Ability to recover full costs through price discrimination in deregulated scheduled air transport markets

The regulatory reforms of domestic airline markets and regional markets such as the Europe Economic Area and the increased number of Open Skies agreements have led to a move away from the administrative structure of fare setting to one dominated by market forces. Within this latter framework the initial market power and price leadership exercised by former flag carriers and charter airlines is gradually being eroded by the emergence of low-cost carriers among other factors. A major problem encountered in supplying pre-committed scheduled services in a competitive market is that of full cost recovery. It has been argued, mainly from studies using aggregate data, that the ability of major carriers to recover fixed costs has deteriorated in deregulated markets as barometric price leadership is replacing that of dominant firm price leadership. This paper uses disaggregate data to examine the pattern of fares set by airlines as they sell seats up to the time of departure of a service. In particular, it analyses the impact of the entrance of low-cost carriers into a small country-Portugal-focusing on the changes that are occurring in Lisbon and Porto airports. As such it looks at the way the price of a particular product an airline service-varies in different market environments and whether price discrimination (yield-management) is any longer a viable approach to full cost recovery.