Tracing the Woes: An Empirical Analysis of the Airline Industry

51 Pages Posted: 25 Nov 2008 Last revised: 3 Oct 2010

See all articles by Steven Berry

Steven Berry

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Panle Jia

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: November 2008

Abstract

The U.S. airline industry went through tremendous turmoil in the early 2000's. There were four major bankruptcies and two major mergers, with all legacy carriers reporting a large profit reduction. This paper presents a structural model of the airline industry, and estimates the impact of demand and supply changes on profitability. We find that, compared with the late 1990s, in 2006, a) air-travel demand was 8% more price sensitive; b) passengers displayed a strong preference for direct flights, and the connection semi-elasticity was 17% higher; c) the changes of marginal cost significantly favored direct flights. These findings are present in all the specifications we estimated. Together with the expansion of low cost carriers, they explained more than 80% of the decrease in legacy carriers' variable profits.

Suggested Citation

Berry, Steven T. and Jia, Panle, Tracing the Woes: An Empirical Analysis of the Airline Industry (November 2008). NBER Working Paper No. w14503, Available at SSRN: https://ssrn.com/abstract=1305513

Steven T. Berry (Contact Author)

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Panle Jia

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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