an economic assessment of the iata interline system · 2014. 9. 15. · interline ticket. in fact...

AN ECONOMIC ASSESSMENT OF THE IATAAN ECONOMIC ASSESSMENT OF THE IATAINTERLINE SYSTEMINTERLINE SYSTEM

Prepared for IATAPrepared for IATA

October , 2000October , 2000

Prepared by:Prepared by:

Economics-Plus LimitedEconomics-Plus LimitedGRA, IncorporatedGRA, Incorporated

E c o n o m i c s P l u sE c o n o m i c s P l u sO c t o b e r , 2 0 0 0O c t o b e r , 2 0 0 0 G R A , I n c o r pG R A , I n c o r p o r a t e do r a t e di

TABLE OF CONTENTSTABLE OF CONTENTS

EXECUTIVE SUMMARY.......................................................................................................1

1.0 INTRODUCTION........................................................................................................5

1.1 IATA Interlining ..............................................................................................51.2 The Economic Dimension..............................................................................51.3 Carrier Motivations.........................................................................................61.4 This Study ........................................................................................................8

2.0 MODELING OF THE ECONOMIC BENEFITS OF INTERLINING....................9

2.1 Data Requirements .......................................................................................102.2 Model Formulation.......................................................................................112.3 Model Results................................................................................................152.4 Counterfactual Scenarios and Interpretation............................................162.5 Conclusions....................................................................................................19

3.0 PASSENGER TRANSFERS AT LONDON HEATHROW...................................21

3.1 Introduction ...................................................................................................213.2 Methodology .................................................................................................213.3 Survey Analysis: Transfer Characteristics................................................223.4 Survey Analysis: Ticket Type ....................................................................253.5 Conclusions....................................................................................................28

4.0 PROCEDURES FOR THROUGH-PRICING IN NETWORK INDUSTRIES.....30

4.1 Introduction ...................................................................................................304.2 Interflora .........................................................................................................314.3 Great Britain Passenger Railways ..............................................................324.4 European Rail Freight Forwarding ............................................................344.5 European Rail Passenger Operations ........................................................364.6 Liner Shipping Conferences ........................................................................364.7 International Postal System .........................................................................384.8 Banking...........................................................................................................394.9 Conclusion .....................................................................................................40

ANNEX 1: THE CAA DATA SET ......................................................................................43ANNEX 2: REPRESENTATIVE CAA SURVEY FORM..................................................49ANNEX 3: TESTING SIGNIFICANCE OF DATA DIVERGENCIES.............................56

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L I S T O F T A B L E SL I S T O F T A B L E S

Table 2.1 Mean Passenger Counts and Market Shares for Sample Markets .........14Table 2.2 Average Characteristics of Flight Offers in the Sample ..........................14Table 2.3 Model Results................................................................................................15Table 2.4 Elasticities of Attributes with Respect to Probability of

Market Share ..................................................................................................16Table 2.5 Value to Consumers of Counterfactual Interline Fare and

Service Changes.............................................................................................17Table 2.6 Estimated Annual Value to Consumers of Interline Fare and

Service Changes in U.S. International Markets.........................................19Table 2.7 Estimated Annual Value to Consumers of Interline Fare and

Service Changes Extrapolated to All International Markets ..................19

Table 3.1 Principal Transfers between Carriers at Heathrow..................................23Table 3.2 Transfer Passengers’ Origins and Destinations........................................23Table 3.3 Transfer Passengers at Heathrow by Number of Sectors and

Nature of Transfer.........................................................................................24Table 3.4 Airline Affiliation Where Passengers Interline ........................................24Table 3.5 Comparison of Tickets Used, by Airline Type, All Transfer

Passengers ......................................................................................................25Table 3.6 Comparison of Tickets Used, by Airline Type, Serial Transfer

Passengers ......................................................................................................26Table 3.7 Comparison of Tickets Used, by Airline Affiliation, All Transfer

Passengers ......................................................................................................27Table 3.8 Proportion of Passengers Paying Full Fare on Next Journey Sector.....28

E c o n o m i c s P l u sE c o n o m i c s P l u sO c t o b e r , 2 0 0 0O c t o b e r , 2 0 0 0 G R A , I n c o r pG R A , I n c o r p o r a t e do r a t e d1

EXECUTIVE SUMMARYEXECUTIVE SUMMARY

The air transport industry interlining system that has developed under theauspices of IATA allows a passenger to make a journey, involving a number ofdifferent airlines, using one ticket issued as a single transaction in one currency.This interlining system depends upon: an agreement between airlines to accept eachother’s tickets; a system for creating through-fares; and a mechanism for dividing thefare revenue between the airlines involved. These agreements are arrived atthrough a series of conferences organized under the auspices of IATA.

Some have come to question the continuing value of interlining in the contextof a rapidly changing competitive environment characterized by mergers andstrategic alliances. In both cases, consumers can avail themselves of “seamless”services with a single or at least similar standard across the entire network. Ininternational markets, consumers may avail themselves of baggage check-through,transit lounges, through ticketing, purchasing a single ticket with a single currency,frequent flyer points on a single or coordinated plan, etc. In short, under a mergeror alliance, the consumer gets a single brand including a deep network. There is agrowing body of economics literature that suggests that consumers value largernetworks and benefit from them.

Of course, many of these same benefits are available to a person buying aninterline ticket. In fact the interline ticket was designed to make the world’s airlinenetworks available to consumers on a consistent basis. In view of the findings inrecent economic literature that consumers value network scope, it would seem easyto make a case for preserving the interline facility as a means for providing morechoices for consumers to access airline networks.

The objections to interlining, however, are not with coordinating elements ofthe service, but with coordinating tariffs. The IATA Tariff consultations provide avenue where all potential interline partners serving a geographic region can workout simultaneously acceptable origin-destination interline fares. These interlinefares do not limit segment initiatives or prevent on-line carriers or alliance partnersfrom undertaking fare initiatives. Competitive concerns may arise in cases whereinterline fares become a de facto standard for pricing in an origin-destination pair oreven a region. Obviously in cases where interlining is rare, or there is vigorous on-line and/or inter-alliance competition, concerns about interline tariff coordinationwould be diminished. In either case, however, consumers may gain through theavailability of interlining services because they value network scope. And, it shouldbe stated that carriers’ willingness to interline is affected by knowing with certaintywhat price will be charged in the market place. For example, the interline tariffcoordination facility may be particularly important in very small markets not pricedoften by one or more the carriers involved in an itinerary.


In the Present Study, we look at international interlining in the followingways:

• In Chapter 1, we provide a context for the economics of airline networksand why consumers value deeper and larger networks that crossinternational boundaries. One implication of these findings is that inliberalized environments, airline consolidation is inevitable either bymerger or alliance. Airline companies involved in consolidations willbenefit because they are providing consumers with what they want—deeper and larger networks. At the same time, consumers can gain manyof these same network benefits via interlining.

• In Chapter 2, we develop and estimate a model designed to calculate theconsumer benefits attributable to the fare and service features ofinterlining. We examine fully flexible interline tickets only. The model isbased on the international interline experience involving markets to andfrom the United States in 1998. We find that:

§ If interline tickets were priced at sum-of-sector fares (instead of beingcoordinated via IATA) all consumers (on-line and interline) would beworse off by an amount equal to about five (5) percent of their fare. InU.S. international markets, this would represent an estimated loss inannual consumer welfare (expressed in 1998 dollars) of about $660million; assuming a similar set of relationships held in other parts ofthe world, the annual loss would be on the order of $1.6 billion.

§ If services were not coordinated and as a result minimum connecttimes on interline journeys increased by an average of 30 minutes, allconsumers (on-line and interline) would again be worse off by anamount equal to about five (5) percent of their fare. In U.S.international markets, this would represent an estimated loss in annualconsumer welfare of about $665 million; assuming a similar set ofrelationships held in other parts of the world, the annual loss would beon the order of $1.6 billion.

§ If both the fare and service dimensions of interlining were altered asnoted above, all consumers would be worse off by an amount equal toabout ten (10) percent of their fare. In U.S. international markets, thiswould represent a loss in annual consumer welfare (expressed in 1998dollars) of about $1.16 billion; assuming a similar set of relationshipsheld in other parts of the world, the annual loss would be on the orderof $2.9 billion.

§ These results are derived from a limited sample of markets andinvolve the experience of world travel to one country of the world.


But, the results suggest that consumers do value the fare and serviceelements of interlining.

• In Chapter 3, we report on an analysis of the CAA passenger survey atHeathrow Airport in London. Because of Heathrow’s historic role as anentry and exit point for the eastern hemisphere for passengers traveling toand from the western hemisphere, this data base provides a rich resourcefor assessing the continued presence of interlining in a world where thereare strong incentives for airline consolidation (via merger andinternational alliances.)

We find that:

§ About one-third of Heathrow passengers transfer between flights.Around one-half of these transfer passengers change between flightsoperated by the same carrier (principally on-line connections withBritish Airways) but there are nearly ten million passengerstransferring between different airlines.

§ Of these ten million passengers, most (7.2 million) transfer betweenairlines that have no apparent affiliation and almost one-third arechanging flights more than once. In these circumstances, fully-flexibletickets provide for almost seamless travel across carriers. Theindications are that about 42 percent of those changing between non-affiliate airlines (or between different alliances) make use of full-faretickets.

§ We conclude that interlining between non-affiliate airlines remains animportant option used by a large proportion of Heathrow’spassengers; as a consequence, interlining is an important means offacilitating competition in international air passenger transport.

• In Chapter 4, we report on how other industries price through traffic onnetworks that connect across borders or other jurisdictions. These lessonsfrom other industries provide a context for interlining and demonstratethat the issues in the airline industry are not unique. We find that:

§ In the liner shipping industry, the conference system used to set ratesand capacity in the liner trades, has been subject to close scrutiny bythe anti-trust authorities and this may have encouraged furtherconsolidation in the industry.

§ The European rail freight industry illustrates well the failure of anindustry to perform when it has not developed a coherent strategy forco-ordination between local networks.


§ The recent division of the rail passenger industry in Great Britain into25 separate, territorial franchises has led to the UK Governmentrequiring that a system be established for maintaining and facilitatingthe benefits of an integrated network, including ticket inter-availabilityacross all trains.

§ Disallowing the tariff conference may accelerate the trend towardsaviation alliances. It is not immediately evident from a competitionstandpoint that this would constitute an unquestionable improvementand, what ever is proposed in its stead, it is important to ensure thatthe airline industry does not regress into the state of affairs found inthe European rail freight industry. There may, of course, be alternativeways of accommodating the concerns of the competition authoritiesregarding tariff consultations and, in this context, other approachespossibly merit further examination.


1.0 INTRODUCTION1.0 INTRODUCTION

1 .11 .1 IATA INTERLININGIATA INTERLINING

The interlining system that has developed under the auspices of IATA allowsa passenger to make a journey, involving a number of different airlines, using oneticket issued as a single transaction in one currency. Cargo shippers enjoy thebenefits of a comparable system. This interlining system depends upon: anagreement between airlines to accept each other’s tickets; a system for creatingthrough-fares; and a mechanism for dividing the fare revenue between the airlinesinvolved. These agreements are arrived at through a series of conferences organizedunder the auspices of IATA. For example, there is a passenger services conferenceto agree on standards and procedures and a passenger tariff coordination conferenceto agree on tariffs. A clearinghouse provides for the settlement of accounts betweenairlines, in accordance with multilateral prorate agreements, so that each participantreceives a single transaction advice and settlement.

Because of coordination between carriers, many of which are otherwisecompeting within the market for air transportation, the system has, in a number ofjurisdictions, required the approval of the anti-trust authorities. In some cases, theseauthorities have attached conditions and/or granted exemptions from their normalcompetition legislation, often with a requirement for periodic renewal. In thiscontext, a number of such exemptions will soon be subject to review, including thatgranted by the European Union.

1 .21 .2 THE ECONOMIC DIMENSIONTHE ECONOMIC DIMENSION

Air carrier interlining agreements assist the air passenger in two importantways. First, they extend the scope of air transport networks by enabling easier andmore convenient travel between locations not connected by a single air carrier.Second, they ‘deepen’ the air transport network by providing additional options fortravel between locations. Although many locations may be reached on the networkof a single carrier, by offering the customer the option of using different carriers fordifferent sectors, and for return travel, it enriches the product, especially with regardto the timing of journeys.1

1 In Chapter 2, we discuss the difficulties encountered in modeling traveler choices involving suchround-trip interlining. The problem arises in specifying the service offer in the context of the consumerchoice model developed. As a result, we report no direct results on this potentially valuable form ofinterlining.


Adding value to the product through interlining agreements is associated withthe following economic benefits:

• Reduced cost to both the airline and passenger, by simplifyingadministrative procedures (i.e. lower transaction costs);

• Increased benefits to existing passengers from reduced travel time, scheduledelay and other characteristics of flight offers made possible by interlining;

• The value of additional journeys (less the cost of providing for them)induced by an enhanced quality product; and

• The economies of density that result from these additional journeys.

This latter economic benefit arises because an increase in the density of travel overpart of the air network will enable larger and more economical aircraft to be utilized.This will reduce airline operating costs which will, depending upon the degree ofcompetition in the market place, either enhance airline profits (add to the producersurplus) or reduce fares (which will add to consumer surplus). The differencebetween interline tariffs and the tariffs which would be available in the absence ofthe interline facility, is an important factor affecting the number of trips undertakenand the precise services chosen by air passengers. The analysis of trip numbers andof service selection, with and without the interline facility, forms the basis of thepassenger benefit calculations developed in this study.

1 .31 .3 CARRIER MOTIVATIONSCARRIER MOTIVATIONS

These views of the benefits of interlining are consistent with moderneconomic literature on the value consumers place on having access to largernetworks. Bailey and Liu (1995), Brueckner and Whalen (2000), and Brueckner andSpiller (1991)2 all develop models in which consumers shop for air travel based onprice and network scope. The logical conclusion of these models is that air carriersare motivated to deepen their networks in order to maintain consumer loyalty.Network scope may be particularly relevant to corporate business travelers whorequire worldwide access to travel options. Because network carriers depend onbusiness travel for a disproportionate share of their profits, extending anddeepening networks is a prime motivation for interlining, alliances and mergers.

Bailey and Liu go on to show that because there are important economicbenefits to increasing network scope, it is logical that there be further consolidationin the airline industry. Recent events including the development of worldwide

2 E. Bailey and D. Liu: “Airline Consolidation and Consumer Welfare” E a s t e r n E c o n o m i cE a s t e r n E c o n o m i cJ o u r n a lJ o u r n a l , (Fall, 1995) pp 463-476; J. Brueckner and W. Whalen: “ The Price Effects of InternationalAirline Alliances” forthcoming in J o u r n a l o f L a w a n d E c o n o m i c s J o u r n a l o f L a w a n d E c o n o m i c s (Fall, 2000); J. Brueckner andP. Spiller: “Competition and Mergers in Airline Networks” I n t e r n a t i o n a l J o u r n a l o fI n t e r n a t i o n a l J o u r n a l o fI n d u s t r i a l O r g a n i z a t i o n 9 I n d u s t r i a l O r g a n i z a t i o n 9 (1991) pp. 323-342.


alliances and mergers (some of which may eventually cross national borders) tend toconfirm that airlines believe they must get larger to compete effectively. Bailey andLiu suggest that such consolidation may also be beneficial to consumers. Bruecknerand Whalen find that consumers gain from alliances (in terms of lower fares) but thatthere is some chance that fares in gateway-to-gateway markets will rise.

Some have come to question the continuing value of interlining in the contextof a rapidly changing competitive environment characterized by mergers andstrategic alliances. In a merger, networks are optimized with a single objective tomaximize the profits of the merged parties. In an alliance, networks arecoordinated, and in cases where anti-trust immunity is granted, prices arecoordinated as well. In both cases, consumers can avail themselves of “seamless”services with a single or at least similar standard across the entire network. Theseservices may include baggage check-through, transit lounges, through ticketing,purchasing a single ticket with a single currency, frequent flyer points on a single orcoordinated plan, etc. In short, under a merger or alliance, the consumer gets asingle brand including a deep network.

Of course, many of these same benefits are available to a person buying aninterline ticket. In fact the interline ticket was designed to make the world’s airlinenetworks available to consumers on a consistent basis. Many of the elements of“seamless” service that make up a merged carrier’s brand or an alliance’s brand arealso available via interlining. In view of the findings in recent economic literaturethat consumers value network scope, it would seem easy to make a case forpreserving the interline facility as a means for providing more choices forconsumers to access airline networks.

