49 Jimrnez Hrs Air Spain

7/30/2019 49 Jimrnez Hrs Air Spain

http://slidepdf.com/reader/full/49-jimrnez-hrs-air-spain 1/4

TRANSPORT MARKET COMPETITION

High Speed Rail vs. Air Competi-

tion in Spain

i

High-speed railway lines (HSR) in Spain have gradu-

ally increased during the last twenty years. At the

beginning of 2010, four HSR lines were operating

on routes where air transport used to be the do-

minant mode of transportation, connecting Madrid

with other mainland cities in short-haul routes. In this article, we examine the air carriers’ reaction

to these HSR entries into the market by using data

at the route level from two perspectives: firstly, we

test whether the high-speed rail links have changed

the frequency that airlines offer; and secondly, we

analyze how the market share of airlines in the to-

tal market (air plus rail) have changed.

Introduction

Before the introduction of high-speed railways (HSR), aircraft

and railways were considered as independent modes of trans-

portation that could not compete given their different features

(Ivaldi and Vibes, 2005). The empirical literature nds that

the introduction of HSR has a signicant effect on consumers

and, therefore, on air carriers. This fact is more relevant in

routes with a distance shorter than 800 kilometers or with a

travel time by train of less than 3 hours (IATA, 2003). In addi-tion to speed, it is the fact that most cities’ railway stations are

located in downtown areas, which gives HSR the travel time

advantage over aircraft (Givoni and Banister, 2007).

There are some examples from around the world about the ef-

fects of HSR on the air sector. Paris-Lyon was one of the rst

routes where a high-speed rail operated and in which airlines

reduced their participation almost 50 percent. In Spain, on the

route Madrid-Seville (HSR entry in 1992), railway increased

its share from 16% to 51% (Park and Ha, 2006).

There is a considerable among of literature analyzing the

inuence of the market structure on competitive variables,mainly prices and frequencies for the case of the air transport

sector.ii Results in all of these studies are similar: the level of

concentration on the route or at the airport positively affects

consumer prices.

Another research branch is related to the rise of low-cost air

carriers. Those studies point out how such air companies disci-

pline competition, leading to price reductions after their entry

or even making incumbent air carriers change their behavior

into a low-cost carrier entry threat, as described in Goolsbee

and Syverson (2008).iii

Concerning the HSR appearance as a competitive mode for air

transport, the number of references is lower. Three works that

summarize the general evolution of such modes are Campos

and Gagnepain (2009), Gourvish (2010) and Albalate and Bel

(2010).

Nevertheless, there is less literature related to competition as

exerted by HSR on airlines than in the case of intra-modal

competition for air transport. This paper aims to shed some

light in this regard by using a database on the route level for

the Spanish market. We evaluate whether high-speed rail has

signicantly changed the frequency, the number of passengers

and the market share of airlines. We carry out this analysis for

air carriers as a whole and also concerning the strategic behav-

ior of the former Spanish ag air carrier Iberia in each route.

DatabaseWe use data on the route level for air carriers’ frequencies and

market shares in the Spanish markets for nine routes with ori-

gin in Madrid and for the period of January 1999 through De-

e-zine edition 49

by: Juan Luis Jiménez and Ofelia Betancor

1



cember 2009. All

routes are operated

by air transport

and train services,

though only in four

of them, the HSR

is in operation, or

at least in the peri-

od under analysis.

For the remainingve routes, there

are plans for future

operation of HSR

services as well.

Table 1 shows

some information

on the main vari-

ables per route,

distinguishing, in

the case of routes

with HSR, the pe-

riod before and af-

ter the introduction

of HSR services.

The variables re-

ported in this table

are the focus of our

econometric analy-

sis as presented

below. Of particu-

lar importance are

the number of total

passengers (air plus

rail), the number of ights and the market share of air transport as compared to the railway mode. In such routes (Barce-

lona, Málaga and Zaragoza), air transport monthly operations

and passengers carried have decreased after the introduction

of HSR services. In turn, passengers transported by railway

(monthly average) increased substantially. In fact, the trains’

market share more than tripled for the route Madrid-Barcelona,

doubled for the route Madrid-Málaga, and almost monopolized

the passengers’ volume in the case of Madrid-Zaragoza.

