Airlines--Rates

Adjusting prices for quality change is an important issue. This study employs a hedonic quality measurement technique to assess the effects of quality on domestic passenger airfare. The econometric analysis utilizes pooled quarterly data on average fare for the largest-share and the lowest-fare carriers, for each of the approximately top 1,000 routes from 1996:Q3 to 1998:Q2. The hedonic regression specifies airfare as a function of distance, total passengers, market share of the airline, and quality variables measuring on-time performance, oversales, baggage handling, complaints, and airline safety. Quality characteristics are found to have several important effects on airfare. Oversales revealed a statistically significant impact on airfare for all distance blocks, passenger complaints were important on short and long routes, and on-time performance and baggage handling were valued by customers only on shorter routes. Competition from low-fare carriers, and differences between airline groups are also identified to be important factors.

The deregulation of the airline industry in the United States in the late 1970's has created more competition between airline companies. Many studies have been done regarding the changes to the industry since deregulation, but little research exists regarding the relationship between airfares, travel distance and route competition. In an effort to discover the relationship between these variables a series of analyses are performed using various statistical models as well as a comparison of the United States airspace to the European Union airspace (a regulated system). In this thesis it was found that not only do the variables that determine airfares in the United States have little to do with distance, but also that there are more variables beyond competition that are necessary to consider.