The objections to interlining, however, are not with coordinating elements ofthe service, but with coordinating tariffs. The fear is that carriers will be able to raisefares and extract monopoly rents by coordinating interline fares. The IATA Tariffconsultations provide a venue where all potential interline partners serving ageographic region can work out simultaneously acceptable origin-destinationinterline fares. These interline fares do not limit segment initiatives or prevent on-line carriers or alliance partners from undertaking fare initiatives. Instead, theinterline fare is one that will be accepted by all airlines potentially involved in theitinerary. Competitive concerns may arise in cases where interline fares become a defacto standard for pricing in an O-D pair or even a region. Obviously in cases whereinterlining is rare, or there is vigorous on-line and/or inter-alliance competition,concerns about interline tariff coordination would be diminished. In either case,however, consumers may gain through the availability of interlining servicesbecause they value network scope. And, it should be stated that carrier’swillingness to interline is affected by knowing with certainty what price will becharged in the market place. For example, the interline tariff coordination facilitymay be particularly important in very small markets not priced often by one or morecarriers involved in an itinerary.


1 .41 .4 THIS STUDYTHIS STUDY

In the Present Study, we look at international interlining in the followingways:

• In Chapter 2, we develop and estimate a model designed to calculate theconsumer benefits attributable to interlining. The model examines thecharacteristics of on-line (including code-share) and interline service offersand seeks to explain why consumers choose between them. One can usethe model to assess the value to consumers of interlining by posingcounter-factual cases involving changes in the interline service offers andthen using the model to predict how consumers will react. One can thenassess consumer welfare in both the actual (base) case and counterfactualcase and thereby obtain values of the different interline service attributes.We then form some general conclusions based on the model results.

• In Chapter 3, we report on an analysis of the CAA passenger survey atHeathrow Airport in London. Because of Heathrow’s historic role as anentry and exit point for the eastern hemisphere for passengers traveling toand from the western hemisphere, this data base provides a rich resourcefor assessing the continued presence of interlining in a world where thereare strong incentives for airline consolidation (via merger andinternational alliances.)

• In Chapter 4, we report on how other industries price through traffic onnetworks that connect across borders or other jurisdictions. These lessonsfrom other industries provide a context for interlining and demonstratethat the issues in the airline industry are not unique.


2 .0 MODELING THE ECONOMIC BENEFITS OF2.0 MODELING THE ECONOMIC BENEFITS OFINTERLININGINTERLINING

The previous discussion in the Introduction suggests that consumers valuenetwork scope which is facilitated by mergers, alliances and interlining. Whetherconsumers are ultimately better off with any of these ways to assemble networksdepends on what alternatives are available to them in the market place. If we canidentify and classify the relevant alternatives available to consumers in themarketplace and then observe which ones they choose, then it may be possible todetermine how they value the characteristics of the services. If we then posecounterfactual cases where one or more elements of interlining services are changed,we can estimate how consumers would be likely to choose among the counterfactualalternatives. By assessing the differences in consumer benefits between the actualand counterfactual cases, we can, in turn, assess the value of elements of interlining.

It is likely that the most important source of economic benefit of theinterlining system is in respect of the second bullet point discussed earlier, namely,the benefits to existing passengers from savings in travel time, reduced scheduledelay and other characteristics of flight offers made possible by interlining.Estimation of these benefits requires the development of a model that places theinterlining facility into the context of a consumer choice model.

Using a standard econometric discrete choice model, we estimate a statisticalrelationship that predicts how consumers choose among the service offers availablein the market. The coefficients of the model provide information on how consumersvalue elements of the on-line and interline service products. The model is in theform of a share equation, where the passenger share gained by each type of servicedepends on the attributes of that service and the competing services.

In the counterfactual case, if the IATA interline facility is changed or notavailable, then the service offers available to the consumer would be changed andthe service offers selected would also change. The model estimated in the base casecan be used to predict how consumers would choose if presented with a changed setof service offers. One can assess the value to consumers of various elements ofinterlining by measuring the differences in consumer welfare in the two cases.

To make the model operative, it is necessary to specify not only thecharacteristics of interline itineraries selected in the base case, but also thecharacteristics of alternative itineraries available to the consumercontemporaneously. This requires a network-planning tool that identifies thealternatives and provides information on the time characteristics. In addition, it isessential to develop fare information on all of the service offers considered in themodel ..


To distinguish alternative itineraries available to consumers, GRA’sproprietary network planning model, GRACE, was applied to both scenarios. Thismodel identifies all of the non-stop, through, one-stop and two stop services offeredto consumers in specified city-pair markets, including on-line (assumed to includealliance) and interline connections. An average (weighted by flights) of the traveltimes experienced in each sample city-pair, estimated separately for on-line andinterline service offers, is then calculated.

The services actually selected in the base case as well as the fares paid can beidentified on an O-D pair basis from the US DOT DB1B ten percent sample of tickets.

These data are described below.

2 .12 .1 D A T A R E Q UD A T A R E Q U I R E M E N T SI R E M E N T S

Our main sources of data for this analysis are the U.S. Department ofTransportation's DB1B database (for the year ended December 1998) which is a 10percent sample of all tickets sold by U.S. carriers, and the Official Airline Guide(OAG), which can be used to identify interline and non-interline flight offers inspecific origin-destination markets. The DB1B sample includes information onlyfrom tickets listing a U.S. carrier on at least one segment. In practice, this means thatwe can examine only markets that involve a U.S. point as either the initial origin orthe final destination.

It is also important to note that the DB1B ticket sample includes both theoperating and ticketing carrier on each segment flown. This allows us to distinguishcode-share flights from true on-line or interline flights in connecting markets.

The ticket sample includes fares and fare class information along withpassenger counts. This allows us to classify the tickets and assign observedpassenger shares and average fares to each type of service offer (on-line andinterline) in each market. The data for the model are completed by utilizing theOAG to assign flight availability and average elapsed time measures to each servicetype.

Data for a typical city pair might look like the following:

C i t y - P a i rC i t y - P a i r P a s s e n g e r s / WP a s s e n g e r s / We e ke e k

F l i g h tF l i g h tss

AverageAverageE l a p s e dE l a p s e d

T i m eT i m e

S e r v i c e T y p eS e r v i c e T y p e

ABQ-HKG 20 16 12:20 online or codeshareABQ-HKG 5 30 13:10 interline


As noted above, once the model has been estimated under the Base Case, wedefine a Counterfactual Case where the fare and/or flight offers are changed for theinterline services. This case will reflect the situation where consumers would haveto purchase two separate tickets to reach their final destination. For the farevariable, the average fare is changed to the sum of nonstop fares of the componentsegments for each service offer. For the flight availability variable, we re-computethe number of flight offers utilizing the GRACE model by assuming that someadditional connect time is needed at transiting airports; this reflects the fact that, inthe absence of an IATA interline facility, passengers may have to account for theirown baggage, and check in separately for each leg of their itinerary. In somemarkets, interline connections will be withdrawn and the interline choices availableto consumers will be less attractive.

To identify what itineraries (on-line, including codeshares, or interline)consumers choose, we apply the new flight offer data in the counterfactual case tothe coefficient results obtained from the statistical model and generate newconsumer choice decisions.

With these data estimates in hand, it is relatively straightforward to computea valid economic measure of the consumer welfare differences between thecounterfactual and base cases, which in turn can be interpreted as the welfare effectof eliminating or changing the IATA interline program.

2 .22 .2 M O D E L F O R M U L A T I O NM O D E L F O R M U L A T I O N

Our model is designed to explain the choice made by consumers between on-line (including code-share) and interline service offers in international city pairs.Our hypothesis is that these choices are based upon the characteristics of the serviceoffers available (including both the one actually selected and all others availablecontemporaneously). The characteristics included in the model are:

• Fare• Number of flight offers• Average elapsed time of the flight offers (including connect time).

Elsewhere, we have outlined in detail the modeling issues with respect to bothvariables and the interpretation of these models; in addition, there is a rich literatureon the subject.3 But briefly, the model is specified by a “logit” function, which saysthat the probability of choosing a given alternative (i) is a function of the

3GRA, Inc. “A Study of International Airline Code Sharing” Prepared for the Office of the Secretary, U.S.Department of Transportation (December 1994); D. McFadden “Conditional Logit Analysis ofQualitative Choice Behavior” in F r o n t i e r s i n E c o n o m e t r i c s F r o n t i e r s i n E c o n o m e t r i c s edited by P. Zarembka , 105-142:New York, Academic and D. McFadden: Econometric Models of Probabilistic Choice” in S t r u c t u r a lS t r u c t u r a lA n a l y s i s o f D i s c r e t e D a t a w i t h E c o n o m e t r i c A p p l i c a t i o n s ,A n a l y s i s o f D i s c r e t e D a t a w i t h E c o n o m e t r i c A p p l i c a t i o n s , edited by C. Manski andD. McFadden, Cambridge, MA, MIT Press, 1981.


characteristics of that alternative relative to the characteristics of all otheralternatives:

Prob (i) = eXi∃/ΣjeXj∃

where X represents the set of characteristics (fare, flight offers, and elapsed time), jrepresents the set of all alternatives available, and ∃ is the set of estimatedcoefficients. In the present context, there are just two alternatives available in eachmarket, online (including code-share) and interline.

An important feature of this modeling approach is that the economic value ofalternative characteristics can be calculated in a straightforward way. In the presentcase, we are interested in the impact on consumer welfare of changes in thecharacteristics of interlining flight offers. Small and Rosen4 have shown that for thelogistic model used here, the change in consumer welfare between the base andscenario cases can be calculated with the following formula:

CV = -(1/λ) [ ln Σjexp(XCj∃) - ln Σjexp(XBj∃) ]

CV is compensating variation, which is a measure of consumer welfare.5 XCj is theset of characteristics for alternative j under the counterfactual case, and XBj

corresponding set under the base case. Note that for the on-line alternative, thesetwo sets of characteristics will be the same under both cases; it is only the interlinealternative that will have changed values of its characteristics. λ represents theeconomic concept of “marginal utility of income,” and with the logit formulation canbe estimated using the negative of the fare coefficient from the statistical modelresults.

Another important advantage of this approach is the ability to look at theservice and fare components of interlining separately. For example, we can assessthe net consumer benefits of the tariff conferences by substituting in sum-of-sectorfares in the counterfactual case, while holding the other interline service components(flight offers and average elapsed time) constant. By re-computing the choices madeby consumers and assessing the net welfare effects, we can examine the benefits ofthe fare coordination alone. Or, we can alter the service components alone and keepthe interline fare levels constant.

2 .2 .12 .2 .1 S e l e c t i n g a S a m p l e o f O - D P a i r s f o r M o d e l i n gS e l e c t i n g a S a m p l e o f O - D P a i r s f o r M o d e l i n g

The DB1B for calendar year 1998 has millions of records. The followingprocedures were followed to draw a sample of records for analysis in this workprogram:

4K. Rosen and H. Rosen “ Applied Welfare Economics with Discrete Choice Models” E c o n o m e t r i c aE c o n o m e t r i c a49(1981) 105-139.5For a given change in price or other characteristic, the compensating variation is defined as the amountof income that must be given to a consumer to make him or her just as well off after the change as before.


1. Relevant tickets were those involving nonstop, one-stop or two-stopinternational travel defined as one origin or destination point outside of theU.S. or its territories. Both on-line (including code-share) and interline ticketswere included.

2. Only unrestricted first, business or Y class tickets were included; these ticketsare unrestricted and fully refundable in the same way that IATA fully flexibleinterline tickets are; there is no identifier in the data base that specificallyidentifies whether other fare codes are fully flexible. By considering onlyunrestricted tickets, the maintained assumption is that those choosing suchtickets would not switch to any form of restricted tickets under the variousscenarios, but might switch from interline to on-line service (or vice versa).

3. All frequent flyer O-D trips (assumed to be any trip with fare less than $25)were excluded.

4. All itineraries where a consumer flew out on one or more carriers andreturned on a different set of carriers were excluded; this was necessarybecause there was no convenient way to specify these flight offers in thecontext of the GRACE network model or the discrete choice model; generally,both models operate in one direction only.

5. All remaining tickets had to be in markets where each type of service –on-line(including alliances) or interline—accounted for at least five percent ofmarket share; this was necessary to ensure that the discrete choice model wasestimated for city pairs where consumers had legitimate choices.

The resulting sample had 3,650 international city-pair markets. The 3,650markets were sorted by great circle distance and then by market size. A ten percentsample was drawn resulting in a balanced sample of 365 markets. The sample thusincludes the full range of market types that may be representative of internationaltravel to/from the U.S., including:

• Small, short-haul markets• Large, short-haul markets• Small, long-haul markets• Large, long-haul markets.

To create the data set, we sorted the tickets in each market by whether theywere on-line (including alliance) or interline. We calculated an average fare for eachtype of service and added up the number of passengers selecting each service.

We then used the GRACE model and the OAG for a representative month(May, 1998) to identify all of the service offers (on-line, including alliances, andinterline) available to consumers in each of the 365 markets. Service offers were


defined by number of flights offered in the month of May. In developing the serviceoffers, GRACE uses actual legal connect times reported in the OAG for specificcarriers and airports. We then calculated the average elapsed time for each type ofservice in each market as reported in the OAG.

The process of identifying all of the service offers available to consumersproved to be extremely time intensive. As a result, we were able to analyze onlythose markets of the 365 selected where on-line and interline service offers had thesame number of stops. That is, the prevalent service offers for both on-line andinterline were either one-stop or two-stop flights for each market, but not a mix ofthe two. The effect of using the resulting reduced sample of 114 city-pairs ratherthan the full complement of 365 has an unknown effect on the results. Given moretime and other resources, this issue could be addressed by adding to the samplesize and re-estimating the model.

2 .2 .22 .2 .2 R e v i e w o f t h e S a m p l e D a t aR e v i e w o f t h e S a m p l e D a t a

The 114 city-pairs used in the estimating sample involved a mix of small andlarge markets with varying shares of on-line and interline passengers utilizingunrestricted tickets. The table below shows sample averages for each service type:

T a b l e 2 . 1T a b l e 2 . 1Mean Passenger Counts and Market Shares for Sample MarketsMean Passenger Counts and Market Shares for Sample Markets

( A n n u a l P a s s e n g e r s , N o t E x t r a p o l a t e d )( A n n u a l P a s s e n g e r s , N o t E x t r a p o l a t e d )

M e a nM e a n M i n i m u mM i n i m u m M a x i m u mM a x i m u m

On-line (incl.Codeshares)

Unrestricted DB1BPax

37.5 1.0 357.0

Market Share 65.1% 8.7% 94.7%

InterlineUnrestricted DB1BPax

9.8 1.0 98.0

Market Share 34.9% 5.3% 91.3%

The fares, flight offers and average elapsed times also varied considerably acrossmarkets. Keep in mind that the fares used here reflect those actually chosen asshown in the DB1B ticket sample, while the flight offers and elapsed times reflectservice offers as shown in the OAG. The following table shows descriptive statisticsfor these characteristics for each service type. All data shown below are passenger-weighted.

T a b l e 2 . 2T a b l e 2 . 2Average Character is t ics o f F l igh t Of fers in the SampleAverage Character is t ics o f F l igh t Of fers in the Sample

M e a nM e a n S t d . D e v i a t i o nS t d . D e v i a t i o n

On-line (incl. Fare ($) 1314 640


Codeshares)Flights/Month 80.5 70.0Avg Elapsed Time (min) 671 396

Interline Fare ($) 1860 739Flights/Month 32.6 35.8Avg Elapsed Time (min) 825 317

2 .32 .3 M O D E L R E S U L T SM O D E L R E S U L T S

As described above, we estimated a logit model of consumer choice betweenon-line and interline service offers over a sample of 114 international city-pairmarkets. Only unrestricted first, business or Y class passengers were considered.The choice between on-line and interline service was modeled as a function of threeexplanatory variables (or attributes) – fare, number of flight offers, and averageelapsed time of the flights. In addition, an alternative-specific constant term wasincluded for the interline option; this is similar to the constant term normally usedin a linear regression, and picks up any unobserved effects particular to interlines(relative to on-lines).

The statistical estimation results in a set of coefficient estimates for theexplanatory variables. A priori, we would expect the fare and elapsed timecoefficients to be negative (as fare/elapsed time increases, the probability ofchoosing that alternative decreases), and the flights coefficient to be positive. Theexpected positive effect of the flights variable may be due both to the capacityincrease and additional departure times that become available when flights areadded. In addition, we might expect the interline constant term to be negative,reflecting the fact that even with the same fares, flights and elapsed times as on-lineoffers, consumers may prefer the latter because they prefer single-carrier service tointerline service. The statistical results are shown below.