Finally, it is worth noting Iberia’s behavior concerning the

starting of HSR services. The change in its air transport mar-

ket share is not so clear. In fact, except for Barcelona, it main-tained or even increased its share. For routes without HSR

services, as expected, the air transport mode is more relevant,

especially for routes connecting Madrid with cities in the

North of Spain. As we will see below, the Madrid-Barcelona

route in particular is competitive, and one where HSR has

clearly won the race with air carriers for the market.

Results of Estimations

The Airlines’ Reaction: the Effects on Flight Frequencies

We test whether the introduction of HSR’ services has had a

signicant effect on ights frequency (a relevant air carriers’

competitive variable that affects their slot policy). To do that,

we will try to explain the number of monthly operations of

direct commercial ights between Madrid and destination i in

the period t by using the following exogenous variables: the

number of air passenger carried in those operations (instru-

mented by tourism per capita, GDP per capita, among others);

the number of railway passengers between Madrid and desti-nation i, in period t (average monthly data in this case); share

of air carrier Iberia in the air market; distance between two

airports; a binary variable that takes value 1 after the entrance

of the HSR in route i and 0 in other case, and some temporal,

xed-effects and seasonal dummies. Nevertheless, the result

of such an analysis can be applied to the whole set of routes

studied, though a different analysis for each route may be

needed. For this reason, we also substitute the HSR introduc-

tion dummy variable with three other ones. These are con-

structed by multiplying HSR

it D by the specic airport dummy.

Using a Two-Stage Least Square estimator (2SLS-IV) with in-strumental variables, we reach several conclusionsiv. Firstly,

on the routes in which Iberia has a higher market share in the

air transport market, the total number of operations decreases,

as pointed in the works by Schipper et al. (2002), Carlsson

(2004) or Bilotkach et al. (2010), too. Secondly, distance neg-

atively affects the frequency of monthly ights. Thirdly, the

parameter of the HSR dummy is negative and is statistically

signicant when explaining the total number of operations.

On average, the number of air transport operations decreases

by 17% in response to the introduction of HSR, though this re-

sult differs depending on the route and the airlines considered.

In general, Iberia reduced its operations in Barcelona by 11%

and by 34% in Zaragoza. The other airlines reduced theirs by

31% in Málaga and almost disappeared on the Madrid-Zara-

goza route. These results are more robust than those described

in Park and Ha (2006) or in other descriptive works, as other

2

Route

from/to

Madrid to/from…

Air

PassengersNumber of ights

Train

passengers

(Renfe)

Distance

Iberia’s

passengershare (air

market)

Air

transport’s

passengershare (air

plus rail

market)

Date

entrance

HSR

Barcelona

(before HSR)

345228

(59719)3255 (483) 51468

483

66.7 86.9 -

Barcelona

(after HSR)

269217

(57966)2806 (535) 200070 49.3 56.9

February

2008

Málaga(before HSR)

105971(20769)

971 (132) 46406

430

60.5 69.1 -

Málaga (after

HSR)

79771

(20574)708 (176) 120404 66.6 39.6

December

2007

Zaragoza

(before HSR)7935 (1308) 232 (30) 45333

251

96.0 14.9 -

Zaragoza

(after HSR)1986 (1070) 85 (37) 96009 95.9 2.2

December

2003

Seville (HSR

for all sample

period)

39601 (6541) 401 (65) 189166 393 91.4 17.4 April 1992

Routes from Madrid to….(without HSR included in the period analyzed)

Alicante62681

(11165)636 (70) 57904 350 70.2 51.6 No HSR

Asturias48427

(10830)506 (86) 6648 377 75.4 87.8 No HSR

Bilbao71663

(13693)813 (112) 3451 319 67.1 95.2 No HSR

Santiago de

Compostela58203 (9257) 603 (95) 5024 490 64.5 91.9 No HSR

Valencia69660

(13979)986 (187) 56406 284 79.2 54.9 No HSR

Table 1: Average monthly data by route. Source: Own elaboration. Standard deviation among brackets.



possible variables affecting the air transport operations are

controlled through econometric means, allowing the delimita-

tion of the specic effects of HSR.

