Impact of 9/11 on U.S. Airline Demand

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Journal of Economics and Business 57 (2005) 75–95

Assessing the impact of the September 11 terrorist attacks on U.S. airline demand Harumi Itoa,1 , Darin Leeb,∗
a

Department of Economics, Box B, Brown University, Providence, Rhode Island 02912, USA b LECG, Corp. 350 Massachusetts Avenue, Suite 300, Cambridge, MA 02139, USA Received 3 July 2003; received in revised form 25 May 2004; accepted 8 June 2004

Abstract This paper assesses the impact of the September 11 terrorist attacks and its after-effects on U.S. airline demand. Using monthly time-series data from 1986 to 2003, we find that September 11 resulted in both a negative transitory shock of over 30% and an ongoing negative demand shock amounting to roughly 7.4% of pre-September 11 demand. This ongoing demand shock has yet to dissipate (as of November 2003) and cannot be explained by economic, seasonal, or other factors. © 2004 Elsevier Inc. All rights reserved. JEL classification: R41; L16; L93 Keywords: Airlines; Structural change; Attenuating shock; September 11

1. Introduction No industry has suffered greater economic damage from the terrorist attacks of September 11, 2001 than the U.S. airline industry. In addition to directly causing a temporary but complete shut-down of the commercial aviation system, the attacks caused many travelers to reduce or avoid air travel, weary of a newly-perceived risk associated with flying. Likewise, following September 11, many businesses put temporary freezes on all but the ∗ 1

Corresponding author. Tel.: +1 617 761 0108; fax: +1 617 621 8018. E-mail addresses: Harumi ito@brown.edu (H. Ito), darin lee@lecg.com (D. Lee). Tel.: +1 650 329 9743; fax: +1 401 863 1970.

0148-6195/$ – see front matter © 2004 Elsevier Inc. All rights reserved. doi:10.1016/j.jeconbus.2004.06.003

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H. Ito, D. Lee / Journal of Economics and Business 57 (2005) 75–95

most essential travel for their employees.1 And although the initial “panic” driven fear of flying immediately following September 11 appears to have largely dissipated, the stringent new security requirements that were implemented as a direct result of the terrorist attacks have made traveling by air more cumbersome and time-consuming than prior to September 11.2 The purpose of this paper is to examine the impact of September 11 on U.S. airline demand and to determine whether or not September 11 and its after-effects have resulted in a negative shift in the demand for air travel. Since September 11, 2001, numerous airlines (both in the U.S. and abroad) have been experiencing a financial crisis unlike any in modern aviation history. While United Airlines and US Airways have already filed for Chapter 11 bankruptcy, many other large U.S. carriers have engaged in dramatic cost-cutting programs. The prospects for (or lack of) a recovery in passenger demand has been the primary issue in the minds of aviation industry leaders and policymakers alike. In this paper, we investigate the form and extent of the downturn in demand for domestic air travel following September 11, 2001. While there is little doubt that September 11 and its after-effects resulted in industry turmoil in the days and months directly following the attacks, there is controversy regarding the longer term impact of September 11 on the airline industry. This controversy arises due to the fact that weak economic conditions (particularly in the labor market) pre-dated and have largely persisted since September 11, 2001. Although the airline industry has always been highly cyclical, it has traditionally been able to weather through temporary economic downturns. The impact of September 11 on airline demand has been so severe, however, that demand still remains well below pre-attack levels more than 2 years after the attacks. Our research purpose is to measure the magnitude of this ongoing shift in demand by disentangling it from both the immediate downward spike following the terrorist attacks (resulting from factors...
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