The Entry of Low-Cost Airlines: Price Competition in the European Airline Market

Abstract

This paper investigates the response of full service carriers (FSCs) to the entry of low-cost carriers (LCCs). We develop a model of airline competition, which accommodates various market structures, some of which include low-cost players. Using data on published airfares of Lufthansa, British Airways, Alitalia and KLM for the main city-pairs from Italy to the rest of Europe, our statistical modelling results confirm the conclusions of the theoretical model. Competition among FSCs appears to affect the price levels of business and leisure segments asymmetrically. In contrast, competition with LCCs reduces the fares of FSCs in all classes proportionally.

Keywords: Pricing strategies, yield management, low-cost carriers, European airline market

JEL Classification: D43, L15, L93