Factors Affecting Airline Profits: Evidence From The Philippines

Abstract

This article examines the factors that affect the profits of four airlines in the Philippines. The estimated profit equation indicates that an additional passenger contributes PHP 1,989 to profits, while an additional seat reduces profits by PHP 1,312. The findings indicate that airlines have a strong incentive to fill a seat before departure, justifying the practice of heavy discounting to stimulate passenger traffic during periods of low demand. An additional route reduces profits by PHP 107.736 million, which may indicate that new routes have lower-than-expected passenger traffic. This may also suggest that most profitable routes are already served by at least one airline and entry into existing routes may not be profitable. The 1997 Asian financial crisis, the 2001 terror attacks in the United States, and the most recent global financial crisis, collectively result in PHP 1.391 billion reduction in profits, underscoring the vulnerability of the airline industry to unanticipated events.