Pricing and competition in US Airline markets : changes in air travel demand since 2000

Since 2000, the US airline industry has been in turmoil. The economic downturn, September 11 and other factors all have had a negative impact on the spending behavior of consumers, and consequently airlines have posted tremendous revenue losses. The objective of this thesis is to analyze fare and passenger changes in the United States between 2000 and 2004 and to observe how air travel demand has changed recently. The Origin and Destination Survey of the US Department of Transportation is the main data source from which the Top 1000 Markets of 2004 were extracted and consistently matched back to 2000 in order to observe market changes. First, an aggregate statistical analysis was performed to conclude that average fares had decreased 16.4% by 2004, whereas traffic rebounded to 2000 levels after dropping by 11%. As a result, revenues had dropped 17.3% by 2004 compared with 2000. The total market sample was then segmented by distance, hub versus non-hub, low-fare airlines' market share, and overall market competition to determine the impact of each factor. These analyses resulted in the following findings. New entry of low-fare airlines resulted in the greatest decline of 31.3% in average fare by 2004.