Vertical integration in airline ticket distribution: A transaction cost analysis

This empirical study investigates whether vertically integrated firms perform better operationally than non-integrated firms. The setting is the U.S. airline ticket distribution industry. All U.S. carriers own and operate their own direct distribution channels. Some have formed integrated airline agencies such as Orbitz, a distribution powerhouse, while others still heavily rely on independent representatives (or travel agents managed through contracts) instead of integrated sales forces.;Whether the transaction of ticket distribution should be performed within a firm or across a market has been a long-lasting debate between airlines and travel agencies. To understand what determines where firm boundaries are drawn, transaction cost analysis is performed based on transaction cost economics and vertical integration theory. DEA (data envelopment analysis) is used to assess operational performance by analyzing sixteen years (1992 through 2007) of detailed data. The data is extracted from annual reports of eleven major U.S. carriers on Form 10-K filed with the SEC (U.S. Securities and Exchange Commission) and Form 41 filed with the DOT (Department of Transportation). In addition, Tobit model regression methods are used to test the relationship between distribution efficiency scores obtained from DEA and proposed determinants.;The results reveal that airlines with vertically integrated airline agencies do not necessarily perform systematically better than those without. These findings suggest that the benefit of ownership of the distribution channel cannot improve airline operational efficiency. This empirical work provides evidence to airline ticket distribution's key stakeholders, the airlines, GDS (Global Distribution System) firms, meta online search agents, and travel agents on whether vertical integration decisions are beneficial to their roles in the distribution industry.