Coordinated Capacity Reductions and Public Communication in the Airline Industry

TL;DR

This paper examines how legacy U.S. airlines coordinate capacity reductions through public communication, finding that discussions about 'capacity discipline' lead to a 2% seat reduction when airlines communicate simultaneously.

Contribution

It introduces a novel text analytics dataset to analyze airline communication and provides evidence of coordinated capacity reductions via public discussions.

Findings

Capacity reductions are 2% lower when airlines discuss 'capacity discipline'

Reductions occur only with concurrent communication among airlines

Communication about capacity reductions is not just unilateral announcements

Abstract

We investigate the allegation that legacy U.S. airlines communicated via earnings calls to coordinate with other legacy airlines in offering fewer seats on competitive routes. To this end, we first use text analytics to build a novel dataset on communication among airlines about their capacity choices. Estimates from our preferred specification show that the number of offered seats is 2% lower when all legacy airlines in a market discuss the concept of "capacity discipline." We verify that this reduction materializes only when legacy airlines communicate concurrently, and that it cannot be explained by other possibilities, including that airlines are simply announcing to investors their unilateral plans to reduce capacity, and then following through on those announcements.