An empirical model of low-cost carrier entry

Competition between low-cost carriers in rapid expansion and full-service network carriers has definitely become one of the most relevant issues of the airline industry. The present paper addresses this matter by analyzing the entry of the low-cost Gol Airlines, in the Brazilian domestic market, in 2001. A route-choice model is estimated by making use of a flexible post-entry equilibrium profits equation and accounting for endogeneity of the main variables. Results indicate the relevance of market size and rival’s route presence as underlying determinants of profitability. Furthermore, it is also performed an analysis of the consistency of Gol’s entry patterns with the route-choice behavior classically established by the pre-eminent US low-cost carrier Southwest Airlines – that is, a focus on short-haul and high-density markets. Evidence is found that although Gol initiated operations by reproducing the behavior of Southwest, it quickly diversified its portfolio of routes and, at the margin, became more in accordance with the pattern of entry of JetBlue Airways (another successful US low-cost carrier), focusing mainly on longer-haul markets, albeit with some relevant country-specific idiosyncrasies.