V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
Analysis of Origin-Destination National Airline Routes in Turkey Using with
Herfindahl-Hirschmann Index
Mehmet YAŞAR1
Ender GEREDE2
Abstract
Concentration means that economic activities in a market are carried out by a few companies.
According to another definition, concentration means that economic resources and activities
are controlled by a few companies. Therefore, there is an inverse correlation between
competition and market concentration. In a concentrated market, monopoly markets will
emerge and thus prices will increase thanks to reduced competition. This situation will affect
existing and potential buyers negatively. In this study, domestic airlines’ origin-destination
(city pair market) passenger numbers were analyzed. The market shares of airlines for each
city pair have been determined on the said numbers and based on the years 2012 and 2014
concentration values for the total 1447 city pairs have been calculated. Consequently, the
large part of markets are determined as monopoly and only a few city pairs’ values show
oligopoly and near-oligopoly.
Keywords: Concentration, Domestic Airline Market, Herfindahl-Hirschmann Index,
Competition, Airline Transportation
JEL Codes: A12, D40, L93
1. Introduction
If the current situation in the domestic airline industry in Turkey is to be examined in
the context of the market structure, it will be useful to understand the current situation of the
airline industry, starting from the 1980s. There are two break points in Turkey that change the
air transport market structure. The first one is the 1983 liberalization and the other one is the
2003 domestic liberalization (Gerede and Orhan, 2015, p. 167).
Until 1984 when Bursa Airlines was established, only Turkish Airlines was active in
domestic air transport (Korul and Küçükönal, 2003, p. 25) and market structure was
monopoly (Dursun et.al., 2014, p. 108). However, as a result of the liberal policies that Turgut
Ozal adopted, the first majör step towards the liberalization of the air transport sector was
taken along with the Turkish Civil Aviation Law No.2920 issued in 1983 (Gerede and Orhan,
2015, p. 169). With the regulation, private airlines were allowed to establish and
transportation activities were liberalized. After Bursa Airlines’ establishment, more airlines
followed it (Gerede and Orhan, 2015, p. 172) and monopoly market strucure changed to
oligopoly market structure. After the law, many airlines established but most of them failed
(Dursun et.al., 2014, p. 108). The main reason for failures is restrictors applied on new entrant
airlines (Gerede, 2011, p. 511). Due to the restrictive regulations introduced by the Authority,
the airline companies were taken out of the market and Turkish Airlines dominated the
domestic market again (Gerede ve Orhan, 2015, s. 186).
1
Anadolu University, Faculty of Aeronautics and Astronautics, E-mail: [email protected], Tel:
0222-335 05 80 / 7025
2
Anadolu University, Faculty of Aeronautics and Astronautics, E-mail : [email protected], Tel: 0222-335
05 80 / 6966
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V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
Turkish Civil Aviation Law 2920, which entered into force in 1983, opened the way for
private airlines to be involved in air transport activities in the market, but with the new
stringent regulations introduced later, the desired free market environment did not exist. The
1996 SHGM decisions (Gerede, 2011, p. 511), which are considered to be one of the most
serious obstacles to the entry of private airline companies into the domestic market, have been
lifted in October 2003 with the aim of removing this situation and making the market more
liberal (Gerede and Orhan, 2015, p.187). After the liberalisation, new airlines have begun to
serve in the market and the monopoly market which was dominated by Turkish Airlines has
evolved from the monopoly view to the present day.
In this study, which evaluates the market structure of Turkish domestic airlines by citycouple context, the number of passengers carried by domestic airlines operating between the
years 2012-2014 is examined on a city-by-city basis and a total of 1447 city pairs' market
structure is analyzed by Herfindahl- Hirschman Index.
2. Theoretical Backround
Concentration means that economic activity in a market is conducted by a few firms
(Pehlivanoglu and Tekce, 2013, p. 364). According to another defination, it means that
economic sources and activities are controlled by a few firms. Therefore, there is an adverse
relationship between competition and market concentration. In a high concentration market,
monopoly market will emerge and thus prices will increase thanks to decreased competition.
This situation affects existing and potential customers adversely (Durukan and Hamurcu,
2009, p. 75).
2.1.Concentration and Market Structure
By examining the market structure, it becomes possible to classify market structures
according to the degree of competition among sellers in the market. These structures vary
between perfect competition markets and monopoly markets. In the perfect competition
markets, there are many sellers on the market and there is a homogeneous market appearance.
