Question

The year 2008 was not good for airlines. Six airlines declared bankruptcy including Aloha Airlines, ATA, Frontier Airlines, and Skybus. Other airlines reduced the number of flights. American Airlines began charging $15 for each piece of luggage checked in to a flight.

Question: Cutting flights and declaring bankruptcy are long-run decisions. What impact would you predict these actions would have on the airlines remaining in business?

Answer 1

In the long run, competitors moves affects how a firm operates and earns in the long run since sometimes people form a view of the industry as a whole and not some particular firms.

In the year 2008, when some airlines declare bankrupcy which included airlines such as Aloha Airlines, ATA, Frontier Airlines, and Skybus, and other airlines would reduce the number of flights, people would get the notion that the airline industry is not doing good as a whole and so those airlines which did not declare bankrupcy would also suffer losses in this case. When people would lose confidence on the airline industry, less people would opt to travel via airlines and there would be less investors willing to invest their money in the airline industry.

With less revenue from the number of passengers going down and less capital inflow in the airline industry, I would predict that these actions would have a negative impact on the airlines remaining in the business.