A time series analysis of the pricing behaviour of directly competitive 'low cost' airlines

This paper, after providing an introduction to the operating context of low cost carriers in Europe,\nexamines the competitive pricing behaviour of airlines. Data is collected by route for cases where more\nthan one airline is in direct competition. Data on fares is obtained from the internet for two airlines with\ncompeting services to Alicante, Prague and Malaga, departing from Nottingham East Midlands Airport in\nthe UK, for the six working weeks up to and including the actual departure. These destinations represent\nleisure traffic. Two domestic business destinations were also selected to illustrate price competition on\nbusiness demand where departure times were within a maximum of 20 minutes of each other and a further\nexamination of competing services from London Gatwick (LGW) was made.\nCross Correlation Analysis is used to examine whether, subject to a variety of lags, the prices offered by\none airline can be seen to be both correlated with the other price series and to lead it. This provides some\ninsight into the pricing strategy adopted by the competitors.\nAutocorrelation Functions (ACFs) and Partial Autocorrelation Functions (PACFs) can also be produced\non the prices offered by each airline. These suggest the nature of the ARIMA model that can be fitted to\nthe series and these models can show the degree to which series values are correlated with their own past\nvalues and whether a reasonable model could be based on an ARIMA approach.\nThe relative strength of these two relationships is examined; are prices more closely explained by the\ncompetitor's actions or the airlines own past price setting?