UGPTI Researchers Evaluate Small City Air Fares

Research at the UGPTI reveals that regulations designed to cut those differences in airline fares between large and small cities would increase costs for airlines, making it more difficult for them to do business in small cities.

The study was prompted by concerns that while airfares have declined since deregulation in the 1970s, passengers from rural and small communities continue to pay higher fares than passengers from metropolitan areas.

John Bitzan (an Assistant Professor in the College of Business Administration and an Affiliate of the UGPTI) and Junwook Chi (an Associate Research Fellow at UGPTI) confirmed earlier studies that showed airfares are 11 percent higher in smaller communities of less than 300,000 people than they are in larger communities. The study also examined the reasons for higher fares, focusing on cost differences, demand differences and differences in carrier market power.

Airfares were found to be higher in small communities due to higher costs of serving low density markets and due to higher market power of carriers in small communities. "Differences in cost characteristics and market power characteristics explain similar proportions of the fare differences," Bitzan says.

"It may be tempting to look at those differences in market power and try to fix them with some form of regulated competition," Bitzan adds. "But we found that any attempt to do so would put upward pressure on costs, and no one would want to provide service to those communities."

The researchers note that the primary reason for higher concentration in small markets appears to be a lower density of service rather than anti-competitive actions. Airlines in small communities have fewer passengers, use smaller equipment and serve these communities less often. Introducing more competition by increasing the number of airlines at a small community airport will decrease loads for existing airlines and decrease the economical equipment sizes. Both of these decreases will lead to an increase in the cost of serving small community airports.

The study was conducted using a 10 percent sample of all tickets sold nationwide in the year prior to the terrorist attacks of Sept. 11, 2001. Results were submitted to the U.S. Department of Transportation and were presented at the Western Economic Association International Conference in Vancouver in July.

Vachal Heads TRB Ag Transportation Committee

Kimberly Vachal, advanced research fellow with the UGPTI, was named to a three-year chair of the Agricultural Transportation Committee of the Transportation Research Board in January.

The TRB is a unit of the National Research Council, a private, nonprofit institution that is the principal operating agency of the National Academy of Sciences and the National Academy of Engineering. The Agricultural Transportation Committee brings together professionals active in agriculture, transportation planning, academia, and the private sector to research issues of common interest. The Agricultural Transportation Task Force membership has varied research interests, ranging from the effects of rail mergers on agricultural producers to evaluating the competitiveness of U.S. exports in the world market.

At the UGPTI, Vachal works with local, regional, and national freight groups to identify logistical opportunities and assess policy implications. Her work focuses on promoting a healthy, competitive logistical system that will enhance the position of rural regions' products and especially agricultural goods, in both domestic and export markets. She has been at the UGPTI since 1992.

"I have been active in the TRB for some time, and this new committee is an opportunity to enhance interaction among industry, policymakers and academia in the area of rural freight and agricultural transportation," Vachal says. "It also raises the profile of the institute and the work we do in this area."