Financial Distress, Survival Network Design and Airline Pricing: An Events Study of a Merger Between a Low-Cost and a Full-Service Carrier

Abstract

This paper develops an events study to investigate the price effects of the acquisition of a financially distressed full-service carrier by a low-cost airline in Brazil. We account for the bankrupt carrier’s survival network design strategies (SNDS) pursued during reorganization, which may be a source of sample selectivity bias. Additionally, as rivals’ pricing could be aimed at driving the distressed carrier out of the market, we treat distress as endogenous. Our results uncover survival pricing behavior stemming from SNDS and a permanent price drop induced by the merger, shedding light on the role of bankruptcy protection in the airline industry.