May 5, 2009

THE ECONOMICS OF AIRPLANE LAYOVERS
     By Catherine Rampell

(Photo credit: Chris Ratcliffe/Bloomberg News)

A new working paper, from Steven Berry at Yale and Panle Jia at M.I.T., looks at the turmoil the United States airline industry went through earlier this decade. Among the interesting findings:

1) Passengers really, really hate layovers. In fact, according to a model the authors use, "the number of passengers on a direct flight would reduce by almost four-fifths when a layover is added to the route."

2) It used to be cheaper for an airline to place a passenger on a connecting rather than on a direct flight. But by 2006, it was more expensive. Why?

I had always wondered whether airlines could make more money on connecting flights than direct flights. On the one hand, passengers hate indirect flights (see #1). This means that consumers are probably willing to pay less for tickets on indirect flights, so the airline’s revenue per trip (and presumably per mile each passenger is flown) is lower. On the other hand, connecting flights can accommodate a broader array of travel routes (and thus more passengers), especially if there is a hub system.

But, according to this new research, perhaps the real sticking point on the costs side is fuel:

In 1999, there was evidence of scale economies for connecting flights. Conditioning on other variables, the marginal cost of serving a connecting passenger on a long route was $18 less than that of a direct passenger, or roughly 12 percent of the average marginal cost.

The cost advantage of connecting flights disappeared in 2006. Conditioning on other cost shifters, the marginal cost of a connecting flight was $12 more expensive than that of a direct flight. The change is probably driven by the increasing fuel cost in the sample period. Since the fraction of fuel consumed at the takeoffs and landings could be as high as 40 percent, rising fuel costs offset the benefit of denser traffic created by connecting flights.