Airlines Entry and Exit and the Impact on Air Traffic Management: An Analytical Framework for Zero-Sum and Positive-Sum Outcomes

Abstract

Passenger airline service can have a significant impact on a metropolitan region's economy in terms of direct spending and employment, as well as on indirect spending related to industries such as tourism and the service sector. In the past decade passenger service levels have changed considerably in many markets because of a wide variety of events including increased competition, terrorism, and a downturn in the economy. Airlines have responded to these challenges in a variety of ways. Some of the traditional network carriers have been forced into bankruptcy in an attempt to reduce costs and compete more effectively with low cost carriers. In contrast, the low cost carriers have expanded service and entered new markets at a rapid pace.

This paper examines the economic evolutionary process whereby a dominant carrier competes intensely in one market against a similar airline and retreats in another where new, lower-cost entrant expands service. Literature is examined for evidence pertaining to the market's response to a network carrier's financial distress, its impact on airport service levels, and implications for local economies. A zero sum case is explained using a recent example. A positive sum case is explored, where the positive contributions of the entering carrier exceed those left behind by the resident carrier. In the process, depending on the types of gains and nature of the evolving airlines' network, the patterns of air traffic may also change. Using these experiences, an analytical framework is proposed that attempts to explain the emergent behavior of low cost carriers when they enter new markets. In addition, the impact of these changes on the air traffic management system is also examined.