Profit Efficiency: Insight into airline business models and strategic choices

Following a challenging start to the 21st century, airlines rebounded to achieve record profits in the aftermath of the Great Recession (2007–2009). While profitability refers to the absolute financial gains of a firm, profit efficiency is a measure of how effectively a firm converts its resources into maximum potential profit, given its operating environment and input prices. These distinct economic concepts raise key questions about airline strategies: Can airlines maximize their profits? Which business models achieve higher profit efficiency? What factors influence their profit efficiency? This study addresses these questions using a stochastic profit efficiency model based on data from U.S. airlines spanning from 2009 to 2019. Our findings reveal that the U.S. airline industry exhibits an average profit efficiency of 93.2 %. Low-Cost Carriers (LCCs) have a higher mean efficiency score of 98.7 % while Full-Service Airlines (FSAs) follow them with 95.3 %. Ultra-Low-Cost Carriers (ULCCs) have the lowest profit efficiency at 86.1 %. Finally, LCCs have demonstrated more stable profit efficiency over the years. In addition, ancillary revenues positively impact the profit efficiency, indicating higher markup resulting from add-on pricing. The strategies implemented after the Great Recession—such as capacity discipline and mergers—have significantly increased profit efficiency while the airport network expansion result in lower profit inefficiency. Overall, this study highlights the extent of profit efficiency for the U.S. airline industry and identifies the key factors influencing it.