Airline industry transformation: Does cost efficiency reflect business model convergence?

This study investigates the convergence of cost efficiency among Full-Service Airlines (FSAs) and Low-Cost Carriers (LCCs), focusing on whether alignment in operational strategies extends to both persistent and transient cost efficiency. While evolving economic pressures such as fluctuating fuel prices, labor costs, and market deregulation have encouraged convergence in airline business models, the effects on cost efficiency remain uncertain. Using data from U.S. airlines spanning 2000 to 2019 and applying a four-component stochastic frontier analysis, our findings indicate convergence in transient cost efficiency, reflecting short-term operational adjustments, but not in persistent cost efficiency, where FSAs consistently outperform LCCs. This structural advantage provides FSAs with greater long-term cost discipline and strategic flexibility. Analysis of inefficiency determinants further shows that network structure plays a dominant role in shaping persistent inefficiency, i.e., denser networks increase long-run inefficiency, whereas greater reliance on nonstop flights enhances structural efficiency. On the transient side, capacity utilization significantly reduces short-run inefficiency, while higher ancillary revenue share is associated with increased short-run inefficiency. These findings highlight that convergence across business models is limited to short-run operational responses; meaningful convergence in long-run cost efficiency would require fundamental and sustained changes to network architecture and business model design.