Working Paper: NBER ID: w14503
Authors: Steven Berry; Panle Jia
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.
Keywords: airline industry; demand; supply; profitability; low-cost carriers
JEL Codes: L10; L11; L13; L91; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low-cost carrier expansion (L93) | market dynamics (D49) |
| price changes (P22) | demand elasticity (D12) |
| marginal costs (D40) | likelihood of opting for direct flights (L93) |
| demand changes (O00) | legacy carriers' variable profits (L93) |