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Transportation Dissertation

Title A Route-Carrier Choice Model: The Impacts of Airline Mergers on Passengers’ Welfare
Year 2019
Degree Master
School Department of Transportation and Logistics Management College of Management National Chiao Tung University
Author Hui-Yu Chen

        The fierce competition in the market has caused many airlines to go bankrupt or to merge with others, and the market structure has thus been changing, too. In view of the fact that the wave of mergers will continue to affect society and industry, a clearer understanding of its impact is an important research topic. From the literature review, it is known that airline mergers will affect the network structure, the state of competition, fares, service quality, and thus passenger welfare. However, most of the literature only partially analyzes the factors listed above, and the empirical study on the actual merger is very limited. Therefore, this study considers relevant factors more completely, establishes the travel demand model that provides sufficient details, and analyzes passenger welfare changes caused by the mergers rationally.
        This study first uses the aggregate data to construct a route-carrier choice model for metropolitan cities to analyze the market. The metropolitan area may contain multiple airports. Each route-carrier is a discrete choice, and passengers are free to choose between airports and flight types (connecting or direct). Also, not selecting any route-carrier (not generating any air trip) is permitted, so that the total demand can remain elastic. In addition, treatment groups and control groups are first defined, and difference-in-differences method is then used to measure the passenger welfare changes (including the analysis of various factors and the differences between traditional and low-cost airline merger).
The results show that the substitutability from high to low are: routes within a carrier > OD airport > non-air alternatives. As for price endogeneity, route distance *oil price and route distance are effective instrument variables. In terms of welfare analysis, as a whole, airline mergers resulted in welfare increase (AA-US merger > US-HP merger > WN-FL merger). And if the markets are further divided into differentcategories, it can be found that the mergers caused welfare increase in most of the categories, while they also caused welfare decrease in the rest of the categories.
        To sum up, the study establishes a choice model that quantifies the impact of mergers on passenger welfare. This model keeps the demand elastic and incorporates route-carrier level variables; the nested structure is designed to take the substitutability and competitive of choices into account (e.g. travelers may choose different OD airports and routes in multiple airports metropolitan areas). In addition, time value and price elasticity become more reasonable after using IVs to deal with endogeneity. The preliminary welfare analysis showed that the impact of the mergers on welfare is positive (as a whole), but differ among markets (city-pair) and airline types (FSC and LCC). Propensity score matching may be used to do further analysis.

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