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Air Travellers' Security Charge (ATSC) and Low Cost and Regional Air Carriers : 2
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IV. Analysis of City Pair Markets in the Context of the ATSC

A.  Background to Analysis

In considering the implications of the ATSC for air travel, the form of the charge (a flat $24 per return trip) is a key factor. While the ATSC increases the cost of air travel by a uniform $24 per round trip, the implications for various markets vary significantly due to the wide range in air fares. For example, the increased cost of air travel to a business traveller on a transcontinental trip could well be less than 1% versus a 24% increase for a passenger on a $100 return ticket for a short haul trip.

The relationship between the ATSC and the level of airfare is a key parameter to understanding the implications of the ATSC: this analysis provides a comprehensive presentation of the characteristics of the relationship on a city pair basis.

1.  Factors that Affect the Level of Airfares

Airline pricing is a complex process that reflects the nature of the demand for air travel, the cost of providing service and the management process of balancing revenues and costs to earn a profit. The following discussion is intended to highlight some of the main features.

(a) Segmentation of air travel demand by business and non-business travellers has a particularly strong influence on airline pricing:
  • Business travellers are typically considered to be less price sensitive, least able to make travel commitments ahead of time or to make use of alternative travel arrangements, and often require flexibility to change travel arrangements at the last minute. Business travellers generally pay much higher prices than non-business travellers;
  • Non-business travel is generally considered to be price sensitive: with price elasticities greater than minus one, airlines can increase revenues by lowering prices[2].

Many airlines have responded to the segmentation of air travel demand by differential pricing, whereby low airfares are targeted at non-business travellers to fill seats that would otherwise go empty. The integrity of the pricing structure is maintained by applying conditions to low fares that make them unattractive to business travellers (such as pre-booking periods and return after a Saturday night). Further, techniques such as yield management to manage seat inventories by type of fare provide effective tools to maximize revenue on a flight basis.

(b)  The cost of providing service also has a direct effect on prices. For example, the distance by air is a major factor for aircraft operating costs and is reflected in the structure of airfares. Another cost factor affecting airfares arises from variations in cost by flight segment across a network of flights. In this case, seats on flight segments with excess capacity can be discounted to encourage passengers to choose itineraries making use of the segment or to attract local passengers and thus fill seats that otherwise would be empty.

Airline costs are by no means uniform and many carriers have chosen to specialize in certain market niches. For example, Westjet initially focused its strategy on short haul markets and developed a cost structure sufficiently low to permit competition with automobile travel. Other carriers such as Tango and Canjet are focused at providing low cost air travel to non-business travellers in medium and long haul markets.

(c)  The pressure of competition from other airlines and modes of transport has an important impact on airfares. Where effective air competition is in place, airfares are typically lower, particularly for the lower, so-called discount airfares. The strength of ground competition has an important influence on airfares in short and medium haul markets, particularly where delays and connections (such as ferries) are involved.

2.  Analytical Procedure

The analysis of the relationship between the ATSC and the level of airfares is designed to reflect the structural features discussed above.

Airfares for each city pair market have been collected to illustrate the range in fares available to both business and non-business travellers (see the above discussion on the segmentation of air travel demand). Three fares have been selected:

The regular published economy is used to represent a walk-on fare where a passenger is assured of transportation with little or no advance commitment, re-fundability, or restrictions on date of return, routing etc. For the most part, these are the Y or Y1 fares published by the airlines. While relatively few passengers use these fares (usually only 10 to 15%), they are often used as a reference benchmark for comparing other fares. Traditionally, the economy fares of a specific carrier have been distance based.

The lowest available fare to the public is of particular interest to non-business travellers who are able to accommodate the many conditions attached to their purchase (return after a Saturday night, advance purchase, limited inventory, limited re-fundability, etc.). Low airfares are very popular: in response to the survey, a number of airlines have indicated that as a general guideline, passengers travelling on airfares within 15% of the minimum represent 40 to 50% of all passengers. The lowest available adult fare, excluding seniors, and short-term, limited availability seat sales, was used to represent this fare segment.

These fares offer transportation typically at about 20% less than the economy fare, but this discount can vary significantly. None of the fares selected require a Saturday night return and business travellers can often accommodate the remaining restrictions that may apply (minor advance booking or 3 day return restrictions). For this reason, "B" or "M" class fares can be used as one guideline for fares available to business travellers. Where fares are not sold by fare class, typical for Low Cost carriers, unrestricted fares available 10 days in advance were used.

The tabulation of the relationship between the ATSC and the level of airfares is presented for Low Cost carriers separately from Regional carriers in recognition of the differences in cost structure and market orientation. For each airline group, city pairs are reported by distance category in order to bring some further homogeneity with respect to airline operations and costs, and the degree of competition from surface modes.

The analysis highlights city pairs where the ATSC represents a high or low percentage of the Lowest fare and includes additional information on the extent of ground and air competition.

B.  City Pair Markets Served by Low Cost Air Carriers

A summary of the Walk-on, "B"/"M" and Lowest fares (including taxes and surcharges) and the percentage increase in fares due to the ATSC for city pairs in each of the three distance categories is presented in Exhibit IV-1. Estimates of the numbers of OD passengers and the travel time savings by flying, allowing for driving times to/from the airport and time spent at the airport, compared to travelling by surface modes are also included in the exhibit. Similar information by city pair and air carrier is presented in Exhibit IV-2 and detailed information is provided in Appendix C.

Low Cost air carriers provide same plane service between about 175 city pairs, carrying roughly 160,000 OD passengers per week in September 2002 between these city pairs (excluding connecting passengers). All of these city pairs are between ATSC listed airports and are therefore subject to the ATSC. The ATSC represents an increase of 8.9% in the Low fare and 7.0% of the "B"/"M" class fare when averaged over all OD passengers on these routes. The breakdown of routes is as follows:


2  The term "price-elasticity" refers to the behaviour of consumers, in response to a change in price. It is defined as: the ratio of the % change in consumption in response to the corresponding % change in price. For example, if consumption falls by 10% in response to an increase in prices of 10%, the elasticity is -1.0. Markets where the elasticity is less than –1.0 are said to be price inelastic and markets where the elasticity is greater than –1.0 are said to be price elastic. [Return]

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