Common Subcontracting and Airline Prices

TL;DR

This paper examines how common subcontracting by regional airlines affects airline prices, revealing that while subcontracting lowers costs, common subcontracting can lead to higher prices, indicating potential anticompetitive effects.

Contribution

It uncovers the dual effects of subcontracting and common subcontracting on airline prices, highlighting their implications for industry competition.

Findings

Subcontracting is linked to lower airline prices.

Common subcontracting is associated with higher prices.

Growth of regional airlines may have anticompetitive impacts.

Abstract

In the US airline industry, independent regional airlines fly passengers on behalf of several national airlines across different markets, giving rise to $\textit{common subcontracting}$. On the one hand, we find that subcontracting is associated with lower prices, consistent with the notion that regional airlines tend to fly passengers at lower costs than major airlines. On the other hand, we find that $\textit{common}$ subcontracting is associated with higher prices. These two countervailing effects suggest that the growth of regional airlines can have anticompetitive implications for the industry.