Economies of scale in the US airline industry after deregulation: a Fourier series approximation

Abstract

This paper analyzes the cost structure of the US airline industry after deregulation, finding that there exist economies of scale at moderate levels of output but that they die off at high levels. The cost–share system is estimated using the Fourier functional form. The global approximation property of the Fourier form allows consistent inference throughout the range of the data. The existence of economies of scale suggests that airlines will try to grow to the efficient size. This conclusion is consistent with the evolution of the US airline industry in the last decade.