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Article
Publication date: 4 January 2011

Adishwar K. Jain and Raymond A.K. Cox

The purpose of this paper is to examine the uncertainty of acquiring the lowest possible airfare when contemplating the purchase of a ticket. A real option model is…

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Abstract

Purpose

The purpose of this paper is to examine the uncertainty of acquiring the lowest possible airfare when contemplating the purchase of a ticket. A real option model is applied to value insurance contracts that could be offered to passengers to cope with price risk. Furthermore, the premiums charged for such airfare price insurance contracts can augment airline carrier revenues.

Design/methodology/approach

Prices on 14 airfares were collected for 79 consecutive days on an assortment of US domestic and international flights from four airline carriers. Volatility in airfares was shown using the price range and SD. The Black‐Scholes‐Merton model was employed to value the call and put options representing different airfare price insurance contracts.

Findings

Airfare price insurance contracts affordability was demonstrated ranging from 1.55 to 11.28 percent of the average dollar ticket price.

Research limitations/implications

The valuations in the paper were based on ex post data that would not be available to the customer purchaser. Nonetheless, the airline carriers that sell the insurance would have better estimates of the price volatility and therefore could price the contracts to make a profit.

Practical implications

Airline passengers would have an opportunity to reduce the ticket price risk they face when buying their tickets. Airline carrier could increase revenues by offering such products.

Social implications

The opportunity to manage price risk contributes to the completeness of markets.

Originality/value

The paper shows that airfare price insurance contracts are a viable tool in the management of price risk.

Details

The Journal of Risk Finance, vol. 12 no. 1
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 11 May 2015

Heesup Han and Jinsoo Hwang

This study aimed to examine young, middle-aged and mature air-travelers’ perceptions of the quality levels of in-flight physical surroundings and service encounters, and…

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1677

Abstract

Purpose

This study aimed to examine young, middle-aged and mature air-travelers’ perceptions of the quality levels of in-flight physical surroundings and service encounters, and investigated the drivers of their repurchase intentions in the low-cost airline industry.

Design/methodology/approach

A sample of 402 passengers on international flights was used. An ANOVA and a series of multiple-regression analyses based on Baron and Kenny’s (1986) suggestion were used.

Findings

In general, significant differences in quality attributes were identified across age groups. Additionally, the role of these quality components, perceived level of the airfare and trust in the airline were found to be decisive in low-cost airline passengers’ decision formation. Further, the mediating impact of perceived level of the airfare and trust was identified.

Originality/value

Research about air-travelers’ decision formation by considering their age is rare in a low-cost airline context. Results of the present study provided meaningful insights for researchers and practitioners in the airline industry.

Details

International Journal of Contemporary Hospitality Management, vol. 27 no. 4
Type: Research Article
ISSN: 0959-6119

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Book part
Publication date: 1 January 2012

Kevin E. Henrickson and John Scott

The past several years have seen dramatic increases in oil prices, which have adversely impacted airlines, with the average price of jet fuel increasing from $1.34 per…

Abstract

The past several years have seen dramatic increases in oil prices, which have adversely impacted airlines, with the average price of jet fuel increasing from $1.34 per gallon between 1995 and 2005 to $2.81 per gallon between 2006 and 2009. As a partial response to these increases in costs, many airlines have introduced fees for services that were previously provided to their customers free of charge. One such charge is a fee on checked baggage, which most airlines introduced in 2008. These charges have been successful in increasing airline revenues, so successful that many airlines have increased their fees multiple times over the past two years. Baggage fees have also enabled airlines to avoid dramatic increases in their airfares, which may result in significantly fewer customers, as these additional fees generate revenues, but since they are not collected when passengers book their tickets, the cost of air travel on these airlines appears lower than it actually is. The most notable exception to this pattern of charging baggage fees is Southwest Airlines, which has launched a “Bags Fly Free” advertising campaign in an attempt to differentiate their product from that of fee charging airlines. In this chapter, we use a spatial autoregressive model to analyze what impact the increase in fuel costs, and the introduction of baggage fees have had on ticket prices. Our results suggest that increases in jet fuel prices are passed along to travelers in the form of higher ticket prices but that baggage fees actually reduce ticket prices, as airlines may substitute baggage fee revenue for ticket revenue to become more competitive on their airfare. We also find that Southwest Airlines has increased their ticket prices on routes in which they compete with fee charging firms, leveraging their “Bags Fly Free” product differentiation to increase their revenues.

