The Effects of Bankruptcy on Airline Yield and Frequency: The case of the duopolistic domestic market in Japan

Abstract

Using data on the Japanese domestic market from 2008 to 2013, this paper investigates the market dynamics triggered by the 2010 bankruptcy protection of Japan Airlines (JAL). Our analysis suggests that JAL downsized its overall operations, leaving relatively thin routes even though there were fewer competitors and slightly higher yields in those thin markets. The airline nevertheless increased the yields and flight frequencies in the consolidated network more significantly than its rival airlines did. Following JAL's bankruptcy, Japanese carriers focused more on improving yield and frequency in general, and the competition between the duopoly airlines (JAL and All Nippon Airways (ANA)) became less effective. In comparison, low-cost carriers (LCCs) and smaller airlines continued to exert significant competitive pressure on the market despite their small market shares. These patterns are different from those observed in the US, where a huge domestic market is served by a large number of competitive airlines. Overall, our analysis suggests that the Japanese government's support of JAL's restructuring efforts was appropriate. However, there is evidence that the JAL-ANA duopoly became less effective in maintaining market competition. The Japanese government should more actively explore ways to provide a level playground to LCCs and smaller airlines so that enhanced competition can promote airline efficiency and services in the long term.