Relationships Under Stress: Relational Outsourcing in the U.S. Airline Industry After the 2008 Financial Crisis

Ricard Gil, Myongjin Kim () and Giorgio Zanarone ()
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Myongjin Kim: Department of Economics, University of Oklahoma, Norman, Oklahoma 73019
Giorgio Zanarone: Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130; Université Libre de Bruxelles (ULB), 1050 Bruxelles, Belgium

Management Science, 2022, vol. 68, issue 2, 1256-1277

Abstract: This paper studies how firms restructure their relational contracts in the face of permanent shocks to the value of their relationships. In the context of the U.S. airline industry, we argue that major carriers enter self-enforcing agreements with their outsourced regional partners because a key aspect of airline operations—the exchange of landing slots under adverse weather—is formally noncontractible. We show empirically that major and regional airlines did not terminate their relational contracts after the 2008 crisis but rather, restructured the scope of such contracts in a way that restored their credibility. In particular, we show that a major airline was less likely to continue outsourcing a route to a regional partner after the 2008 crisis the lower the present discounted value of their preexisting relationship and hence, the larger the negative effect of the crisis on the relational contract’s “self-enforcing range.”

Keywords: relational contracts; adaptation; outsourcing; airlines (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:2:p:1256-1277

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