute

T
X
t1

t Quartert

Table 2 presents descriptive statistics on key variables used in the analysis by category of route.
The number of observations refers to the number of cases for each category over the 12 quarters
of observation. Delta's passengers are the carrier's average passenger total per route for a quarter. For example, Delta averaged 4895 passengers per quarter, or about 54 passengers per day, on
competitive routes terminating in Atlanta. This total compared to the 2337 passengers per quarter, or 26 passengers per day, that ValuJet averaged on the same routes. Route passengers refer to
the total passengers on the route, including Delta's and ValuJet's passengers. Note that both
Delta's yields and route yields (the average for all carriers) were signicantly higher on routes
terminating in Atlanta than on ow-through routes. ValuJet's yields were signicantly lower than
Delta's yields on routes where the two carriers competed. On the ve categories of routes, Delta's
average market share varied between 40 and 54%. Finally, ValuJet's average market share was
28% on routes terminating in Atlanta and 17% on the ow-through routes, an indication that
ValuJet was competing with Delta on both categories of routes.
22

The only slot controlled airport in our sample is New YorkLa Guardia.
Data were derived from US Census Bureau (1995).
24
The variables in (4) are identical to those in (2) except for the inclusion of the exogenous variable, Population,
from the Passengers Eq. (3), and the exclusion of the endogenous Passengers variable. The interpretation of the coefcients, however, between Eqs. (2) and (4) diers since the right-hand-side variables that appear in both Eqs. (2) and
(3) have both direct eects on yields [from Eq. (2)] and indirect eects through the passenger Eq. (3) (given that we are
no longer estimating a separate Passengers equation). For example, the direct eect of vacation routes on yield is likely
to be negative; that is vacation routes have lower prices than non-vacation routes since they attract a smaller percentage of business travelers. However, vacation routes also have higher passenger trac than other routes, all else held
constant. Therefore, vacation routes, in the passenger equation, may have a positive coecient. To the extent that
vacation routes leads to higher passenger trac, and higher trac is associated with higher yields (a shift to the right of
the demand curve), then the indirect eect of vacation routes on prices is positive. (For example, one might expect
prices on routes to the Caribbean to be higher in the winter than in the summer since they attract higher volumes of
tourists in the winter.) Thus, the direct and indirect eects of vacation routes on yields are in the opposite direction.
23

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R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

Table 2
Descriptive statistics
Mean values

Number of observations
Delta's passengers
ValuJet's passengers
Route passengers
Delta's yields ($/mile)
ValuJet's yields ($/mile)
Route yields ($/mile)
Delta's market share (%)
ValuJet's market share (%)

Atlanta
competitive
routes

Atlanta
non-competitive
routes

Flow-through
competitive
routes

Flow-through
routes with
ValuJet on
one segment

Flow-through
routes with
ValuJet on
no segments

201
4895
2337
9465
0.327
0.162
0.260
54
28

1224
1821
0
2986
0.314
N/A
0.293
68
0

447
529
203
1669
0.220
0.150
0.192
41
17

2813
624
0
2510
0.206
N/A
0.192
40
0

2236
352
0
1281
0.203
N/A
0.192
50
0

4. Results
Separate estimations were conducted for each of the ve categories of routes, identied
above.25 The results for the estimation of Delta's yields for routes terminating in Atlanta, both
competitive and non-competitive, are presented in Table 3. All continuous variables were logged
so that the coecients could be interpreted as elasticities. As shown in Table 3, the signs of the
coecients for the estimation of Delta's yields on routes competitive with ValuJet appear to be as
expected. Distance has a negative coecient and Distance-Squared a positive coecient, indicating that yields decrease (but at a decreasing rate) as the length of routes increase. The coecient for Population is positive, but insignicant, indicating that the populations of the endpoints
of the route do not eect yields. The coecient for Vacation Route is negative meaning that
vacation routes have lower fares than non-vacation routes. Finally, the coecient for Slot-Controlled routes is positive implying that routes with restricted slots at one of the endpoints have
higher fares than those without these restrictions.
The Distance and Distance-Squared coecients from the non-competitive estimation, are the
same signs as those in the competitive regression, although the Distance-Squared coecient is not
signicant. The Population coecient is negative, and signicant, indicating that routes with high
populations at the endpoints have lower fares. This result may be due to economies of density;
that is high populations can support more frequent service, leading to economies of density and
lower yields. The Vacation Route coecient is negative, and signicant, while the Slot Controlled
coecient is negative (i.e. the wrong sign) but not signicant.
The major variables of interest, at least for the purpose of this study, are the time series dummies. The dummies for the fourth quarter of 1993 in both estimations, the rst period in which we