In monopoly markets there is only one seller. Given today's markets, it is difficult to come
across perfect competition markets and monopoly markets, and for that reason markets are
formed somewhere between these two extremes. Some of them are duopoly in which there are
two sellers and the oligopoly where many sellers are located, and monopolistically
competitive market where many firms that have no influence on price (Polat, 2007, p. 99).
There are many factors to be considered when determining the market structure, and one
of them is the market size controlled by a small number of enterprises. Concentration indices
are used to measure the dimension (Polat, 2007, p. 99). Market concentration indices provide
useful indicators for measuring market power, but there is no systematic relationship between
the relevant indices and economic variables such as cost, demand, or changes in these
variables. Since these indices are market-based values, determining the market power of a
company in a market should consider other data related to that field (Durukan and Hamurcu,
2009, p. 77).
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V. Anadolu International Conference in Economics,
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3. Literature Review
Examining market concentration literature reveals that there are many studies in the
different fields. Onder (2016) stated that the concentration analysis of biscuits, chocolate and
sugar products sector has high concentration values according to CR4 and CR8 analyzes of
the related sectors and that according to the results of HHI and Entropy and Rosenbluth index
the sector is between oligopoly and monopolistic competition. Kaynak (2016) in the apparel
manufacturing sector determined the market structure between 1995 and 2014 according to
CR8, high concentration was observed except for the years 2002-2003, low concentration
until 2008 according to HHI, middle after 2008 to a certain extent. Yang's (2016) study of the
impact of low-cost carriers on airport pairing on a model of airport couple demand has led to
the conclusion that HHI concentration level and LCC entry effects are important for passenger
demand at the line level. Korkmaz et.al. (2016) found that there is a bi-directional interaction
between concentration and financial fragility in their study of the relationship between
concentration and financial fragility in the banking sector between 2007 and 2014. In the
study of the Kastamonu halva production sector between 1994 and 2014, Dilek and Konak
(2016) observed that the concentration values in the related sector have fallen over time and
that the industry showing oligopolistic characteristics in 2003 has increased competition in
recent years.
Uzbek and Fidan (2016) found that there were high concentration values in the pesticide
industry and therefore determined the market structure as oligopolistic. Dai et al. (2014) have
concluded that increasing competition in markets that are heavily involved in price
diversification and competition in the US aerospace industry has resulted in increased price
distribution but less price diversification at competitive markets. Kiracı et.al. (2015)
conducted concentration analysis at the top 5 domestic airports and they concluded that the
market is far away from a competitive structure. Sarıbaş and Tekiner (2015) stated that the
level of competition in the Turkish Civil Aviation sector is oligopolistic and that high
concentration ratios stem from the high market share of Turkish Airlines.
4. Methodology
In this study, concentration analysis was used to determine the market structure of
domestic air transport by city pairs. In the process of analysis, the methods used to measure
market concentration have been examined. There are two main focuses on this. Of these
methods, two methods were examined in details.
There are many methods used to measure industry or market concentration. The most
commonly used methods are the M-Firm Concentration Ratio and the Herfindahl-Hirschman
Index (HHI Index) methods. These methods are used in the framework of market performance
and structure-behavior-performance approach. The M-Firm Concentration rate refers to the
market concentration as the sum of the market shares of generally four, eight or twelve firms
operating in the market (Pehlivanoglu and Tekce, 2013, p. 374). M-Firm concentration ratio is
calculated as follows (Yıldırım and Eskinat, 1995, p. 37):
= 1/x
(1)
: concentration ratio for ‘M’ number of firms.
: the value of ‘x’ variable for ‘i’ firm when firms are ranged according to this variable.
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V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
X: the total value of ‘x’ variable for all firms in a market.
The calculated value is between 0 and 100 (Suslu and Baydur, 1999, p.155), and a
higher concentration rate represents a lower competition and, conversely, a lower
concentration rate represents higher competition (Pavic et.al., 2012, p. 56). As a result of the
transactions made with M-Firm's concentration ratio (Polat, 2007, p. 100):




<30: low concentration (there is competition in the market)
30 ≤
< 50: medium concentration (competition is reduces, almost oligopoly)
50 ≤
≤ 70: high competition (competition is limited and oligopoly formed
market)
> 70: very high competition (monopoly market).
Over the years,
analyzes have become widely used models for measuring market
concentration, but have begun releasing
to HHI with criticism as to the analysis of (1)
not reflecting the relative size of the market enterprises and (2) incorporating only a certain
part of the firms involved in the analysis (Weinstock, 1982, s. 285). Today's widely used HHI
is the sum of the squares of market shares of each of the operators in the market and is
calculated as follows:
HHI:
(2)
HHI: Herfindahl-Hirschmann Index Value
: market share of firm ‘i’.
