The Role of Product Differentiation in Profitability Change: An Analysis of the Domestic U.S. Airline Industry (by Charles Howell and Emili Grifell-Tatjé)

The U.S. Airline industry swung from $31 billion in losses over the eight-year period 2002 to 2009 to $90 billion in profits over the seven-year period 2010 to 2016. To explore this industry-wide shift we decompose annual profitability change over the fifteen-year period and analyze the economic drivers, with a focus on the driver of product differentiation. The inclusion of product differentiation, an economic driver not typically included in the analysis of financial performance, is one of the primary contributions of this paper. We also introduce a novel method of decomposing profitability change and use the combination of a standard cost function paired with a non-standard revenue function. To illustrate the relevance and applicability our methodology, we examine these financial performance measures for twenty individual carriers in the U.S. airline industry between 2002 and 2016.