V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
Market Share, the Number of Competitors and Concentration: An
Empirical Application on the Airline Industry
Mehmet Yaşar1, Kasım Kiracı2
Abstract
This study examines the market structure and competition level of the airline market in the
world. In this context, it is aimed to determine the market structure and the level of
competition with the market shares of certain airlines in the world. In general, airline
transportation is divided into 7 different markets. These are Asia Pacific, Australasia, Eastern
Europe, Latin America, Middle East - Africa, North America and Western Europe. In this
study, the market structure and the level of competition in the markets listed above and all
over the world were examined for the period 2006-2015. In the study, CRm and HerfindahlHirschman Index (HHI), which are the most used market concentration ratios, were used in
the literature. The findings of the study show that in the mentioned markets, the market
structure is generally competitive, but significant changes in market structure have taken place
over the years.
Keywords: Market Share, Airlines, Concentration, Herfindahl-Hirschman Index, CRm
JEL Classification: B22, L93, R40
1
2
Anadolu University, Faculty of Aeronautics and Astronautics, TR, [email protected]
Anadolu University, Faculty of Aeronautics and Astronautics, TR, [email protected]
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V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
1. Introduction
The air transport sector is one of the fastest growing sectors in the world. This is a situation
that has caused intense competition in the aviation sector and has led to the rapid change of
the competition parameters of the sector. Mergers & Acquisitions and alliances among the
stakeholders of the industry have significantly altered the industry's market structure and
made it more dynamic. One of the main factors in the measurement of market structure in air
transport is the relationship between the market structure and firm performance. The liberal
market movement in air transport began in 1978 in the United States and was adopted by all
the countries of the world in the following period. The liberalization of the air transport
market has set the stage for the removal of state controls before entry into the market and for
new players to operate more freely on the market. This has also allowed airlines to operate in
different markets and make these markets more competitive. Although there are a number of
factors that may negatively impact the development of competition in the airline market (such
as slow capitalization and countries' protectionist policies for flag carrier airlines), it is quite
clear that the market has become increasingly competitive.
The market shares of companies in air transport are generally determined by the geographical
location in which they operate. More specifically, an airline's market share in any market is
determined by its share of total traffic between two points (origin/destination) or by the ratio
of total traffic in a geographical market (such as Asia Pacific Market). In this study, the
concentration level of the airline market will be examined based on the geographical markets
in which the airline companies operate. This study differs from studies conducted in the
literature in several respects. The first of these is the lack of studies on the concentration of
the market and the level of competition in airline geographical markets in the world. The
second point of difference is in the use of more than one concentration method in the
measurement of market structure in the mentioned geographical markets. The last one is the
implementation of this practice for a period of 10 years. This will give access to information
about the level of competition in geographical markets and how the market structure has
progressed over the years.
2. Theoretical Background
Concentration means that a large percentage of the total economic resources and activities
(labor, sales, income generated and assets owned by the companies) are controlled by a small
percentage or a few of the units that own or control this collection (Polat, 2007: 99).
Concentration is also closely related to the number of firms and firm size. According to this,
the factors leading to the decrease in the number of firms and the increase in the size of the
firms cause a directly or indirect increase in the concentration levels. Factors affecting firm
size are examined in two groups - supply and demand side. Accordingly, supply-side factors
that affect growth are associated with scale economies, as they affect the firm's long-run
average cost curve. For this reason, the benefits companies derive from economies of scale
are considered to be the most important factors that affect the concentration. The factors
affecting firm size in terms of demand include absolute size of the product, product
homogeneity or degree of variance, geographical location, time, dependency on supply and
demand conditions in other markets, demand fluctuation and ability to forecast (Akan 2002:
92-93). In addition, businesses can grow and benefit from the growth in many ways, including
scale economies, increased efficiency, greater resilience to environmental change, and
increased profitability (Weinzimmer, 2000: 35).
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V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
Despite many definitions of the concept of market concentration, it is generally possible to
define it with respect to the distribution of number (or size) of the buyers and sellers in a
particular product market (Durukan ve Hamurcu, 2009:76). Concentration level or index
depends on the number of units in a certain market and on the distribution of economic
resources and activities between the units that make up the market. There is a negative
relationship between the number of firms in the market and the concentration level (Polat,
2007: 99). Market concentration indexes provide insight into how competitive the market is.
In general, if the number of firms operating in the market is high, with equally high levels of
influence then the concentration will reduce and competition increase. The determination of
competition level of the market plays an important role in the determination of the market
concentration level (Yıldız, 2012: 50) and as such many methods have been developed to
measure it. In this study, the market concentration will be measured through the most
commonly used methods in the literature.
