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Outsourcing and Price Competition: An Empirical Analysis of the Partnerships Between Legacy Carriers and Regional Airlines

Abstract

This paper investigates the determinants and competitive effects of legacy carriers’ outsourcing decision with independent regional airlines. Legacy carriers allocate a larger share of their operations to an independent regional airline partner compared to their own fleet or a wholly owned regional airline on routes that experience stronger competition, particularly from low-cost carriers. Moreover, legacy carriers’ airfares are lower on routes that they outsource more prominently to an independent regional airline. The results suggest that increased route competition is a motivation for the growing use of independent regional airlines by legacy carriers.

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Fig. 1

Notes

  1. 1.

    Legacy carriers are major airlines that existed prior to industry deregulation in 1978. The “Big Six” legacy carriers studied in this paper are American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines, United Airlines, and US Airways.

  2. 2.

    The key distinction between the ticketing carrier and the operating carrier is that the ticketing carrier is the airline that the passenger purchased the ticket from, whereas the operating carrier is the airline that is in charge of the aircrew and fleet that are used on the flight.

  3. 3.

    Market fare is calculated by the U.S. Bureau of Transportation Statistics as the itinerary yield multiplied by the number of miles flown. Ancillary fees—such as baggage fees, priority seating fees, and the cost of food and beverage purchased on the flight—are not accounted for in the market fare.

  4. 4.

    Since this paper focuses on the legacy carriers’ outsourcing decision with their independent regional airline partners, wholly owned regional airlines are not reported in Table 1.

  5. 5.

    It can be the case that regional airlines are flying travelers on one leg of a one-stop or multi-stop itinerary. However, the issue with these itineraries is that a legacy carrier can be responsible for a portion of the one-stop or multi-stop itineraries as well. In other words, I focus on nonstop products in order to avoid the complication with some passengers flying on a legacy carrier plane to get them from a origin airport to a hub airport and then a regional airline from the hub airport to the final destination airport. Thus, a focus on nonstop products provides a cleaner analysis of the legacy carrier’s decision to operate that particular route itself or with an independent regional airline.

  6. 6.

    Following Kwoka et al. (2016), the five LCCs that are studied in this paper are: Allegiant Air, AirTran Airways, Frontier Airlines, JetBlue Airways, and Southwest Airlines.

  7. 7.

    See Brueckner et al. (2013), Kwoka et al. (2016), and Rupp and Liu (2016) for more details on LCCs.

  8. 8.

    I do not include panel fixed effects (e.g. carrier-route fixed effects) in Eq. (1) since Greene (2014) explains that the incidental parameters problem arises when including time-invariant fixed effects in a Tobit model, leading to a downward bias in the disturbance variance parameter and unreliable estimates of marginal effects.

  9. 9.

    Regional airlines do not sell tickets independently from legacy carriers and rely exclusively on legacy carriers for passenger traffic. In fact, official websites for regional airlines will merely identify the routes that it services for legacy carriers and sometimes include links to the legacy carrier’s official website for ticketing purposes.

  10. 10.

    The estimated coefficient for Bankrupt is blank for Continental Airlines since it never went under bankruptcy protection during the sample time period.

  11. 11.

    WN is the International Air Transport Association code for Southwest Airlines.

  12. 12.

    See Borenstein (1989), Lee and Luengo-Prado (2005), and Lederman (2008).

  13. 13.

    See Borenstein and Rose (1994), Stavins (2001), and Gerardi and Shapiro (2009).

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Acknowledgements

I would like to thank the editor, Larry White, and two anonymous referees, as well as Matthew Lewis, James Peck, Huanxing Yang, Stephen J. K. Walters, Nicholas Rupp, and seminar participants at The Ohio State University, East Carolina University, the Southern Economic Association Annual Meeting, and the International Industrial Organization Conference for helpful suggestions and comments. All errors are my own. Earlier versions were circulated under the title, “Pro-Competitive Vertical Integration: The Relationship between Legacy Carriers and Regional Airlines.”

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Correspondence to Kerry M. Tan.

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Tan, K.M. Outsourcing and Price Competition: An Empirical Analysis of the Partnerships Between Legacy Carriers and Regional Airlines. Rev Ind Organ 53, 275–294 (2018). https://doi.org/10.1007/s11151-017-9610-z

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Keywords

  • Outsourcing
  • Legacy carriers
  • Regional airlines
  • Low-cost carriers
  • Airfares