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

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The Financial Performance of Low-Cost and Full-Service Airlines in Times of Crisis Triant Flouris, Thomas John Walker. Canadian Journal of Administrative Sciences. Halifax: Mar 2005. Vol. 22, Iss. 1; pg. 3, 18 pgs

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. Résumé

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....
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