3. Literature Review
Although many studies have been done in literature regarding on market concentration, it is
observed that the market structure and concentration in the air transport sector has not been
sufficiently examined. The main reason for this state is the difficulty of finding data in
aviation and the lack of adequate sectoral data. Among the studies that focused on the
concentration in the air transport market, Lijesen et al. (2002) examined the market
concentration of two pairs of cities (Paris-New York and London-New York) using the
Herfindahl-Hirschman Index (HHI) and CR4 Index methods. The findings of the study show
that the structure of the airline network determines part of the competitive power, and that
company mergers and network configurations affect the market concentration. Naldi and
Flamini (2014) examined the market concentration in various sectors, including civil aviation,
using the Herfindahl-Hirschman Index (HHI) and CR4 Index methods.
Similar to the study by Lijesen et al. (2002), in a that examined the level of competition
between Paris-New York and London-New York City pairs, a conclusion was reached that
found the air transport market to have characteristics of a non-concentrated market . Sarıbaş
and Tekiner (2015) examined the market concentration in the civil aviation sector in Turkey
using CRn and Herfindahl-Hirschman Index (HHI) methods. In the study, it was determined
that the concentration in the aviation sector is high in Turkey. In addition, Lijesen (2004)
reviewed the concentration and competition level of the civil aviation sector by correcting the
Herfindahl-Hirschman Index (HHI). The empirical findings of the study showed that the
corrected Herfindahl-Hirschman Index gives better results than the traditional indicators.
Competition in the air transport sector appears to have been made in studies that are evaluated
in terms of networking and entry to the market. For example, Alderighi (2012) examined the
impact of the operations of low-cost airlines on competition in Europe. Dobruszkes (2006)
analyzed the change in market structure as a result of the introduction of low cost airlines in
Western Europe and its impact on competition. Susilo and Axhausen (2014) used the
Herfindahl-Hirschman Index method to examine the market concentration in terms of daily
travel habits and location. In addition, studies have been conducted on the market
concentration in the banking sector using the Herfindahl-Hirschman Index or CRm method
(Akomea and Adusei, 2013; Hannan, 1997; Kumar et al., 2011, Yayla, 2007). Similar
methods have been used to measure the concentration of market concentration in
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V. Anadolu International Conference in Economics,
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manufacturing (Akan, 2002), food (Blažková, 2016) and steel industry (Chang, 1997;
Pehlivanoglu and Tiftikçigil, 2013) sectors.
4. Methodology
As can be recalled from the literature, concentration means that a small number of firms
dominate a large part of the market. In other words, there is a negative relationship between
market concentration and the level of competition in the market. (Kostakoğlu, 2015: 131).
In this study, the concept of concentration with regards to the air transportation industry, has
been evaluated by dividing it into 7 different regions of the world. In this context, the aim of
this research is to determine the level of competition within the air transport system by
considering the market shares of the airline companies using certain indexes.
In the study, the worldwide analysis was carried out on 7 different geographies. Each of these
shown in the tables and graphs, but to mention briefly these regions are Asia-Pacific,
Australasia, Southern Europe, Latin America, Middle East and Africa, North America,
Western Europe. Classification of the databases in which the data were obtained in the
identification of these regions was used, as well as the regional distinctions included in the
annual reports of the industry's leading organizations and their future estimates. In this
context, analyzes were carried out on all the eight regions of the world.. Data from 2006-2015
were obtained from the Euromonitor passport database. These data were obtained from the
mentioned database on the internet.
Data were analyzed using with N-firm concentration ratio and Herfindahl-Hirschman Index
and the findings presented separately for each type of analysis. The first of the abovementioned index is N-firm concentration ratio. The index, also referred to as CRn, represents
the sum of the market shares of the first N largest firms within an industry. (Kaynak, 2016:
28). In the N-firm concentration index, there is no criterion on how n is determined. In
general, the first 4, 8, 10 or 20 firms are used. (Güneş vd., 1997: 34). As the number of firms
to be used in the analysis increases factors such as industry size and characteristic features of
the number of whose values are expected increase should be taken into account. The N-Firm
Concentration Rate is calculated as follows. (Shy, 1995: 172):
=
i: 1,2,3,…n
(1)
Here
indicates the market share of the (first, second, third…n) firm.
represents the total
number of the market share of n firms. The values according to the result of N-Firm
concentration analysis can be classified as follows (Polat, 2007: 100):




< 30
< 50
< 70
→ Low level concentration,
→ Medium level concentration,
→ High concentration,
→ Very high concentration.
