Market Performance of Low-Cost Entry into the Airline Industry: A Case of Two Major Japanese Markets

Abstract

This is an empirical analysis of the dynamic changes in consumer surplus and industry profits after a low-cost carrier (LCC) enters markets, performed by estimating structural demand and price equations using unbalanced carrier-specific panel data of two to four carriers on nine routes for four to eight years (130 samples). Our findings are that gains in consumer surplus were substantial for as long as two years after market entry, but losses began in the third year, when two of the LCCs agreed on a code share with All Nippon Airways (ANA), a full-service carrier; since the third year, those carriers seem to have regained profitability. Our conclusion is that Japanese regulatory sectors, which have allowed full-service carriers other than ANA to engage in behavior that drives LCCs out of competitive markets while also allowing the code-shares between ANA and LCCs, seem to stand by the industry instead of consumers.