Profit Margins in U.S. Domestic Airline Routes

Abstract

This paper estimates profit margins in the U.S. airline industry at the domestic route level. The dynamic estimation methodology used not only is robust to any simultaneity/endogeneity bias by construction but also results in profit margin estimates that are highly consistent with actual profit data from the U.S. airline industry. Estimated annual profit margins have an average of about 13.3%, with a range between 2.7% and 42.9% across routes. A cross-route analysis further suggests that annual profit margins decrease with airfare and distance, whereas they increase with the market share of the largest airline serving the route. The U.S. cities forming airline routes with lower/higher profit margins are also identified.