T a b l e 2 . 3T a b l e 2 . 3Model Resul tsModel Resul ts

V a r i a b l eV a r i a b l e E s t i m a t e d C o e f f i c i e n tE s t i m a t e d C o e f f i c i e n t z -va luez -va lue

Fare -4.6305E-4 -6.129Flights/Month 7.7574E-3 11.942Avg Elapsed Time -4.6914E-3 -10.645Interline Constant -0.6611 -12.542

As shown above, all coefficients appear with the expected sign, and the z-values (which correspond to the familiar t-statistic in linear regression) are all wellin excess of 2 in absolute value, indicating strong statistical significance. In terms ofoverall model fit for the logit model, there is no single measure equivalent to the R2

used in linear regression that has gained universal acceptance among statisticiansand econometricians. Nevertheless, one commonly used measure is the percentageof correctly predicted choices; this is particularly relevant for situations where thereare only two choices available, as is the case presently. On a passenger-weighted


basis, the model estimated here correctly assigns 69 percent of the samplepassengers across all markets, which is indicative of a fairly good model fit.

It is important to note that, unlike the case with linear regression, the absolutemagnitudes of the coefficients in a logit model do NOT represent marginal effects ofa change in the explanatory variables on the probability of choosing one alternativeover another. However, it is possible to compute the relevant marginal effectsand/or elasticities (the latter represent the percent change in the probability due to aone percent change in the attribute level). For present purposes, we have computedtwo elasticities for each explanatory variable, first applied to the interline offers, andthen to the on-line offers. The impacts, which are calculated at the sample means,are not necessarily symmetrical. Results are shown below.

T a b l e 2 . 4T a b l e 2 . 4E l a s t i c i t i e s o f M a r k e t S h a r e s w i t h R e s p e c t t o C h a n g e s i n A t t r i b u t e sE l a s t i c i t i e s o f M a r k e t S h a r e s w i t h R e s p e c t t o C h a n g e s i n A t t r i b u t e s

1% Increase in: Effect on Interline Share Effect on On-line Share

Interline Fare -0.58% +0.21%On-line Fare +0.48% -0.17%

Interline Flights +0.15% -0.05On-line Flights -0.25% +0.09%

Interline Elapsed Time -2.52% +0.91On-line Elapsed Time +2.41% -0.87

The table shows that elapsed time is a particularly important attribute thatcan have significant impacts on the on-line/interline decision. Fares have a moremodest effect, while the number of flight offers has an even smaller impact. Theseresults are generally consistent with the notion that travelers choosing unrestrictedtickets are quite time-sensitive, but relatively fare-insensitive. One would expectsuch passengers to also be particularly attracted to those service options thatprovide more departure opportunities, and this is confirmed in the model. But,consumers seem to be less sensitive to this attribute than the others. Part of theexplanation may be that the average market in the sample is already well served(averaging almost three flights per day), so additional flight offers may haverelatively small impacts.

Overall, the model results accord with our a priori expectations and fit thesample data fairly well. In the next section we present the results of applying avariety of counterfactual situations to the model.

2 .42 .4 COUNTERFACTUAL SCOUNTERFACTUAL S CENARIOS AND INTERPRETATIONCENARIOS AND INTERPRETATION

To assess the effects on consumers of changing the interline system we pose acounterfactual set of service offers for the interline alternative. The revised interline


offers are then “presented” to consumers in the context of the model and a forecast ismade of how consumers would choose among the on-line and interline serviceoffers in the counterfactual case. The following counterfactual cases were evaluated:

• F a r e E f f e c t O n l yF a r e E f f e c t O n l y : Fully flexible interline fares were adjusted upwardto equal sum-of-sector fares under the assumption that in the absence ofIATA tariff conferences, airlines would only accept sum-of-sector fares oninterline tickets. The increase in fares utilized for this case was 21.4percent for one-stop itineraries and 37.7 percent for two-stops.6

• S e r v i c e E f f e c t O n l yS e r v i c e E f f e c t O n l y : In the absence of IATA service conferences,through baggage and ticketing service might not be feasible or as easilyaccomplished. As a result, interline journey times might increase aspassengers would have to leave more time to make connections betweenless coordinated services. For this counterfactual case, a 30-minuteincrease in the minimum required connect time was assumed.

• Fare and Serv ice E f fec t sFare and Serv ice E f fec t s : A third case was run combining both thefare and service effects as described above; this case was designed tosimulate the effects of a substantially reduced or eliminated interlinesystem.

The measure of the welfare effects on consumers used is the “compensatingvariation”, which is defined as the amount of money one would have to payconsumers in the counterfactual case to keep them just as well off as they were in thebase case. Another way to think about compensating variation is that it is the valueconsumers place on the change change in service posited in the counterfactual case a f t e ra f t e rthey have a chance to change their itineraries.

Following are the values consumers place on the interline service changes (ona per passenger basis) based on the model results:

T a b l e 2 . 5T a b l e 2 . 5Value to Consumers of Counter factual In ter l ine Fare andValue to Consumers of Counter factual In ter l ine Fare and

Serv ice ChangesServ ice Changes

C a s eC a s e ChangeChange Ave rage Va lue pe rAve rage Va lue pe rP a s s e n g e rP a s s e n g e r

6 These percentage increases were developed from a sample of 35 city pairs using the Expedia Internetservice. It should be noted that airlines might choose to strike bilateral deals on some routes that couldresult in different and presumably lower fare increases than those posited here. Because interliningcarriers already have incentives to strike bilateral deals in more heavily traveled markets where theyface on-line (including interline) competition, it is not clear how often carriers would choose toundertake further bilateral deals in the absence of the IATA tariff conference. Nor is it possible to knowwhat the bilaterally negotiated prices would be. In view of the potential for bilateral deals, one couldinterpret the sum of sector fares as a maximum likely to obtain in less traveled markets where it wouldnot be economic to undergo bilateral negotiations. We have no data to suggest how often the sum ofsector fares would obtain.


Fare Only 21.4% increase for one-stops37.7% increase for two-stops

5.55% of fare

Service only 30 minute increase inminimum required connecttime

5.60% of fare

Fare and Service Combination of Above Cases 9.79% of fare

Recall that the consumer values are net of the changes in service offers selected byconsumers. So, for example, while the posited fare changes are between 21.4 percentand 37.7 percent, once the passenger has reassessed the options and re-optimizedfrom the choices now available, he or she would only have to be paid about five (5)percent of the total ticket price to be compensated for the counterfactual increase infares. Similarly, while the increase in minimum connect time causes an average 29percent decrease in the number of interline flight offers7 and a corresponding 3%increase in average elapsed time for those still offered, compensation would have tobe again about five (5) percent of the fare. If both fare and service dimensions werechanged simultaneously, compensation would need to be in the range of ten (10)percent. These figures assume that on-line service providers (including code-shares) do not change their service offers in reaction to the less competitive interlineservice offers posited in the counterfactual case.

2 .3 .12 .3 .1 Impl i ca t ions for In ternat iona l In ter l in ingImpl i ca t ions for In ternat iona l In ter l in ing

The results in Table 2.5 are based on a limited sample of U.S. internationalmarkets. A larger sample of U.S. markets might provide better estimates of thevalue of the interline service dimensions. One could pose other counterfactual casesand obtain different results from the model. Having provided these caveats, we canalso conclude that consumers do place a significant value on the fare and servicecomponents of interlining. For the U.S. markets analyzed, the value of the fare andservice components are each equivalent to between five and six percent of the fare.Together, the fare and service components are valued at just under ten percent of theaverage fare. These values apply not just to those selecting interline service, but toall passengers in the market since a consumer benefits from the array of serviceoffers available and not just from the one he or she selects. In other words, allconsumers would be worse off if interlining service offers were less competitive.

The results presented here can be most appropriately applied to U.S.international markets and to passengers flying on full fare (fully flexible) tickets.8For these passengers, we can ask the question:

What was the total value (in 1998) to passengers flying on full faretickets of the fare and service dimensions of interlining (as definedin this study)?

7 With the increase in minimum connect times, some existing connections would no longer be “legal”and would not be available to consumers.8 Excluding one-way interlines (passengers flying in one direction on one carrier and the other onanother carrier); these service offers could not be modeled in our specification.


The following extrapolations are at least indicative of these aggregate values.9

T a b l e 2 . 6T a b l e 2 . 6Est imated Annual Value to Consumers of In ter l ine FareEst imated Annual Value to Consumers of In ter l ine Fare

and Serv ice Changes in U.S. In ternat ional Marketsand Serv ice Changes in U.S. In ternat ional Markets

C a s eC a s e ChangeChange A n n u a l V a l u e ( 1 9 9 8 $ )A n n u a l V a l u e ( 1 9 9 8 $ )Fare Only 21.4% increase for one-stops

37.7% increase for two stops$660 million


$665 million

Fare and Service Combination of Above Cases $1.16 billion

Finally, if we assume that the percentage (of fare) values from U.S.international markets are indicative of the values consumers place on interlining inother regions of the world, we can provide the following rough estimates of theannual (1998) values of the fare and service dimensions of interlining:

T a b l e 2 . 7T a b l e 2 . 7 Est imated Annual Va lue to Consumers o f In ter l ine Fare and Serv iceEst imated Annual Va lue to Consumers o f In ter l ine Fare and Serv ice

Changes Ext rapolated to A l l In ternat ional MarketsChanges Ext rapolated to A l l In ternat ional Markets

C a s eC a s e ChangeChange A n n u a l V a l u e ( 1 9 9 8 $ )A n n u a l V a l u e ( 1 9 9 8 $ )Fare Only 21.4% increase for one-stops

37.7% increase for two stops$1.63 billion


$1.65 billion

Fare and Service Combination of Above Cases $2.89 billion

2 .52 .5 CONCLUSIONSCONCLUSIONS

This chapter describes the development and estimation of a model designedto calculate the consumer benefits attributable to the fare and service attributes ofinterlining. The model developed examines the characteristics of on-line (includingcode-share) and interline service offers and seeks to explain why consumers choosebetween them. The model is applied to assess the value to consumers of interliningby posing counter-factual cases involving changes in the interline service offers andthen using the model to predict how consumers will react. The model confirms that 9 The extrapolations for both the U.S. and world markets are done as follows. We found the cities in eachIATA region of the world accounting for 80 percent of total international seat departures based on theOAG for May 1998. We then computed average distances between and within regions based on thedistances between these cities. The result is an estimated average distance between IATA world regions.We then used a yield curve for unrestricted tickets generated from the international DB1B to estimate theaverage fare in inter-regional markets assuming the average distances. We then applied the percent offare figures from Table 1 to the fares and added up the results across IATA annual passenger estimateswithin and between regions for 1998.


consumers value the service and fare dimensions of interlining and would be worseoff if interline service offers were made less competitive because fares and/orelapsed times increase or fewer interline service offers were available in the absenceof coordination by the carriers. Because the coordination is effected (at least in part)via IATA conferences, these findings also provide indications that consumers placea value on the coordination among carriers affected by the IATA conferenceprograms.

Because our findings are based on a limited sample involving only flights toand from the United States, we also recommend that further work be done on thisissue in the future to generate more robust results especially for interlining in otherparts of the world.


3 . 03 . 0 PASSENGER TRANSFERS AT LONDONPASSENGER TRANSFERS AT LONDONHEATHROWHEATHROW

3 .13 .1 INTRODUCTIONINTRODUCTIONIn this section we analyse the journey characteristics of passengers

transferring between flights at London Heathrow, which is the world’s largestairport, in terms of international passenger movements. Around one-third ofHeathrow’s terminal passengers use the airport to transfer between flights, themajority of them transferring between international flights. Using the annual,ongoing, CAA London Heathrow Airport passenger survey, we analyse the natureof these transfers (origin and destination, interline and on-line by number of sectorsand by airline affiliation) before establishing a profile of ticket/fare choice. Theobject of the latter is to see if the use of full fare tickets, similar to IATA fully flexibletickets, is associated with particular types of flight transfer. The analysis does notpresume that the profile at this airport is typical but, nonetheless, the size anddiversity of passengers at the airport means that a cross-section of behaviour isestablished.

3 .23 .2 M E T H O D O L O G YM E T H O D O L O G Y

The analysis of transfer passenger patterns requires the availability of eitherticket records or passenger survey data. A large, on-going, survey of departingpassengers is undertaken at Heathrow; Annex 1 provides an overview of this surveytogether with the methodologies used to generate the data required for this analysis.

Despite being a large survey undertaken for a number of years, it has, for ourpurposes, a number of limitations. First, responses on fares are based on passengers’perceptions, which may not coincide with the actual fare paid, particularly when athird party purchase is involved. Second, questions on fare paid (and ticket type) arenot questions that must be answered for the interview to be accepted as valid. (Bycontrast, if some “core” questions are not answered, the interview is aborted.) Forthis reason, coupled with the fact that the fare questions may be difficult to answer,the response rate can be low.

Third, the pertinent question in the survey (See Annex 2) requests the farepaid on the next sector flown. If the passenger is transferring they are unlikely toknow, or accurately know, the fare for only one leg of their journey. Consequently,for transferring passengers the response rate for this question is negligible.10 Forthese reasons we did not attempt to analyse fare information.

10 The response rate to this question even by one-sector passengers is only around 10 percent.


Response rates to the question on ticket type were, by contrast, relativelygood—around 60 percent of passengers responded to this question. This highresponse rate was achieved in part, however, because of the use of relatively broadfare/ticket categories. Thus, we cannot say whether “full fare economy tickets” weretickets at IATA tariffs or at tariffs negotiated under bilateral arrangements. For thepurposes of this study, however, we will assume that the essential conclusions onfull fare tickets also apply to fully flexible tickets at IATA tariffs.

Included in our approach is an examination of two hypotheses, namely:

• The greater the need to transfer between flights, the more likely it is thatthe passenger will choose a full fare ticket; and

• The greater the degree of perceived discontinuity at the transfer point, themore likely it is that the passenger will purchase a full-fare, fully flexibleticket.

To examine the first hypothesis, we distinguish, in particular, betweenpassengers who change aircraft only once—at Heathrow—and passengers whomake multiple transfers.

In the case of the perceived discontinuity in the journey at the transfer point,we distinguish in particular between passengers who use only one carrier (or acombination of carriers forming a commercial alliance) throughout, and those whochange between different carriers (or carrier alliances) at Heathrow.

3 .33 .3 SURVEY ANALYSIS : TRANSFER CHARACTERISTICSSURVEY ANALYSIS : TRANSFER CHARACTERISTICS

In 1998, the total number of (terminal) passengers using Heathrow was 60.4million. Of this number, transfer passengers, that is, those who made a change offlight, whether interlining between flights by different carriers or connecting on-linebetween flights of the same carrier, accounted for 32 percent (19.3 million).

Table 1 shows that 51 per cent of transfers at Heathrow were on-line, most ofwhich (48 per cent of total transfers) were transfers between British Airways flights.The remaining 49 percent of transfers are interlines and are widely dispersedbetween carriers; transfers between BA and other carriers shown in the table accountfor a further 14 percent while transfers between these carriers plus BA and all othercarriers serving Heathrow account for the remaining 30 percent.11

11 The dispersal of this transferring is such that if we reduce the cut-off of carrier pairs that are explicitlyidentified in Table 1 from 1 percent to 0.5 percent, this adds only one carrier pair: between BritishMidland and Air Canada.


Tab le 1 :Tab le 1 :P r i n c i p a l T r a n s f e r s B e t w e e n C a r r i e r s a t H e a t h r o wP r i n c i p a l T r a n s f e r s B e t w e e n C a r r i e r s a t H e a t h r o w

( T w o - W a y P a s s e n g e r T r a n s f e r P e r c e n t a g e )( T w o - W a y P a s s e n g e r T r a n s f e r P e r c e n t a g e )A i r l i n e 1A i r l i n e 1 A i r l i n e 2A i r l i n e 2 P e r c e n t a g eP e r c e n t a g eBritish Airways American Airlines 2British Airways Air Canada 1British Airways British Airways 48British Airways British Midland 3British Airways Canadian 2British Airways Aer Lingus 3British Airways Qantas 2British Airways United Airlines 1British Midland American Airlines 1British Midland British Midland 2British Midland United Airlines 2British Midland Virgin Atlantic 2United Airlines United Airlines 1Other All carriers 30T o t a lT o t a l 100100

Table 2 shows a profile of passengers’ origins and destinations from which itcan be seen that Heathrow transfer traffic is dominated by passengers travellingbetween the Americas and Europe (including the UK). Less dominant, butimportant, are intra-European transfers and transfers between Europe and Asia.

