The Cost Structure of the Integrated Air Freight Business

This paper intends to deeply analyse the cost structure of integrators by means of a flexible functional form, namely the translog cost function. A company’s cost structure is essential in its strategic decision making. Hence, to examine whether the integrators’ strategies are consistent with their cost structure, the knowledge of their cost function is indispensable. The cost function estimation is based on quarterly time-series data from 1990 to 2010 of FedEx and UPS. A total as well as a variable cost function is estimated. Regarding the total cost function, a static and dynamic model are estimate. It is found that both integrators exhibit strong scale and density economies. This means that their aggressive growth and cooperation strategies over the past 10 to 15 years are consistent with their cost structure. In addition, the results reveal some important differences between the cost structure of FedEx and UPS.


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