Domestic Airline Competition, Legacy Carrier Consolidation and the Rise of the Low-Cost Carrier
In the past eight years, the airline market in the United States has gone through a string of bankruptcies, some brought on by the severe economic recession in 2008 and 2009. These financial difficulties provided the impetus for four giant airline mergers, causing concern that market concentration had exceeded a healthy limit. This paper examines the competitive landscape of domestic air travel through an analysis of the relationship between airline fares and different levels of competition in the domestic airline market. Taking US Department of Transportation data from 2008 and 2016, I use an ordinary least squares (OLS) regression model to determine the relationship between average market fares and the type/number of competing airlines in each airport-pair market. The results for each year represent the strength of competitive forces, which I then compare to determine the manner in which competition has changed over the eight-year period. I find that the changes in the competition are ambiguous with respect to an overall shift in a single direction. Instead, competition appears to have transformed rather than increased or decreased. I interpret this as a shift in competition from a one-directional effect of low-cost carriers on legacy airlines to a more direct form of competition where low-cost (including Southwest) and legacy carriers compete more evenly in a more transparent but austere market environment.
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