The Remains of Regulation: Airlines' Profits after Liberalization

This paper develops an empirical model of entry to analyse the effect of previous regulation on European airlines' post-liberalization profits. I distinguish between European flag carriers which are highly regulated at the beginning of the eighties, and independent airlines. I find that the latter enjoy sunk-cost advantages but get lower variable profits than the former. This means that possible efficiency disadvantages suffered by the flag carriers are more than offset by their higher perceived quality, leading to a situation in which they are less likely to enter a route, but also less likely to exit.