Bankruptcy and product-market competition: Evidence from the airline industry

Abstract

We investigate the e¤ects of Chapter 11 bankruptcy …lings on product market competition using data from the US airline industry. We …nd that bankrupt airlines permanently downsize their national route structure, their airport-speci…c networks, and their route-speci…c ‡ight frequency and capacity. We also …nd that bankrupt airlines lower their route-speci…c prices while under bankruptcy protection, and increase them after emerging. We do not …nd robust evidence of signi…cant changes by the bankrupt airline's competitors along any of the dimensions above. Overall, our results are consistent with the hypothesis that bankruptcy is the result of a war of attrition over capacity and network cutbacks.

Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry

“…With the exception of Goolsbee and Syverson (2008) (GS hereafter), the literature on airline pricing and market structure that uses the DB1B database does not employ regression weights (see for instance Borenstein (1989), Berry (1990), Borenstein and Rose (1994), Borenstein and Rose (2003), Gerardi andShapiro (2009), Ciliberto andSchenone (2012), Snider and Williams (2015), and Ciliberto et al (2017)). Other than citing GS's decision to weight by passenger counts, AST offer no additional reasoning for using regression weights in this context.…”

Why does the airline industry over-invest?

“…For the period 1984e2001, Borenstein and Rose (2003) find that US carriers entering into Chapter 11 reorganization drop about 20% of the flights operated. For the period 1997e2007, Ciliberto and Schenone (2010) find that bankrupt US carriers under Chapter 11 reorganization drop approximately 25% of their pre-bankruptcy routes, and within a route lower the frequency of flights by 21%. So in both cases, a larger part of capacity remains operational within the distressed carrier.…”

Effects of Mergers and Divestitures on Airline Fares

“…The empirical approach used here closely follows the approach in Ciliberto and Schenone, who investigated the effect of bankruptcy on prices, capacity, and quality, measured in relation to delays, cancellations, and age of a fleet (8,9). Two main relationships were estimated.…”