The Competitive Effects of Firm Exit - Evidence from the U.S. Airline Industry

In the last decade, the domestic U.S. airline industry has experienced a substantial consolidation trend. In addition to a number of high level mergers such as American Airlines – Trans World Airlines (2001), America West – US Airways (2005) and Delta Air Lines – Northwest Airlines (2009), several smaller carriers such as National Airlines (2002), Independence Air (2006) and ATA Airlines (2008) had to leave the industry.

Despite this high relevance of firm exits for the recent development of the domestic U.S. airline industry, empirical evidence on the effects of these consolidations is rare. Studies focusing on the market impact of liquidations do not exist to the best of our knowledge and the existing studies on the competitive effects of airline mergers almost exclusively stem from the 1980s and focus on the specific case of a largely overlapping route network of the merging parties (due to a shared hub). However, such a network structure is rather uncommon in recent mergers and therefore raises the demand for both a new conceptual framework for investigating firm exits in the airline industry and a corresponding new empirical analysis of the effects of such firm exits.

Against this background, we study the competitive effects of five liquidations and six mergers in the domestic U.S. airline industry between 1995 and 2010. Applying fixed effects regression models we find that route exits due to liquidation lead to substantially larger and permanent price increases (of about 12 percent) than merger-related exits. Within the merger category, our analysis reveals that prices on overlapping routes increase by about 6 percent in the short run, whereas a simple merger-induced switch of the operating carrier causes a significant price increase of about 3 percent. Accordingly, we observe large reductions in quantity for route exits caused by firm liquidations and moderate reductions in case of merger-related exits. Entry-inducing effects of firm exits are found particularly for liquidations and smaller mergers.

Hüschelrath, Kai and Kathrin Müller (2012), The Competitive Effects of Firm Exit - Evidence from the U.S. Airline Industry, ZEW Discussion Paper No. 12-037, Mannheim.