25
Yields used in the estimation include the federal 10% ticket tax during those periods that this tax was in force and
exclude the tax when the tax was not collected.

R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

71

Table 3
Estimation results on Delta's yields for routes terminating in Atlanta
Variable

Competitive routes
Coecient estimate

Constant
Distance
Distance-squared
Population
Vacation route
Slot controlled
1994-1
1994-2
1994-3
1994-4
1995-1
1995-2
1995-3
1995-4
1996-1
1996-2
1996-3
R-squared
No. of observations
a
b
c

16.451
4.894
0.332
0.000
0.202
0.241
0.096
0.098
0.144
0.101
0.044
0.050
0.036
0.106
0.221
0.314
0.327
0.82
324

Non-competitive routes
T-statistic
a

7.28
6.59a
5.42a
0.32
8.01a
3.96a
1.92c
1.95c
2.85a
2.00b
0.87
0.99
0.71
2.10b
4.39a
6.24a
6.48a

Coecient estimate

T-statistic

4.430
0.882
0.005
0.001
0.058
0.055
0.113
0.045
0.049
0.028
0.123
0.122
0.100
0.048
0.018
0.058
0.046

13.54a
8.78a
0.66
1.80c
2.13b
1.26
3.83a
1.52
1.64
0.94
4.14a
4.11a
3.37a
1.61
0.60
1.95c
1.55

0.91
1101

Signicant at the 99% condence level.

Signicant at the 95% condence level.
Signicant at the 90% condence level.

have observations, have been omitted from the regressions, so all other periods can be compared
to this base. As illustrated in Table 3, Delta's yields on competitive routes fell signicantly below
the base period yields for all four quarters of 1994, and then, again, from the fourth quarter of
1995 to the third quarter of 1996. These results are in contrast to those from the estimation of the
non-competitive routes terminating in Atlanta, as also indicated in Table 3. In the rst quarter of
1994, Delta's yields on non-competitive routes rose signicantly above the base period, and were
signicantly above the base for three quarters in 1995. Yields were only signicantly below base
prices in one quarter of the study; that is during the second quarter of 1996.
Fig. 5 tracks the trends in Delta's yields for the competitive and non-competitive routes and
compares those trends to a national index. As opposed to the results from Fig. 3, Fig. 5 shows
trends in yields after controlling for other inuences (e.g. population changes and route specic
factors for which variables were entered into the estimations of yields). As illustrated in the gure,
yields on both the competitive and non-competitive routes roughly tracked the national trend
through to the third quarter of 1995. After that period, yields on the competitive routes fell about
25%, while yields on the non-competitive routes continued to, at least roughly, track the national
trends. The conclusions from the Atlanta estimation results is that Delta's yields appeared to have
fallen on the routes in which it competed with ValuJet, even after holding other variables constant,
but do not appear to have risen, relative to national trends, on the non-competitive routes.

72

R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

Fig. 5. Trend indexes from regressions on Delta's Atlanta yields.

