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Tracing the Woes: An Empirical Analysis of the Airline Industry

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  • Steven Berry
  • Panle Jia

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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Publication status: published as Steven Berry & Panle Jia, 2010. "Tracing the Woes: An Empirical Analysis of the Airline Industry," American Economic Journal: Microeconomics, American Economic Association, vol. 2(3), pages 1-43, August.
Handle: RePEc:nbr:nberwo:14503

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  1. Federico Ciliberto & Elie Tamer, 2009. "Market Structure and Multiple Equilibria in Airline Markets," Econometrica, Econometric Society, Econometric Society, vol. 77(6), pages 1791-1828, November.
  2. Forbes, Silke J., 2008. "The effect of air traffic delays on airline prices," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(5), pages 1218-1232, September.
  3. 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.
  4. Christopher T. Conlon & Julie Holland Mortimer, 2008. "Demand Estimation Under Incomplete Product Availability," NBER Working Papers 14315, National Bureau of Economic Research, Inc.
  5. 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.
  6. Olivier Armantier & Oliver Richard, 2008. "Domestic airline alliances and consumer welfare," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 39(3), pages 875-904.
  7. Austan Goolsbee & Chad Syverson, 2004. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," Working Papers, NET Institute 04-04, NET Institute, revised Dec 2004.
  8. Severin Borenstein, 2005. "U.S. Domestic Airline Pricing, 1995-2004," Macroeconomics, EconWPA 0501006, EconWPA.
  9. Severin Borenstein & Nancy L. Rose, 1991. "Competition and Price Dispersion in the U.S. Airline Industry," NBER Working Papers 3785, National Bureau of Economic Research, Inc.
  10. Philip G. Gayle, 2004. "Does Price Matter? Price and Non-price Competition in the Airline Industry," Econometric Society 2004 North American Summer Meetings, Econometric Society 163, Econometric Society.
  11. Harumi Ito & Darin Lee, 2003. "Incumbent Responses to Lower Cost Entry: Evidence from the U.S. Airline Industry," Working Papers, Brown University, Department of Economics 2003-22, Brown University, Department of Economics.
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Cited by:
  1. Friberg, Richard & Huse, Cristian, 2012. "How to use demand systems to evaluate risky projects, with an application to automobile production," MPRA Paper 48906, University Library of Munich, Germany.
  2. Bilotkach, Volodymyr & Lakew, Paulos Ashebir, 2014. "On sources of market power in the airline industry: Panel data evidence from the US airports," Transportation Research Part A: Policy and Practice, Elsevier, Elsevier, vol. 59(C), pages 288-305.
  3. Alderighi, Marco, 2010. "Fare dispersions in airline markets: A quantitative assessment of theoretical explanations," Journal of Air Transport Management, Elsevier, Elsevier, vol. 16(3), pages 144-150.
  4. Amit Gandhi & Zhentong Lu & Xiaoxia Shi, 2013. "Estimating demand for differentiated products with error in market shares," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP03/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  5. Ciliberto, Federico & Schenone, Carola, 2012. "Are the bankrupt skies the friendliest?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(5), pages 1217-1231.
  6. Ciliberto, Federico & Schenone, Carola, 2010. "Bankruptcy and Product-Market Competition: Evidence from the Airline Industry," MPRA Paper 24914, University Library of Munich, Germany.
  7. Lydia Cheung, 2013. "The Upward Pricing Pressure Test for Merger Analysis: An Empirical Examination," Working Papers, Auckland University of Technology, Department of Economics 2013-03, Auckland University of Technology, Department of Economics.
  8. Redondi, Renato & Malighetti, Paolo & Paleari, Stefano, 2012. "De-hubbing of airports and their recovery patterns," Journal of Air Transport Management, Elsevier, Elsevier, vol. 18(1), pages 1-4.
  9. Philip G. Gayle, 2013. "On the Efficiency of Codeshare Contracts between Airlines: Is Double Marginalization Eliminated?," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 5(4), pages 244-73, November.
  10. Escobari, Diego & Lee, Jim, 2013. "Demand Uncertainty and Capacity Utilization in Airlines," MPRA Paper 46059, University Library of Munich, Germany.
  11. Steven L. Puller & Anirban Sengupta & Steven N. Wiggins, 2009. "Testing Theories of Scarcity Pricing in the Airline Industry," NBER Working Papers 15555, National Bureau of Economic Research, Inc.
  12. Escobari, Diego & Mellado, Cristhian, 2013. "The Choice of Airport, Airline, and Departure Date and Time: Estimating the Demand for Flights," MPRA Paper 47943, University Library of Munich, Germany.
  13. Jan K. Brueckner & Dan Luo, 2013. "Measuring Strategic Firm Interaction in Product-Quality Choices: The Case of Airline Flight Frequency," CESifo Working Paper Series 4066, CESifo Group Munich.
  14. Stephen Martin, 2012. "Market Structure and Market Performance," Review of Industrial Organization, Springer, Springer, vol. 40(2), pages 87-108, March.
  15. Itai Ater & Eugene Orlov, 2013. "The Effect of the Internet on Performance and Quality: Evidence from the Airline Industry," Working Papers, NET Institute 13-07, NET Institute.
  16. Ciliberto, Federico & Williams, Jonathan, 2010. "Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conjectural Parameters in the Airline Industry," MPRA Paper 24888, University Library of Munich, Germany.
  17. Andrea Migliardi & Valter Di Giacinto, 2013. "Low cost carriers and foreign tourism in Italy: a cointegrated VAR analysis," ERSA conference papers ersa13p47, European Regional Science Association.
  18. Hwa Ryung Lee, 2010. "Bankruptcy and low cost carrier expansion in the airline industry," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 502, Institute for Empirical Research in Economics - University of Zurich.
  19. Puller, Steven L. & Taylor, Lisa M., 2012. "Price discrimination by day-of-week of purchase: Evidence from the U.S. airline industry," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 84(3), pages 801-812.

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