Bankruptcy protection and pricing strategies in the US airline industry

In this paper, we empirically examine the effects of bankruptcy protection (Chapter 11) on an airline and its rivals' pricing strategies. We estimate a price equation on a panel of 400 routes over the period 1987-1993. We als o examine the impact of bankruptcy on a firm's average operating costs. The results indicate that a bankrupt airline is able to lower its operating co sts and that these cost reductions are partially translated into lower pric es. Rivals appear to lower their prices more than the bankrupt carrier. The ir reaction appears stronger in dense markets and in markets where they fac e a bankrupt airline that will not survive its bankruptcy. They also appear to start lowering their prices prior to the bankruptcy of the weak airline . These results are consistent with aggressive pricing by rivals and the ma gnitude of the estimated effects suggest that they may have contributed, in part, to the financial losses of the industry in the early nineties. (C) 1 999 Elsevier Science Ltd. All rights reserved.