Operating Leverage and Systematic Risk of the U.S. Airline Industry

This study provides empirical evidence of a positive relationship between operating leverage and systematic risk of the U.S. airline industry. This paper contributes to the literature related to operating leverage by developing a method to estimate the degree of operating leverage using publicly available information on aircraft capacity and operating expenses of the publicly listed airlines. The results suggest that, holding other financial characteristics constant, a rise in operating leverage of an airline is associated with an increase in systematic risk as perceived by the investors. In order to achieve desirable levels of operating leverage, the airlines are advised to contemplate decisions on capacity adjustments and operating expenses management in reactions to changes in economic conditions