This research reviews and reconciles previous research on the relationship between
airline financial condition and air fares. A contingency framework is developed and
empirically tested using data from the U.S. airline industry. The results suggest that the
magnitude of the effect of financial condition on prices depends on airline characteristics
such as operating costs and market power as well as on competitive characteristics like
market concentration and a firm’s financial condition relative to its route market
competitors. It is further shown that this effect is substantially larger for firms operating
under Chapter 11 protection than for firms approaching bankruptcy.
