Spanish Domestic Airline Market Structure and Incumbent Cost Response to Market Entry: Direction and Magnitude of Response

Abstract

This study analyses incumbent cost response to route-level entry in the Spanish airline market, by assessing the type of entrant and airport capacity restrictions. It includes 193 routes where incumbents react to entrants, estimating the operating costs for each carrier using a multiple-source database based on accounting and industrial engineering procedures. The results reveal that, under airport capacity restrictions, incumbents accommodate in costs more when facing low-cost entrants than formerly regulated ones; while the elimination of such restrictions drives incumbents to greater cost retaliation to low-cost entrants than to formerly regulated ones. Product differentiation predicts these dynamic effects.