Asymmetric Cost Behavior and Operating Strategy in the Airline Industry

Operating strategy is an important determinant of cost behavior but the influence of strategy on cost behavior has received limited attention in the literature on asymmetric cost behavior. When resources are strategically connected, resource adjustments are complex and adjustment costs include spillover effects, whereas, when resources are strategically separable, adjustment costs are isolated. Using data from 2003 to 2019 for the U.S. airline industry, we investigate how airline firms’ cost behavior is associated with two distinctive operating strategies: full-service networks and low-cost point-to-point operations. Full-service networks link resources strategically while low-cost point-to-point service involves resources that are strategically separable. Using revenue passenger miles as an activity-based cost driver for operating costs, we document that cost behavior of full-service carriers (FSCs) is sticky, but cost behavior of low-cost carriers (LCCs) is not sticky. In separate analyses, we also test for stickiness of non-monetary measures of resources used instead of dollar-value operating costs. We find that both the number of employees and the number of flights are sticky with respect to RPMs for FSCs, but are not sticky for LCCs