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Tracing the Woes: An Empirical Analysis of the Airline Industry

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Author Info
Steven Berry
Panle Jia

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Abstract

The U.S. airline industry went through tremendous turmoil in the early 2000's. There were four major bankruptcies and two major mergers, with all legacy carriers reporting a large profit reduction. This paper presents a structural model of the airline industry, and estimates the impact of demand and supply changes on profitability. We find that, compared with the late 1990s, in 2006, a) air-travel demand was 8% more price sensitive; b) passengers displayed a strong preference for direct flights, and the connection semi-elasticity was 17% higher; c) the changes of marginal cost significantly favored direct flights. These findings are present in all the specifications we estimated. Together with the expansion of low cost carriers, they explained more than 80% of the decrease in legacy carriers' variable profits.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14503.

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Date of creation: Nov 2008
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Handle: RePEc:nbr:nberwo:14503

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Find related papers by JEL classification:
L0 - Industrial Organization - - General
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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  1. Severin Borenstein & Nancy L. Rose, 2007. "How Airline Markets Work...Or Do They? Regulatory Reform in the Airline Industry," NBER Working Papers 13452, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Austan Goolsbee & Chad Syverson, 2005. "How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," NBER Working Papers 11072, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Harumi Ito & Darin Lee, 2003. "Incumbent Responses to Lower Cost Entry: Evidence from the U.S. Airline Industry," Working Papers 2003-22, Brown University, Department of Economics. [Downloadable!]
  4. Jean-Pierre H. Dubé & Jeremy T. Fox & Che-Lin Su, 2009. "Improving the Numerical Performance of BLP Static and Dynamic Discrete Choice Random Coefficients Demand Estimation," NBER Working Papers 14991, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Severin Borenstein & Nancy L. Rose, 1995. "Competition and Price Dispersion in the U.S. Airline Industry," NBER Working Papers 3785, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Severin Borenstein, 2005. "U.S. Domestic Airline Pricing, 1995-2004," Macroeconomics 0501006, EconWPA. [Downloadable!]
    Other versions:
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