As a result of the calculations made, the index value is between 0 and 10,000 and the
markets are segmented as follows (Su, 2003, s. 12):



0 < HHI ≤ 2000 low concentration
2001 ≤ HHI ≤ 4000 medium concentration
4001 ≤ HHI ≤ 10000 high concentration.
Apart from these figures, there are also studies that classify the relevant values as 01000, 1000-1800 and +1800, or 0-1500, 1500-2500 and +2500(Pehlivanoglu and Tekce,
2013, p. 375).
The HHI concentration index takes into account both each business operating in the
market and the relative status of the shares of these businesses. In the calculation, taking the
squares of the market shares provides a more weighted representation of the businesses with
higher ratios in terms of market dominance.
As a result, this index provides a more holistic view compared to the CR_ (M) index for
the corresponding market (Weinstock, 1982, p. It is also accepted as a more sensitive
measurement tool, as it takes account of the changes between business sizes and the whole
distribution is included in the account (Kaynak and Arı, 2011, p. 50). Along with the above
reasons, the HHI index has been one of the most popular market-setting instruments in the
1980s (Polat, 2007, p. 100).
HHI was used as a means of concentration analysis in this study where the
concentration ratios on the basis of city pairs are examined in the domestic domestic air
transportation of Turkey. The use of HHI has both taken into account the missing aspects of
the
analysis in the literature and the fact that there are enough companies in the city
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V. Anadolu International Conference in Economics,
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market for
analysis. The data were obtained from statistical yearbooks of the General
Directorate of State Airports Authority and from the Directorate of Statistics, General
Directorate of Civil Aviation. The obtained data were analyzed by HHI concentration index
and the market structure of city pairs was determined and at the same time frequency analyzes
were performed according to the concentration values of city pairs. Analyzes made are
considered separately for each and the results are evaluated both within themselves and
comparatively.
5. Findings and Comments
In this study where the market structures at the city-couple level are determined in the
domestic airline transportation of Turkey, the HHI analysis has examined the market
structures of the city-pairs in three different categories and classified and frequency analyzed
for each year. Table 1 shows the number of the passengers carried in the relevant years and
Table 2 shows the number of domestic market activity.
Table 1. Number of Passengers Carried by Airline Companies in Domestic Flights
Airlines
Borajet
Atlas Global
Onur Air
Pegasus
Sun Express
Anadolu Jet
Turkish Airlines
TOTAL3
Domestic Passenger Numbers
2012
2013
2014
671.861
460.730
655.625
3.691.150
4.729.292
4.723.709
5.282.311
6.272.085
6.098.701
10.229.798
20.447.828
23.938.738
4.739.717
4.162.862
4.395.227
9.086.577
15.223.427
17.206.697
21.228.489
24.837.184
28.315.313
54.949.103
76.146.913
85.416.166
Resource: General Directorate Of State Airports Authority Statistics Annals (2012-2014)
According to Table 1, total passenger numbers increased by more than 30 million
(55,4%) between 2012 and 2014. When examining airlines seperately reveals that there is no
regular increase in passenger numbers. Some airlines’ passenger numbers decreased and then
increased one year later (Borajet and Sun Express). Other airlines’ passenger numbers
increased and then decreased one year later (Atlas Global and Onur Air). Among airlines only
Pegasus, Anadolu Jet and Turkish Airlines passenger numbers increased stedialy on a regular
basis. Pegasus which has the highest passenger number increase. Its 2012-2013 increase was
10,2 million (99,8%), ıts 2013-2014 increase was 3,5 million (17,07%) and its total increase
was 13,7 million (134%). Turkish Airlines’ domestic passenger numbers increase was stable
and between 2012 and 2014 there was an increase with 7,1 millions. Though this increase,
Turkish Airlines’ domestic market share decreased and other airlines got this share.
3
The total number includes passengers carried by Corendon, Freebird and Tailwind airlines, which operate
charter flights.
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V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
Table 2. Number of Domestic Markets
Airlines
Borajet
Atlas Global
Onur Air
Pegasus
Sun Express
Anadolu Jet
Turkish Airlines
TOTAL4
Number of Domestic Markets (2012-2014)
2012
2013
2014
83
134
96
39
77
78
44
56
54
125
135
149
99
100
88
93
121
148
166
228
235
397
520
530
Resource: General Directorate Of State Airports Authority
According to Table 2, there is a 33.5% increase in the total market (city pairs) compared
to 2012-2014. When the decline is examined one by one, only 10 new city pairs (1.9%) are in
the active markets at the end of 2014, when 123 new markets (30.9% increase) are added to
competing markets by the end of 2013 has been observed. When examining airlines, Atlas
Global, Pegasus, Anadolu Jet and Turkish Airlines increased market numbers compared to the
previous year and this increase was regular. Turkish Airlines has added 69 new markets to the
total number of active markets and has increased market numbers by 41.5%. Sun Express is
the only airline that its market numbers decreased compared to the 2012-2014 period.