Tab le 2 :Tab le 2 :Transfer Passengers ’ Or ig ins and Dest inat ionsTransfer Passengers ’ Or ig ins and Dest inat ions

(Percentage of Tota l Transfer r ing)(Percentage of Tota l Transfer r ing)Coun t r yCoun t r y

Coun t r yCoun t r yA f r i c aA f r i c a A m e r i c aA m e r i c a

ss A s i aA s i a E u r o pE u r o pee

M i d d lM i d d lee

E a s tE a s t

O c e a nO c e a niiaa

T o t aT o t a

Africa 0 00Americas 2 0 22Asia 0 4 0 44Europe 4 42 17 19 8282Middle East 0 5 0 4 0 99Oceania 0 0 0 2 0 0 22T o t a lT o t a l 66 5151 1717 2525 00 00 100100

In Table 3, transfer passengers are analysed in terms of the number of sectorsflown.12 The table shows that around 2.9 million (30 percent) of interliningpassengers, are flying at least three sectors (or equivalently, two connecting flights)and that the more sectors flown, the more likely it is that the passenger will changecarrier. Overall, about 20 percent of all transfer passengers flying through Heathrowwere changing between flights more than once.

12 By “sectors” we mean passenger sectors (i.e., number of flights on separate aircraft), not flight sectors.


Tab le 3 :Tab le 3 :Transfer Passengers a t Heathrow by Number o f SectorsTransfer Passengers a t Heathrow by Number o f Sectors

and Nature of Transferand Nature of Transfer(Mi l l ion Depar t ing Passengers)(Mi l l ion Depar t ing Passengers)

I n t e r l i n eI n t e r l i n e O n - l i n eO n - l i n e T o t a lT o t a l2 sectors 6.633 8.784 15.4173 sectors, 2 prior to Heathrow 1.396 0.514 1.9103 sectors, 2 after Heathrow 1.330 0.431 1.7614+ sectors 0.169 0.032 0.201T o t a lT o t a l 9 . 5 2 79 . 5 2 7 9 . 7 6 29 . 7 6 2 1 9 . 2 8 91 9 . 2 8 9

Tab le 4 :Tab le 4 :Ai r l i ne A f f i l i a t ionA i r l i ne A f f i l i a t ion †† Where Passengers In ter l ine Where Passengers In ter l ine

(Mi l l ion Depar tures*)(Mi l l ion Depar tures*)A i r l i n e A f f i l i a t i o nA i r l i n e A f f i l i a t i o n

S e c t o r sS e c t o r s

NoneNone

ChangChangee

A l l i a nA l l i a nccee

Code-Code-s h as h arere

S a m eS a m eA l l i a nA l l i a n

ccee

E q u i t y /E q u i t y /F r a n c h iF r a n c h i

ssee

T o t a lT o t a l

2 sectors 4.601 0.460 0.749 0.717 0.070 6.6333 sectors, 2 prior to

Heathrow0.873 0.106 0.169 0.233 0.011 1.396

3 sectors, 2 afterHeathrow

0.883 0.094 0.164 0.172 0.005 1.330

4+ sectors 0.120 0.015 0.007 0.027 0.000 0.169T o t a lT o t a l 6.476 0.674 1.089 1.149 0.086 9.528

†† With no equity, code share, franchise or alliance affiliation, based on published information in AirlineBusiness, July 1999.* Individual items may not add up to column total due to omission of uncategorised items.

Table 4 shows the relationship between carriers used by interliningpassengers. Where passengers change carrier, three-quarters of the transfers (7.2million13 of 9.5 million) are between airlines not affiliated with each other; perhaps asurprising conclusion in view of the formation of many alliances between theworld’s airlines14. But it does emphasise a continuing requirement for interliningopportunities. As was noted in paragraph 3.2, the profile of the airline pairs usedby interlining passengers at Heathrow is very dispersed. Given the myriad ofpassenger origins and destinations (and the large number of airlines), the ability totransfer effectively between unaffiliated airlines is important, despite the growth ofalliances and code-sharing.

13 6.476 million plus 0.674 million.14 This finding is, perhaps, even more surprising given that we are examining Heathrow, with its strongAmerica-Europe traffic flows, where alliances are relatively strong.


3 .43 .4 SURVEY ANALYSIS : T ICKET TYPSURVEY ANALYSIS : T ICKET TYP EE

The second part of the analysis focused on the relationship between thejourney characteristics of transfer passengers and type of ticket used. The key datafields developed were those identifying transfers on-line, and transfers where therewas no apparent commercial agreement between the carriers involved. Table 5,below, compares, for these two categories, the type of ticket used.15 The analysisconsiders only survey respondents who gave a valid response to the question onticket type (representing around 11.4 million, or 60 percent, of total transfers).

Tab le 5 :Tab le 5 :C o m p a r i s o n o f T i c k e t s U s e d , b y A i r l i n e T y p e , A l l T r a n s f e r P a s s e n g e r sC o m p a r i s o n o f T i c k e t s U s e d , b y A i r l i n e T y p e , A l l T r a n s f e r P a s s e n g e r s

P e r c e n t a g e o f T i c k e t sP e r c e n t a g e o f T i c k e t sT i c k e t T y p eT i c k e t T y p e Change o fChange o f

A i r l i n e *A i r l i n e *O n - L i n e C o n n e c t i o nO n - L i n e C o n n e c t i o n

First 1 1Business/Club 14 13Economy - Full Fare 26 21S u b t o t a l : F u l l F a r eS u b t o t a l : F u l l F a r et i c k e t st i c k e t s

4141 3535

Economy – Discount 31 36Economy - Don’t Know 17 14Inclusive Tour (IT) 8 10Other 0 0Air miles 1 2Frequent Flyer 1 1Standby 0 0Staff Discount 2 2Total 100 100Population size 4,654,316 4,631,041Percentage of transfers† 41% 41%

*With no equity, code share, franchise or alliance affiliation, based on published information in AirlineBusiness, July 1999.†Transfer passengers who gave a valid response to the question on ticket type.

The results in the table appear to suggest that full-fare tickets are used morewhere there is a change of airline. However, using a Student’s t Distribution test (forwhich details are outlined in Annex 3), the difference between the two transfer typesis not significant at either the level α = 0.05 or, indeed, at α = 0.10. Thus, there is nostatistically significant difference in the use of full-fare tickets between passengerswho are connecting on-line and those who are changing airlines.

In Table 6, we present the same contrast between passengers who transfer on-line and those who interline but, in this case, we restrict the analysis to thosepassengers who have flown more than two sectors on the current journey (that is,

15 Note that where the passengers have flown two sectors prior to Heathrow, we cannot be certain thatthe journey was entirely on-line as the survey does not record details of the airline used for the firstsector.


they have transferred at more than one airport). These passengers are undertakingwhat we refer to in the table as “serial” transfers.

Tab le 6 :Tab le 6 :C o m p a r i s o n o f T i c k e t s U s e d b y A i r l i n e T y p e , S e r i a l T r a n s f e r P a s s e n g e r sC o m p a r i s o n o f T i c k e t s U s e d b y A i r l i n e T y p e , S e r i a l T r a n s f e r P a s s e n g e r s

P e r c e n t a g e o f T i c k e t sP e r c e n t a g e o f T i c k e t sT i c k e t T y p eT i c k e t T y p e C h a n g e o f A i r l i n e *C h a n g e o f A i r l i n e * O n - L i n e C o n n e c t i o nO n - L i n e C o n n e c t i o nFirst 1 2Business/Club 10 11Economy - Full Fare 26 25S u b t o t a l : F u l l F a r eS u b t o t a l : F u l l F a r et i c k e t st i c k e t s

3737 3838

Economy – Discount 35 37Economy - Don’t Know 19 13Inclusive Tour (IT) 6 9Other 0 0Air miles 0 1Frequent Flyer 1 1Standby 0 0Staff Discount 1 1Total 100 100Population size 1,484,811 520,598Percentage of Transfers† 13% 5%

*With no equity, code share, franchise or alliance affiliation, based on published information in AirlineBusiness, July 1999.

†Transfer passengers who gave a valid response to the question on ticket type.

It is apparent from Table 6 that, as was the case in Table 5, there is nodifference in the use of full-fare tickets between those interlining and thosetransferring between flights with the same carrier. This might be because there aretwo distinct types of passenger making frequent use of connecting flights: “back-packers” and business people. The “back-packers” are particularly price-sensitivebut not time-sensitive so that they are attracted to low, discounted fares even if theresulting journey involves the inconvenience of frequently changing flights;business people tend to be time- and convenience-sensitive and relativelyinsensitive to price so that, if they have to transfer between flights, they will tend touse full-fare tickets. Consequently, the use of discounted tickets by the formergroup would suppress the contrast in the use of full-fare tickets that we wouldexpect between passengers interlining and those making on-line connections.

We conclude, therefore, that there is no identifiable link in this survey databetween passengers’ use of fully-flexible tickets and the type of connection beingmade, or that “serial” transfer passengers are more inclined to use fully-flexibletickets as insurance against missed flight connections.

Table 7 provides an analysis of ticket purchasing by all transfer passengers,by the nature of affiliation between the pre-Heathrow and post-Heathrow carriersused by them.


Tab le 7 :Tab le 7 :C o m p a r i s o n o f T i c k e t s U s e d , b y A i r l i n e A f f i l i a t i o n , A l l T r a n s f e r P a s s e n g e r sC o m p a r i s o n o f T i c k e t s U s e d , b y A i r l i n e A f f i l i a t i o n , A l l T r a n s f e r P a s s e n g e r s

P e r c e n t a g e o f T i c k e t sP e r c e n t a g e o f T i c k e t s

T i c k e t T y p eT i c k e t T y p e NoNoAAfff fi li l..

ChangeChangeA l l i a n cA l l i a n c

ee

CodeCodeS h a r eS h a r e

S a m eS a m eA l l i a nA l l i a n

ccee

E q u i t y /E q u i t y /F r a n c h i sF r a n c h i s

ee

O n - l i n eO n - l i n e

First 1 1 1 2 0 1

Business/Club 14 25 10 17 28 13

Economy - Full Fare 26 24 27 20 25 21

S u b t o t a l : F u l l F a r eS u b t o t a l : F u l l F a r et i c k e t st i c k e t s

41 50 38 39 53 35

Economy - Discount 31 24 30 29 26 36

Economy - Don’t Know 17 11 15 11 18 14

Inclusive Tour (IT) 8 10 13 7 1 10

Other 0 0 0 0 0 0

Air miles 1 1 1 3 1 2

Frequent Flyer 1 1 1 9 0 1

Standby 0 0 0 1 0 0

Staff Discount 2 2 1 2 0 2

Total 100 100 100 100 100 100

Population size 4,654,316 464,086 840,558 711,633 77,968 4,631,041

Percentage of Transfers† 41% 4% 7% 6% 1% 41%

The table does not provide conclusive evidence of higher use of full-faretickets where airline affiliation is weak. The only significant behavioural patterns liein the greater use of full-fare tickets where there is an equity or franchise linkbetween the carriers used; and where passengers change flights between alliances.In the case of equity/franchise links, we would have expected that passengerswould be less inclined to opt for full-fare tickets. It seems here that other factors,probably associated with the business use of franchised domestic British AirwaysUK operations, are influencing the situation.

Table 7 also shows that 50 percent of people transferring between airlinealliance groupings buy full-fare tickets (compared to only 35 percent of on-linepassengers)—this is a statistically significant result. What is less clear, however, iswhy this different pattern is not repeated where passengers are transferring betweenairlines that are not members of an alliance (41 percent use full fare tickets which isnot a statistically significant difference). One other notable contrast is the use of airmiles or frequent flyer tickets by passengers transferring between carriers in thesame alliance.

Table 8 shows the proportion of passengers using full-fare tickets for theirnext sector, by principal transfer pairs, where journey airport origins anddestinations have been coded into major world regions.


Tab le 8 :Tab le 8 :P r o p o r t i o n o f P a s s e n g e r s P a y i n g F u l l F a r e o n N e x t J o u r n e yP r o p o r t i o n o f P a s s e n g e r s P a y i n g F u l l F a r e o n N e x t J o u r n e y

S e c t o rS e c t o rA n a l y s e d b y F l i g h t R e g i o nA n a l y s e d b y F l i g h t R e g i o n

Reg ionReg ion P e r c e n t o fP e r c e n t o fT rans fe rsTrans fe rs ††

P e r c e n t P a y i n g F u l l -P e r c e n t P a y i n g F u l l -F a r eF a r e

Africa - Americas 1 33

Americas - Africa 1 40

Africa - Europe 3 33

Europe - Africa 1 39

Americas - Asia 1 49

Asia - Americas 2 37

Americas - Europe 28 35

Europe - Americas 11 39

Americas - Middle East 3 35

Middle East - Americas 2 46

Asia - Europe 10 35

Europe - Asia 4 29

Europe - Europe 26 43

Europe - Middle East 2 41

Middle East - Europe 3 48

Total % 100 38

No. 11,417,007* 4,386,763*

*Where a response was provided on fare type.

††The variation in the transfer share within transfer pairs is largely a function of the variation in theresponse rates according to the direction of the flow. In particular, flows to Europe have higher responserates than flows from Europe. This probably results from fewer language difficulties in interviewing onintra-European flights (which include domestic UK flights) than interviewing on, for example, out-boundAsian flights, where a higher proportion of non-English speakers is inevitable. (The survey is undertakenverbally, or with interview cards, in a number of languages but, nonetheless, response rates to non-mandatory questions will inevitably be lower.)

Allowing for survey response asymmetry, the table shows that the proportionof passengers paying full-fare generally ranges between 30 and 40 percent of thepassengers. In the light of the apparent response bias (see footnote to Table 8), itwould be inappropriate to draw stronger conclusions from the data.

3 .53 .5 CONCLUSIONSCONCLUSIONS

The analysis shows that London Heathrow, is a major international hubairport with about one third (or nearly 20 million) of passengers transferringbetween flights. Although around half of Heathrow’s transfer passengers change


between flights operated by the same carrier (that is, on-line connections -principally by British Airways), there are nearly 10 million passengers transferringbetween airlines.

Of these passengers, most (7.2 million) transfer between airlines that have noapparent affiliation and almost one third are changing flights more than once. Inthese circumstances, fully-flexible tickets provide for as-near-as-seamless travelacross carriers. The indications are that about 42 per cent of those changing betweennon-affiliate airlines (or between different alliances) make use of full fare tickets.

However, the results of the data analysis are not conclusive enough—or thedata are not of sufficient quality—for us to conclude that the use of full-fare ticketsincreases with the complexity (the number of transfers between flights, or betweenunaffiliated carriers) of the journey. What we can conclude is that interliningbetween non-affiliate airlines remains an important option used by a largeproportion of Heathrow`s passengers. It is most likely, therefore, that the interliningfacility is an important means of facilitating competition in international airpassenger transport.


4.0 PROCEDURES FOR THROUGH-PRICING4.0 PROCEDURES FOR THROUGH-PRICINGIN NETWORK INDUSTRIESIN NETWORK INDUSTRIES

4 .14 .1 INTRODUCTIONINTRODUCTION

IATA’s though-ticketing product has features found in many servicenetworks, whether those networks are for the delivery of energy, products orpeople. In the absence of a single producer who can provide a comprehensiveservice, service provision typically develops into a system with two primarycharacteristics:

First, where producers cannot supply services over a comprehensivegeographical or temporal network, they often establish formal commercialarrangements to enable the seamless delivery of those services via complementaryproviders.

Second, producers establish parallel processes so that the customerundertakes only one purchase transaction, irrespective of how many producers areinvolved in providing the service.

The development of these pseudo-single networks delivers much of thebenefits of single ownership, by providing a comprehensive service and reducingcustomers’ transaction costs to a single deal. There are numerous examples whereservice providers co-ordinate their services and tariffs, to varying degrees, toprovide a comprehensive service. The examples included in this review are:

• Interflora flowers retailing and distribution• Great Britain passenger railways• European rail freight forwarding• European rail passenger operations• Liner shipping conferences• International postal system• Banking

In each case, the key issues are the retailing and pricing of through-facilities;and the establishment of a mechanism for apportioning revenue. In the followingsection we look at how several of these network industries operate and concentrateon how they establish through-pricing.