In addition to these analyses, it appears that the level of 50 % obtained in
analysis
corresponds to the 70% from
analysis (Durukan and Hamurcu, 2009: 78). The reason for
this is the fact that the rising number of firms with increasing value will change the
classification system. For this reason, even though this is the most used type of analysis, its
biggest point of criticism is that it does not take into account the whole of the market.
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V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
Another type of analysis used in the research is the Herfindahl-Hirschman Index (HHI). HHI
consists of the resulting values from the sum of squares of the market shares of all firms in the
industry obtained from the concentration analysis of N-firms (Yayla, 2005: 42). These values
range from 0 to 10000, and as the number gets smaller, the market can be said to more
competitive (Yıldız, 2012: 51). As impossible as it is, if the value is 0, a fully competition
market is observed, even though this is very difficult to come by today. If the HHI value is
10000, the market is a monopoly. The HHI value is calculated as follows (Günlü, 2011: 103):
HHI:
(2)
In other words, there is only one company on the market, and this company is dominating all
the markets. Classifications made for HHI values are as follows (Su, 2003: 20):



0
≤ HHI < 2000
2000 ≤ HHI < 4000
4000 ≤ HHI ≤ 10000
→ Low Concentration,
→ Medium Concentration,
→ High Concentration,
In addition to this classification, the value between 0-1000 represents full competition,
implying low concentrated markets, HHI values between 1000-1800 represent medium
concentration markets and HHI values between 1800-10000 are concentrated markets
(Durukan and Hamurcu, 2009: 78). In this study, the first given classification will be used,
since the distribution among the classifications is more balanced.
5. Findings and Comments
5.1 Concentration Ratio Values According to CR8 Index
This section includes tables and charts of CRm values analyzed in line with the data obtained
from the market shares of airline companies between the years of 2006 and 2015.
Table 1 Analysis of CR8 Concentration Ratio Between 2006-2015
ANALYSIS OF CR8 CONCENTRATION RATIO (2006-2015)
1
2
3
4
5
6
7
8
REGIONS / YEARS
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Asia Pacific
Australasia
Eastern Europe
Latin America
Middle East and Africa
North America
Western Europe
World
37,1
72,7
42
45,3
40,8
69
42,7
28,5
37,1
74,8
40,2
47,3
39,3
68,4
42,8
27,3
38,4
70,6
43,4
50,9
39,5
71,1
44,7
29,2
38,4
68,2
43,4
47,5
39,9
70,5
44,7
28,1
40,2
72,5
46,5
51,2
41,9
70,8
48
29,4
41,3
67
49,3
54,7
44
72,7
51,6
30,8
40,6
71,2
59,1
56,8
46,1
73,2
52,1
30,3
38,9
72,5
61
58,7
46,1
74,7
51,7
32,3
38,3
69,9
59,8
60,8
47,7
74,9
52
32,3
37,1
67,8
56,2
57
46,7
74,5
54,4
33,1
Table 1 shows the values related to market concentration in air transport. The transformation
of the market structure and concentration of 7 the airline markets and the world market during
2006-2015 period was examined using CR8 concentration analysis. Accordingly, North
America and Australasia markets were determined to have the highest market concentration
from 2015. The other three markets (Eastern Europe, Latin America and Western Europe),
were observed to be very close to each other in terms of concentration. In addition, it is
observed that the market concentration in the mentioned markets followed increasing trend
through the years, hence market competition level in these markets followed a declining trend.
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V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
The level of concentration in air transport in Asia Pacific and World markets seems to be
quite low. This is an indication that competition is intense in these markets. The graphical
representation of the concentration ratios calculated on the basis of the CR8 index is as
follows.
CR8 Concentration Ratio Values
Figure 1 Graphic of CR8 Concentration Ratio Between 2006-2015
Anaylsis of CR8 Concentratıon Ratio (2006-2015)
80
70
60
50
1
2
3
4
5
6
7
8
40
30
20
10
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Years
5.2 Concentration Ratio Values According to Herfindahl-Hirschmann Index
This section includes tables and charts of HHI values analyzed in line with the data obtained
from the market shares of airline companies between the years of 2006 and 2015.
