The Value of Bluer Skies - How Much Do Consumers Gain from Entry by JetBlue Airways in Long-Haul U.S. Airline Markets?

In the last decade, the domestic U.S airline industry has experienced a pronounced consolidation trend reflected in three high-profile mergers and the demise of several smaller players such as ATA Airlines or National Airlines. The only significant countervailing force was the market entry and growth of JetBlue Airways. Since its first market appearance in February 2000 until the end of 2009, the low-cost airline managed to build up a route network with 60 destinations in 21 US states and transported about 20 million domestic passengers (in 2009) making it the 9th largest airline in the United States. Furthermore, despite its rapid growth, JetBlue Airways still managed to realize an overall net income of USD 201 million, and therefore belongs to the small group of profitable airlines.

Against this background, the paper estimates the effects of entry by the low-cost carrier JetBlue Airways in long-haul domestic U.S. airline markets. For the period from 2000 to 2009, we find that non-stop fares are on average about 21 percent lower post-entry; however, the magnitude of the price effect depends on the pre-entry market structure. While entry into monopoly markets triggered an average price decrease of about 25 percent, the respective average price drop for entries into oligopoly markets lied at about 15 percent. Based on additional estimates of the price and income elasticities for long-haul domestic U.S. flights, we are able to calculate that JetBlue's long-haul entries alone led to an increase in consumer welfare of about USD 661 million, only referring to the effects in the first year after the respective entry events. Our empirical analysis reveals further that although the largest percentage price decreases are observed for entries in monopoly markets, the largest absolute increases in consumer welfare are realized by entries in oligopoly markets.

Hüschelrath, Kai and Kathrin Schopen (2012), The Value of Bluer Skies - How Much Do Consumers Gain from Entry by JetBlue Airways in Long-Haul U.S. Airline Markets?, ZEW Discussion Paper No. 12-072, Mannheim.