4 .24 .2 I N T E R F L O R AI N T E R F L O R A

Interflora is a private organization, set up in 1923 to promote and facilitate thedistribution of orders for floral arrangements within and between countries. It is anon-profit making organization, with 60,000 members worldwide. Its origins stemfrom the development of the railways and the use of these networks by individualretailers. The subsequent spread of the telephone network, however, enabled theestablishment of a system where it was the order for flowers that was dispatched (toa participating florist near the home of the flower recipient) rather than the wastefulcarriage of the perishable flowers themselves; the extent of this new system was atthe time restricted by the extent of the participating florists rather than the extent ofthe transport (railway) network.

Interflora is run as a collective. It is administered in 10 regions, which meeton a regular basis to discuss policy and organize training programs. One key areaof policy that is set by the Interflora organization is the common commission ratecharged by the florist who accepts the initial order for flowers. In the context of ourstudy, however, it is important to note that the organization does not set prices forthe flowers themselves—the actual pricing of flowers remains the domain of theindividual retailer.

The retailing system relies on a single-shop process for taking orders—aDirectory of members indicates where the Order for flowers will be sent. TheDirectory also indicates whether any charge will be made for cartage. Members whoadvertise that they cover a given geographical area are obliged to accept thattransmitted order. Although the originating retailer can use the Directory toestablish the cartage charge, the retailer does not have an agreed price for preciselyspecified floral arrangements.

The customer normally places a “standard” order, where an indicativeillustration gives the customer a guide as to the final floral arrangement butallowing local conditions and prices to determine the final composition and colorsof the arrangement. The Interflora administration itself undertakes “test orders” toensure that the value of the order is complied with.

The less-common “open” order involves the customer specifying the precisenumber and type of flowers that are to be delivered. The cost of this order is notknown in advance as it depends on the delivery-florist’s flower costs. The order canthen proceed with, or without, confirmation of the final cost of the order.

The florist taking the original order receives a 20 percent commission fortaking the order. If the order is for a foreign destination, the local originatingcurrency is converted into Interflora currency units: the “Fleurin” (divided into 100“Petales”) as a guide as to the price bracket (and therefore flower arrangement) thatthe originating currency will purchase. Obviously, wild movements in exchange


rates will lead to a need to regularly alter the Fleurin currency rate. The 10-regionInterflora administration system assists in setting up broad rates of exchange.

Interflora runs clearing houses that clear the credits and debits betweenflorists. A clearinghouse deposit is held, which acts as a float for the outstandingunsettled accounts; the deposit varies by florist, in relation to each member’sturnover. A charge is made to the florist for each clearinghouse transaction.

To summarize, the Interflora floral distribution network provides amechanism for customers to use their local florist to arrange for the delivery offlowers by a florist at a remote location. The Interflora organization provides thefacilities to promote this common, one-stop retail frontage and guaranteed productquality; and to oversee the mechanism for settlement of credits and debits betweenflorists. Crucially, Interflora collates information on floral arrangement prices ineach administrative area that enables the florist to provide “standard” ordercustomers with an indication of the type and quality of flowers that would bedelivered to the recipient. Adjusting the contents of the floral arrangement that isfinally delivered therefore obviates the need for Interflora to oversee a mechanism tonegotiate common prices for flowers.

4 .34 .3 GREAT BRITAIN PASSENGER RAILWAYSGREAT BRITAIN PASSENGER RAILWAYS

After 1996-97, passenger rail services in Great Britain were provided by 25geographically-based franchise operators – “Train Operating Companies” (TOCs).This franchise system replaced a single (government) operator, British Rail, whichhad been responsible for provision and operation of the public rail service networkin Great Britain. Despite this split of the service provision, the government soughtto retain network benefits enjoyed by passengers. (An early policy proposal torestrict the number of outlets selling the full range of through tickets was abandonedfollowing considerable opposition.) For this reason, franchising included processesfor third-party ticket sales; through-ticketing and (almost universal) inter-availabletickets; and a Rail Settlement Plan as a clearing-house to distribute the resultingrevenue.

The arrangements for retailing, ticket pricing and revenue settlementare as follows. To maintain the benefits of a network of rail ticket outlets, TOCs arerequired to sell tickets for use on other TOCs. The TOCs’ ticketing system uses twobasic computer systems to identify ticket prices and issue tickets – one is the APTISsystem (with its portable variant, PORTIS) and the other is the TRIBUTE system.Where off-line calculations are required, a standard set of Fares Manuals is issued tostations.

The requirement for TOCs to offer network-wide tickets – through-tickets and inter-available tickets – is limited to three broad ticket types: Standard(“Economy”) tickets, Season tickets and Saver (off-peak) tickets. In addition torestricted travel times placed on Saver tickets, the network-wide tickets have other


restrictions that truncate the level of consumer benefits that would otherwise flowfrom such ticketing. For example, the passenger has a restricted choice of routes thatmay be used to get between station pairs. Further, depending on which of the tickettypes the passenger chooses, the user might be unable to change dates of travel,break the journey at an intermediate station, or receive a refund for an unused ticket.

Each Franchise Agreement between a TOC and the Franchise Directoridentifies station pairs where that TOC sets fares for “network” tickets. Only onedesignated TOC (the “lead” TOC) is responsible for setting fares on a given railwayline, even if other TOCs use the same section of track. For example, the role ofsetting network fares between London and Newcastle is undertaken by the GreatNorth Eastern Railway TOC. TOCs are not permitted to discuss fare setting witheach other. Annual fare increases for standard rail franchise products – fullStandard, Season and Saver tickets – might, in any case, be subject to an RPI-X* priceregulation.

Where a through ticket crosses ‘lead TOC’ boundaries, the level of thethrough fare tends to be less than (and should not be more than) the price of buyingindividual tickets for each section. (In principle, for a given ticket, the incrementalfare for the minor TOC’s section reflects the discount taper prevailing from the majorTOC calculation.).

This fare-setting process removes the need for negotiation betweentrain operating companies. Nonetheless, in setting up this system of through- andinter-available tickets (albeit, under some ‘popular’ political pressure), thegovernment sought to retain consumers’ network benefits. The consequence of thisapproach is that, for the given inter-available and through tickets, a TOC is obligedto accept tickets that have been priced by another TOC.

The TOCs’ umbrella organization, the Association of Train OperatingCompanies (ATOC), undertakes the coordinating tasks – such as the exchange offares information and computation of revenue distribution (the Rail Settlement Plan)– that are required to provide networked tickets. As ATOC’s co-ordination mightotherwise be seen as anti-competitive behavior, interline ticketing is exempted fromthe UK Competition Act (an Act which mirrors EU Directives on competition).Unlike most other exemptions in the UK, however, the exemption in this case isgranted by the Rail Regulator rather than the Office of Fair Trading (OFT).

It should be noted that the franchise requirement for inter-availabletickets does not preclude a TOC from also marketing its own ticket, which is validonly on its own services but offered at a discount price to the inter-available ticket.Depending on the route, such operator-specific tickets may be a significantproportion of all tickets sold.

Revenue for inter-available and through tickets is apportionedbetween TOCs under the Rail Settlement Plan. As rail travel is largely turn-up-and-


go, without seat booking, the revenue due to each TOC is derived from estimates ofpatronage on each TOC’s trains. The ORCATS computer program calculates theestimates of revenue due. For each station pair, ORCATS uses information on thequality of each TOC’s service (e.g., train frequency, journey time and number ofinterchanges) to estimate each TOC’s passenger traffic and revenue share.

To summarize, the reorganization of passenger railway operations inthe 1990s has largely preserved network benefits such as through-ticketing andinter-available ticketing. One-stop ticket purchasing has also been preserved. AFranchise Agreement identifies a single TOC as a “lead” TOC on a given route; thatTOC sets fares for inter-available tickets. There is no discussion (nor mechanism)between the lead and other TOCs as to what such prevailing fares should be. TheRail Settlement Plan is used to apportion the revenue where tickets are available foruse on other TOC services. The co-ordination required to offer these tickets is,however, exempted from competition law.

4 .44 .4 EUROPEAN RAIL FREIGHT FORWARDINGEUROPEAN RAIL FREIGHT FORWARDING

The efficiency of rail freight operations relative to road freight lies in thedistance that rail freight is carried: generally the longer the haul, the more efficient isthe rail operation relative to road freight. Consequently, the European rail freightindustry offers the potential for substantial gains in efficiency from ensuring acoherent rail network, in the form of technical, operational and product cohesion.The European rail freight industry presents an example, however, of theconsequences of not coordinating such activities: the industry has been severelyunder-performing financially and losing market share, despite the growth in long-distance, pan-European traffic.

One form of co-ordination between the railway systems lies in jointownership, such as the Intercontainer-Interfrigo combined transport operation,which is owned by 29 European railway companies. Until recent years, however,European freight operations have remained essentially national-based, with poorco-ordination of activities. The rail freight forwarding industry in Europe has thusbeen characterized by commercial, operational and technical fragmentation.Crucially, in the context of rate setting, trans-European rail freight is normallycharged on an individual operator basis, essentially remaining outside of a coherentpricing strategy. (For instance, a transfer of goods between The Netherlands andSpain would be costed on the basis of the sum of charges levied by each staterailway.) For this reason, such freight has not attracted the normal distance-taperedrates traditionally associated with long distance movements.

A consequence of this lack of co-ordination is that rail freight has a lowmarket share, relative to road, in long-distance markets where it should have anatural advantage over road-based freight. An example is the chemical industry,which sends only 6 percent of all cross-border shipments by rail as against sending


25 percent of domestic tonnage by rail. This is despite the fact that the averageinternational haul for chemicals by rail in Europe is 520 kilometers long, comparedto a less-competitive 370 kilometers for internal hauls. A commonly quoted averagedoor-to-door speed for international rail freight in Europe is only 16 km/h. Suchfreight is hampered by uncoordinated train schedules, train reordering(“marshalling”) en route and the need to change locomotives and staff at borderstations.

As with other industries, in recent years, rail freight organizations havesought to co-ordinate or merge their activities, to try to remedy the penalties theyincur for not offering a coherent network. In the last few years there have beenseveral initiatives aimed at coordinating activities:

• A joint company was formed in 1997 in Scandinavia, Nordic RailInternational (NRI), between the railways of Denmark, Norway andSweden. NRI coordinates international freight movements from the regionto other regions and within the region.

• Dutch and German rail freight operations have recently been groupedunder one company, Rail Cargo Europe, to price, market and operate theconstituent freight services as one merged operation.

• Swiss and Italian railways (SBB and FS) are establishing a joint rail freightbusiness for international freight between the countries.

• The European Commission, DG VII, has pushed the concept of “TransEuropean Rail Freight Freeways” (TERFF) that facilitates rail freightoperation across specified corridors across Europe. As it has evolved, theTERFFs coordinate pricing, marketing and operation across the nationalrailway systems. At the outset of the concept, the Luxembourg Railways(CFL) provided a customer facility for a “One-Stop Shop” in the sale ofspecific train “paths” (timings) across given railway systems. CFLfacilitates and negotiates the timing and pricing of paths, liasing withother railways on tariffs. The initial through-tariffs offered after the launchof the first routes in 1998 showed significant cost savings to customerswhile train timings were markedly improved, albeit from a very poorbase. Despite the under performance of European rail freight, and theadvantages of TERFFs in addressing the main causes of the underperformance, the EC Competition Directorate, DGIV, is neverthelessconcerned about the collaborative agreements that are necessary to createthe Freeways and they fear that the agreed tariffs for international paths


may amount to price fixing that would obstruct open access by third-partyhaulers.16

Thus, in each case—alliances, mergers or co-ordination—the objective is toprovide a coherent strategy on pricing and on the quality of the service provided.The unified one-stop shop of freight alliances and of the TERFFs are intended toforge a network to offer a single product that is not penalized in operational orpricing terms for the discontinuities between the underlying producer networks.However, if DGIV is reluctant to accept coordinated tariff setting for train paths, itseems likely that the industry will either consolidate into few pan-European freightforwarders or international rail freight will become even less important for themovement of freight across Europe.

4 .54 .5 EUROPEAN RAIL PASSENGER OPERATIONSEUROPEAN RAIL PASSENGER OPERATIONS

It would appear that European rail passenger services offer a more coherentnetwork than rail freight operations. To a limited extent this coherence occurs inpassenger train operations and ticketing, with through-running of some trains acrossinternal European frontiers and with through-ticketing being available.

A number of European railway and ferry operations jointly offer ‘Eurail’passenger travel passes for non-Europeans, valid for unlimited usage for a specifiedtime across a specified geographical area. The member organizations are then givena share of the revenue thus generated. The crux of the system lies in accepting theallocated revenue share as a reasonable approximation of usage of the Pass on agiven operator’s network.

Technical co-ordination in passenger services, however, remains as distant asever. The historical legacy of the European rail network includes, in particular, theprevalence of non-standard rail-width gauges on the Iberian Peninsula and EasternEurope. This leads, normally, to passengers having to change trains. More recently,however, railways have adopted markedly different standards in rolling stock (withimplications for track standards), with a number of different train types (SpanishTalgo, French TGV, Italian Pendelino, German ICE, Swedish X2000).

4 .64 .6 LINER SHIPPING CONFERENCESLINER SHIPPING CONFERENCES

The essence of the economics of the liner shipping industry is its economiesof scale; the larger the ship, the greater the potential for efficiency and thus for lowerrates. However, a competitive environment, with fluctuating demands due to

16 DGIV had earlier expressed concern about the Railways Usage Contract between Eurotunnel and theFrench and British Railways, where a common freight rate was set for both national railways throughthe Channel Tunnel. The two railway organizations were also given exclusive use of 50 percent of theTunnel, thereby challenging open access objectives.


seasonal and cyclical factors, can lead to the over-supply of vessels at any one time.The consequence can be intense competition in rates, which may lead to serviceinstability and, subsequently, to inadequate investment in the industry. Thepotential impact of this on world trade could be damaging.

It is in this context that a “conference” system has developed to co-ordinaterates and capacity between shipping companies. However, this has met withguarded acceptance (through anti-trust immunity) by regulatory bodies across theworld. Indeed, in 1974, the liner conference system received formal internationalrecognition, through the United Nations Convention on a code of conduct for linerconferences. Although conferences have existed for over a century, the more recentdevelopment of shipping alliances and mergers is working to bring about theirgradual demise. The alliances have arisen partly from increasing regulatorypressure on conferences and partly from the development of new low-costscheduled and charter shipping operations operating outside the conference system.

The characteristics of the liner shipping conference system, which act tostabilize the commercial environment by restricting competition, has traditionallyincluded the following:

• Setting of mutually-agreed freight rates for given types of goods;• Setting capacity levels on important routes;• Combining schedules and sharing capacity;• Operating ‘loyalty’ schemes, to offer favourable rates to shippers using

only conference shipping lines;• Setting technical standards.

Conferences have also—contentiously—set rates for intermodal operation(inland as well as sea transport).

While the essence of this system is to provide a stable commercialenvironment, shipping lines nonetheless incur some costs. For instance, havingagreed to be members of a conference, a shipping line is typically required toconform to the rates set. This conformity leads to some surrender of ratingflexibility. This restriction may be too great should the conference system not proveeffective in delivering stable freight rates - hence the growth of non-conferenceshipping.

The conference system has guarded acceptance in the USA (through anti-trustimmunity) and in the European Union (through block exemption from Article 85(1)of the Treaty of Rome—Article 3 of Regulation 4056/86 grants a group exemptionfor liner conferences). The exemption has been given in recognition of the“distinctive characteristics of maritime transport,”17 where conferences have a

17 Recital 6 of Regulation 4056/86.


“stabilizing effect” and lead to the provision of “reliable services.”18 This immunityis conditional, however, on conference members conforming to the terms of theexemption—breaches of the conditions for exemption or of obligations, will lead tothe exemption becoming void or being removed. For instance, in 1998, the 15shipping line members of the Trans-Atlantic Conference Agreement (TACA) werejudged by the EU to have undertaken price fixing in their dealings and wereconsequently fined by the EU. Particular concerns of the EU involve, first,conferences seeking to set prices on the land part of journeys—which led, forinstance, to the EU fining the 14 members of the Far Eastern Freight Conference(FEFC) in 1995; and second, conferences seeking to set constraints on capacity.

In the USA, also, the conference system has been tolerated by regulatoryauthorities but, nonetheless, US regulatory action has reduced the efficacy of theconference system there. First, the 1984 Shipping Act gave conference members theright to take “Independent Rate Action.” Subsequently, the enactment of the OceanShipping Reform Act in 1999 has provided that while service contracts betweencustomers and a conference must be publicly available, those contracts between acustomer and an individual shipping line must remain confidential. Thisconfidentiality inevitably makes it easier for shipping lines to break with conferencepricing structures.

