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

8844 Words Jun 2nd, 2008 36 Pages
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

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
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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.

When investigating the impact that the events of 9/11 had on each airline's risk, we consider both the systematic and unsystematic volatility of the stocks' returns. This allows us to differentiate between risk factors that affected the market as a whole and risk factors that affected the firms specifically.
Although we employ only a small sample, our results are highly consistent.2 We observe that Southwest performed significantly better after 9/11 than its mainstream competitors

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