The Total Passenger and Market Shares

We now focus on how passengers (by routes and market shares

by mode change) after the introduction of HSR. In this case,

we explain the total passengers (train plus air) carried in route

i at year t, the Air Transport Share in terms of passengers of

the total transport market (air plus railways) and the Iberia´s

Share in terms of passengers. The empirical strategy, descrip-

tion of variables and period of time considered was similar to

that applied to get estimates for the effect on frequencies, but

for the fact that variables were on a yearly basis.

Our results show that the introduction of HSR in the Spanish

markets has produced an important impact on demand. In fact,

it has increased between 41 to 86 per cent, depending on the

routes, however, we are not able to identify what part of it has

been deviated from the road market and what part is purely

new generated demand. On the other hand, the air transport

total market share has also been signicantly affected. After

the introduction of HSR, the air transport share in terms of

passengers is between 14 to 33 percentage points lower. Fi-

nally, Iberia’s share in the air markets also reduced with the

introduction of HSR, and it is for the Madrid-Barcelona route

that such a decrease is more important.

Summary and Conclusions

HSR not only affects the environment, mobility or the process

of territorial integration, but also other competitive transport

modes, especially air transport. The rst objective of our work

was to delimitate the air carriers’ reaction to the introduction

of HSR in terms of frequencies offered. With that aim, we

conducted an empirical analysis by using monthly data on air

transport operations in nine Spanish routes with origin Madrid

from January 1999 through December 2009.

By controlling the factors that might affect airlines’ decision

when offering a given operations frequency (number of pas-senger, level of concentration at the air route, income, tour-

ism, distance, xed effects, etc.) and with a Two-Stage Least

Square estimator (2SLS-IV) with instrumental variables, we

arrived to the following main conclusion: the introduction of

HSR in Spain, a political decision exogenous to the route’s

features, has reduced on average the number of air transport

operations by 17 %, though this result differs depending on

the route and the airlines considered.

As a second objective, we aimed to check whether or not the

introduction of HSR has favored market size in terms of pas-

sengers, and to what extent it has altered the shares of airlines

in the total market (air plus railways) and Iberia’s passengers

share in the air transport market. For this part of our work,the main conclusions are: On the one hand, the introduction

of HSR in the Spanish markets has allowed the demand to

increase substantially, between 41 to 86 per cent, depending

on the routes. The most important effect is registered for the

Madrid-Barcelona route, however, we are not able to identify

what part of it has been come from the road market and what

part is purely new generated demand. On the other hand, and

in spite of such an increase, the weight of air transport in the

total market has been reduced. Finally, the Iberia’s share in

the air markets also reduced with the operation of the HSR.

End Notesi This article summarizes a more detailed analysis developed in the

paper entitled “When trains go faster than planes: the strategic reac-

tion of airlines in Spain”. We would like to thank Javier Campos,

Pilar Socorro and Xavier Fageda for their helpful comments and sug-

gestions. We are also grateful to Iberia and Renfe for provision of

data, and to Agustín Alonso for assistance with the database. The

main research was undertaken within the project AEROAVE funded

by the Spanish Ministry of Science and Innovation, research grant E

20/08. The responsibility for possible errors is solely ours.

ii Some examples are the works by Borenstein (1989), [0]Ev-

ans and Kessides (1993), or Fageda (2006), for data at the route

level; and the articles by Brander and Zhang (1990), Oum et al.

(1993) or Fisher and Kamerschen (2003), for aggregated data.

iii For the United States air transport market, the works by Dresner

et al. (1996) or Morrison (2001) may be consulted. For the European

case, we can mention the works by Alderighi et al. (2004) or Gaggero

and Piga (2010). For the Spanish market, Fageda et al. (2010) show

how the incumbent traditional airline (Iberia) reacts to low cost car-

riers’ competition in two ways. Firstly, by creating low costs sister

companies, and secondly, trying to reduce costs at its main brand.

iv For detailed results please contact the authors. In a two-stage least

squares (2SLS) regression analysis, an instrument variable is used to

create a new variable that explains in turn the behaviour of another.