Such regulatory actions, together with the close scrutiny of, and restrictionson, conferencing and fear or actuality of fines has led to the development ofshipping alliances. Alliances involve the less-demanding requirements of scheduleco-ordination and space-sharing but explicitly exclude common rate-setting. Thegrowth in non-conference shipping is, in itself, reducing the incentive for shippinglines to remain in conferences, where they are tied to given rates. Thus, in summary,while shipping lines remain enthusiastic about co-ordination, the evolution of acompetitive shipping environment and of regulation, is leading to alternative formsof relationships and the gradual demise of the long-standing conference system.

4 .74 .7 INTERNATIONAL POSTAL SYSTEMINTERNATIONAL POSTAL SYSTEM

One of the earliest examples of international co-ordination of activities over ageographic network is the universal postal delivery system. Since 1874, nationalgovernments have maintained membership in an intergovernmental organization,the Universal Postal Union (UPU), which has provided the system for the worldwidedelivery of letters and packages. The UPU is currently an agency of the UnitedNations.

The supreme authority of the UPU is the Congress, which meets every fiveyears. The UPU sets rates for payments between administrations; these rates are setat levels that ensure that administrations are compensated for providing services on

18 Recital 8 of Regulation 4056/86.


the basis of a set of costs averaged over the international postal system. Postaladministrations are, however, authorized to form bilateral and multilateralagreements at rates that cover their specific costs.

The UPU “Convention and Postal Parcels Agreement” formalizes the processof exchanging mail between postal administrations and of accounting for theservices provided, while fostering financial self-sufficiency. This latter objective isrelevant because of the growth in more recent years, of worldwide courierscompanies. UPU members’ in contrast to these courier companies are committed touniversal delivery.

Delivery of mail was based originally on the presumption of equal flows ofmail in each direction. In reality, there were a number of flow imbalances.Consequently, in 1969, the UPU introduced weight-based charging for inwardpostage—“terminal dues.” This, however, was exploited by those sending manylightweight items. More recently, the European Commission has taken the view thatthe only appropriate form of redress between postal administrations lay in a chargebased on the actual cost of inward postal delivery, rather then the weight or numberof items.

The UPU is therefore an organization that facilitates international postaldelivery, within an environment of financial self-sufficiency. The UPU setsuniversal postal tariffs, albeit within an environment that also permits bilateral andmultilateral agreements. To date, most postal administrations have had a monopolyfor letters and small packets delivered within their own administered areas andhave had a duopoly for the delivery of these items between administration areas.The rapid growth of courier companies, together with growing governmentliberalization of postal services is, however, breaking down these patterns. Indeed,there is the prospect in the near future of national postal organizations operating inother countries (notably, across EU countries). Postal regulators have, none the less,permitted the mutual setting of rates that guarantee the recovery of costs,irrespective of relative efficiency.

4 .84 .8 BANKINGBANKING

The growth in international trade, travel and technology has fused stronglinks within and between national and international banks. Insofar as personalcustomers are concerned, the expectation is not that their local bank will berepresented on the customer’s wider travel horizons, but that simple, inexpensivefacilities will exist for the traveler to use other banks’ facilities to undertaketransactions.

In the UK, agency banking of this form is based on bilateral or multilateralreciprocity agreements (such as the ‘Four Bank’ Agreement between Barclays,Lloyds, Royal Bank of Scotland and Bank of Scotland on reciprocal usage of


Automatic Teller Machines (ATMs)) or via the ‘Cirrus’ system (where paymentreconciliation occurs through Visa or MasterCard, with the customer’s bank takinginitial responsibility for costs incurred by the agency bank in issuing cash). In thiscontext, it is the irrelevance of the bank brand, when the agency bank network isused, that has led to strong opposition by consumer groups in the USA and UK(amongst other places), to the imposition of ‘substantial’ disloyalty charges for useof agency bank facilities. Such charges undermine the flexibility of the network thathas built up rapidly in recent years.

In commercial banking, also, there are many areas of inter-banking(“correspondent banking”), where a strong network, and inter-dependence, hasdeveloped: banks can simultaneously be suppliers, buyers and customers to eachother in meeting customers’ needs. In Correspondent Banking a bank or financialinstitution acts on behalf of another in a particular place. Thus, while the banking(or financial) network has become a complex system of competing organizationsacting in competition, its members nonetheless also act in concert in bringing aboutthe efficient flow of money. In facilitating the reconciliation of cash flows and costsincurred, organizations such as the Association for Payment Clearing Services (in theUK), the (USA) Clearing House Interbank Payments System (CHIPS), owned by theNew York Clearing House Association, and the Bank for International Settlements(Switzerland) bring about the almost seamless network of banking facilities.

The introduction of the Euro currency in Europe will further reducereconciliation costs between banks, which in itself will further encourage banks toact in concert with other banks to facilitate currency flows. The skills involved inthese cash settlements may lead to banks devolving such activities to third-partyplayers, to harness economies of scale of such operations. In this respect, thebranding of individual banking facilities becomes less important to the customerthan efficient and flexible service delivery. The essence of the system’s efficiency is,however, its reliance on communication and co-ordination.

4 .94 .9 CONCLUSIONCONCLUSION

We have conducted a review of several network industries to establish howcompanies have responded to a lack of comprehensive coverage for their ownindividual networks. In each case the companies have sought to co-operate witheach other, thus benefiting their own sales and providing a facility that mightotherwise be unavailable to the customer. However, there are also indications thatattempts by anti-trust bodies to limit co-operation particularly with respect to thedetermination of through tariffs, is encouraging the consolidation of the industriesconcerned. We noted that this trend was occurring in the shipping industry, which ismoving, slowly, away from the long established system of liner shippingconferences that brought together smaller companies.


We also noted that, the customer is less concerned with the brand than havingaccess to a network. This is evident, for instance, in the national and internationalbanking industry’s co-operation in developing joint operations for transfers ofpayments and providing customers with widespread access to cash throughAutomatic Teller Machines—it appears to matter little which bank is physicallyproviding the cash.

Some networks such as Interflora and postal systems, have a long history ofco-operation. In both of these examples there is a need to consider the viability ofthe individual parties to the network when setting prices. With shipping, on theother hand, the development of large, often global companies is providing analternative direction to the traditional network of individual companies. The largecompany inevitably has less need to co-ordinate activities because, by itself, itprovides a comprehensive network.

The passenger rail industry in Great Britain has, ironically, recently moved inthe opposite direction to most other network industries in that it has moved from asingle passenger train operator, British Rail, to 25 separate passenger trainfranchises. In undertaking these changes, however, there was widespreadacceptance of the network benefits from information, ticket retailing, ticket inter-availability across all trains, and from tapered through-fares across stationinterchanges. The reforms have consequently incorporated processes that ensure themaintenance of these network features. The obverse of this continued networkbenefit for passengers has been the development of a revenue distribution system toapproximate the dispersal of revenue between train operators according topassenger usage.

While rail reforms in Great Britain have sought to safeguard networkbenefits—European rail freight operations, in particular, have suffered financiallyfrom a failure of the national rail operators to develop a coherent system of jointmarketing, technical integration, commercial rate setting and train operations. Thereis strong evidence that the European freight operations are doing less well thannational operations, despite rail freight being naturally more competitive over thelonger, pan-European distances. With increased competition from other modes, thefailure of the European rail freight industry to develop a coherent single networkbetween the constituent railway companies has meant that the industry is grosslyunder-performing. The consequence of not developing a coherent, comprehensivenetwork is higher subsidies and the loss of benefits associated with less roadcongestion.

There are interesting parallels between the aviation industry and some of thenetwork industries reviewed. The aviation industry has traditionally overcomeproblems associated with limited networks by establishing procedures, throughIATA, that enable the air passenger easy access across different airline networks atan agreed tariff. But this interlining system is now challenged by a developmentsimilar to that occurring in the liner shipping industry, namely consolidation. In the


airline industry, because of the restrictions imposed by bilateral air treaties, thisconsolidation takes the form of alliances; in the shipping industry it has taken theform of mergers as well as alliances. There is a view that the latter development hasbeen encouraged by the more restrictive stance adopted in recent times by the anti-trust authorities. If this is indeed the case, then attempts to constrain the IATAinterlining system (for example, by disallowing the tariff conference) may acceleratethe trend towards aviation alliances. It is not immediately evident from acompetition standpoint that this would constitute an unquestionable improvementand, what ever is proposed in its stead, it is important to ensure that the airlineindustry does not regress into the state of affairs found in the European rail freightindustry. There may, of course, be alternative ways of accommodating the concernsof the competition authorities regarding tariff consultations and, in this context,other approaches possibly merit further examination.


ANNEX 1 : THE CAA DATA SETANNEX 1 : THE CAA DATA SET

11 CAA London Heathrow te rmina l passenger surveyCAA London Heathrow te rmina l passenger survey

1.1 The analysis of interlining passengers at London Heathrow airport used datafrom the UK Civil Aviation Authority’s (CAA) ongoing terminal passengerssurvey for Gatwick, Heathrow and Manchester. This study used the 1998annual survey. The survey involves interviewing outbound passengers,whether the travellers have arrived at Heathrow by surface modes or whetherthey have arrived by air. The survey therefore includes travellers in transitwithin a single-coded flight as well as travellers who are interlining betweenflights.

1.2 We should note at the outset, however, that CAA’s definition of “interlining”differs from that term that is generally used in the airline industry. CAA’sdefinition of interlining refers to all persons who switch between flights, notjust to those persons who switch flights to a different carrier. Thus, forinstance, at Heathrow all travellers who switch between British Airways’international flights and British Airways’ domestic flights are regarded asinterliners.

1.3 Travellers are surveyed throughout the year, with sampling being dividedinto twelve, month-long, sub-periods. The essence of the survey structure isthat it should capture the patterns of traveller characteristics on each routeserving the surveyed airport. As a consequence, each route is surveyed. Forthis reason of overall representativeness, however, the survey is alsoundertaken throughout the year rather than at a single period within the year,in order to capture seasonal variation. Further, the survey is undertakenacross periods of the day and types of day (e.g., Monday to Thursday versusSaturday) to capture other traveller variations (such as leisure travelpreponderance on weekends and outside of early morning departures).

1.4 Potential interviewees were identified on a systematic basis (using cordon-line techniques, such as choosing every xth person) as they passed through tothe departure lounge or into the departure gate waiting room. If the “target”person then agreed to be interviewed, this was undertaken where and when itwas convenient.

1.5 Sample records for a given route for a given period were then given a weightto expand each sub-sample to a population which, in the case of LondonHeathrow in 1998, was then aggregated across each sub-sample to 60.4million terminal travellers. Of these terminal travellers, there were 85,991CAA interviews undertaken. This corresponds to a contact rate of travellersof 1 in 702 travellers at Heathrow.

1.6 Of the 60.4 million travellers, 19.3 million (just under one-third) were peoplewho were interlining at the airport. Around 11 million of these interlinedairside (that is, within the secure area) and 8.3 million interlined landside.


1.7 Summary information from survey analysis undertaken by CAA is providedin the CAA document, CAP703, “Passengers at Gatwick, Heathrow andManchester Airports in 1998”. (ISBN 0860397793).

22 S u r v e y d a t a u s e d i n t h e s t u d yS u r v e y d a t a u s e d i n t h e s t u d y

2.1 Annex 2 provides a copy of a representative survey questionnaire as put tomost terminal passengers. (As many questions relate to journey origin andairport access, the survey form for transit passengers is necessarily muchtruncated.) Survey records obtained from CAA were restricted to recordswhere passengers interlined between airline services at Heathrow. In thiscontext, therefore, travellers who interlined between air services at Heathrowand services at London Gatwick (and other London airports) were excludedfrom our analysis.

2.2 Having requested that CAA restrict the survey records to Heathrowinterliners, we requested the responses for the following questions:* Question 6: “Which AIRPORT did you fly from?”

* Question 7: “Which AIRLINE did you fly with?”

* Question 10: “At which AIRPORT did you start your air journey?”

* Question 23: “Which AIRPORT are you travelling to on the flight youare now boarding?”

* Question 27: “At which airport will you COMPLETE your airjourney?”

* Question 28: Which AIRLINE will you use to fly from (airport in Q23)?

* Question 48: What TYPE of ticket do you have?”

2.3 We also obtained the route detail, that is, where the passenger was ticketed togo to and with which airline; the route detail in this case is the official airline(not the code-shared airline) and the airport is where the flight is routed to, orvia. (In this context of code-sharing, the passenger may perceive that they aretravelling with another airline.)

2.4 The response to Question 48 (What type of ticket do you have?) was codedinto 11 fare categories, with three ticket groups covering full fare ticket types:“First”, “Business/Club” and “Economy - Full Fare” tickets. The questionrelates to the fare type used on the next sector of the traveller’s journey out ofHeathrow; we assume that it is the same ticket type that was used on thesector into Heathrow. The other ticket categories relate to discounted ticketsor where the traveller did not know the precise form of the Economy ticket.Crucially for our analysis, we have made the assumption that full-pricedtickets correspond to fully-flexible IATA tickets. It is not possible, with thisdegree of detail to be isolate the IATA discounted round-the-world tickets.

2.5 Each survey record (interview) was supplied with a weight (representativenumber of passengers) that the traveller characteristics were assumed to


correspond to. As a consequence, adding up each weight gives the totalnumber of travellers in a given year.

33 Data check ing and c lean ingData check ing and c lean ing

3.1 The data were supplied by CAA in Excel spreadsheet format. There are15,351 records, representing 19,289,450 passengers, that is 1 in 1,257interlining passengers. The response rate is not as good as the overall rate (1in 702), probably because of the higher proportion of travellers in interliningwhere language may be a barrier to interviewing; it may, of course, also be aconscious survey design action, if variability of behaviour of interliningtravellers is lower than for terminating travellers.

3.2 As requested to CAA, there are 9 fields (or columns of responses) for eachsurvey record (interview) in the database. Seven fields relate to describingthe airports and airlines used to take the traveller between their origin anddestination: fields show the airport used prior to Heathrow (plus any earlierairport, if there was an airport prior to that), the airline used to accessHeathrow, the immediate airport and airline to be used after Heathrow, theairline used to get from the intermediate airport and the final (destination)airport. In addition, each record records the ticket type that is being used forthe sector for the leg from Heathrow. Finally, each record contains a“population” field, which is the weight (number of passengers) to which therecord relates.

3.3 The airport and airline details for each traveller were presented in the form ofIATA codes: airlines were represented in two-letter codes while airports wererepresented in three-letter codes.

3.4 Having received the survey data, but prior to our analysis, we undertook areview of the responses. While we accept that a reasonable degree ofaccuracy and logic checks will have been undertaken on the data set, we alsorecognised that the data may still not be in a totally consistent format - withthree airports and over 170,000 records in total each year, each with over 100data fields and a range of different airport and airline coding systems, someinconsistent reporting of passenger responses are inevitable.

3.5 The key items of data provided to us where inconsistency can arise is whetherairlines and airports are reported in IATA or ICAO codes. With travellersproffering travel documents and tickets that may use other codes, someelement of error is inevitable. The surveyor may, therefore, use the traveller’stravel documentation as the basis for recording flight details even if the codesare ICAO codes. For this reason, we needed to search the database for codesthat did not conform to the IATA coding system. An example of the errorwould be where the surveyor has used the code “SAS” for ScandinavianAirlines instead of “SK”, the appropriate IATA airline code. In this case, andwhere an ICAO airport code has been used, we need to ensure that inchanging the code to IATA format that we are confident that the change isvalid. For instance, we would be confident that a traveller recorded as


travelling from Stockholm to Copenhagen to Heathrow by the incorrectly-coded SAS was travelling by Scandinavian Airlines (SK) but we would not beconfident if the airline code recorded on that route was that for Qantas.

3.6 In this context, changes were only made to survey records where a code wasclearly wrong (e.g., if the code was too long or and where there was norecorded equivalent IATA code) and where supporting information fromother fields indicated that the change was plausible (e.g., if the airline wasincorrectly recorded as QAN for Qantas (instead of QF), for an initial flightbetween Melbourne and Sydney.

44 R e s p o n s e r a t e sR e s p o n s e r a t e s

4.1 The CAA survey sets requirements on interviewers to ensure that essentialquestions are completed - a very small proportion of interviews were deemedunsuccessful, as these essential (or “core”) questions were not completed. Inthis context, the core questions include questions on airports and airlinesused by the traveller, that is, our records were supplied with 100 percentresponse rates on these questions. The question on ticket type is not a corequestion, however, so the response rate was only around 60 percent,representing 11.4 million travellers.

