Rivalry amongst European low cost airlines: Are shareholders enjoying the game?

Abstract

We develop a model of quantity and price competition for low cost airlines based on announcements of new routes and their impacts on the announcer and on its rival. We find that both firms’ profits may rise or fall as a result of an announcement of new routes, depending on launching costs for the announcer, and on whether market expansion or market substitution is dominant for the rival. We present an empirical study for two European low cost airlines that shows asymmetric behaviour; while EasyJet announcements have positive effects on Ryanair’s share price, the opposite is does not occur. This suggests that an airline’s reputation for reacting in response to rivals’ announcements may affect the stock market and may thus affect announcement behaviour.