1. Airline Industry Consolidation William M Swan Chief Economist Boeing Commercial Airplanes Marketing December 2003

2. “The Industry is Consolidating?” Airlines are disappearing: –SwissAir; Sabena; Canadienne Airlines are getting smaller –USAir; United; British; Scandinavian These are venerable names –Large airlines; Brand names; Long histories

3. Whose Viewpoint? 1.Boeing/Airbus/Engine Manufacturers Number of airlines in world & shares 2.Regulators Number of airlines in region & shares 3.Passengers Number of airlines going where I want to go

4. Airlines in the World Suppliers to airlines want to know –How many customers –How much market power for each Two Measures –Share of top 10 airlines in world –Herfindahl “number of competitors” Answer –Concentration is getting LESS

5. World Top 10 Airlines' Share of Available Seat Kilometers is Declining

6. The Data Published (OAG) jet schedules for August--33 years Excluding two regions not published before 1990 –Mainland China domiciled carriers –CIS domiciled carriers Share for top 10 airlines in 1971 was 55% Share for top 10 airlines in 1985 was down to 42% US Consolidation 1987-1992 increased top to back to 51% Decline in recent decade to 41% Trend consistently down during decade US Carriers drive answer: 6 or 7 out of top 10 airlines Top 10 roster changed – “birth and death” process

7. Equivalent Competitors Rises from 24 to 42

8. What Does “Equivalent Competitors” Mean? Scheduled Jet Schedules 1971-2003 –Airline share of world ASK (Available Seat Km) “Herfindahl” number of competitors –Competition is number of equal-sized airlines –Expresses actual all-airlines’ shares into equivalent equal shares that have the same level of competition –Actual airlines runs from 155 in 1971 to 400 in ’03 –“Herfindahl” is a widely-accepted measurement – H = 1 / ∑(S a 2 )  airlines a

9. Who Dominates my Territory? Airlines in Regional Flows “Market” no longer the whole world –Markets are major regional flows –Short-haul flows: Europe, Asia, N. America, Other Short –Long-Haul flows: Atlantic, Pacific, Asia-Europe, Other Long This gives Regulators’ viewpoint Reflects competition among local majors –Total world statistics are dominated by US carriers

10. Slow Decline in Top 10 Shares in all four Regional Flows

11. Regulators’ Viewpoint: Competition isRising in Short-Haul Flows

12. Top 10 Airlines’ Share Shows Strong Decline in all Long-Haul Flows

13. Regulators’ Viewpoint: Competition is Rising in Long-Haul Flows

14. Passengers’ Perspective: How Many Airlines by Airport Pair? This gives a passenger’s viewpoint “Market” is a single nonstop airport-pair Data is ASK-weighted average of markets World, Short-Haul Flows, Long-Haul Flows Answer is near 2 for short-haul Answer is near 3 for long-haul

15. Passengers’ Perspective World Average Number of Competitors Small Decline based on Airport Pairs

16. Regional Competition is Flat From Passengers’ Perspective

17. Long-Haul Competition Declines From Passengers’ Perspective Based on Airport-Pairs

18. “Reduced” Competition in Pairs Comes with Many New Pairs

19. Regional Flows Also had Large Increases in Number of Pairs

20. Nonstop, ASK, Airport-pair Data Underestimates Competition and Growth Comparison data available for US Domestic –Passenger ticket data (O-D) –By Passenger Origin-Destination and Airline Airport-pair, ASK-weighted, Competitors: –Declines from 2.4  1.6 –This is Passenger measure quoted above O-D, Revenue-Weighted, rises: 2.1  2.3 O-D City-pair, $-wt, rises more: 2.3  2.8

21. The Better the Measure, The Nicer the Answer

22. Competition is Getting Better Less Consolidation world-wide Less Consolidation within Flows Competition by Airport-Pair nearly Flat Measurement Underestimates –Passenger O-D values are higher –By City-Pair competition is rising Measured both intuitively (top 10) and “Scientifically” (Herfindahl Competitors)