Tracing the Woes: An Empirical Analysis of the Airline Industry

Steven Berry () and Panle Jia

No 14503, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: L0 L1 L13 L91 L93 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-mic
Date: 2008-11
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