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Financial Distress and US Airline Fares

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  • Christian Hofer
  • Martin Dresner
  • Robert Windle

Abstract

This paper examines the impact of firm financial distress and bankruptcy on an airline's pricing behaviour. Three theoretical rationales are set forth: the supply-side rationale suggests that the bankrupt firm's lower operating costs may result in lower prices; from a demand perspective, distressed firms' prices may be lowered in response to reduced consumer demand; and the strategic rationale then suggests that distressed firms may reduce prices and sell off inventory to generate cash for long-term survival. The hypotheses are tested by estimating price and output equations with data from the US airline industry. The results provide support for the supply-side and demand-side rationales and confirm the general contention that distressed carriers' fares are lower, all other things being equal. © 2005 LSE and the University of Bath

Suggested Citation

  • Christian Hofer & Martin Dresner & Robert Windle, 2005. "Financial Distress and US Airline Fares," Journal of Transport Economics and Policy, University of Bath, vol. 39(3), pages 323-340, September.
    • Handle: RePEc:tpe:jtecpo:v:39:y:2005:i:3:p:323-340
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    Cited by:

    1. Dresner, Martin & Eroglu, Cuneyt & Hofer, Christian & Mendez, Fabio & Tan, Kerry, 2015. "The impact of Gulf carrier competition on U.S. airlines," Transportation Research Part A: Policy and Practice, Elsevier, vol. 79(C), pages 31-41.
    2. de Oliveira, Renan P. & Oliveira, Alessandro V.M., 2021. "Financial distress, survival network design strategies, and airline pricing: An event study of a merger between a bankrupt FSC and an LCC in Brazil," Journal of Air Transport Management, Elsevier, vol. 92(C).
    3. Adler, Nicole & Mantin, Benny, 2015. "Government and company contracts: The effect on service and prices in international airline markets," Economics of Transportation, Elsevier, vol. 4(3), pages 166-177.
    4. Wang, Zuozheng & Hofer, Christian & Dresner, Martin E., 2013. "Financial condition, safety investment and accident propensity in the US airline industry: A structural analysis," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 49(1), pages 24-32.

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