Determinants of profitability and recovery from system-wide shocks: the case of the airline industry

Abstract

Purpose: Examination of the determinants of profitability in the U.S. domestic airline industry by considering operations strategy, productivity, and service measures, while focusing the attention on the effects of the 9/11 attack. Design/methodology/approach: We propose a series of hypotheses regarding the effect of operations strategy, productivity, and service before and after the 9/11 attack. Using quarterly data between 1995 and 2007 we run empirical analysis using the Parks time series method. Findings: Prior to 9/11, operations strategy, productivity, and service measures are significantly related to profitability. However, after 9/11, none of the service measures are significant. Further analysis suggests that after 9/11 passengers are more forgivable to service glitches or are associating lack of service with the intensified security measures imposed after 9/11. We also find that after 9/11, the profitability of full-service carriers is improving faster than that of focused carriers. Originality/value: Our work extends earlier work in a variety of directions by accounting for more recent data, larger scope of variables, and the consideration of the 9/11 attack. We highlight an important link between an outside shock (9/11) and the importance of service that follows this shock.