Does vertical integration affect firm performance? Evidence from the airline industry

Authors


  • We are grateful to the editor, Ariel Pakes, and two anonymous referees for comments that greatly improved the article. Itai Ater, Severin Borenstein, Ken Corts, Julie Cullen, Luis Garicano, Bob Gibbons, Scott Masten, Anita McGahan, Michael Salinger, and Steve Tadelis provided valuable input. We also thank seminar participants at the Harvard-MIT Organizational Economics Seminar (2007), Northwestern University, Kellogg School of Management (2009), Loyola Marymount University (2007), the University of California, Berkeley, Haas School of Business (2008), the University of Rochester, Simon School of Business (2007), the University of Southern California, Marshall School of Business (2007), the University of Toronto, Rotman School of Management (2007), the Allied Social Science Association Conference (2008), the International Society for New Institutional Economics Conference (2006), and the NBER Universities Research Conference on the Airline Industry (2009). Graton Gathright provided excellent research assistance. Lederman acknowledges financial support from the Social Science and Humanities Research Council of Canada. All errors are our own.

Abstract

We investigate the effects of vertical integration on operational performance. Large U.S. airlines use regional partners to operate some of their flights. Regionals may be owned or governed through contracts. We estimate whether an airline's use of an owned, rather than independent, regional at an airport affects delays and cancellations on the airline's own flights out of that airport. We find that integrated airlines perform systematically better than nonintegrated airlines at the same airport on the same day. Furthermore, the performance advantage increases on days with adverse weather and when airports are more congested. These findings suggest that, in this setting, vertical integration may facilitate real-time adaptation decisions.

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