Evaluating the long-run effect of economic factors on airline service failures: A comparison between low-cost and legacy carriers with an ARDL approach

Abstract

With the increasing airline business model hybridization, the difference in service sensitivity concerning financial conditions between low-cost carriers (LCCs) and legacy carriers remains to be determined. Considering the close connections between systematic economic factors and airline financial conditions, we focus on how fuel costs, the interbank lending rate, and market concentration affect the service failures of LCCs and legacy carriers. In the US domestic airline business context, the analysis is conducted using an autoregressive distributed lag (ARDL)-bounds testing approach and time series data from June 2003 through May 2023. The results indicate that the long-run effects of the interbank rate and fuel costs on airline services vary across low-cost and legacy carriers. Despite the comparable service levels achieved by LCCs and legacy carriers, their service dynamics respond differentially to financial performance, a factor intricately linked to interbank rates and fuel costs. LCCs exhibit a superior proficiency in cost management, potentially contributing to their lower susceptibility to variations in financial performance compared to legacy carriers. Market concentration adversely impacts the service failures of LCCs and legacy carriers. Intense market competition, particularly when resulting in reduced pricing, may diminish the motivation for airlines to enhance their service quality. The research contributes to understanding the long-run relationship between financial performance and the service of LCCs and legacy carriers within the framework of business convergence. Such insights are of paramount significance for airline managers and policymakers. Furthermore, our research outcomes offer empirical evidence facilitating a more comprehensive understanding of the convergence of airline business models from a service perspective.