The Construction of a Low Cost Airline Network

In a number of industries, the success and sustainability of a new rm's business strategy is tied to its sequential decisions to enter multiple markets. In all these industries, rms face the key challenge to optimize the sequence of entries in a number of di erent markets - taking into account possible internal resource constraints and external barriers to entry - in order to operate pro tably and to build-up a sustainable market presence. In designing such a sustainable entry pattern, a new entrant typically has to decide on the optimal mixture of two distinct entry strategies: entering existing markets and facing competition of incumbent rms and entering new markets which can be expected to contribute to the overall pro tability and success of the company. We focus on the domestic U.S. airline industry in order to empirically estimate entry decisions and their timing. We distinguish between entry into new markets, i.e. markets which have not been served directly by another airline in the year prior to the entry, and entry into existing markets, i.e. markets which were already served directly by another airline. In particular, we investigate the construction of a low cost airline network. We choose JetBlue as our unit of observation, rst, because of its amazing success story. JetBlue can be seen as the only signi cant and successful entrant in the domestic U.S. airline industry in the last two decades. Within 10 years this airline rapidly grew becoming the 9th largest U.S. airline in 2009. Second, we chose JetBlue because it is the only entrant we can observe from its inception and track its development over almost a decade. Adopting duration models with time-varying covariates, we nd that Jet- Blue consistently avoided concentrated airports and targeted concentrated routes; network economies also a ected entry positively. For non-stop entry into a route that has not been served on a non-stop basis before, our analysis reveals that the carrier focused on thicker routes and secondary airports, thereby avoiding direct confrontation with network carriers. Non-stop entry into existing non-stop markets, however, shows that JetBlue concentrated on longer-haul markets and avoided routes already operated by either other low cost carriers or network carriers under bankruptcy protection.

Hüschelrath, Kai, Kathrin Schopen and Volodymyr Bilotkach (2011), The Construction of a Low Cost Airline Network, ZEW Discussion Paper No. 11-052, Mannheim.