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hjulicher
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Predatory Pricing (LCC vs Legacy)

Sun Jan 29, 2017 7:57 pm

I'm currently working on my Master's Thesis in economics and have chosen the topic predatory pricing in the aviation industry. The Bureau of Transportation Statistics collects and publishes data on 10% of the tickets sold by airlines. I'm trying to find recent examples where a LCC has entered the city-pair of an entrenched legacy airline, and where prices and capacities were adjusted due to this market entry. I'm only interested in US domestic examples, as only data for these city-pairs is available. I'm hoping that some of you may be able to think of examples that I could look up.

N.B. These examples are probably not actual cases of actual predatory pricing, but definitely do exhibit behaviors used in predatory pricing usually when a LCC enters a city-pair serviced by only 1 legacy carrier.

Off the top of my head, one example is
B6 vs DL / BOS-DTW in March 2014
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BobPatterson
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Re: Predatory Pricing (LCC vs Legacy)

Sun Jan 29, 2017 8:05 pm

What constitutes "predatory pricing" in your usage of the term?

Introductory low price to get established on a route?

Below cost pricing and, if so, for how long a period?

Who was the predator in your 2014 example, DL or B6? What were the initial and ultimate prices?
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hjulicher
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Re: Predatory Pricing (LCC vs Legacy)

Sun Jan 29, 2017 8:35 pm

BobPatterson wrote:
What constitutes "predatory pricing" in your usage of the term?

Introductory low price to get established on a route?

Below cost pricing and, if so, for how long a period?

Who was the predator in your 2014 example, DL or B6? What were the initial and ultimate prices?



Ultimately your questions would be for a regulator to determine. I'm not trying to determine or identify examples of predatory pricing, but rather instances where an LCC entered a market (city-pair) where only one established (often legacy carrier) was operating to perform analysis on how an incumbent may react to market entry and that there exists significant grey areas (as well as approaches) as to how to determine acts of predatory pricing.

Predatory pricing, depending on what school of thought you follow, The Chicago School or Post-Chicago School, can be simply based on below cost (marginal or average variable costs) in order to extinguish a competitor from a route and then later raise prices so as to recoup the lost revenues during the predatory period. However, according to the Post-Chicago School, several barriers to entry may also exist and may be used to even prevent the potential entrance of a new entrant, especially in instances where the entrenched carrier enjoys substantial market power.

In my DTW-BOS example, I'd like to analyze the average fare paid before entry and after entry. In this case, B6 was already quite established in the BOS local market and could draw on the strengths it leveraged from that market and thus successfully entered the market, however DTW was one of the later markets added at BOS for B6 which could be linked to signals DL(NW) used in the past against other new entrants where DL(NW) enjoyed monopoly rents. The airline market in terms of LCC is much more developed in 2016 than it was in 2006 and/or 1996. These LCCs are established and have the resources, brand awareness, and cater to a different customer segment that traditional carriers which has led to their success. However, this was not the case for Skybus, Independence Air or Proair.
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sagechan
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Re: Predatory Pricing (LCC vs Legacy)

Mon Jan 30, 2017 1:43 am

I'd suggest looking at NK's entry into DTW, DFW, etc, plus compare to NK at LAX where multiple incumbents exist.
717, 733, 734, 738, 739, 744, 752, 763, 772, 77W, 789, A319, A320, A321, A332, A333, A359, MD88, CRJ, CR7, CR9, DH1, DH2, DH3, S340, ER4, E170, E175, E190/CO, NW, US, AC, NH, AA, UA, DL, WN, WS, SK, VY, LA, QF, AR, AV, MH, KA, AS
 
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Re: Predatory Pricing (LCC vs Legacy)

Mon Jan 30, 2017 1:55 am

WestJet v. NewLeaf very recently in Mesa. ;-)
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MIflyer12
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Re: Predatory Pricing (LCC vs Legacy)

Mon Jan 30, 2017 2:06 am

Look at NW vs. Midway Airlines on MEM-RDU in 1999-2000.

http://www.prnewswire.com/news-releases ... 85347.html
 
RushmoreAir
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Re: Predatory Pricing (LCC vs Legacy)

Mon Jan 30, 2017 2:13 am

For the period 2011-2015, I count 93 markets with one incumbent NLC that saw LCC entry, and 113 one-incumbent markets that saw ULCC entry in that same period. Some of those might have had another "uncategorized" player in the market like HA/SY or had two entries at one time, so not all of them are quite as stark as DTW-BOS, but plenty of examples to choose from! Here are some I randomly picked out (I think they satisfy your criteria, but you should double check to be sure):

LCC Entry
Southwest's entry into ATL-SAN in 2013 against DL (airport-level competition)
Southwest's entry into ICT-DAL in 2013 against AA ICT-DFW (metro-level competition)
Southwest's entry into BNA-DAL in 2015 against AA BNA-DFW (metro-level)
JetBlue and Southwest almost simultaneously jumped into BOS-HOU in 2014 against UA BOS-IAH (metro-level)
JetBlue's entry into CLE-BOS in 2015 against UA (airport-level) - this one might be mucked up by NK's entry into the market around the same time

