A translog cost function of the integrated air freight business: The case of FedEx and UPS

• We estimate a total and variable translog cost function of FedEx and UPS.
• A static as well as a dynamic, first-order autoregressive approach is used.
• Both integrators exhibit strong scale and density economies.
• The cost structure of FedEx and UPS depends mostly on the labor input price.
• The consolidation in the integrator industry is expected to continue.

This paper analyzes the cost structure of the integrated air freight business by means of a translog cost function. This allows to extend knowledge on the supply side and to examine if strategies of integrators are consistent with cost structure. The cost function is based on quarterly time-series data from 1990 to 2010 for FedEx and UPS. A total and a variable model are estimated. In addition, a static as well as a dynamic approach is followed. We find that integrators exhibit strong scale and density economies in the short and the long term. This result is in line with the aggressive expansion and cooperation strategies pursued by integrators. Our results indicate that the concentration in the integrated air freight industry will continue: a concern for industry actors and regulatory agencies.