Cost-Minimization and Adaptation in Crisis Mode : Insights from the Airline Industry

This paper studies how firms navigate the tradeoff between cost-minimization and adaption via their firm boundary decisions in the form of outsourcing, integration, or a mixture of the two strategies. We focus on the U.S. airline industry, where all major carriers outsource some of the flights within their route network to regional airline partners, and study how carriers respond to COVID-19 policy shocks from state-specific travel restrictions and vaccine rollouts. Our findings indicate that when facing unexpected contingencies, changes in major carriers' outsourcing behavior tend to be limited to more temporary ticketing, flight, and pricing decisions, rather than longer-term adjustments in the number of outsourced routes. We also find that the responses are larger on routes that involve a mixture of own and outsourced fleets. These results in turn underscore the importance of flexibility and stability in maintaining vertical relationships between upstream and downstream firms