Bankruptcy and Low Cost Carrier Expansion in the airline industry

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1、InstituteforEmpiricalResearchinEconomicsUniversityofZurichWorkingPaperSeriesISSN1424-0459WorkingPaperNo.502BankruptcyandLowCostCarrierExpansionintheAirlineIndustryHwaRyungLeeSeptember2010BankruptcyandLowCostCarrierExpansionintheAirlineIndustryHwaRyungLeeInstit

2、uteforEmpiricalEconomicsUniversityofZurichThisversion:June2010AbstractThispaperstudieshow…nancialdistressa¤ectscompetitionandhowincumbentbankruptcya¤ectsthegrowthofrivals,speci…callyinthecontextofairlinebankruptcies.Ibeginbystudyingwhetherbankruptairlinesputco

3、mpetitivepressuresonrivalsbycuttingfaresandmaintainingorexpandingcapacityonthe1000mostpopulardomesticroutesfrom1998-2008.Theresultssuggestthat,althoughbankruptlegacyairlinesreducefares,theyalsoreducecapacitiessigni…cantly.Low-costcarrier(LCC)rivalsdonotmatchth

4、efarecutsandexpandcapacitiesby13-18%abovetrendgrowth.Thesigni…cantcapacityreductionsassociatedwithlegacyairlinebankruptciescreategrowthopportunitiesforLCCrivals.ThisindicatestheexistenceofbarriersthathavelimitedLCCsfromexpandingfasterandmoreextensively.TheLCCe

5、xpansionduringrivals’bankruptciesisevengreaterwhenIconsiderthe200mostpopularairportsinsteadofthe1000mostpopularroutes.Duringlegacyairlines’bankruptcy,non-LCCrivalsreducecapacitiesontheroutesa¤ectedbythebankruptcybutexpandatthea¤ectedairports.Alikelyexplanation

6、forthisresultisthatnon-LCCsavoid“bankruptcy”routesasmorecompetitivepressureisexpectedwithincreasingpresenceofLCCs,buttheypickupthegatesortimeslotsgivenupbythebankruptairlinestoexpandonotherroutes.Onbalancethetotalroutecapacityonthe1000popularroutesshowsonlyamo

7、destdecreaseduringbankruptcyandeventuallyrecovers,butthecapacitymixchangesinfavorofLCCs.Overall,I…ndlittleevidencethatdistressedairlinestoughencompetitionandlowerindustrypro…tability.LCC’scapacitygrowthduringlegacyrivals’bankruptcysuggeststheexistenceofmarketf

8、rictionsincompetition.1IntroductionThispaperstudiestwoseparatebutrelatedtopicsbyexaminingairlinebankruptcies:oneisthelinkbetween…nancialdistressandmarketcompetitionandtheotherissti