We examine the impact of the COVID shock on airlines’ disinvestment and investment decisions. We show that consistent with the predictions of the real options theory in the context of irreversible disinvestment and investment decisions, airlines initially chose relatively reversible options, followed by relatively irreversible ones. We also examine how different levels and types of financial constraints, as manifested through state bailouts and operational slack resources, impacted airlines’ disinvestment and investment decisions. We find that airlines classified as less constrained by our two measures of financial constraints chose to a) retain more of their assets, b) undertake disinvestment and investment decisions relatively quickly, and c) opt for relatively reversible decisions over irreversible ones.
