Determinants of entry on airline markets

Abstract

Air passenger transportation industry is dynamically expanding, and a l though t h e emergence of new airline companies is rare, existing companies are actively competing for routes. Firm's entry into a new destination can speak for its profitability, which cannot be directly observed, so entry patterns can provide additional information about the market that is other wise difficult to obtain. The study is based on Russian domestic flights data, route characteristics, and airline market presence characteristics to identify factors that may influence airline's likelihood of entering a route. Using this dataset, we estimate the entry model proposed earlier (Berry, 1992 ). To identify the factors affecting airline entry on a route between two cities wihin Russia, we use probit. To validate our results we use machine learning algorithms to solve a binary choice problem. The results obtained are partly consistent with the results of previous studies: there is a significant positive effect of population and the number of tourist cities on the route (proxies for demand ). Also, a variable characterizing the presence of the airline at the airports of the route in the previous period has a significant positive effect on the probability of air line enter a route. Un like the studies on European an d US data, our paper shows a negative effect of distance on entry probability, which can be explained by the peculiarities of Russian geography. This conclusion is important for effective policy making in Russian regions especially in promoting tourism and developing passenger transportation . KEYWORDS