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Competition on multiple routes breeds tacit collusion among airlines, resulting in poorer service for their passengers, new study finds

April 1, 2009

For more information, contact: Benjamin Haimowitz, HHaimowitz@aol.com

Pity the airline passenger. Several studies have documented the many delays and cancellations travelers face on routes where there is little or no choice of carrier, a category embracing the great majority of domestic non-stop service. Now new research reveals similar problems caused not by lack of competition but by what might seem its opposite -- airline competition on multiple routes.
 
"Airline delays increase with multimarket contact," finds a report in the current issue of the Academy of Management Journal. The delays, it concludes, are largely "due to increased time spent on the ground, primarily before the aircraft leaves the gate," and are the likely result of "reduced investments in check-in, baggage, and/or maintenance staff and equipment...We also find that airlines cancel more flights, fly smaller planes, and offer fewer flights as their multimarket contact with rivals increases."
 
The inconvenience for passengers stemming from multimarket contacts can be considerable, according to the study by Jeffrey T. Prince and Daniel H. Simon of Cornell University. "We would expect that the majority of flights take off and arrive on time, regardless of the carrier's multimarket contact," they write. "But, when other factors create delay pressures -- e.g., bad weather, unusually high air traffic, mechanical problems -- then airlines are more likely to reallocate resources from routes with higher multimarket contact to those with lower multimarket contact. Therefore, we would expect the effect of multimarket contact to be substantially greater under such conditions."
 
Prince and Simon find that, on routes with high multimarket competition, the percentage of arrivals that are an hour or more late is 11.6%, a proportion almost one third greater than the 8.8% for routes with low multimarket competition. For arrivals two hours or more late, the difference is even more dramatic -- 8% vs. 4.2%, almost double the rate. In addition, high multimarket competition results in an airline's cancelling about 7.5 flights per month on a route, three more cancellations than would occur with low multimarket competition.
 
In all, delays attributable to multimarket contact amount to $9.5 billion annually in lost time to passengers, the authors estimate, based on a national survey of U.S. domestic air passengers that found business travelers willing to pay $36 for each hour of reduced travel time and non-business travelers willing to pay $15 per hour.
 
Why should multimarket contact among carriers have this effect? "It does seem paradoxical," Prince acknowledges. "One might expect that the more companies compete against each other in different markets, the more eager they would be to outdo their competitors in customer service. That it doesn't work out that way is the result of a phenomenon students of management call 'mutual forbearance.' "
 
Mutual forbearance amounts to a kind of collusion. As the study explains, the concept "posits that firms that compete in multiple markets will be more likely to cooperate, because a competitive attack in any one market may draw responses in all other jointly contested markets. Therefore, the punishment for deviations from collusive behavior would increase with the number of markets across which rivals meet." Identified more than 50 years ago as a factor in business competition, mutual forbearance has been studied in many industries, including air travel, where it has been found to result in higher prices. Prince and Simon are the first to study its impact on the quality of air service.
 
The professors made their findings through an analysis of the performance over the course of 80 months of 10 major carriers providing domestic service in the US. They focused on the 1,000 routes with the greatest monthly passenger volume, and, since the Bureau of Transportation Statistics measures on-time performance only for individual flights, they restricted their analysis to non-stop service. For carriers on the routes studied, they added up for each month the contacts each airline had on other routes with its focal-route competitors. The average number of such contacts per month was about 37, meaning that an airline on a given route typically encountered its competitors on 37 routes each month.
 
In addition to documenting the general effect of multimarket contacts on service quality, Prince and Simon find that contacts on moderately competitive markets do more to foster mutual forbearance than contacts on highly competitive markets (such as New York-Chicago) or those dominated by a single carrier. In the words of the authors, a "higher level of competition creates incentives to reduce prices and improve service quality, reducing the threat of retaliation. Similarly, on the most highly concentrated routes...the dominant firm is likely to perceive little threat from fringe competitors, while airlines with a very small presence on a route may recognize that they have little to lose if the dominant firm retaliates against them."
 
Do the study's findings offer lessons to policy-makers? The authors believe they provide new reasons for wariness of airline mergers. Comments Prince: "Mergers can be bad for consumers in reducing the amount of competition. But they can also result in more multimarket contact, which earlier research has shown to lead to higher prices and which we have now shown to result in lower-quality service as well. Hopefully, regulators will take cognizance of all these issues the next time a big merger is under consideration."
 
The new study, entitled "Multimarket Contact and Service Quality: Evidence from On-Time Performance in the US Airline Industry," is in the April/May issue of the Academy of Management Journal.  This peer-reviewed publication is published every other month by the academy, which, with about 18,000 members in 103 countries, is the largest organization in the world devoted to management research and teaching. The academy's other publications are the Academy of Management Review, Academy of Management Perspectives and Academy of Management Learning and Education.

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