The effect of rail travel time on airline fares: First evidence from the Italian passenger market

- Using flight-level data we measure the effect of rail travel time on airline fares.
- We find that airlines set, on average, higher fares as rail travel time increases.
- The competitive pressure by rail travel time is perceived from the 40th before departure.
- The effect of rail travel time shrinks as the departure is further away in time.

The empirical evidence shows that travel time is crucial for rail transport to be a competitor to air transport. However, there are no papers testing whether travel time has a direct effect on airline pricing. This paper is a step towards filling this gap. We test and quantify the effect of rail travel time on airline fares, using unique data at flight-level. We find that airlines design pricing strategies taking into consideration the travel time of competing rail transport service. Airlines are found to set, on average, higher fares as rail travel time increases. However, the competitive pressure induced by rail travel time is perceived by airlines only as the day of departure gets closer: from the 40th to the day before departure it increases while it gradually decreases as the departure date gets further away.