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Financial Distress and US Airline Fares

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  • Christian Hofer
  • Martin Dresner
  • Robert Windle
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    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

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    Bibliographic Info

    Article provided by London School of Economics and University of Bath in its journal Journal of Transport Economics and Policy.

    Volume (Year): 39 (2005)
    Issue (Month): 3 (September)
    Pages: 323-340

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    Handle: RePEc:tpe:jtecpo:v:39:y:2005:i:3:p:323-340

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    Web page: http://www.bath.ac.uk/e-journals/jtep

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