Table 2 Analysis of HHI Concentration Ratio Between 2006-2015
ANALYSIS OF HHI CONCENTRATION RATIO (2006-2015)
YEARS →
REGIONS ↓
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Asia Pacific
238,84
227,35
247,73
243,5
256,27
274,88
267,97
250,87
246,14
235,68
Australasia
2620,1
2691,94
2334,78
2152,2
2332,82
1811,55
1897,51
1939,9
1740,78
1613,1
Eastern Europe
367,12
310,19
350,28
327,05
385,69
431,72
745,11
809,85
812,98
729,51
Latin America
335,07
367,14
447,65
395,83
462,92
516,84
719,24
669,44
748,9
664,45
Middle East and
Africa
317,13
278,87
271,91
275,09
320,63
368,06
442,85
458,44
513,42
514,73
North America
666,04
651,58
808,15
781,01
865,09
898,97
910,54
1078,28
1088,07
1068,91
Western Europe
394,83
380,44
416,72
430,51
485,01
537,14
520,21
501,56
498,49
542,43
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V. Anadolu International Conference in Economics,
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World
147,83
139,77
154,15
149,35
160,48
169,8
167,55
179,44
179,9
185,39
Table 2 shows the rates of concentration and competition levels of airline markets in the
world using the Herfindahl-Hirschman Index (HHI) method. For there to be any market
competition in the Herfindahl-Hirschman Index (HHI), the market concentration rates should
be lower than 1000. When the HHI indexes for seven airline markets in the study and the of
the world market are examined, it is seen that in a significant part this ratio is below the 1000
critical level. In addition, the most competitive markets from 2015 are listed as Asia Pacific,
Middle East - Africa and Western Europe. The North American market is seen to have risen
above the critical value of 1000 in the 2006-2015 period. This indicates that competition in
the market is gradually diminishing. In the Australasia market, there is a downward trend
from 2006 towards the year 2015. In other words, it can be said that the Australasia market
has become increasingly competitive. The graphical representation of the concentration ratios
calculated on the basis of the Herfindahl-Hirschman Index (HHI) is as follows.
Figure 2 Graphic of HHI Concentration Ratio Between 2006-2015
Anaylsis of HHI Concentratıon Ratio (2006-2015)
HHI Concentration Ratio Values
3000
2500
1
2
3
4
5
6
7
8
2000
1500
1000
500
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Years
6. Conclusion
Two different empirical methods have been used in this study of market concentration in the
airline market. These are identied as CRm and Herfindahl-Hirschman Index (HHI). The aim
of this study was to trend in market concentration in the air transport market between 2006
and 2015. The study differs from other studies in literature in several respects. The first of
these is that there is no study that has conducted regarding the market structure of the air
transport industry and the concentration level of the air transport in the whole world . The
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V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
second is that no empirical studies have been done on the transformation of the airline market
structure in the 10 years between 2006-2015. The last one is the combined use of market
concentration indices which are frequently used in the literature. In this respect, the aim of
this study is to determine how the airline market structure has transformed over the years in
the mentioned markets and to determine whether there are any differences depending on the
markets.
When the results obtained from CR8 method for seven airline markets and the world market
determined in the study are examined, it is seen that the highest market concentration is in the
North America and Australasia markets and the lowest concentration is in the Asia Pacific
market. In the CRm analysis, there is an inverse relationship between concentration ratios and
competition level. In other words, the low CRm ratio indicates that the level of competition is
high, which is an indication of a competitive market, whereas the high CRm means that the
level of competition is low. The study examined the level of market concentration in the
world market as well as the seven airline markets. Accordingly, it appears that the world
market has a very competitive structure compared to other markets. When the trend values of
the market concentration in the 10-year period are examined, it is seen that the concentration
of the market increased in a significant part of the markets, an indication of a decline in the
level of competition. For example, in Eastern Europe, Latin America and Western Europe,
whose market concentration ratios range from 40 to 50 as of 2006, concentration ratios range
from 50 to 60 by 2015. This suggests that the level of competition is lower in the mentioned
markets. Another ratio used in the study to determine the level of concentration of the market
and competition is the Herfindahl-Hirschman Index (HHI) method. The HHI method is one
of the most commonly used methods in the literature for determining market concentration.
When the findings obtained using the HHI method are examined, it is noted that the
concentration value of Asia Pacific, Middle East - Africa and Western Europe markets are
very low and thus there is a competitive market structure exists. It is observed that the highest
concentration levels in the study are in the Australasian markets, while the level of
competition in the market has increased over the years. In the Australasia markets, the HHI
index is observed to have fallen below the critical value of 1800 from 2014. In addition, the
North American market has a competitive structure in 2006, but in 2015 it is above the 1000
critical level.
When the findings of the study are evaluated, both the CRM analysis and the HerfindahlHirschman Index method generally show that the airline market has competitive features. On
the other hand, the findings show that in some markets competitive market characteristics are
weaker and that the market is gradually approaching oligopolistic market characteristics. In
future studies, the level of competition in the airline market can be examined using analytics
other than the methods described here. In addition, more specific findings can be obtained by
measuring the level of competition on airlines' flights.
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V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
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