The cost implications of upgauging in the U.S. airline industry

Abstract

The cost impact of upgauging is often attributed to economies of density, yet production theory emphasizes that cost savings depend on how intensively available capacity is utilized. This implies a potentially nonlinear relationship between aircraft seat capacity and short-run variable costs. Accordingly, a critical question arises for the airline industry: is there still room for further upgauging, or have airlines already reached the limit of its cost-saving potential? Using an unbalanced panel of U.S. airlines from 2000 to 2024, we estimate translog variable cost functions by business model to examine the cost implications of upgauging, measured by seats per departure. The results provide evidence consistent with a U-shaped relationship between upgauging and variable costs: moderate increases in seat capacity are associated with lower variable costs, while further increases eventually correspond to higher costs, potentially reflecting operational frictions and utilization constraints. In addition, the results provide strong evidence that low-cost carriers operate below cost-minimizing aircraft size, while the evidence for full-service airlines is less conclusive, suggesting potential scope for further upgauging. Robustness checks across pre- and post-crisis subsamples yield qualitatively similar patterns. Collectively, these findings challenge the view that the benefits of upgauging have been fully realized.