Tracing the Woes: An Empirical Analysis of the Airline Industry
American Economic Journal: Microeconomics 2 (August 2010): 1–43; DOI: 10.1257/mic.2.3.1
44 Pages Posted: 10 Jul 2019
Date Written: August 1, 2010
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 Classification: L13, L25, L93
Suggested Citation: Suggested Citation