Content provided in partnership with

Financial Performance of Low-Cost and Full-Service Airlines in Times of Crisis, The

Canadian Journal of Administrative Sciences, Mar 2005 by Flouris, Triant, Walker, Thomas John

Abstract

This paper examines the stock and accounting performance of three major airlines in the United States in the aftermath of the September 11, 2001, terrorist attacks. September 11 (9/11) resulted in dramatic changes in the airline industry and had significant implications for the economic gains and future prospects of most airlines. Our study focuses on the stock market's perception of the viability of low-cost versus full-service business models in the aftermath of 9/11. We choose Southwest Airlines as a typical low-cost airline and compare its accounting and stock performance to two full-service airlines, Continental and Northwest. We find that Southwest's performance was highly superior to that of Continental and Northwest and argue that Southwest's business model, in the eyes of investors, provides the firm with significantly more financial and operational flexibility than full-service airlines. Southwest's lower operating costs, consumer trust, product offering, corporate structure, workforce and work practices, as well as operational procedures are all factors that appear to contribute to Southwest's relative success.

More Articles of Interest: FINANCIAL COMPARISONS ACROSS DIFFERENT BUSINESS MODELS IN THE CANADIAN...; Southwest Airlines Expected to Continue Strong Financial Performance.; What Southwest Airlines Should Do Next; Low Cost Airline News - North America; The Market Share of Low-Cost Carriers in Europe Reached 16.3% in May 2006 - a...

Résumé

Cet article étudie la performance boursière et comptable de trois grands transporteurs aériens opérant aux États-Unis au lendemain des attentats du 11 septembre 2001. Ces événements ont entraîné des changements radicaux dans l'industrie du transport aérien et ont eu des répercussions considérables sur les gains économiques de la plupart des compagnies aériennes. Notre étude compare la viabilité des modèles d'entreprise à bas prix à celle des modèles traditionnels, au lendemain de l'attaque terroriste. Nous avons choisi Southwest Airlines comme l'exemple type de transporteur aérien pratiquant des bas prix et nous comparons sa comptabilité et le rendement de son action à ceux de deux transporteurs aériens à service complet, notamment Continental et Northwest. Nous constatons que le rendement de Southwest est de loin supérieur à celui de Continental et de Northwest. Nous montrons que, d'après les investisseurs, le modèle de gestion de Southwest lui donne beaucoup plus de flexibilité financière et opérationnelle que le modèle de gestion pratiqué par les transporteurs aériens traditionnels. La faiblesse de ses charges d'exploitation, la confiance des consommateurs, son offre de produits, sa structure d'organisation, son effectif, ses pratiques de travail, ainsi que ses méthodes opérationnelles sont autant d'éléments qui semblent contribuer au succès relatif de Southwest.

The extant aviation literature includes several studies that discuss the advantages and disadvantages of the distinct business models employed by low-cost and full-service (or "legacy") carriers.1 Recent studies by Lawton (2002, 2003) discuss the strategies that both types of airlines have pursued in reaction to the September 11, 2001 (9/11) attacks and outline how those airlines have fared after 9/11. Although Lawton provides a brief review of the airlines' stock performance, his discussion is mostly qualitative in nature. Carter and Simkins (2004) provide a quantitative analysis of the stock performance of a sample of U.S. airlines after the events of 9/11, but do not focus on performance differences between low-cost and full-service airlines. To our knowledge, there is no study that specifically analyzes performance differences between low-cost and full-service carriers in a risk-adjusted event study framework. In addition, there is no study that examines the impact of the 9/11 attacks on the accounting performance or systematic and unsystematic volatility of the respective airlines. Our study fills this gap by providing a comprehensive quantitative analysis of a small sample of low-cost and full-service carriers around 9/11.

Our methodological approach proceeds as follows: we first examine the short-term and long-term stock price performance as well as the accounting performance of Southwest, Continental, and Northwest following the 9/11 attacks. We then analyze how the 9/11 events impacted the risk, that is, the systematic and unsystematic volatility of the airlines' stock returns. We choose Southwest as a representative of the low-cost carriers, and Northwest and Continental as firms that follow a full-service business model. The three airlines are of comparable size and were all profitable in 2000 and the first half of 2001, prior to the events of 9/11. In addition, Northwest and Continental were picked for a baseline comparison based on the fact that, to date, neither has filed for bankruptcy protection as a result of the systemic shocks of 9/11.

When analyzing a firm's accounting performance around a particular event, we can gain valuable insights into how the event impacted the firm's revenues, profitability, and liquidity, as well as a variety of other performance measures. Because such an analysis only employs historical data, however, it provides little insight into the expected future performance of the firm. To examine the impact of the 9/11 attacks on the future prospects of our sample airlines we analyze their stock performance before and after the event. Because stock market participants base their valuation of a company's stock on the firm's expected future cash flows rather than on historical information, an event study of a firm's stock price performance reflects how the market as a whole anticipates the firm will do in the future. Lawton (2003) advances the argument that low-cost carriers (LCCs) were in a position to go on the offensive and aggressively exploit the changed industry climate after 9/11 by renegotiating labour contracts, by negotiating lower prices for new airplanes in what had suddenly become a buyer's market for new aircraft, and by pursuing aggressive pricing strategies to increase their market share relative to legacy carriers. Legacy carriers, being exposed to a significantly higher overhead burden, were forced into defensive strategies that provided them with little operational flexibility. These developments are difficult to observe in the airlines' accounting figures in the short term, but if they are perceived to change a firm's future cash flows they should be reflected in the market's valuation of the firm's stock.

Financial Performance of Low-Cost and Full-Service Airlines in Times of Crisis, The

Canadian Journal of Administrative Sciences, Mar 2005 by Flouris, Triant, Walker, Thomas John

Find Research Guides for:

Find Featured Titles for: Business

Most Popular Articles in Business

Most Popular Publications in Business