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Bankruptcy protection and pricing strategies in the US airline industry

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  • Barla, Philippe
  • Koo, Bonchun

Abstract

In this paper, we empirically examine the effects of bankruptcy protection (Chapter 11) on an airline and its rivals' pricing strategies. We estimate a price equation on a panel of 400 routes over the period 1987-1993. We also examine the impact of bankruptcy on a firm's average operating costs. The results indicate that a bankrupt airline is able to lower its operating costs and that these cost reductions are partially translated into lower prices. Rivals appear to lower their prices more than the bankrupt carrier. Their reaction appears stronger in dense markets and in markets where they face a bankrupt airline that will not survive its bankruptcy. They also appear to start lowering their prices prior to the bankruptcy of the weak airline. These results are consistent with aggressive pricing by rivals and the magnitude of the estimated effects suggest that they may have contributed, in part, to the financial losses of the industry in the early nineties.

Suggested Citation

  • Barla, Philippe & Koo, Bonchun, 1999. "Bankruptcy protection and pricing strategies in the US airline industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 35(2), pages 101-120, June.
    • Handle: RePEc:eee:transe:v:35:y:1999:i:2:p:101-120
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    Cited by:

    1. Barla, Philippe, 1996. "Rivalry in the U.S. Airline Industry," Cahiers de recherche 9603, Université Laval - Département d'économique.
    2. Ng, Kam To & Fu, Xiaowen & Lee, Jaewoon & Yamaguchi, Katsuhiro & Zhu, Chuanyan, 2023. "The Effects of Bankruptcy on Airline Yield and Frequency: The case of the duopolistic domestic market in Japan," Transport Policy, Elsevier, vol. 142(C), pages 28-36.
    3. Gong, Stephen X.H., 2007. "Bankruptcy protection and stock market behavior in the US airline industry," Journal of Air Transport Management, Elsevier, vol. 13(4), pages 213-220.
    4. de Oliveira, Renan P. & Oliveira, Alessandro V.M., 2021. "Financial distress, survival network design strategies, and airline pricing: An event study of a merger between a bankrupt FSC and an LCC in Brazil," Journal of Air Transport Management, Elsevier, vol. 92(C).
    5. Bock, Sebastian & Forsyth, Peter & Niemeier, Hans-Martin & Mantin, Benny, 2019. "Chapter 11 and the level playing field: Should chapter 11 be considered as a subsidy?," Journal of Air Transport Management, Elsevier, vol. 74(C), pages 39-46.
    6. Craig Freedman & Alex Blair, 2007. "If Corporate Governance is the Answer, What is the Question? The Illusory Relation between Structural Solutions and Japanese Deflation," The Economic and Labour Relations Review, , vol. 17(2), pages 11-35, April.
    7. Bock, Sebastian & Mantin, Benny & Niemeier, Hans-Martin & Forsyth, Peter John, 2020. "Bankruptcy in international vs domestic markets: Evidence from the airline industry," Transportation Research Part A: Policy and Practice, Elsevier, vol. 132(C), pages 728-743.

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    Keywords

    Airline pricing Bankruptcy;

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