Banking

Bankruptcy And Low Cost Carrier Expansion In The Airline Industry

Date Added: Sep 2010
Format: PDF

This paper studies how financial distress affects competition and how incumbent bankruptcy affects the growth of rivals, specifically in the context of airline bankruptcies. The author begins by studying whether bankrupt airlines put competitive pressures on rivals by cutting fares and maintaining or expanding capacity on the 1000 most popular domestic routes from 1998-2008. The results suggest that, although bankrupt legacy airlines reduce fares, they also reduce capacities significantly. Low-Cost Carrier (LCC) rivals do not match the fare cuts and expand capacities by 13-18% above trend growth. The significant capacity reductions associated with legacy airline bankruptcies create growth opportunities for LCC rivals.