What’s the difference in yield for travel between large citiesas opposed to small cities? 1

What’s the difference in yield for travel between large cities as

opposed to small cities?

Robert F. Luke Jr.

Yielding to Competition

What’s the difference in yield for travel between large citiesas opposed to small cities? 2

What’s the difference in yield for travel between large cities as

opposed to small cities?

The demand for air travel has increased at an accelerated

rate of growth since the De-regulation Act of 1978. The

introduction of low fare carriers and the merger of traditional

airlines have made flying accessible to all economic classes.

Over the past 34 years we have witnessed a dramatic decrease in

the overall average cost to travel by air. Throughout these

changes in demand and price elasticity over the past years, the

benefactors of these changes are markets driven by pure

competition. These markets determine the yield and how much

airlines will charge to travel. Low cost carriers (LCC’s) have

succeeded in creating competition in markets that were once

oligopolies. LCC’s have lowered the yields in markets that were

What’s the difference in yield for travel between large citiesas opposed to small cities? 3

once high yield destinations for traditional airlines. Not all

cities were afforded the same relief as some were just not big

enough to receive the metro discount. The focus of this research

paper will be to explain what’s the difference in yield for

travel between large cities as opposed to small cities? Rural

communities in need of air carrier service pay a greater expense

than urbanized residents airlines yield to, in order to remain

competitive against their rivals. During the Regulation era,

airlines understood their roles and the service they provided,

and didn’t really cross those restricted flight areas. Airlines

worked together to keep the UFA’s (unidentified flying airlines)

out of their airspace during the Regulation era to protect their

interests. The De-regulation has opened the airspace to UFA’s

and competition has driven airline prices. The level of

competition has determined who will be the sacrificial lambs and

who will receive hub and spoke immunity.

According to John Bitzan; assistant professor of the College

of Business Administration at North Dakota State, and Junwook

What’s the difference in yield for travel between large citiesas opposed to small cities? 4

Chi; Research Fellow Upper Great Plains Transportation Institute.

“the U.S. General Accounting Office (U.S. GAO) studying airfare

changes between 1979 and 1994 at 112 of the nation’s largest

airports:”

• real airfares dropped by 8.5 percent at airports serving small communities

• real airfares dropped by 10.9 percent at airports serving medium-sized communities• real airfares dropped by 8.3 percent at airports

serving large communities

Further, in examining airfare changes between 1990 and the second quarter of 1998 for 171 airports, GAO (1999) found:

• real airfares dropped by an average of 19.5 percent at airports serving small communities• real airfares dropped by an average of 22 percent at airports serving medium communities• real airfares dropped an average of 22.2 percent at airports serving medium-large communities• real airfares dropped an average of 21 percent at airports serving large communities

Even though airfares on the average dropped a study in 1996

confirmed that 13 of the 49 small airports studied airfares

increased, 19 of the 38 medium airports witnessed an increase in

airfares, and 7 of the 35 large airports studied had airfares

What’s the difference in yield for travel between large citiesas opposed to small cities? 5

increased. “GAO (1996) found the fare reductions tended to occur

at airports that realized increased competition, particularly

low-cost carrier competition.” This study also recognizes that

wherever there was not a strong presence from low cost carriers

or no low cost carrier service at all airfares dramatically

increased above the national average air fare cost. A 1999 GAO

study focusing air fares during the years 1994-1998 explains this

fact. “In making an assessment of why these communities may have

realized fare increases, GAO noted that 12 of the 13 small

community airports, 3 of the 4 medium community airports, and 7

of the 9 medium-large community airports where fare increases

occurred were served by an airline that had at least a 40 percent

share of the airport’s passengers. Moreover, for the 13 large

community airports where fare increases occurred, 7 were hubs for

major airlines. Finally, none of the small and medium community

airports where fare increases occurred were served by low-cost

air carriers. Low cost air carriers had small market shares at

most of the medium-large and large airports where fare increases

occurred.” The rural air fare study completed for Congress by

What’s the difference in yield for travel between large citiesas opposed to small cities? 6

the Department of Transportation in 1996 examined the origin-

passenger survey (O&D Survey) submitted by large certificated air

carriers. A yield (dollars/mile) by Mileage Category chart below

illustrates the difference in average yields when low cost

carriers are competing and in these markets and when they are

not.

