An Empirical Investigation of the Relationship between Profitability Persistence and Firms' Choice of Business Model: Evidence from the U.S. Airline Industry

Abstract

ABSTRACT This paper examines the influence of a firm's business model on the relative persistence of profitability in the U.S. airline industry. The strategic management literature describes a firm's business model as reflecting how that firm chooses to compete in the marketplace. Given this linkage between business model, competition, and the marketplace, we conjecture that the persistence of profit margin and asset turnover ratios will be influenced by firms' choices of business model. Further, we hypothesize that this choice of business model influences the relative persistence of the individual revenue and expense components of current profit margin and asset turnover ratios for future profitability ratios. We test these conjectures by (1) partitioning our sample firms according to business model (network carriers versus low-cost carriers), and (2) decomposing sample firms' profit margin and asset turnover ratios into components relating to pricing policy, input cost control, and productivity. We find that the profit margin and asset turnover ratios of network carriers tend to be more persistent than those of low-cost carriers, and that this differential persistence is reflected in the associations between current revenue and expense components, and future profit margin and asset turnover ratios.