Entry and exit in the post-liberalized German airline market

Table of Contents

1 INTRODUCTION

2 THE LIBERALIZATION PROCESS OF EUROPE’S SKIES

2.1 Pre-Liberalization Status Quo

2.2 Liberalization of Intra-European Air Transport

2.2.1 The three Liberalization Packages

2.2.2 Cabotage Rights

2.2.3 The Single European Sky Initiative 2004

2.3 Liberalization of International Air Transport

2.4 Liberalization Review

3 THEORY

3.1 What do we know about entry?

3.2 Entry deterrence and dynamic competition

3.2.1 A model of limit capacity

3.2.2 Excess capacity as prospect for collusion

3.3 A four-stage game of airline market entry

3.4 Airline capacity utilization

4 THE GERMAN AIRLINE MARKET

4.1 Infrastructure

4.1.1 Airports

4.1.2 Slots, slot pools and slot allocation

4.2 Demand for air travel

4.3 Supply of air travel

4.4 Ground transport

4.4.1 Railway system

4.4.2 Road network

4.5 Modes of transport compared

4.6 The short-haul problem

5 ANALYSIS OF ENTRY AND EXIT

5.1 Purpose

5.2 Data

5.2.1 Data construction

5.2.2 Strengths and weaknesses of the data set

5.3 Methodology

5.4 Entry, exit and welfare effects

5.5 Entry and exit over time

5.5.1 The 1996 entry wave

5.5.2 The 2004 entry wave

5.5.3 Airlines 1993-2006

5.6 Entry, exit and market concentration

5.7 Entry, exit and incumbent behaviour

5.8 Entry, exit and prices

5.9 The German Airline Market in 2006

5.9.1 Route network

5.9.2 Market shares

5.9.3 Brand competition

5.10 Summary of Results

6 IMPEDIMENTS TO COMPETITION

6.1 Barriers to entry

6.1.1 Strategic barriers to entry

6.1.2 Structural barriers to entry

6.2 Alliances – an economic necessity?

7 SUMMARY

Research Objectives and Key Topics

This thesis examines the entry and exit dynamics within the German airline market following the European liberalization process. The central research objective is to analyze whether the liberalization of the European sky had an effect on competition on large national routes, evaluating whether structural barriers to entry continue to limit market contestability.

• Analysis of market entry and exit waves from 1993 to 2006.
• Evaluation of incumbent behavior and entry deterrence strategies (capacity and frequency).
• Assessment of market concentration and structure in the post-liberalized environment.
• Comparison of air travel with ground transport alternatives.
• Investigation of the impact of airline alliances and consolidation.

Excerpt from the Book

Summary of Chapters

INTRODUCTION: Provides an overview of the airline industry’s economic challenges and the regulatory context of liberalization.

THE LIBERALIZATION PROCESS OF EUROPE’S SKIES: Summarizes the history and legislative measures of European airline liberalization, including the three liberalization packages.

THEORY: Reviews theoretical perspectives on market entry, exit, and entry deterrence, particularly in the context of excess capacity and game-theoretic models.

THE GERMAN AIRLINE MARKET: Defines the German market landscape, analyzing infrastructure, demand, and the specific competitive pressures from ground transport and low-cost carriers.

ANALYSIS OF ENTRY AND EXIT: Presents empirical data on entry and exit dynamics, market concentration, and incumbent behavior from 1993 to 2006.

IMPEDIMENTS TO COMPETITION: Discusses remaining structural and strategic barriers to entry and the role of alliances in the current market environment.

SUMMARY: Concludes the findings, noting the persistent low contestability of the German market despite liberalization efforts.

Keywords

Airline Industry, Market Liberalization, Entry and Exit Dynamics, German Airline Market, Slot Allocation, Market Concentration, Low Cost Carriers, Incumbent Behavior, Entry Deterrence, Economies of Scale, Airline Alliances, Market Contestability, Short-haul Problem, Air Transport, Infrastructure

Frequently Asked Questions

What is the core subject of this thesis?

The thesis investigates the competitive landscape of the German airline market following the European liberalization process, focusing specifically on entry and exit dynamics on major national routes.

What are the central themes explored in the work?

Key themes include the legislative transition of the European aviation market, the role of entry barriers (both structural and strategic), the influence of ground transport competition, and the behavior of incumbent airlines in response to new market entrants.

What is the primary research question or objective?

The primary objective is to determine if European liberalization effectively promoted competition and market contestability on major inner-German routes, or if structural barriers persist.

Which scientific methodology is utilized?

The author employs a descriptive empirical approach, utilizing annual flight schedule data from OAG/DLR to track entry and exit patterns, calculate market concentration (Herfindahl index), and analyze firm-level behavior over a thirteen-year period.

What is covered in the main body of the paper?

The main body covers the legislative history of liberalization, theoretical frameworks for market entry, a detailed characterization of the German market infrastructure and demand, and a comprehensive empirical analysis of route-level competition.

Which keywords best characterize this research?

Key terms include market liberalization, entry and exit dynamics, airline competition, slot allocation, market concentration, and structural barriers to entry.

How does the author define the "short-haul problem"?

The "short-haul problem" refers to the economic difficulty airlines face on short routes, where high fixed costs for take-off and landing clash with the need to keep fares low due to high price sensitivity and competition from ground transport.

What role do airline alliances play according to the research?

The author suggests that while alliances may offer operational efficiencies, they also carry an inherent risk of becoming anticompetitive by increasing market concentration and reducing the number of effective independent competitors.