About the Authors

Juan Luis Jiménez, Economics of Infrastructure and Transport Group(EIT), Universidad de Las Palmas de Gran Canaria. Ph.D. in Eco-

nomics, Lecturer at that University. His research eld is competition

policy, regulation, energy policy and transportation. Ofelia Betan-

cor, Economics of Infrastructure and Transport Group (EIT), Uni -

versidad de Las Palmas de Gran Canaria. PhD in Economics and

Associate Professor at that University. She is also responsible of re-

search on Transport Economics at FEDEA (Fundación de Estudios

de Economía Aplicada) in Madrid.

Corresponding author: [email protected]

ReferencesAlbalate, D. and Bel, G. (2010) High-Speed Rail: Lessons for Policy

Makers from Experiences Abroad, Research Institute of Applied

Economics Working Paper 2010/03, pp. 3-29.

Bilotkach, V., Fageda, X. and Flores-Fillol, R. (2010) Scheduled ser-

vice versus personal transportation: the role of distance. Regional

Science and Urban Economics, 40, 60-72.

Brander, J. A., and Zhang, A. (1990) A Market Conduct in the Airline

Industry: An Empirical Investigation, Rand Journal of Economics,

3

Photo 1: Courtesey of wallpapersonline.org



21, 567-583.

Campos, J., and Gagnepain, P., (2009) Measuring the intermodal ef-

fects of high-speed rail. In: De Rus, G. (Ed.), Economic Analysis of

High Speed Rail in Europe. BBVA Foundation, Madrid.

Carlsson, F. (2004) Prices and departures in European domestic avia-

tion markets, Review of Industrial Organization, 24, 37-49.

Dresner, M., J.S. Chris Lin and R. Windle (1996) The impact of low-

cost carriers on airport and route competition, Journal of Transport

Economics and Policy, 30, 309-329.

Evans, W. N., and Kessides, I.N. (1993) Localized Market Power in

the U.S. Airline Industry, The Review of Economics and Statistics,75, 66-75.

Fageda, X. (2006) Measuring conduct and cost parameters in the

Spanish airline market, Review of Industrial Organization, 28, 379-

399.

Fageda, X., Jiménez, J.L. and Perdiguero, J. (2010) Price rivalry in

airline markets: a study of a successful strategy of a network carrier

against a low-cost carrier, Journal of Transport Geography, forth-

coming.

Fisher, T., and Kamerschen, D.R. (2003) Price-Cost Margins in the

U.S Airline Industry using a Conjectural Variation Approach, Journal

of Transport Economics and Policy, 37, 227-259.

Gaggero, A.A, Piga, C.A., (2010) Airline competition in the British

Isles. Transportation Research-E, 46, 270-279.

Givoni, M. and Banister, D. (2007) Role of the railways in the future

of air transport. Transportation Planning and Technology, 30 (1), 95-

112.

Gourvish, T. (2010) The High-Speed Rail Revolution: History and

Prospects. Mimeo, London School of Economics.

IATA Air Transport Consultancy Services (2003) Air/rail inter-mo-

dality study. Final Report.

Ivaldi, M. and Vibes, C. (2005) Intermodal and intramodal compe-

tition in the long-haul passenger transport markets. Idei report 9.

March.

Morrison, S.A. (2001) Actual, Adjacent and potential competition:Estimating the full effect of Southwest airlines, Journal of Transport

Economics and Policy, 35, 239-256.

Oum, T. H., Zhang, A. and Zhang Y. (1993) Interrm Rivalry and

Firm-Specic Price Elasticities in Deregulated Airline Markets,

Journal of Transports Economic and Policy, 27, 171-192.

Park, Y. and Ha, H.K. (2006) Analysis of the impact of high-speed

railroad service on air transport demand. Transportation Research

parte E, 42, 95-104.

Schipper, Y., Rietveld, P., Nijkamp, P. (2002) European airline re -

form: an empirical welfare analysis, Journal of Transport Economics

and Policy, 36, 189-209.

e-zine edition 49 AJ 4

A e r l i n e s

49 Jimrnez Hrs Air Spain

Documents

Transcript of 49 Jimrnez Hrs Air Spain