Table 4 presents the results of our estimation of Delta's yields for the three categories of owthrough routes. The estimated coecients for the control variables, for the most part, mirrored
the results derived in the previous regressions. The coecients for the Distance variable were
negative and signicant in two of the three estimations, and the coecients for DistanceSquared were positive and signicant in two of the estimations, as well. The coecients for
Population were negative in all three models, and signicant in two of them. The coecients for
Vacation were negative and signicant in all three of the estimations. Finally, Slot-Controlled
route coecients were positive and signicant in the two regressions for which the variable was
applicable.
In comparing the time dummies, it appears, again, that the competitive routes tend to have
more negative and signicant coecients (as compared to the base period, 1993, fourth quarter)
than do the other route categories. This pattern is evident in Fig. 6. All three route categories
tracked, roughly, national trends through to the fourth quarter of 1995 at which time Delta's
yields for all three categories fell below national yields. However, among the three categories of
routes, it is evident that Delta's yields on the competitive routes fell to about 75% of base yields,
while Delta's yields in the one-segment competitive and non-competitive categories fell to only 85
to 90% of the base. Therefore, again while there was evidence that yields on ow-through competitive routes fell signicantly compared to national trends, there is no counter evidence that
Delta raised prices on non-competitive routes to counter this decline in revenues.

R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

73

Table 4
Estimation results on Delta's yields for routes owing through Atlanta
Variable

Competitiveboth segments

Competitiveone segment only

Non-competitive

Coecient estimate

T-statistic

Coecient estimate

T-statistic

Coecient estimate

T-statistic

Constant
Distance
Distance-2
Population
Vacation Rte
Slot-control
1994-1
1994-2
1994-3
1994-4
1995-1
1995-2
1995-3
1995-4
1996-1
1996-2
1996-3

6.755
1.348
0.020
0.000
0.157
N/A
0.012
0.092
0.133
0.052
0.065
0.093
0.081
0.049
0.132
0.256
0.302

2.01b
1.32
0.26
0.37
10.00a
N/A
0.38
2.88a
4.17a
1.61
2.04b
2.92a
2.52b
1.52
4.11a
8.00a
9.44a

14.847
3.932
0.229
0.001
0.237
0.019
0.056
0.056
0.083
0.075
0.063
0.056
0.051
0.016
0.082
0.141
0.153

23.99a
21.66a
17.44a
2.61a
31.31a
1.68c
3.21a
3.18a
4.72a
4.28a
3.58a
3.17a
2.87a
0.88
4.69a
8.00a
8.70a

11.728
2.816
0.152
0.005
0.182
0.069
0.090
0.040
0.074
0.089
0.026
0.012
0.022
0.036
0.048
0.124
0.111

10.74a
9.23a
7.04a
11.20a
14.30a
4.56a
3.34a
1.47
2.75a
3.31a
0.96
0.46
0.81
1.34
1.77c
4.62a
4.16a

R-squared
Observations

0.78
792

a
b
c

0.78
3516

0.83
1188

Signicant at the 99% condence level.

Signicant at the 95% condence level.
Signicant at the 90% condence level.

Fig. 6. Trend indexes from regressions on Delta's ow-through yields.

74

R. Windle, M. Dresner/Transportation Research Part E 35 (1999) 5975

5. Conclusions
Recent research has found that the entrance of low cost carrier, Southwest Airlines, leads to
lower prices on routes it has entered. This paper extends this analysis by examining the impact of
entry on routes by another discount carrier, ValuJet, into an established carrier's hub and by
examining price changes on routes not entered by the low cost carrier. In order to address this
question, we examined the impact of competition by the low-cost carrier ValuJet on yields by the
established carrier, Delta, at Delta's hub in Atlanta. We found that Delta lowered its fares on
competitive routes terminating in Atlanta in response to competition by ValuJet. In addition, we
found that Delta lowered its fares on routes owing through its Atlanta hub to compete with
ValuJet. Finally, we did not nd evidence that Delta increased fares on non-competitive routes
(either those terminating in Atlanta or owing through Atlanta) to compensate for lost revenues
on the competitive routes. This nal result runs counter to the conjectures of the DOT and supports the argument that rms practice rational economic pricing in their hub-and-spoke networks. Since the carriers are likely already maximizing prots on a route by route basis, they are
unable to oset declines in revenue from increased competition on one route by raising prices on
another route.
The policy implication from this research is that governments should encourage the entry of
low-cost carriers in order to increase consumer welfare. We found no evidence that an established
carrier responds to low cost competition by increasing prices on routes without low cost carrier
competition. Lower fares were realized both on routes that terminated at a competitive hub as
well as on competitive routes that owed through the hub.

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