Session 1: Airline Competition, Financial Volatility and Recent Trends
Speakers: Steven Berry (Yale University and NBER) and Panle Jia (MIT and NBER)
Paper: Tracing the Woes: An Empirical Analysis of the Airline Industry
Abstract: The U.S. airline industry went through tremendous turmoil in the early 2000s. 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 more price sensitive; (b) passengers displayed a strong preference for direct flights, and the connection semi-elasticity was much 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 percent of the decrease in legacy carriers’ variable profits, with changes in demand contributing to more than 50 percent of the reduction.
Speakers: Federico Ciliberto (University of Virginia) and Carola Schenone (University of Virginia)
Paper: Bankruptcy and Product-Market Competition: Evidence from the Airline Industry
Abstract: In this paper we investigate price changes in airline markets when one of the competitors files for protection under Chapter 11. We study both how average prices change and the prices charged by each carrier change in response to a bankruptcy filing. We find that, on average, firms reduce their prices by just 1 percent when they file for bankruptcy protection. Yet, the effects on prices are very heterogeneous across events. We estimate price changes ranging from negative 14.5 percent (ATA’s bankruptcy) or 5.2 percent (first USAir filing) percent, to a 4.6 percent increase in the case of Northwest’s bankruptcy. We find much less heterogeneity in the post-bankruptcy period: all bankrupt firms return to their pre-bankruptcy levels or higher when they emerge from bankruptcy. Finally, we find that competitors do not match the price changes of the bankrupt firms. The lack of significant price reductions during the bankruptcy filings and finding of increases in prices after the emergence from bankruptcy provide strong evidence against the hypothesis that firms file for bankruptcy protection to lower their operating costs, since cost savings (if any) should still persist after the emergence from Chapter 11. This is a striking and very surprising result, since airlines always justify their bankruptcy filings as ways to lower their operating costs.
Speaker: Rene Kamita (Economic Analysis Group, Antitrust Division)
Paper: Analyzing the Impact of Antitrust Immunity: Price Effects Following the Aloha-Hawaiian Antitrust Immunity Agreement
Abstract: Coordination between competitors may take various forms. In this paper, I examine the impact of an agreement in which two airlines received antitrust immunity to coordinate air travel capacity between December 2002 and October 2003. Using data on airfares from the Department of Transportation's Origin and Destination database, I find a significant and steady increase in price during the period of coordination, consistent with the depletion of previously purchased low priced travel vouchers. Moreover, I find price effects that appear to persist well beyond the period of antitrust immunity. Several possible explanations for the prolonged price effects are discussed. That a number of firms have announced plans to enter the inter-island travel markets is consistent with a scenario in which post-immunity prices reflect supra-competitive pricing rather than a new competitive equilibrium. I conclude that the airlines may have been able to tacitly sustain coordination past the period in which they received immunity.