Professor studies Internet's impact on airlines
James D. Dana, Jr.
It’s not all bad news with the airlines these days.
Airline passenger “loads” — the percentage of airline seats filled on a given flight— are actually up, most likely due to the ease of making online ticket reservations, among other factors, according to newly hired interdisciplinary professor James D. Dana, Jr.
By studying the Internet and air travel tendencies of 75 major U.S. cities from 1997 to 2003, Dana and co-author Eugene Orlov of Compass Lexicon, conclude in a paper on pricing, information and the efficiency of the Internet economy, that the Internet is helping an industry more efficiently fill planes and stick to competitive pricing.
“This doesn’t mean that air-travel throughout has gotten less expensive,” Dana said. “Obviously, gas prices will also have their impact on travel costs. And the expensive seats; those that are either first-class or last minute, remain costly. But the cheaper seats are purchased even more cheaply by people using the Internet.”
Dana comes to Northeastern University this year from Northwestern University as a major interdisciplinary hire in economics and business. It is in part a decision he made to link forces with this campus’ airline expert Steve Morrison, and fellow economist. “A big factor in my decision to come to Northeastern was Steve Morrison,” he said, noting that his wife Kathryn Spier also came east to teach in the Harvard Law School.
Decisions to travel by plane, for whatever reason, are made so much easier for travelers because of the Internet, he found. Things like departures, arrivals, routes, and numbers of connections required to get from A to B are demystified in a few minutes of avid typing at the keyboard, he noted.
“What we’ve found is that more people are flying today, and the prices are set in a way that makes it cheaper to fly on planes that would otherwise have empty seats,” Dana said.
As a result, passenger loads have gone up. According to records of the Bureau of Transportation, planes were roughly 60 percent full in the mid-1990s, but reached as high as 86 filled last summer, he said. In the period he studied, planes went from 69 percent full in 1997 to 73 percent full in 2003.
People are also traveling more on off-peak days. “There was a time when Tuesday and Wednesday were slower days,” he said. “Now, that’s all changed. Obviously, people are attracted to the dates because they can get lower prices, and airlines will offer incentives to encourage people to travel off peak.”
He added, “The Internet is helping airlines move passengers to planes with empty seats.”
Dana’s methods for studying the increased load, and other trends with the Internet and air travel, involved comparing the flight and computer habits of residents in 75 major U.S. cities. Using data sets that showed percentages of residents connected to the Internet and percentages of people who traveled, he was able to draw conclusions about the impact of the Internet on the airline industry.
Looking forward, Dana hopes to study other aspects of passenger phenomenons, including a possible correlation between the affluence of a city or community and frequency of flights: “For example, are cities that are doing well economically also sending more people into the air?” he asked. “We would like to be able to control for that factor, statistically.”
At the heart of this one study is a vast body of work examining theoretical industrial organization, competitive strategy and operations management, with emphasis on pricing, managing demand uncertainty and revenue management.
The Internet is changing everything, Dana said, in the conclusion of his work.
“The Internet has clearly made it easier for consumers to become informed about alternatives to their preferred time of departure, carrier or destination,” he said in his concluding remarks. “A customer buying a ticket on an airline’s web site, such as United.com, or on a third party travel service web site, such as Expedia.com, selects their itinerary from a much larger set of options than those that are available to a customer making a reservation on the telephone.”
The more a consumer learns, the easier it is for an airline to reduce its capacity cost. United Airlines, for example, offers consumers lower fare deals on its web site.
Dana said the Internet has also helped the airline industry to save nearly $1 billion a year by filling a higher percentage of its flights.
The role of the Internet in business has tendrils in many other directions. Down the road, Dana hopes to study the role that job search engines like Monster.com have on employee happiness at work. “This is really preliminary, but I’m hoping to study whether employees who find their jobs through job-search sites have more longevity at their employers,” he said.
Dana received his doctorate from MIT in 1988 and his bachelors in economics from Yale in 1982.
He obtained tenure in the Kellogg School of Management at Northwestern University in 2002, and before that, he was an associate professor there, beginning in 1994.
He is the author of numerous publications, including “Price Discrimination with a Resource Constraint,” forthcoming in Economics Letters; “Entry Deterrence in a Duopoly Market,” with The Berkeley Electronic Journal of Economic Analysis & Policy: Advances, 2007; and “Comment: General and Specific Rules: A Mechanism Design Approach,” with Journal of Institutional and Theoretical Economics, 2005.
– Susan Salk