Details

Pricing Behavior and Non-Price Characteristics in the Airline Industry
Type: Book
ISBN: 978-1-78052-469-6

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Book part
Publication date: 6 August 2014

John Bitzan, Alice Kones and James Peoples

This chapter uses airline data on fares, traffic, and flight characteristics to estimate a series of fare equations for international flights. The results are used to…

Abstract

This chapter uses airline data on fares, traffic, and flight characteristics to estimate a series of fare equations for international flights. The results are used to examine the role of international competition as a determinant of fares along international flights originating or departing from the United States. Findings suggest that actual and potential competition are important determinants of international airfares. We interpret these results as indicating that pricing behavior along US–international routes is consistent with the theory of imperfect contestability.

Details

The Economics of International Airline Transport
Type: Book
ISBN: 978-1-78350-639-2

Keywords

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Book part
Publication date: 14 December 2018

Hangjun Yang, Qiong Zhang and Qiang Wang

In this chapter, we will review the history, deregulation, policy reforms, and airline consolidations and mergers of the Chinese airline industry. The measurement of…

Abstract

In this chapter, we will review the history, deregulation, policy reforms, and airline consolidations and mergers of the Chinese airline industry. The measurement of airline competition in China’s domestic market will also be discussed. Although air deregulation is still ongoing, the Chinese airline industry has become a market-driven business subject to some mild regulations. Then, we will review the impressive development of the high-speed rail (HSR) network in China and its effects on the domestic civil aviation market. In general, previous studies have found that the introduction of HSR services has a significant negative impact on airfare and air travel demand in China. The rapidly expanding network of HSR has important policy implications for Chinese airlines.

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Book part
Publication date: 12 July 2006

Henry G. Iroegbu

This article assessed the effects of airfares and foreign exchange rates on Global Tourism demand. It identified three categories from the assessment – The Market Segment…

Abstract

This article assessed the effects of airfares and foreign exchange rates on Global Tourism demand. It identified three categories from the assessment – The Market Segment Effect; The Substitution Effect; and The Facilitation Effect. The tourism literature is rich with vast studies on the effects of various components of tourism prices on international tourism, but lacking in comprehensive categorization of the identified effects. Such assessment would enable tourism destination planners and service providers to be able to focus on identified specific issues and finding their pertinent solutions. It has been determined that while there might be identified profound effects, their solutions are not applicable to all tourism destinations or services.

Details

Advances in Hospitality and Leisure
Type: Book
ISBN: 978-1-84950-396-9

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Case study
Publication date: 2 August 2013

Terence P.C. Fan

Strategic management and marketing.

Abstract

Subject area

Strategic management and marketing.

Study level/applicability

Executive education; postgraduate; undergraduate.

Case overview

By 2004, the low-cost carrier model had just recently been introduced to Southeast Asia. Airlines under this model quickly began taking market share. Singapore's first budget carrier, Valuair, finds itself in fierce competition between two rapidly emerging competitors in the second half of 2004. Valuair needs to expand in order to remain competitive. However, for this to happen the company needs additional access to capital. The CEO, Sim Kay Wee, has begun pitching to investors that his company is a smart low-risk investment. Is Sim right, given Valuair's competitive position and the market environment in which it operates?

Expected learning outcomes

Students will be able to apply strategic frameworks in order to develop an understanding of Valuair's market position and use this understanding to advice investment decisions.

