Friday, September 26, 2014

Competition and Financial Structure: Evidence from Airlines

Gianpaolo Parise, Swiss Finance Institute discusses Competition and Financial Structure: Evidence from Airlines.

ABSTRACT: Using a large dataset of flight routes, I study the effect of route competition on financial variables in the airline industry. I find that growing route competition pushes airlines to accumulate cash reserves, affects the maturity structure of their liabilities and reduces their propensity to lease airplanes. Cash hoarding policies are driven by small and financially constrained airlines. Conversely, competition affects the debt maturity structure of large and financially unconstrained air carriers. To establish causality, I exploit two quasi-natural experiments: the industry deregulation during Carter's administration and the introduction of high-speed trains in the north-east corridor. Overall, my results suggest that the main response to competition in the airline industry is the lengthening of the maturity of the debt. However, the increasing number of airlines that cannot borrow long-term drove up average cash holdings in the industry.

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