Input misallocation and cost penalties in U.S. airlines: A pre/post COVID-19 comparison of full-service airlines and low-cost carriers

Labor shortages triggered by the COVID-19 pandemic have significantly constrained U.S. airlines’ ability to allocate resources efficiently and minimize costs. This study investigates how these labor disruptions affect cost structures across different airline business models, specifically full-service airlines (FSAs) and low-cost carriers (LCCs). Using a primal approach, we examine how airlines adjust their use of labor, fuel, and capital inputs, and quantify the resulting cost penalties from input misallocation over the period 2010 to 2024. Our results reveal that, during the pre-pandemic period, FSAs consistently overused labor, while LCCs disproportionately relied on capital and fuel relative to labor. The associated cost penalties from these allocative inefficiencies were 1.7 % for FSAs and 3.4 % for LCCs. In the post-pandemic period, both FSAs and LCCs increasingly overused labor in response to staffing shortages and rising wages. However, the cost impact of labor overuse remained relatively modest, averaging 1.2 % across both models as labor exhibits a lower marginal cost relative to capital and fuel. A key insight for decision makers is that not all input distortions carry equal cost risk. While labor shortages remain a critical operational concern, the short-term cost of labor overuse may be less severe than the consequences of underutilizing higher-cost inputs like capital and fuel. For FSAs, rigid legacy labor structures reduce workforce flexibility, whereas for LCCs, constraints from decreasing returns to scale require more precise resource planning. To maintain cost efficiency amid persistent labor challenges, improving workforce productivity and adopting upgauging strategies emerge as practical and effective solutions.