The Relationship Between Passenger Load Factor and Financial Performance in International Airline Companies: COVID-19 Shock Effect

Abstract

Purpose – This study empirically examines the effect of the COVID-19 pandemic shock on the relationship between passenger load factor and financial performance in international airline companies.

Design/methodology/approach – This study utilizes an unbalanced panel data framework comprising quarterly observations from 14 international airline companies over the 2019Q1-2024Q4 period. The F-test and Hausman (1978) specification test collectively indicate that the fixed effects estimator yields consistent parameter estimates. In the presence of serial autocorrelation and cross-sectional dependence across panels, the Driscoll-Kraay (1998) nonparametric covariance matrix estimator is employed to produce heteroscedasticity and autocorrelation consistent standard errors.

Results – The empirical findings reveal that the passenger load factor coefficient is positive and statistically significant at the 1% level, indicating that higher passenger load factors contribute favorably to the return on assets of international airline companies. The leverage coefficient is negative and statistically significant, suggesting that higher levels of debt financing exert a detrimental effect on asset profitability. The fuel cost variable is also found to have a negative and statistically significant effect on return on assets. The revenue per passenger kilometer coefficient is positive and statistically significant at the 5% level, whereas the effects of unit cost and fleet size on return on assets are not statistically significant. The coefficient of the COVID-19 pandemic shock dummy variable is positive and significant at the 1% level; however, this finding is not interpreted in isolation but rather in conjunction with the interaction term. The interaction term coefficient is negative and statistically significant at the 1% level, indicating that the relationship between passenger load factor and return on assets not only weakens but also reverses in direction during the pandemic period. Specifically, a one-unit increase in passenger load factor increases return on assets by 0.297 units in reference periods, whereas this effect reverses to approximately -0.221 during the COVID-19 shock period.

Discussion – During the reference periods, passenger load factors exert a positive effect on the return on assets of international airline companies; however, this effect turns adverse during the COVID-19 pandemic shock period. The interaction term finding demonstrates that the COVID-19 pandemic shock induced a structural transformation in the mechanism linking passenger load factor on asset profitability. Specifically, a one-unit increase in passenger load factor during the reference periods is associated with a 0.297-unit increase in return on assets, whereas this effect reverses to -0.518 during the shock period. In companies where a substantial portion of available capacity remained unutilized due to travel restrictions and social distancing measures, fixed costs became unsustainable, and the marginal contribution of each unit increase in load factor to asset profitability fell short of the associated operational costs. This outcome suggests that the COVID-19 pandemic transcended a mere demand shock, fundamentally disrupting the underlying relationship between cost structure and capacity utilization in airline companies.