START-UP AIRLINES: A COUNTER-CYCLICAL PHENOMENON

This paper proposes the theory that while the behavior of the major airlines follows the business cycle of the time, the behavior, activity, and emergence of start-up airlines is somewhat counter-cyclical. The theory is supported by both the supply side of the operation and the demand side. The behavior of both passengers and producers of the service (start-up) is rational and expected. The scenario the paper attempts to illustrate is as follows: During an economic downturn, there is an expectation of reduction in disposable income. During such times, the rational consumer behavior predicts shying away from consumption of luxurious goods or services such as air travel provided by the incumbent large carriers. As a result, large incumbent airlines would face reduction in their passengers and therefore contract their services by dropping routes and/or eliminating air services to some of their destinations. High unemployment of skilled labor, coupled with the downsizing of their fleet will result. Once the pool of skilled labor and operationally safe aircraft is abundant, the new airlines, with much reduced cost structure, will emerge. Their emergence is further fueled by passengers' desire to switch to less expensive air travel service (substitution effect). The entrepreneurs of the new airlines are usually furloughed employees of the failed airlines who have the ambition and skill to manage a new airline. During the economic upswing, the income effect will dominate and passengers will reduce their consumption of air service by the start-ups in face of frill offerings and luxurious services of large carriers. As a result, during expansionary times, newly emerged start-up airlines will face a reduction in passengers, and due to their highly leveraged and under capitalized financial position, will fold or be taken over.

Language

  • English

Media Info

  • Features: References;
  • Pagination: p. 595-602

Subject/Index Terms

Filing Info

  • Accession Number: 00727088
  • Record Type: Publication
  • Report/Paper Numbers: Volume 2
  • Files: TRIS
  • Created Date: Oct 18 1996 12:00AM