Profit Margins in U.S. Domestic Airline Routes

Abstract

This paper estimates profit margins in the U.S. airline industry at the domestic route level. The dynamic estimation methodology used not only is robust to any simultaneity/endogeneity bias by construction but also results in profit margin estimates that are highly consistent with actual profit data from the U.S. airline industry. Estimated annual profit margins have an average of about 13.3%, with a range between 2.7% and 42.9% across routes. A cross-route analysis further suggests that annual profit margins increase with the market share of the largest airline serving the route, whereas they decrease with airfare. Important policy suggestions follow.

Keywords: Profit Margin, Price Elasticity U.S. Domestic Routes

JEL Classification: C32, L93