At the end of 2013, this airline added a new city pair to the previous year's number, but
withdrew 12 markets, decreasing its total line numbers by 12.5% in 2014. Borajet and Onur
Airlines are the ones where the increase in the number of markets in which they operate has
not continued. The market numbers of these two airline operators have increased compared to
the previous year at the end of 2013 but declined at the end of 2014 compared to 2013.
Significant fluctuations are seen in Borajet’s market numbers, with the increase and decrease
rates of Onur Air being relatively small.
Table 3 shows the concentration analyzes of airline companies operating in Turkey
domestic airlines between 2012 and 2014, based on the number of passengers they carried in
the city pair markets.
Table 3. Concentration Value Ranges of Domestic City Pair Markets
Market Types
Low Concentration
Mid-Concentration
High Concentration
Values
0-1000
1001-2000
2001-3000
3001-4000
4001-5000
5001-6000
6001-7000
7001-8000
2012
2
5
21
60
14
12
4
2013
12
22
74
25
11
2014
1
9
26
73
30
9
Since the sum of the lines operated by airline companies also covers the common markets, the total line only
gives the number of cities operating in the domestic market.
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V. Anadolu International Conference in Economics,
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8001-9000
9001-10000
TOTAL
19
287
397
19
357
520
13
369
530
According to the information in Table 3, 390 of the 397 city pairs operating in 2012
were identified as dense markets (%98,23). According to 390 market frequency analysis, it is
seen that 287 markets are among 9001-10000 values. When the figures for 2013 are
examined, it is seen that 508 of the 520 markets are intensive markets. When the figures for
2013 are examined, it is seen that 508 of the 520 markets are intensive markets (%97,69). In
the 357 city pairs market, which is located in the intensive markets, the values are in the range
of 9001-10000 which is defined as monopoly. When the year 2014 is taken into consideration,
a similar situation has been observed in previous years and it is seen that in 520 of 530 city
pairs in operation, values indicate dense markets (98,11). It is also observed that during the
years, the two carriers dominate a large part of the market.
Of these, 81 city pairs (4001-5000: 21; 5001-6000: 60) in 2012, 96 city pairs in 2013
and 99 cities in 2014 are confronted as the number of city pairs dominated by two carriers.
As a result of these analyzes, it is seen that most of the markets of Turkey domestic air
transport show monopoly and monopoly-like characteristics and some of them are duopol.
Therefore, although the idea that the liberation movements that took place at the beginning of
the 2000s has increased the competition, it is seen that the market is still far away from the
intense competition today. As a result of the analyzes, it is presented in Graph 1 in order to
better understand the difference between the frequency ranges of city pairs.
2012-2014 Concentration Values
369
357
400
350
300
269
250
200
150
100
61
50
0 0 0
0 0 0
2 0 1
5
12
9 17
74 73
22 26
14 25
30
11
12 9 17
19
13
0
2012
2013
2014
Figure 1. Concentration Chart Between The Years 2012-2014
Figure 1 shows that the vast majority of city-pair markets constitute monopoly and
close to monopoly markets. Monopoly markets are followed by duopoly markets with 50016000. As seen in the graffic, all markets in each year are intensive. Moreover, medium-dense
markets are also very small numbers.
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V. Anadolu International Conference in Economics,
May 11-13, 2017, Eskişehir, Turkey.
6. Conclusion
In this study, which is determined by the Herfindahl-Hirschman Index as a means of
concentration analysis of market structures on the basis of city-pairs in the period 2012-2014,
the research findings reveal that the market clearly shows monopoly and monopole character.
These findings indicate that the mentioned sector is far from the competition. When
examining other studies on market structure concentration analysis there are 3 main categories
(intensive, medium-intensity and non-intensive markets). However, in this study,
concentration values were examined under 10 headings and it was revealed that which
markets from the intensive markets are monopoly or duopoly.
In this study, HHI which is one of the most popular concentration analysis tools was
used. Further studies might evaluate analysis with bigger data set. Moreover, by using other
concentration analysis tools (Entropy, RI, CCI ), the market can be analyzed in more than one
way and similarities and differences can be revealed.
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