Rapid capacity expansions and failure: A trap for new airline entrants?

• New airlines expanding the fastest incur higher failure risks afterward than others.
• High product market overlap with a competitor reduces the chances of fast expansions.
• As such, high overlap with competitors reduces failure risks of new airlines.
• Rapidly expanding airlines were not simply catching up on capacity growth.
• Empirical support is derived from 10 years of data for de novo intra-Europe airlines.

This paper investigates whether fast capacity expansions as a means to narrow cost differentials between a de novo airline entrant and established incumbents helps or hinders the survival of the entrant. Evidence from a longitudinal sample of new entrants in the European passenger airline industry showed that these firms exhibited higher failure risks after rapidly expanding capacity. Further, high product market overlap with an established incumbent reduced the probability of new entrants undertaking such expansions, in turn reducing the probability of failure.