Yield (dollars/mile) by Mileage CategoryMarket Category 1-250 251-500 501-750 751-1000 1001-1500 1501-2000 2000+ TotalSmall CommunitiesAverage Yield .7073 .4044 .3028 .2267 .1761 .1532 .1271 .2161All Large HubsAverage Yield .3832 .2453 .1970 .1725 .1386 .1246 .1109 .1546Large hubs -w/low fare comp. .2969 .1927 .1542 .1411 .1185 .1180 .0798 .1436w/o low fare

comp. .6107 .3877 .4436 .2091 .2772 .1347 .1145 .2055

It is evident that competition drives the yield in the

airfare. The Department of Transportation explains that the

average yields in markets in the 501-750 mile category ranged

from 10.34 cents per mile to 40.83 cents per mile. The yield

What’s the difference in yield for travel between large citiesas opposed to small cities? 7

provides a wide range but makes perfect sense from the eyes of an

airline. Atlanta’s Hartsfield International airport is a great

example of this being Delta’s primary hub as well as Air Tran’s,

a low cost carrier. In markets they directly compete against

each other, the yield is significantly lower than markets where

they don’t compete against each other. For example, a fare from

Boston to Atlanta will have lower yields than air fares from

Atlanta to Columbia, South Carolina (SC). Reason being is

simple; Boston and Atlanta are aviation mega-cities that both Air

Tran and Delta serve creating competition for both carriers to

meet their load demands. The yield in this market will also be

lower since Air Tran is a competitive low cost carrier that can

operate with lesser operational expenses than Delta. The cause

and effect of this triggers a need for lower yields in this

market to maintain load capacity in this market. The yield in

the Atlanta to Columbia, SC market will be greater for two

reasons. The route is not served by Air Tran and Delta provides

the only direct service to Atlanta from Columbia, SC. This

allows Delta to charge whatever price they want because they are

What’s the difference in yield for travel between large citiesas opposed to small cities? 8

the only carrier meeting the demands of service for that route.

Researching airfares on cheaptickets.com provides the evidence in

my hypothesis to establish the theory. The results have been

provided below.

The price of service below from Atlanta to Columbia, SC verifies

the higher yield in airfare, due to the lack of competition in

the market and market control by Delta.

What’s the difference in yield for travel between large citiesas opposed to small cities? 9

Even though US Air Express offers service at 343.00, the flight

connects through Charlotte, NC where you have a layover that gets

you into Atlanta three hours later. Delta’s flight is non-stop

and gets you there in an hour. Most travelers in this case would

prefer to drive for four hours to Atlanta instead of being

delayed in airports for three hours, or pay the high yield as

most business travelers do in order to receive the convenience of

What’s the difference in yield for travel between large citiesas opposed to small cities? 10

a one hour flight. Smaller markets like Columbia, SC are more

expensive to serve since there is lower traffic density, shorter

miles travelled, lower load factors, and smaller aircraft needed

to service the market. These markets are often dominated by one

or two airlines which typically lead to higher yields in

airfares. Marketing power has an impact on the airfare yields as

frequent flyer programs offered by major airlines provide more

incentive to the business traveler to fly with them. The ability

to earn free flights with airlines that service more destinations

is the deciding factors to pay the increased yields in airfares.

However, at the end of the business day though, the competition

between airlines and the cities they are competing for service in

determines the yield between small and large cities.

A hypothesis is not theory until research proves it to be

factual. The competition in large and small city markets

determines the yield in airfare, market demand, and ticket price.

Smaller cities will continue to experience the higher yield in

airfares as long as the airlines serving their city own more than

forty percent of the market, provide the only needs to their

What’s the difference in yield for travel between large citiesas opposed to small cities? 11

demands, and have no direct competition to affect the airfare

yield. The airfare disparity is an unfair business practice for

the consumer, but a ‘fare’ market value for the airline(s)

providing the small city service. The government used to demand

the airlines serve smaller cities and pay them for the empty

seats. Now the airlines just charge the passengers who eagerly

look for a chance to fill the seat. As low cost carriers evolve

maybe the yield will too and allow smaller cities to enjoy the

savings major cities do when competition promotes savings.

Works Cited

Rural Airfare Study (1998)

Retrieved from

What’s the difference in yield for travel between large citiesas opposed to small cities? 12

http://ostpxweb.dot.gov/aviation/rural/scexec.pdf

Bitzan, John and Chi, Junwook (2004): “Airfares to Small and

Medium Sized Communities.” North Dakota State University.

General Accounting Office (GAO) (1999): “Airline Deregulation:

Changes in Airfares, Service Quality, and Barriers to Entry.”

Report to Congressional Requesters, Washington, D.C.

General Accounting Office (GAO) (1996): “Airline Deregulation:

Changes in Airfares, Service, and Safety at Small, Medium-Sized,

and Large Communities.” GAO/RCED-96-79, Washington, D.C.

General Accounting Office (GAO) (1999): “Airline Deregulation:

Changes in Airfares, Service Quality, and Barriers to Entry.”

GAO/RCED-99-92, Washington, D.C.

General Accounting Office (GAO) (1990) “Airline Deregulation:

Trends in Airfares at Airports in Small and Medium-Sized

Communities.” GAO/RCED-91-13, Washington, D.C.

http://www.ugpti.org/pubs/pdf/DP156.pdf

Published Airfares

What’s the difference in yield for travel between large citiesas opposed to small cities? 13

Retrieved from

www.Cheaptickets.com