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Tracing the Woes: An Empirical Analysis of the Airline Industry

  • Steven Berry
  • Panle Jia

The US airline industry went through tremendous turmoil in the early 2000s, with four major bankruptcies, two major mergers, and various changes in network structure. This paper presents a structural model of the industry, and estimates the impact of demand and supply changes on profitability. Compared with 1999, we find that, in 2006, air-travel demand was 8 percent more price sensitive, passengers displayed a stronger preference for nonstop flights, and changes in marginal cost significantly favored nonstop flights. Together with the expansion of low-cost carriers, they explain more than 80 percent of legacy carriers' variable profit reduction. (JEL L13, L25, L93)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mic.2.3.1
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File URL: http://www.aeaweb.org/aej/mic/data/2008-0100_data.zip
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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 2 (2010)
Issue (Month): 3 (August)
Pages: 1-43

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Handle: RePEc:aea:aejmic:v:2:y:2010:i:3:p:1-43
Note: DOI: 10.1257/mic.2.3.1
Contact details of provider: Web page: https://www.aeaweb.org/aej-micro
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  1. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-83, August.
  2. Christopher T. Conlon & Julie Holland Mortimer, 2013. "Demand Estimation under Incomplete Product Availability," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 1-30, November.
  3. Elie Tamer & Federico Ciliberto, 2004. "Market Structure and Multiple Equilibria in Airline Markets," Econometric Society 2004 North American Winter Meetings 517, Econometric Society.
  4. Austan Goolsbee & Chad Syverson, 2004. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," Working Papers 04-04, NET Institute, revised Dec 2004.
  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. 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.
  7. Olivier Armantier & Oliver Richard, 2008. "Domestic airline alliances and consumer welfare," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 875-904.
  8. Forbes, Silke J., 2008. "The effect of air traffic delays on airline prices," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1218-1232, September.
  9. Philip G. Gayle, 2004. "Does Price Matter? Price and Non-price Competition in the Airline Industry," Econometric Society 2004 North American Summer Meetings 163, Econometric Society.
  10. Severin Borenstein, 2005. "U.S. Domestic Airline Pricing, 1995-2004," Industrial Organization 0504016, EconWPA.
  11. 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.
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