Relational Adaptation Within and Between Firms: Evidence from the Us Airline Industry

Abstract: We study how governance and firm boundaries affect an organization’s ability to adapt to unforeseen contingencies. To do so, we focus on the airline industry, where adaptation of flight schedules under bad weather is not formally contractible, and yet is essential for network performance. In our setting, major airlines may achieve adaptation through four different governance structures: (1) reshuffling flights operated through their own planes; (2) reshuffling flights operated by fully-owned regional partners; (3) reshuffling flights operated by independent regional partners; or (4) reshuffling flights operated by non-partners – competing domestic majors, international carriers, cargo aircrafts, or private planes. The major’s formal control over adaptation differs across governance structure, being maximum under (1), medium-high under (2), and low under (3) and (4). This creates a potential need for relational contracting to ensure timely adaptation both under integrated partnership (governance (2)) and under collaborative outsourcing (governance (3)), as argued by Baker, Gibbons and Murphy (2002). Using data from landing slot exchanges in the three airports of NYC during February 2016 under Ground Delay Programs called on by the Federal Aviation Administration, we examine differences in the nature, size and composition of slot exchanges across all four governance structures. Our results are consistent with a theoretical framework that compares vertical integration, relational contracting and arms’ length contracting as means of adaptation.