Quality of Service and the Demand for Air Travel

Q UALITY of service has been neglected in empirical studies of air travel. Travel demand depends on travel time as well as the usual price and activity variables. Travel time includes not only average en route time, but delay. Following Douglas-Miller (1974a,b), frequency delay is the gap between one's desired and the nearest offered departure time, while stochastic delay is time lost due to the nearest offered departure being unavailable. Their sum, schedule delay, is the major element in air service quality. Despite its theoretical importance, no empirical study of air travel demand has incorporated it.' This one does.2 A second novel feature of this study is that it models demand on a service segment rather than passenger origin-destination demand. From the carriers' point of view, this is the relevant market demand. Much air travel is done in several segments rather than non-stop. Ideally, segment demand should be modelled based on passenger origin-destination demand, with service segment demand built up from all the possible routings using the segment under study. In practice this is impossible, since the origin-destination passenger data contain no information on routings. This is why previous demand studies, based on origin-destination data, have been unable to incorporate consideration of delay. The third novel feature of this study is that it is based on time series estimation embedded in a simultaneous equations model of service segment markets. Elsewhere (Anderson-Kraus, 1980), we have reported on the supply side of the model. The time chosen is 1973-76 (48 monthly observations), when fares were set according to the CAB formula, and flight scheduling rivalry dominated carrier competition. The results below indicate that segment demand can be successfully modelled with these methods. It is notable that price elasticities in excess of one in absolute value are found even in a number of business markets. It is dangerous to draw general conclusions from a specific instance of success, but the results do support further attempts to model demand incorporating delaybased quality of service. Many markets are characterized by significant waiting costs and competition over the reduction of these costs. Where feasible, the results below indicate that even crude measures of delay have a significant payoff. Part I lays out the model of demand and service quality and embeds it in the model of market equilibrium. Part II presents the results.