Strategic Responses Under Increasing Uncertainty: Flight Cancellation Decisions by Domestic Airlines

In this study, we assess the influence of strategic interaction on airlines' decisions to cancel flights amid the heightened uncertainty of the early Covid-19 pandemic in Japanese domestic market. Airlines were compelled to modify their operations, predominantly through the cancellation of scheduled flights. Leveraging a novel dataset comprising airlines' public announcement, we examine the timing and magnitude of flight cancellation by integrating with data on the progression of the pandemic and the enactment of public policies. Our analysis of cancellation practices of airlines indicates that the risk of infections significantly influenced airline cancellations; specifically, an increase in the infection risk by 30% is correlated with a 10% rise in the cancellation rate during the early period of the pandemic. Additionally, our results reveal that strategic interaction also relates to the dynamics of flight cancellation decisions. The hazard rate of cancellation event is more than 30% lower in duopoly market, while it gets closer to that of monopoly market as the departure date approaches, which is in line with the implication of the war of attrition.