Airline choice, switching costs and frequent flyer programmes

Abstract

Switching costs are costs that customers face when switching from one firm to another. In markets such as the airline market where repeated purchases are common, switching costs may be substantial. In this paper, the switching costs are estimated for domestic airline routes in Sweden between 1992 and 2002. In addition, the determinants of these switching costs are tested for; in particular, to what extent factors such as frequent flyer programmes and flag carriers have an effect on switching costs. A substantial switching cost is found. Although a large part of this calculated switching cost can be attributed to perceived quality differences, it is also found that frequent flyer programmes contribute a non-negligible part of the switching cost. The paper ends with a brief discussion on the welfare consequences of switching costs, where the connection between habit formation and switching costs is discussed.

Acknowledgements

We have received valuable comments and assistance from Håkan Brobeck, Mikael Ingemarsson and Olof Johansson-Stenman. Financial support from the Swedish Civil Aviation Administration and the Swedish Agency for Innovation Systems is gratefully acknowledged.

Notes

¹ Since data at the airline level is not public information we cannot report descriptive statistics at the airline level.

² Note that the regulation could still be affected, for example in terms of level, by habit formation.