Bankruptcy and Low Cost Carrier Expansion in the Airline Industry

Hwa Ryung Lee
2010
This paper studies how ...nancial distress a¤ects competition and how incumbent bankruptcy a¤ects the growth of rivals, speci...cally in the context of airline bankruptcies. We begin by studying whether bankrupt airlines put competitive pressures on rivals by cutting fares and maintaining or expanding capacity on the 1000 most popular domestic routes from 1998-2008. Our results suggest that, although bankrupt legacy airlines reduce fares, they also reduce capacities signi...cantly. Low-cost
more » ... antly. Low-cost carrier (LCC) rivals do not match the fare cuts and expand capacities by 13-18% above trend growth. The signi...cant capacity reductions associated with legacy airline bankruptcies create growth opportunities for LCC rivals. This indicates the existence of barriers that have limited LCCs from expanding faster and more extensively. The LCC expansion during rivals'bankruptcies is even greater when we consider the 200 most popular airports instead of the 1000 most popular routes. During legacy airlines' bankruptcy, non-LCC rivals reduce capacities on the routes a¤ected by the bankruptcy but expand at the a¤ected airports. A likely explanation for this result is that non-LCCs avoid "bankruptcy" routes as more competitive pressure is expected with increasing presence of LCCs, but they pick up the terminals or time slots given up by the bankrupt airlines to expand on other routes. On balance the total route capacity on the 1000 popular routes shows only a modest decrease during bankruptcy and eventually recovers, but the capacity mix changes in favor of LCCs. 0 I am especially grateful to my advisor, Richard Gilbert, for invaluable suggestions, guidance and support. I am deeply indebted to Aaron Edlin, Joseph Farrell, J. Miguel Villas-Boas, and So...a Berto Villas-Boas for their insightful suggestions and encouragement. I would like to thank for helpful comments at di¤erent stages of this project, which improved the paper greatly. I have also bene...ted from the comments made by the seminar participants at UC Berkeley. Financial support from the Korea Foundation for Advanced Studies is gratefully acknowledged. All errors are my own.
doi:10.5167/uzh-51761 fatcat:tbl5x323f5ev7nsxjzjiijrqhu