4.2 In our analyses where we use the ticket field, we have considered onlyresponses where a valid response has been given on ticket type. The issue isthen whether there has been a systematic bias in the non-responses. In thiscontext it should be remembered that the interviewee is being asked whattheir ticket type is on the leg out of Heathrow, not the leg into Heathrow. Inall likelihood the ticket type will be the same in both cases (and we assume assuch) but, nonetheless, the issue is not as simple as with persons undertakinga single sector journey. In most cases of uncertainty it is assumed that“Economy - Don’t Know” would be a catch-all response. We take theassumption, therefore, that there is not a systematic bias. In the event thatsuch bias was present, however, we believe it would merely alter the ticketshares in general without affecting the ticket shares across airline pair types(e.g., online and alliance partners).

55 D e r i v a t i o n o f n e w f i e l d sD e r i v a t i o n o f n e w f i e l d s

5.1 In undertaking survey analysis we needed to derive new data fields todescribe interliner or carrier characteristics. These new fields include:• The number of stages involved in the traveller’s journey between the

airport of origin and the airport of final destination. Thus, for instance, aperson making a journey from Dublin to Paris, interlining via Heathrow,would have made two stages.


• A sub-set of the above analysis is identifying where a traveller is making asingle interchange and where travellers are undertaking multiple - or“serial” - interlining. For instance, a person travelling from New York toBerne via Heathrow and Paris is coded in the database as a “serial”interliner.

• Where travellers are interlining at Heathrow between different services bythe same airline, that interlining is coded as being “online”.

5.2 We also coded airlines in terms of their alliances, where they were coremembers of that alliance. (Some alliances have associate members.) Wesought to describe alliances by the airlines that were members of an alliancefor all, or the majority of the period of, 1998. Inevitably, the objective ofdescribing airlines in this way was undermined by the differingcharacteristics of the alliances. For instance, airline membership of the StarAlliance is probably more likely to involve a higher level of co-ordinationand co-operation than membership of OneWorld. The consequence of this isthat the service attributes of a non-IATA through-Star ticket are arguably moreattractive than those of non-IATA interlining between OneWorld members.(One litmus test of alliances is their attitude to earning and using Air Milesand Frequent Flyer points.)

5.3 The airlines that were assumed to be in the four alliances in 1998 (or for themajority of that period* ) are:

The S tar Al l i ance :The S tar Al l i ance :- United Airlines- Lufthansa- SAS- Air Canada- Thai International- Varig

O n e W o r l dO n e W o r l d ††

- American Airlines- British Airways- Canadian Airlines- Qantas- Cathay Pacific

A t l a n t i c E x c e l l e n c e / Q u a l i f l y e rA t l a n t i c E x c e l l e n c e / Q u a l i f l y e r- Delta Airlines- Swissair- Austrian Airlines- Sabena

* Alliance membership has changed significantly since that time.† The alliance name, OneWorld, did not, however, come into existence until after 1998.


W i n g sW i n g s- KLM- Northwest Airlines

5.4 Airline pairs into and out of Heathrow were also identified by whether therewas any franchising or equity link between the airlines. A major example ofthe equity link is that between British Airlines and Qantas, the latter beingpart-owned (25%) by BA. Both airlines are also members of OneWorldthough it is through the equity link (rather than the alliance) that the airlinescode-share on the Europe-Australia Kangaroo route. Given the similarity ofthe practical effect of franchising and equity links, and for simplicity, equity-and franchise-linked airlines are considered in one classification, “equity”.

5.5 In addition to airline alliancing, on some routes airlines undertake codesharing. The code sharing between two airlines may take the form of havingtwo aircraft (one by each airline), with each airline being responsible for atleast one sector of the overall code-shared route. Alternatively, two (or more)airlines may co-operate on a route by one airline providing the aircraft andsome (or all) of the crew and selling some of the seating capacity to thepartner airline.

5.6 We used code share information for each airline and route as provided in theJuly 1999 edition of “Airline Business” (which also included the period ofvalidity of such partnerships). Such information was then applied to eachrecord in the CAA database, mapping each interviewee’s airport prior toHeathrow, the corresponding airline into and out of Heathrow and theimmediate airport after Heathrow. That is, we mapped the code shareinformation only against travel details for travellers’ journeys into and out ofHeathrow.


A N N E X 2 : R E P R E S E N T A T I V E C A A S U R V E Y F O R MA N N E X 2 : R E P R E S E N T A T I V E C A A S U R V E Y F O R M

Illustrative reproduction of CAA’s London Heathrow passenger surveyCAACAA 1 9 9 8 A I R P O R T S U R V E Y1 9 9 8 A I R P O R T S U R V E Y

H E A T H R O W A I R P O R TH E A T H R O W A I R P O R TTERMINAL 2January-December 1998

DateDateR O U T ER O U T EDomestic …… 1International .. 2

S E XS E XMale ……. 1Female ..... 2

O U T C O M EO U T C O M EP o s i t i v e . …P o s i t i v e . …N e g a t i v e . . .N e g a t i v e . . .

1. Positive2. Refusal

T i m eT i m e 3. IneligibleFLIGHTFLIGHTT Y P ET Y P E

F l i g h tF l i g h tN u m b e rN u m b e r

Shi f tShi f t 4. No Time

Scheduled.......1 Target ....... 1 5. No English(Go to Q1)

Charter ............2 Other ......... 2 6. Other

INTRODUCTION: I am carrying out a survey for the Civil Aviation Authority tohelp in airport planning. Can you please tell me...11 I n w h i c h C O U N T R Y h a v e y o u b e e n l i v i n g f o r m o s t o f t h e l a s tI n w h i c h C O U N T R Y h a v e y o u b e e n l i v i n g f o r m o s t o f t h e l a s t

12 months?12 months?

IF UK/WESTERN EUROPE at Q1 go to Q2, if FOREIGN go to Q3 SHOWCARDS 1-4 FOR WESTERN EUROPE

22 W h e r e i s y o u r H O M E ?W h e r e i s y o u r H O M E ?Town .........................................................................................................District Council/London Borough........................................................County/District........................................................................................UK Passengers onlyA n d c a n y o u p l e a s e t e l l m e y o u r p o s t c o d e ?A n d c a n y o u p l e a s e t e l l m e y o u r p o s t c o d e ?ALL PASSENGERS

33 H a v e y o u a r r i v e d a t t h i s a i r p o r t B Y A I R w i t h i n t h e l a s t 2 4H a v e y o u a r r i v e d a t t h i s a i r p o r t B Y A I R w i t h i n t h e l a s t 2 4h o u r s ?h o u r s ?

YES ............ 1 Go to Q4 NO ............ 2 Go top Q1144 D i d y o u c o m e t o L O N D O N J U S T t o C H A N G E p l a n e s o r d i dD i d y o u c o m e t o L O N D O N J U S T t o C H A N G E p l a n e s o r d i d

y o uy o uhave another reason for coming here?have another reason for coming here?Change planes ............... 1Other reason .................. 2

55 H a v e y o u b e e n t h r o u g h p a s s p o r t / c u s t o m s c o n t r o l a tH a v e y o u b e e n t h r o u g h p a s s p o r t / c u s t o m s c o n t r o l a tHEATHROW?HEATHROW?

Yes ................................... 1No .................................... 2

66 W h i c h A I R P O R T d i d y o u f l y f r o m ? . . . . .W h i c h A I R P O R T d i d y o u f l y f r o m ? . . . . . .....................77 Which AIRLINE d id you f ly wi th? . . . . . . . . . . . . . . . . . . . . . . . . . . . .Which AIRLINE d id you f ly wi th? . . . . . . . . . . . . . . . . . . . . . . . . . . . .


88 At which TERMINAL d id you ar r ive?At which TERMINAL d id you ar r ive?H e a t h r o wH e a t h r o w GatwickGatwick Stans tedStans ted L u t o nL u t o n

DKDK (S)(S) (N)(N) DKDK11 22 33 44 88 55 66 77 99 1010

99 D i d y o u s t a r t y o u r A I R j o u r n e y f r o m D i d y o u s t a r t y o u r A I R j o u r n e y f r o m (a i rpor t in Q6)(a i rpor t in Q6) ??Yes ............... 1 Go to Q23No ................ 2 Go to Q10

1010 A t w h i c h A I R P O R T d i d y o u s t a r t y o u r a i r j o u r n e y ?A t w h i c h A I R P O R T d i d y o u s t a r t y o u r a i r j o u r n e y ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . .. . . . . . . . . (country/state)1111 WheWhe r e d i d y o u B E G I N y o u r j o u r n e y i n t h e U K t o c a t c h t h i sr e d i d y o u B E G I N y o u r j o u r n e y i n t h e U K t o c a t c h t h i sf l ight?f l ight?

Town ................................................................................................................District Council/London Borough .............................................................County .............................................................................................................Postcode ..........................................................................................................

If foreign resident or UK resident whose ORIGIN is NOT HOME go to Q121212 M a y I j u s t c h e c k , w a s t h i s a t r a n s i t s t o p o r d i d y o u h a v e aM a y I j u s t c h e c k , w a s t h i s a t r a n s i t s t o p o r d i d y o u h a v e a

r e a s o n f o r b e i n g i n r e a s o n f o r b e i n g i n ( p l a c e i n Q 1 1 )( p l a c e i n Q 1 1 ) ??Business location ........................................................ 2Leisure location .......................................................... 3Other (write in) ......................................................... 4

IF TRANSIT, go back and ask Q11 AGAIN unless transit from LGW/STN/LTNAIRPORT then go to Q6SHOW CARD 5SHOW CARD 5 ASK ALL NON UK RESIDENTS

1313 W h i l s t i n t h e U K h a v e y o u b e e n a n y w h e r e o u t s i d e t h eW h i l s t i n t h e U K h a v e y o u b e e n a n y w h e r e o u t s i d e t h eSOUTH EAST on th i s t r ip?SOUTH EAST on th i s t r ip?Yes ............................................................................. 1 Go to Q14No .............................................................................. 2 Go to Q15

1414 I n w h i c h p l a c e o u t s i d e t h e S O U T H E A S T d i d y o u s p e n dI n w h i c h p l a c e o u t s i d e t h e S O U T H E A S T d i d y o u s p e n dm o s t t i m e ?m o s t t i m e ?

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .

G o t o Q 1 5G o t o Q 1 5

1515 C o u l d y o u t e l l m e C o u l d y o u t e l l m e i n d e t a i l H O W Y O U T R A V E L L E D f r o mi n d e t a i l H O W Y O U T R A V E L L E D f r o m. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( p l a c e i n Q 1 1 )( p l a c e i n Q 1 1 ) to HEATHROW Airpor t to HEATHROW Airpor tt o d a y ?t o d a y ?


Private or hire car - ask what happened to car and if parked which car park orlocation was usedTo........................To LHR

CARCAR P r i v a t e C a r - d r i v e nP r i v a t e C a r - d r i v e nawayawayPr ivate Car - shor t t e rmPr ivate Car - shor t t e rmcar parkcar park

0102

0102

0102

Last modeonly

COURTESY BUSCOURTESY BUSO R V A L E TO R V A L E TS E R V I C E SS E R V I C E S

P r i v a t e c a r - v a l e tP r i v a t e c a r - v a l e ts e r v i c es e r v i c e

03 03 03 Valet service

P r i v a t e c a r - a i r p o r t l o n gP r i v a t e c a r - a i r p o r t l o n gt e r m c a r p a r k b u st e r m c a r p a r k b u s

04 04 04

P r i v a t e c a r - p r i v a t e l o n gP r i v a t e c a r - p r i v a t e l o n gt e r m c a r p a r k b u st e r m c a r p a r k b u s

05 05 05 Car park used

P r i v a t e c a r - b u s i n e s s c a rP r i v a t e c a r - b u s i n e s s c a rp a r k b u sp a r k b u s

06 06 06 Car park used

Pr ivate car - s ta f f carPr ivate car - s ta f f carp a r k b u sp a r k b u s

07 07 07

Pr iva te car - ho te l carPr iva te car - ho te l carp a r k b u sp a r k b u s

08 08 08 Hotel used

Pr iva te car - type o f carPr iva te car - type o f carpark unknownpark unknown

09 09 09

HIRE CARHIRE CAR Hire car - dr iven awayHire car - dr iven away 10 10 10Hire car - shor t term carHire car - shor t term carp a r kp a r k

11 11 11

Hire car - h i re carHire car - h i re carc o u r t e s y b u sc o u r t e s y b u s

12 12 12 Hire carcompany

AIRLINE CARAIRLINE CAR C o u r t e s y C a r ( A i r l i n e s )C o u r t e s y C a r ( A i r l i n e s ) 13 13 13TAXI/MINICABTAXI/MINICAB TaxiTaxi 14 14 14

M i n i c a bM i n i c a b 15 15 15BUSES/COACHESBUSES/COACHES H o t e l b u sH o t e l b u s 16 16 16

Charter CoachCharter Coach 17 17 17 CoachCompany

R a i l / A i r B u sR a i l / A i r B u s( R e a d i n g / W o k i n g / S t o c k l( R e a d i n g / W o k i n g / S t o c k le y P a r k )e y P a r k )

18 18 18

N a t i o n a l / R e g i o n a l C o a c hN a t i o n a l / R e g i o n a l C o a c hS e r v i c eS e r v i c e

19 19 19 Coachcompany

A i r b u sA i r b u s 20 20 20Gatwick/HeathrowGatwick/HeathrowCoach Serv iceCoach Serv ice

21 21 21 Coachcompany

L o n d o n B u s C o m p a n i e sL o n d o n B u s C o m p a n i e s 22 22 22 Bus companyL o c a l B u s C o m p a n i e sL o c a l B u s C o m p a n i e s 23 23 23 Bus companyT y p e o f B u s / c o a c hT y p e o f B u s / c o a c hCompany unknownCompany unknown

24 24 24


T U B ET U B E T u b eT u b e 25 25 25TRAINTRAIN N a t i o n a l R a i l w a y sN a t i o n a l R a i l w a y s 26 26 26

P a d d i n g t o n E x p r e s sP a d d i n g t o n E x p r e s s 27 27 27O T H E RO T H E R B o a tB o a t 28 28 28

Other (wr i te in )Other (wr i te in ). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .. . . . . . . . . .

29 29 29

1616 H o w L O N G d i d y o u r j o u r n e y t a k e f r o m p l a c e i n H o w L O N G d i d y o u r j o u r n e y t a k e f r o m p l a c e i n (Q11)(Q11) ??H o u r s . . . . . . M i n u t e s . . . . . .H o u r s . . . . . . M i n u t e s . . . . . .

1717 W h y d i d y o u C H O O S E t o t r a v e l t o t h e a i r p o r t t o d a y b y W h y d i d y o u C H O O S E t o t r a v e l t o t h e a i r p o r t t o d a y b y ( l a s t( l a s tm o d e i n Q 1 5 )m o d e i n Q 1 5 ) ??. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1818 H o w m a n y p e o p l e c a m e i n t o t h e t e r m i n a l t o s e e y o u o f f ?H o w m a n y p e o p l e c a m e i n t o t h e t e r m i n a l t o s e e y o u o f f ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 .19 . I n c l u d i n g y o u r s e l f , h o w m a n y p e o p l e a r e T R A V E L L I N G i nI n c l u d i n g y o u r s e l f , h o w m a n y p e o p l e a r e T R A V E L L I N G i n

y o u r i m m e d i a t e g r o u p ?y o u r i m m e d i a t e g r o u p ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .. . . . . . . . . . . .

