Entry Behavior and Financial Distress: An Empirical Analysis of the U.S. Domestic Airline Industry

Abstract

The present paper tests the empirical link between a firm's financial structure and its entry decision in the US airline industry. The analysis of airline data from the top 500 airport-pairs during the period 1993-2003 shows that financially distressed air carriers with high leverage and low liquidity are generally less likely to enter a new airport-pair market. This is particularly true for US Airways, American, Alaska, Delta, Midway, America West, ATA, JetBlue, and AirTran. While the present paper does not find carriers with similar cost structures respond to financial distress in similar ways, when faced with worsening economic conditions, high cost carriers significantly reduce the probability of entering a new airport-pair, on the other hand, low cost carriers only decrease the probability of new entry at a marginally significance level. The finding that air carriers generally respond to financial distress by decreasing the probability of entry is consistent with literature showing that highly leveraged firms compete less aggressively. The evidence of a link between air carrier financial condition and entry decision indicates the important role of financial structure in airline entry.