Turning adversity into opportunity: Market power, public policy, and financial market dynamics in times of war

We examine the impact of the ongoing war in Israel as a localized, yet recurrent, shock to the global airline industry, focusing on a distinct case of minimal indirect government intervention. Our analysis shows that a last-resort insurance scheme, although avoiding direct net fiscal costs, reshaped the regional industry entirely by strengthening the leading privately-owned domestic carrier, which more than doubled in value and increased government tax revenues. However, these benefits came at a welfare cost through reduced competition and higher fares, alongside substantial disproportionate losses for foreign airlines exposed to Israel. Low-cost carriers proved more resilient, eventually generating positive abnormal returns. Financial markets initially misjudged the implications of the intervention, with a delayed recognition of its positive effects not occurring until several months later, thereby struggling to impose effective discipline on policy actions or offer policymakers timely and accurate insights. Overall, the findings highlight how limited interventions in response to localized shocks can alter competitive dynamics, fiscal outcomes, and market efficiency, providing broader policy lessons for governments and regulators.