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The Value of Relational Adaptation in Outsourcing: Evidence from the 2008 shock to the US Airline Industry

Ricard Gil (), Myongjim Kim and Giorgio Zanarone

No HIAS-E-32, Discussion paper series from Hitotsubashi Institute for Advanced Study, Hitotsubashi University

Abstract: In the airline industry, ex-post adaptation of flight schedules is necessary in the presence of bad weather conditions. When major carriers contract with independent regionals, conflicts over these adaptation decisions typically arise. Moreover, the celerity of needed adjustments requires that adaptation be informal, and hence enforced relationally. In this paper, we theoretically analyze, and empirically test for, the importance of relational adaptation in the airline industry. Our model shows that for relational contracts to be selfenforcing, the long-term value of the relationship between a major and a regional airline must be at least as large as the regional's cost of adapting flight schedules across joint routes. Thus, when facing a shock that forces it to terminate some routes, the major is more likely to preserve routes outsourced to regional airlines that have higher adaptation costs, as the value of the major's relationship with those regionals is larger. We analyze the evolution of U.S. airline networks around the 2008 financial crisis, and we find that consistent with our theoretical predictions, regional routes belonging to networks with worse average weather, and hence higher adaptation costs, were more likely to survive after the shock.

Keywords: Relational contracting; adaptation; natural experiment; airlines; outsourcing (search for similar items in EconPapers)
JEL-codes: L14 L22 L24 L93 (search for similar items in EconPapers)
Pages: 48 p.
Date: 2016-09
New Economics Papers: this item is included in nep-cta, nep-ind and nep-tre
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