The impact of low cost airline entry on competition, network expansion, and stock valuations

We conduct event studies and statistical analysis to explore the impact of low cost carriers’ entry on legacy airline stock prices. Oligopoly structures, entry barriers, and high fixed costs make the airline industry highly susceptible to competitive and network expansion impact of low cost airlines’ entry. Positive stock returns are observed, which we interpret as the spillover effects of network expansion. Thus, rising passenger traffic and improved connectivity increase the revenues of legacy airlines to sufficiently offset the low cost carriers’ competitive threats.

► Two opposing effects of low cost carrier entry: competition and network expansion.
► Competition hurts but network expansion helps legacy airlines’ stock prices.
► 118 LCC entries into 31 major airports; 566 announcement & 34,929 control returns.
► New Finding: Net impact on legacy airline stock valuation is positive.