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

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