Peak-Load Pricing and Airline Reactions at European Airports

Abstract

Conventional wisdom in the economics of pricing holds that peak-load pricing can enhance welfare in cases where demand peaks are clearly identifiable and highly predictable. However, this pricing tool has not found acceptance among airlines in the past. In the very few cases in which peak-load pricing has been introduced, regulators have faced strong opposition from airlines. Recent research has focused on whether airlines could pass the additional costs associated with peak-load pricing on to passengers. Expanding on this work, this paper assesses how peak-load pricing would impact airline costs and forecasts howairlines would react to the implementation of a peak-load pricing regime. We use a simultaneous autoregressive model to predict airline pricing reactions. Our findings indicate that for certain routes, airlines would subsidize revenue decreases in off-peak times with price increases during peak times. This finding corroborates the perception held by airlines that a peak-load pricing regime would encourage new competitors to enter the market at off-peak times.