This paper examines actual entry and exit dynamics in the German airline market in light of the European liberalization process. For this purpose, flight schedules data was used to derive entry and exit statistics for a set of chosen inner-German routes over a period of thirteen years. Data was analysed in cross-sectional and longitudinal manner while identifying different entry waves and examining incumbent behaviour with respect to entry deterrence strategies. Furthermore, the market’s concentration and structure was tracked to allow a conclusion with respect to the market’s contestability after liberalization. The results suggest the existence of remaining structural barriers to entry and depict a rather unsatisfactory overall state of the post liberalized market.
Table of Contents
1 INTRODUCTION
2 THE LIBERALIZATION PROCESS OF EUROPE’S SKIES
2.1 Pre-Liberalization Status Quo
2.2 Liberalization of Intra-European Air Transport
2.2.1 The three Liberalization Packages
2.2.2 Cabotage Rights
2.2.3 The Single European Sky Initiative 2004
2.3 Liberalization of International Air Transport
2.4 Liberalization Review
3 THEORY
3.1 What do we know about entry?
3.2 Entry deterrence and dynamic competition
3.2.1 A model of limit capacity
3.2.2 Excess capacity as prospect for collusion
3.3 A four-stage game of airline market entry
3.4 Airline capacity utilization
4 THE GERMAN AIRLINE MARKET
4.1 Infrastructure
4.1.1 Airports
4.1.2 Slots, slot pools and slot allocation
4.2 Demand for air travel
4.3 Supply of air travel
4.4 Ground transport
4.4.1 Railway system
4.4.2 Road network
4.5 Modes of transport compared
4.6 The short-haul problem
5 ANALYSIS OF ENTRY AND EXIT
5.1 Purpose
5.2 Data
5.2.1 Data construction
5.2.2 Strengths and weaknesses of the data set
5.3 Methodology
5.4 Entry, exit and welfare effects
5.5 Entry and exit over time
5.5.1 The 1996 entry wave
5.5.2 The 2004 entry wave
5.5.3 Airlines 1993-2006
5.6 Entry, exit and market concentration
5.7 Entry, exit and incumbent behaviour
5.8 Entry, exit and prices
5.9 The German Airline Market in 2006
5.9.1 Route network
5.9.2 Market shares
5.9.3 Brand competition
5.10 Summary of Results
6 IMPEDIMENTS TO COMPETITION
6.1 Barriers to entry
6.1.1 Strategic barriers to entry
6.1.2 Structural barriers to entry
6.2 Alliances – an economic necessity?
7 SUMMARY
Research Objectives and Key Topics
This thesis examines the entry and exit dynamics within the German airline market following the European liberalization process. The central research objective is to analyze whether the liberalization of the European sky had an effect on competition on large national routes, evaluating whether structural barriers to entry continue to limit market contestability.
- Analysis of market entry and exit waves from 1993 to 2006.
- Evaluation of incumbent behavior and entry deterrence strategies (capacity and frequency).
- Assessment of market concentration and structure in the post-liberalized environment.
- Comparison of air travel with ground transport alternatives.
- Investigation of the impact of airline alliances and consolidation.
Excerpt from the Book
4.6 The short-haul problem
The previous section on Germany’s ground transportation structure together with the comparison of the different modes of transport have shown that alternative modes of transportation, namely railway and private automobile, are highly attractive in the inner-German market. Accordingly, ground transport is a substitute for air transport especially on short to medium distances. As substitutability is high, demand is strongly sensitive to prices or in other words, price elasticity and cross-price elasticity of demand are high. Therefore, to attract traffic in short-haul markets, airlines need to keep fares low. On the other hand, to cover the higher seat-mile costs on short stage lengths, an airline needs to keep its rates high. This short-haul dilemma does also exist for other modes of transport but is acute for the airline industry due to the structure of the costs involved. The underlying economic problem is that of economies of scale, which exist even for a single flight since the costs for an airline to take-off and landing are constant no matter how long the distance of the flight will be. This includes the costs for processing passengers and cargo at terminals, landing fees at the airport and higher fuel consumption during take-off and landing. Costs per seat-mile consequently decrease as the size of the airplane (more seats) and/or the length of stage (the distance flown) increase. Short-haul traffic therefore puts pressure on prices due to higher seat-mile costs as a result of a shorter length of stage on the one hand and a usually smaller aircraft due to high frequencies (which multiplies the problem) on short distance routes on the other hand.
Summary of Chapters
INTRODUCTION: Provides an overview of the airline industry’s economic challenges and the regulatory context of liberalization.
THE LIBERALIZATION PROCESS OF EUROPE’S SKIES: Summarizes the history and legislative measures of European airline liberalization, including the three liberalization packages.
THEORY: Reviews theoretical perspectives on market entry, exit, and entry deterrence, particularly in the context of excess capacity and game-theoretic models.
THE GERMAN AIRLINE MARKET: Defines the German market landscape, analyzing infrastructure, demand, and the specific competitive pressures from ground transport and low-cost carriers.
ANALYSIS OF ENTRY AND EXIT: Presents empirical data on entry and exit dynamics, market concentration, and incumbent behavior from 1993 to 2006.
IMPEDIMENTS TO COMPETITION: Discusses remaining structural and strategic barriers to entry and the role of alliances in the current market environment.
SUMMARY: Concludes the findings, noting the persistent low contestability of the German market despite liberalization efforts.
Keywords
Airline Industry, Market Liberalization, Entry and Exit Dynamics, German Airline Market, Slot Allocation, Market Concentration, Low Cost Carriers, Incumbent Behavior, Entry Deterrence, Economies of Scale, Airline Alliances, Market Contestability, Short-haul Problem, Air Transport, Infrastructure
Frequently Asked Questions
What is the core subject of this thesis?
The thesis investigates the competitive landscape of the German airline market following the European liberalization process, focusing specifically on entry and exit dynamics on major national routes.
What are the central themes explored in the work?
Key themes include the legislative transition of the European aviation market, the role of entry barriers (both structural and strategic), the influence of ground transport competition, and the behavior of incumbent airlines in response to new market entrants.
What is the primary research question or objective?
The primary objective is to determine if European liberalization effectively promoted competition and market contestability on major inner-German routes, or if structural barriers persist.
Which scientific methodology is utilized?
The author employs a descriptive empirical approach, utilizing annual flight schedule data from OAG/DLR to track entry and exit patterns, calculate market concentration (Herfindahl index), and analyze firm-level behavior over a thirteen-year period.
What is covered in the main body of the paper?
The main body covers the legislative history of liberalization, theoretical frameworks for market entry, a detailed characterization of the German market infrastructure and demand, and a comprehensive empirical analysis of route-level competition.
Which keywords best characterize this research?
Key terms include market liberalization, entry and exit dynamics, airline competition, slot allocation, market concentration, and structural barriers to entry.
How does the author define the "short-haul problem"?
The "short-haul problem" refers to the economic difficulty airlines face on short routes, where high fixed costs for take-off and landing clash with the need to keep fares low due to high price sensitivity and competition from ground transport.
What role do airline alliances play according to the research?
The author suggests that while alliances may offer operational efficiencies, they also carry an inherent risk of becoming anticompetitive by increasing market concentration and reducing the number of effective independent competitors.
- Citation du texte
- Nicole Petrick (Auteur), 2007, Entry and exit in the post-liberalized German airline market, Munich, GRIN Verlag, https://www.grin.com/document/78738
