A time series analysis of the pricing behaviour of directly competitive 'low-cost' airlines

This paper, after providing an introduction to the operating context of low cost carriers in Europe,examines the competitive pricing behaviour of airlines. Data is collected by route for cases where morethan one airline is in direct competition. Data on fares is obtained from the internet for two airlines withcompeting services to Alicante, Prague and Malaga, departing from Nottingham East Midlands Airport inthe UK, for the six working weeks up to and including the actual departure. These destinations representleisure traffic. Two domestic business destinations were also selected to illustrate price competition onbusiness demand where departure times were within a maximum of 20 minutes of each other and a furtherexamination of competing services from London Gatwick (LGW) was made.Cross Correlation Analysis is used to examine whether, subject to a variety of lags, the prices offered byone airline can be seen to be both correlated with the other price series and to lead it. This provides someinsight into the pricing strategy adopted by the competitors.Autocorrelation Functions (ACFs) and Partial Autocorrelation Functions (PACFs) can also be producedon the prices offered by each airline. These suggest the nature of the ARIMA model that can be fitted tothe series and these models can show the degree to which series values are correlated with their own pastvalues and whether a reasonable model could be based on an ARIMA approach.The relative strength of these two relationships is examined; are prices more closely explained by thecompetitor's actions or the airlines own past price setting?