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Do Airline Bankruptcies Reduce Air Service?

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  • Severin Borenstein
  • Nancy L. Rose

Abstract

The airline industry's current financial crisis has raised concerns over the ramifications of airline bankruptcies for air service and the economy. Such bankruptcies, however, nearly always occur when demand is weak, and, thus, when even healthy airlines are inclined to reduce flights. Moreover, from a consumer and policy perspective, the real concern is total air service offered, not the number of flights offered by a particular airline. We study all major U.S. airline bankruptcies since 1984 in order to estimate the effect of bankruptcy on air service, controlling for demand fluctuations and recognizing that competing airlines may increase service in response to a reduction in flights by a bankrupt airline. We do not find substantial effects of bankruptcy on flights offered or destinations served at large and small airports, but do find an impact at medium sized airports. We estimate, however, that service changes due to bankruptcy are not large in comparison to typical quarter-to-quarter fluctuations in service that occur at airports in the absence of carrier bankruptcies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9636.

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Date of creation: Apr 2003
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Publication status: published as Borenstein, Severin and Nancy Rose. “The Impact of Bankruptcy on Airline Service Levels." American Economic Review Papers and Proceedings 93, 2 (May 2003): 415-419.
Handle: RePEc:nbr:nberwo:9636

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  1. Hendel, Igal, 1996. "Competition under Financial Distress," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 309-24, September.
  2. Gregor Andrade & Steven N. Kaplan, 1998. "How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed," Journal of Finance, American Finance Association, vol. 53(5), pages 1443-1493, October.
  3. Pulvino, Todd C., 1999. "Effects of bankruptcy court protection on asset sales," Journal of Financial Economics, Elsevier, vol. 52(2), pages 151-186, May.
  4. Matthias Kahl, 2002. "Economic Distress, Financial Distress, and Dynamic Liquidation," Journal of Finance, American Finance Association, vol. 57(1), pages 135-168, 02.
  5. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-35, June.
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Cited by:
  1. Lee, Hwa Ryung, 2009. "Bankruptcies and low-cost Carrier Expansion in the Airline Industry," Department of Economics, Working Paper Series qt8g8639tn, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Lee, Hwa Ryung, 2009. "Does Bankruptcy Protection Harm the Airline Industry?," Department of Economics, Working Paper Series qt0s40v0x9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Severin Borenstein & Nancy L. Rose, 2003. "The Impact of Bankruptcy on Airline Service Levels," American Economic Review, American Economic Association, vol. 93(2), pages 415-419, May.

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