The impact of entry by high capacity airlines on incumbents

This master’s thesis examines empirically the impact of market entries by high capacity airplanes on the incumbent airlines’ strategy in terms of airfare, aircraft capacity and frequency of flights. Using a dataset of the U.S. aviation sector from 1993 - 2013, I find that entries by high capacity airplanes have a significant negative impact on the incumbents’ airfare level. Once a new airline enters the market with a high capacity airplane, incumbents tend to decrease their overall capacity, primarily by downsizing frequency but also aircraft capacity. These findings are based on a dynamic panel data model. Sensitivity analyses support the results and hint at a positive correlation between aircraft size of the entering airline and effect intensity. This research is valuable for market entering airlines just as incumbents facing competitive challenges through high capacity airlines.