ULCC Entry
Allegiant's entry into MEM-FLL in 2015 against AA's MIA-MEM (market-level competition)
Frontier's entry into DEN-BIS in 2012 against UA (airport-level)

If you're doing your master's thesis on this kind of work, I would highly recommend getting a data subscription to Diio or OAG (or another airline intelligence provider) as (1) you'll be able to access batch schedule files in excel form, enabling you to easily identify some of these markets and (2) pre-cleaned DB1B data, which is truly a godsend for research purposes - otherwise be prepared to spend a month removing obvious errors from the BTS data. Also, if you're looking at pricing/fares, be sure to investigate metro-area-level effects (not just airport pair effects) as parallel markets distort results. See Daraban and Fournier (2008) or Goolsbee and Syverson (2008). Also MIT has a new white paper out that has a section on some pricing effects of LCC/ULCC entry: https://dspace.mit.edu/handle/1721.1/104869

Additionally, remember that local fares are not as highly correlated with average segment fare as you might think, especially with legacies since they use O&D-level revenue management systems (where a fare offered on AAA-BBB-CCC is not simply the sum of available fares on AAA-BBB + BBB-CCC). Legacies also have a much higher percentage of connecting passengers that may be subsidizing a lower local fare (to compete against LCC/ULCC entrant offering a low local fare), thus raising the average segment fare above true segment cost, and that even is excluding upline and downline network revenue contributions. This makes determining whether airlines are "pricing below cost" quite difficult (but it sounds as if you already recognize this, props to you).
NW UA DL F9 CO WN LO QF FI AC MU CA EU LH LX DY B6 AA HA NZ MW HU U2 SK AF EK IB HX WS G4 AZ IG 4B

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msycajun
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Re: Predatory Pricing (LCC vs Legacy)

Mon Jan 30, 2017 2:27 am

NK's entry into the MSY-DTW market in 2014 comes to mind. IIRC DL added flights and cut fares pretty dramatically.
 
hjulicher
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Re: Predatory Pricing (LCC vs Legacy)

Mon Jan 30, 2017 10:26 pm

RushmoreAir wrote:
Additionally, remember that local fares are not as highly correlated with average segment fare as you might think, especially with legacies since they use O&D-level revenue management systems (where a fare offered on AAA-BBB-CCC is not simply the sum of available fares on AAA-BBB + BBB-CCC). Legacies also have a much higher percentage of connecting passengers that may be subsidizing a lower local fare (to compete against LCC/ULCC entrant offering a low local fare), thus raising the average segment fare above true segment cost, and that even is excluding upline and downline network revenue contributions. This makes determining whether airlines are "pricing below cost" quite difficult (but it sounds as if you already recognize this, props to you).


Yes, I'm quite aware that network effects do make analysis very difficult, and that regulators have often run into these type of problems when evaluating LCC (ULCC) vs Legacy Carriers. However, from my personal professional experience in Revenue Management, it's often times that the connecting passenger is used to create a base-load and that the local O&D passenger is actually subsidizing (to some extent) the connecting passenger. However, the value of the revenues (in total) brought by the connecting passengers may improve the revenues on the main leg, but hardly ever on the shorter/connecting leg. Sometimes I really envy the simplicity that LCCs operate under, as complexities like connecting traffic streams are not as relevant in their business models.

Thank you for your valuable post (and too all the other contributors as well). There are definitely some city-pairs that I will look into.
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Rajahdhani
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Re: Predatory Pricing (LCC vs Legacy)

Mon Jan 30, 2017 10:47 pm

Though perhaps less current, an interesting side-reading of Legend Airlines (out of DAL), could provide some insight into the tactics employed by a legacy (in this case, AA) against an entrant - and how that ultimately pressured them out of existence.

https://en.wikipedia.org/wiki/Legend_Airlines

I can't provide hard data to prove predatory pricing - however, AA's moves (especially converting their F-100s to especially compete with Legend's DC-9s) were 'highly competitive'. Anecdotally, at the time - Legend's pricing was unmatched, then competed against AA's (with AA 'competing' at the same fare). This was, as externally - AA challenged their every authority, and soon after completing the disintegration of Legend - retreated to DFW.
 
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aloha73g
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Re: Predatory Pricing (LCC vs Legacy)

Mon Jan 30, 2017 11:04 pm

You could look at the interisland market in Hawaii in 2006 when Mesa set up go!

Aloha and Hawaiian sued them successfully for predatory pricing since Mesa had signed non-compete agreement during HA & AQ's bankruptcies to get a look at their confidential business records info while contemplating investment. go! offered fares as low as $9 when they started. Pre-go! I think HA & AQ's lowest fares were about $58 one way.

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