An Empirical Investigation of the Relationship Between Profit Margin Persistence and Firms’ Choice of Business Model: Evidence from the US Airline Industry

49 Pages Posted: 20 Aug 2010 Last revised: 10 Dec 2010

See all articles by Denton Collins

Denton Collins

Texas Tech University - Rawls College of Business

Leon Chan

San Diego State University

Francisco J. Román

George Mason University - Department of Accounting; George Mason University

Date Written: December 7, 2010

Abstract

This paper examines the influence of a firm’s business model on the relative persistence of profit margins in the U.S. airline industry. The strategic management literature describes a firm’s business model as reflecting how that firm chooses to compete in the marketplace. Given this linkage between business model, competition and the marketplace, we conjecture that the persistence of profit margins will be influenced by firms’ choices of business model. Further, we hypothesize that this choice of business model influences the relative persistence of the individual revenue and expense components of current profit margins for future margins. We test these conjectures by (1) partitioning our sample firms according to business model (network carriers versus low-cost carriers), and (2) decomposing sample firms’ profit margins into components relating to pricing policy, input cost control, and productivity. While low-cost carriers are, on average, more profitable than their network carrier counterparts, we find that the margins of network carriers tend to be more persistent than those of low-cost carriers, and that this differential persistence is reflected in the association between current revenue and expense components and future margins.

Keywords: Profit margin persistence, cost control, business model, U.S. airline industry

JEL Classification: D24, L23, L25, M21, M41

Suggested Citation

Collins, Denton and Chan, Leon and Román, Francisco J., An Empirical Investigation of the Relationship Between Profit Margin Persistence and Firms’ Choice of Business Model: Evidence from the US Airline Industry (December 7, 2010). AAA 2011 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1661987 or http://dx.doi.org/10.2139/ssrn.1661987

Denton Collins (Contact Author)

Texas Tech University - Rawls College of Business ( email )

School of Accounting
Lubbock, TX 79409
United States

Leon Chan

San Diego State University ( email )

United States

Francisco J. Román

George Mason University - Department of Accounting

Fairfax, VA
United States

George Mason University ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-1849 (Phone)

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