An Empirical Analysis of the Competitiveness in the U.S. Airline Industry

The purpose of this paper is to investigate the competitiveness of the airline industry in the United States from 1982 to 2012. We examine the stochastic behavior of corporate profitability ratios using a balanced panel of publicly-traded U.S. Airline firms. In particular, we use a panel unit root approach to examine the persistence of profitability. Using a second generation panel unit root test developed by Pesaran (2007) that controls for cross-sectional dependence, we find some evidence that is consistent with airlines¡¯ return on assets (ROA) exhibiting mean-reversion during a part of our examination period, but not for the full period. In particular, our findings show that when ROA is used as a profitability measure, profits are mean-reverting in the earlier years of our examination period but not mean-reverting following the demand shocks of the terrorist attacks of September 11, 2011 and the 2008 recession. Therefore, our findings produce some evidence in support of the long-standing ¡°competitive environment¡± hypothesis originally set forward by Mueller (1977).