Competition in the Spanish domestic airline sector: Market deregulation, switching costs and route cost behaviour

Abstract

This study examines the relationship between switching costs and cost reaction, at the route-level, of the established airlines to entry in Spanish domestic markets, taking into account the entrant profile and airport capacity restrictions. It includes information of 193 Spanish domestic routes in which incumbents react to entrants; where operating costs, for each airline in each one of these routes during 10 years. The balanced panel used is constructed by setting up a multiple-source database based on accounting and industrial engineering procedures. The results show the moderating role of entrants profile and regulatory constraints on the relationship between incumbent's switching costs and its route cost response against those entrants. They also reveal the importance of policy measures aimed at reduction of market power and consumer protection in the airline industry, in which switching costs are artificially-created at the company's discretion and where operating costs at the route-level need to be evaluated together with the various service elements. This study is complements current literature related to incumbent cost reaction to market entry in the airline industry because it analyzes the specific reaction that an established carrier performs at the route level. Moreover, it analyzes the whole set of routes in the Spanish domestic market rather than a selected one like most of previous studies. It also, explicitly analyzes the effect of three measures of switching costs that can influence such incumbent reaction to market entry.