2020 I s t h i s y o u r O U T W A R D o r R E T U R N j o u r n e y ?I s t h i s y o u r O U T W A R D o r R E T U R N j o u r n e y ?O u t w a r d . . . . . . . . . . . . . 1O u t w a r d . . . . . . . . . . . . . 1 G o t o Q 2 1G o t o Q 2 1R e t u r n . . . . . . . . . . . . . . . . 2R e t u r n . . . . . . . . . . . . . . . . 2 G o t o Q 2 2G o t o Q 2 2S i n g l e . . . . . . . . . . . . . . . . . 3S i n g l e . . . . . . . . . . . . . . . . . 3 G o t o Q 2 3G o t o Q 2 3

2121 HH o w l o n g W I L L y o u b e a w a y ?o w l o n g W I L L y o u b e a w a y ? . . . . . . . . W e e k sW e e k s . . . .. . . .DaysDays . . . . Hours. . . . Hours

O RO R2222 H o w l o n g H A V E y o u b e e n a w a y ? H o w l o n g H A V E y o u b e e n a w a y ? . . . . . . . . W e e k sW e e k s . . . .. . . .DaysDays . . . . Hours. . . . Hours2323 W h i c h A I R P O R T a r e y o u t r a v e l l i n g t o o n t h e f l i g h t y o u a r eW h i c h A I R P O R T a r e y o u t r a v e l l i n g t o o n t h e f l i g h t y o u a r e

now board ing?now board ing?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2424 W h i c h a i r l i n e a r e y o u f l y i n g w i t h ?W h i c h a i r l i n e a r e y o u f l y i n g w i t h ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2525 What i s your FLIGHT NUMBER?What i s your FLIGHT NUMBER?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2626 A r e y o u f l y i n g t h e r e j u s t t o C H A N G E o r a r e y o uA r e y o u f l y i n g t h e r e j u s t t o C H A N G E o r a r e y o u

C O M P L E T I N G y o u r a i r j o u r n e y a t C O M P L E T I N G y o u r a i r j o u r n e y a t (a i rpor t in Q23)(a i rpor t in Q23) ??C o m p l e t e . . . . . 1 C o m p l e t e . . . . . 1 G o t o Q 3 0G o t o Q 3 0Change . . . . . . . . 2 Change . . . . . . . . 2 G o t o Q 2 7G o t o Q 2 7

2727 A t w h i c h a i r p o r t w i l l y o u C O M P L E T E y o u r a i r j o u r n e y ?A t w h i c h a i r p o r t w i l l y o u C O M P L E T E y o u r a i r j o u r n e y ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


2828 W h i c h A I R L I N E w i l l y o u u s e t o f l y f r o m W h i c h A I R L I N E w i l l y o u u s e t o f l y f r o m ( a i r p o r t i n( a i r p o r t i nQ 2 3 )Q 2 3 ) ? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NORTH AMERICAN, WESTERN EUROPEAN DESTINATIONS ONLY - SHOWSHOWCARDS 1-4CARDS 1-4

3030 Where i s your MAIN DESTINATION?Where i s your MAIN DESTINATION?Town/City ..................................................................................................................Country/State .............................................................................................................

3131 W h a t m o d e o f T R A N S P O R T w i l l y o u u s e t o l e a v e ( a i r p o r t i nW h a t m o d e o f T R A N S P O R T w i l l y o u u s e t o l e a v e ( a i r p o r t i nQ 2 3 o r Q 2 7 )Q 2 3 o r Q 2 7 ) ??

Circ lC i rc lee

Pr ivatePr ivateCarCar

. . . .. . . .11

HireHire . . . .. . . .22

TaxiTaxi . . . .. . . .33

B u s / c o aB u s / c o achch

. . . .. . . .44

m o d em o d e T u b e / t r a iT u b e / t r a inn

. . . .. . . .55

O t h e rO t h e r . . . .. . . .66

Don’tDon’tK n o wK n o w

. . . .. . . .77

SHOW CARD 7SHOW CARD 73232 W h a t i s t h e C H I E F P U R P O S E o f y o u r p r e s e n t t r i p ?W h a t i s t h e C H I E F P U R P O S E o f y o u r p r e s e n t t r i p ?BUSINESSBUSINESSACCOMPANYING passenger onbusiness (company ticket) 1

withAttending Internal Company BusinessMeetings with customers/others outsidethe company 4Conference/CongressTrade Fair/ExhibitionBusinessArmed services 7Airline Staff (Positioning)Contract Home LeaveOverseas Employment-less than twelvemonths 10- 12 months or more 11Studies paid by employer/ -formal academic course 12- other course 13Au pair 14

NON BUSINESSNON BUSINESSACCOMPANYING passenger on business(own ticket)

15with

SKIING 16Holiday Fare paid separately 27Holiday IT/Package- Hotel 17 28 UK

- Self catering 18 29 Res- Cruise 19 Go Q36

Visiting friends and relatives 20Migration 21Studies private/grants- formal academiccourse 22- other course 23Cultural/Sports 24Unaccompanied school children 25Other (Write in) 26

ALL BUSINESS PASSENGERS3333 What i s the MAIN BUSINESS of your f i rm or organisa t ion?What i s the MAIN BUSINESS of your f i rm or organisa t ion?


. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . manumanu

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s e l l s e l l

UK RESIDENTS ONLYUK RESIDENTS ONLY3434 What i s your OCCUPATION?What i s your OCCUPATION?

J o b t i t l eJ o b t i t l e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Q u a l i f i c a t i o n sQ u a l i f i c a t i o n s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .. . . . . . . . .

S i z e S i z e s i t e / d e p t s i t e / d e p t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r e s p o n s i b l e r e s p o n s i b l efor for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SHOW CARD 8SHOW CARD 83535 W h i c h o f t h e s e a g e g r o u p s d o y o u c o m e i n t o ?W h i c h o f t h e s e a g e g r o u p s d o y o u c o m e i n t o ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

If groups 1-2 end interview

3636 W H O b o o k e d y o u r h o l i d a y ?W H O b o o k e d y o u r h o l i d a y ? Se l f . . . . . . . . . . . . . . . . . . . . . 1Se l f . . . . . . . . . . . . . . . . . . . . . 1Other . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . 2. . . . 2

3737 D o e s y o u r h o l i d a y h a v e a n A T O L n u m b e r ?D o e s y o u r h o l i d a y h a v e a n A T O L n u m b e r ?Y e s . . . . . . . . . . . . . . . . . . . . . . 1Y e s . . . . . . . . . . . . . . . . . . . . . . 1No . . . . . . . . . . . . . . . . . . . . . . . 2No . . . . . . . . . . . . . . . . . . . . . . . 2Don’ t Know . . . . . . 3Don’ t Know . . . . . . 3

ALL NON BUSINESS PASSENGERS SHOW CARD 8SHOW CARD 83838 W h i c h o f t h e s e A G E g r o u p s d o y o u c o m e i n t o ?W h i c h o f t h e s e A G E g r o u p s d o y o u c o m e i n t o ?

If groups 1-2 end interviewUK NON BUSINESS PASSENGERS O N L YO N L Y3939 W h a t i s t h e o c c u p a t i o n o f t h e c h i e f I N C O M E e a r n e r i n y o u rW h a t i s t h e o c c u p a t i o n o f t h e c h i e f I N C O M E e a r n e r i n y o u rh o u s e h o l d ?h o u s e h o l d ?

J o b t i t l eJ o b t i t l e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Q u a l i f i c a t i o nQ u a l i f i c a t i o n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .. . . . . . . . . .

S i z e / d e p t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r e s p o n s i b l e f o rS i z e / d e p t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r e s p o n s i b l e f o r. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B u s i n e s sB u s i n e s s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . .BUSINESS PASSENGERS G o t o 4 2G o t o 4 2


NON BUSINESS PASSENGERSNON BUSINESS PASSENGERS4040 INCLUDING YOURSELF how many members of your family are living in

your household? ................................................................4141 How many are CHILDREN under 16? ...........................4242 Have you FLOWN BEFORE this trip? Yes ............... 1

No ............... 2SHOW CARD 94343 W h y d i d y o u c h o o s e t o f l y W h y d i d y o u c h o o s e t o f l y f romfrom HEATHROW Airpor t HEATHROW Airpor tt o d a y ?t o d a y ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .W E S T E R N C O N T I N E N T A L E U R O P E O N L YW E S T E R N C O N T I N E N T A L E U R O P E O N L Y4444 H a v e y o u u s e d E U R O S T A R ?H a v e y o u u s e d E U R O S T A R ? Y e s . . . 1Y e s . . . 1G o t o Q 4 5G o t o Q 4 5

B r u s s e l s L iB r u s s e l s L i l l e P a r i s . . . . E u r o d i s n e y . . . . S k i R e s o r t sl l e P a r i s . . . . E u r o d i s n e y . . . . S k i R e s o r t sNo . . . 2 No . . . 2 G o t oG o t o

Q 4 5Q 4 5PASSENGERS TRAVELLING TO BRUSSELS/LILLE/PARIS AT Q23PASSENGERS TRAVELLING TO BRUSSELS/LILLE/PARIS AT Q23G O T O Q 4 6G O T O Q 4 64545 I f E u r o s t a r w e n t d i r e c t l y t o ( p l a c e i n Q 2 3 ) w o u l d y o u h a v eI f E u r o s t a r w e n t d i r e c t l y t o ( p l a c e i n Q 2 3 ) w o u l d y o u h a v eu s e d i t f o r t h i s t r i p ?u s e d i t f o r t h i s t r i p ?

Y e s . . . . . . . . . . . . . . . . . . . . . . . . . . . .Y e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .1 1 G o t o Q 4 8G o t o Q 4 8

No . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .No . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2 G o t o Q 4 7G o t o Q 4 7

Don’ t Know Don’ t Know ( reason)( reason) . . . . . . . . . 3. . . . . . . . . 3G o t o Q 4 7G o t o Q 4 7

D o n ’ t K n o w . . . . . . . . . . . . . . . . . . . . . . . 3D o n ’ t K n o w . . . . . . . . . . . . . . . . . . . . . . . 3G o t o Q 4 8G o t o Q 4 84646 W h y d i d y o u n o t u s e E U R O S T A R f o r t h i s t r i p ?W h y d i d y o u n o t u s e E U R O S T A R f o r t h i s t r i p ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G o t o Q 4 8G o t o Q 4 84747 W h y w o u l d y o u n o t h a v e u s e d E U R O S T A R f o r t h i s t r i p ?W h y w o u l d y o u n o t h a v e u s e d E U R O S T A R f o r t h i s t r i p ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ALL PASSENGERS CURRENT SECTOR ONLY SHOW CARD 10ALL PASSENGERS CURRENT SECTOR ONLY SHOW CARD 104848 W h a t T Y P E o f t i c k e t d o y o u h a v e ?W h a t T Y P E o f t i c k e t d o y o u h a v e ?

FirsFirs tt 1 1B u s i n e s s / C l u bB u s i n e s s / C l u b 2 2Economy - Fu l l f a reEconomy - Fu l l f a re 3 3E c o n o m y - D i s c o u n tE c o n o m y - D i s c o u n t 4 4Economy - Don’ t knowEconomy - Don’ t know 5 5I n c l u s i v e t o u r ( I T ) o n s c h e d u l e d o r c h a r t e r f l i g h t sI n c l u s i v e t o u r ( I T ) o n s c h e d u l e d o r c h a r t e r f l i g h t s 6 6Char ter sea t on lyChar ter sea t on ly 7 7S tandbyStandby 8 8S ta f f - d i scountSta f f - d i scount 9 9


A i r m i l e sA i r m i l e s 1010F r e q u eF r e q u e n t F l i e r n t F l i e r ( o t h e r s c h e m e )( o t h e r s c h e m e ) 1111Other Other (wr i te in )(wr i te in ) 1212


4949 Is your t i cke t S INGLE or RETURN?Is your t i cke t S INGLE or RETURN?S i n g l e S i n g l e 1 1 G o t o Q 5 0G o t o Q 5 0R e t u r n R e t u r n 2 2 G o t o Q 5 0G o t o Q 5 0R o u n d r o b i n t r i p R o u n d r o b i n t r i p 33 G o t o Q 5 2G o t o Q 5 2

5050 How much d id your t i cke t COSTHow much d id your t i cke t COST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Non IT . . . . . . . . . . . . . . . . . . . . . . . . . . . . CURRENCYNon IT . . . . . . . . . . . . . . . . . . . . . . . . . . . . CURRENCY.......................................................................

5151 D o e s t h i s i n c l u d e a i r p o r t t a x ? D o e s t h i s i n c l u d e a i r p o r t t a x ? Y e sY e s. . . . . . . . . . . . . . . . . . . . . . . . . . . 1. . . . . . . . . . . . . . . . . . . . . . . . . . . 1

NoNo. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

DD on’ t knowon’ t know. . . . . . . . . . . 3. . . . . . . . . . . 35252 W h a t i s y o u r s e a t n u m b e r ? W h a t i s y o u r s e a t n u m b e r ?

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ALL BUSINESS PASSENGERS SHOW CARD 11ALL BUSINESS PASSENGERS SHOW CARD 1153a53a Can you indica te f rom th i s card which ANNUAL incomeCan you indica te f rom th i s card which ANNUAL income

g r o u p a p p l i e s t o y o u B E F O R E t a x a n d o t h e r d e d u c t i o n s ?g r o u p a p p l i e s t o y o u B E F O R E t a x a n d o t h e r d e d u c t i o n s ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ALL NON BUSINESS PASSENGERS SHOW CARD 11ALL NON BUSINESS PASSENGERS SHOW CARD 115 3 b5 3 b Can you indica te f rom th is card the to ta l ANNUAL INCOMECan you indica te f rom th is card the to ta l ANNUAL INCOME

o f A L L y o u r f a m i l y l i v i n g i n y o u r h o m e B E F O R E t a x a n do f A L L y o u r f a m i l y l i v i n g i n y o u r h o m e B E F O R E t a x a n do t h e r d e d u c t i o n s ?o t h e r d e d u c t i o n s ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

T H A N K Y O U V E R Y M U C H F O R Y O U R H E L PT H A N K Y O U V E R Y M U C H F O R Y O U R H E L P


ANNEX 3 : TESTING SIGNIFICANCE OF DATA DIVERGENCESANNEX 3 : TESTING SIGNIFICANCE OF DATA DIVERGENCES

1.1 In this Annex we outline the statistical basis for identifying the degree ofsignificance of differences between two sets of data. This analysis is required,in particular, in assessing the picture of interlining patterns that emerge fromthe CAA terminal passengers’ survey at London Heathrow Airport. Inessence, we seek to underpin observed contrasts or similarities of data with astatistical foundation.

1.2 By way of illustration, we will use the example of the proportion of personswho use full-fare tickets: does the proportion of full-fare tickets rise when theinterlining traveller has to switch at Heathrow a flight operated by anotherairline carrier than when the traveller moves between flights operated by thesame airline?

1.3 The approach to establishing whether there is any “significant” differencebetween the data relies on five stages of analysis.Stage One: Hypotheses

Our objective is to establish whether, using statistical tests, that the full-fareproportion on ‘Online’ interlining is significantly different from ‘ChangeAirline’ interlining. The base (or “null”) hypothesis is that the twoproportions are not significantly different; the alternative hypothesis is thatOnline full-fare take-up is significantly different from Change Airline full-faretake-up.Stage Two: Test Statistic

The test statistic we use is the Z statistic which, in this case, relies on thepresumption that the sample size of the surveying is large and, therefore, thatthe divergence between the two fare proportions, relative to the pooledestimated of the standard error, can be presented in mathematical form. Wetest the alternative hypothesis as a one-sided test, so we reject the basehypothesis if Z takes a large negative number.Stage Three: Rejection Region

If we take a significance level of α - 0.05 (“alpha” = 0.05), which is theequivalent of being 95 percent certain about the correctness of our conclusion,then, using a Students’ t Distribution table, based on a large sample size, wearrive at a Z.05 = 1.645. This means that when we estimate our value of Z, aone-tailed rejection region for Z is that it should be less than -1.645.Stage Four: Calculation

In stage four we calculate the Z estimate; here we use the travellerproportions rather than the actual traveller population figures. This consistsof essentially two components. First, the proportion of full-fare tickets in eachof Online and Change Airline cases is calculated. The figures are 0.35 and0.41, respectively.


The second component is to establish the pooled estimate of the variance. Inthis simple, large sample case, this is the sum of the two full-fare proportions,divided by the summed share, that is (35% + 41%)/200%. This is around 0.38.The observed value of the test statistic is then calculated from the differencebetween the two proportions of full-fare, multiplied by the square-root of thetotal sample size (in this case, 100+100), divided by the pooled estimate of thevariance. The corresponding observed value of the Z-statistic in this case is-0.897.Stage Five: Conclusion

The observed value of the test statistic, is -0.897, which falls in the acceptanceregion of the “null” hypothesis, that is, at level α=0.05, where Z is -1.645, weretain the null hypothesis that there is no difference between the two sets ofproportions. Even using α=0.10 (that is, accepting only a 90 percentprobability that our conclusion is correct), where Z is -1.282, we still retain thehypothesis that there is no difference between the two proportions. Thus, weconclude that there is no difference in the rate of purchase of full-fare ticketsbetween travellers changing airlines at Heathrow and those remaining withthe same airline when changing flights.

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an economic assessment of the iata interline system · 2014. 9. 15. · interline ticket. in fact...

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