Supplementary materials

Teaching notes are available for educators only. Please contact your library to gain login details or e-mail support@emeraldinsight.com to request teaching notes.

Details

Emerald Emerging Markets Case Studies, vol. 3 no. 4
Type: Case Study
ISSN: 2045-0621

Keywords

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Case study
Publication date: 31 December 2013

Terence P.C. Fan

– “Way smarter”: Valuair in the budget airline industry.

Abstract

Title

“Way smarter”: Valuair in the budget airline industry.

Subject area

Strategic management and marketing.

Study level/applicability

Executive education; postgraduate; undergraduate.

Case overview

By 2004, the low-cost carrier model had just recently been introduced to Southeast Asia. Airlines under this model quickly began taking market share. Singapore ' s first budget carrier, Valuair, finds itself in fierce competition between two rapidly emerging competitors in the second half of 2004. Valuair needs to expand in order to remain competitive. However, for this to happen the company needs additional access to capital. The CEO, Sim Kay Wee, has begun pitching to investors that his company is a smart low-risk investment. Is Sim right, given Valuair ' s competitive position and the market environment in which it operates?

Expected learning outcomes

Students will be able to apply strategic frameworks in order to develop an understanding of Valuair ' s market position and use this understanding to advice investment decisions.

Supplementary materials

Teaching notes are available for educators only. Please contact your library to gain login details or e-mail support@emeraldinsight.com to request teaching notes.

Details

Emerald Emerging Markets Case Studies, vol. 3 no. 4
Type: Case Study
ISSN: 2045-0621

Keywords

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Book part
Publication date: 14 December 2018

Colin C. H. Law, Yahua Zhang and Anming Zhang

This chapter reviews the history of regulation and deregulation in international air transport and discusses the positive impacts of deregulation and open skies on the…

Abstract

This chapter reviews the history of regulation and deregulation in international air transport and discusses the positive impacts of deregulation and open skies on the tourism sector in the Asia Pacific region. The Hong Kong–Bangkok market was examined, which shows that the granting of the fifth freedom rights has given the two places sufficient air service provisions to build tourism. Future reforms in air transport such as relaxing ownership restrictions and expanding air freedoms rights are explored.

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Book part
Publication date: 31 May 2016

Mikio Takebayashi

This chapter examines the airline performance effect arising from collaboration between airlines and high speed railway (HSR). The analysis presents scenario simulations…

Abstract

This chapter examines the airline performance effect arising from collaboration between airlines and high speed railway (HSR). The analysis presents scenario simulations using a bi-level model, which takes into account the effect of competition among airlines and HSR. Using real data, we examine the Japanese domestic market and the Japan-based international market: the markets consist of Tokyo Metropolitan Area, Osaka Metropolitan Area, Seoul/Korea, Frankfurt/Germany, Paris/France, London/United Kingdom, and Los Angeles/United States. Analysis of the domestic market assumes airlines and HSR compete against each other, and analysis of the international market assumes airlines only compete with each other. Initially, we conduct performance analysis using a simulation that mimics the current relationship between airlines and HSR. Then we present three scenarios for different combinations of collaboration between airline and HSR based on airline alliances. The results from this exercise are then used to examine the impact of the collaboration on the profits of airlines and HSR, passenger’s utility, and the network design of airlines. Last, we show the potential benefit to airlines – profitability, market share, and demand growth – from the airline-HSR collaboration. Our model shows that in Japan: (1) Airlines can improve their profitability in international operations by the collaboration with HSR when airlines set their hubs so they can connect to HSR; (2) The airline which has a lower unit operating cost than rivals and sets its hubs to connect to HSR can improve its joint profit with HSR through collaboration; (3) Airlines that don’t operate domestic flights and don’t set their hubs to connect to HSR encourage increased fare competition by coordinating with HSR, but their profit decreases. Whether these results are generalizable to other regions should be the subject of future study.

Details

Airline Efficiency
Type: Book
ISBN: 978-1-78560-940-4

Keywords

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