Abstract

In this study we investigated the hypothesis that both the overall risk (volatility) of a firm and the systematic risk of common stock of a firm in an industry are positively associated with the degree of operating leverage, or negatively associated with firm’s level of variable costs. We focused on the airline industry. The profits of the airline industry depend on business cycle. The operating leverage amplifies the rate of change of profits and thus Earings per Share. The airline industry holds high operating leverage due to its industry structure. The test results show that the empirical results are consistent with the hypotheses that the average variable cost component is negatively associated with both the overall and systematic risk measures for the airline industry. Therefore for a manager in the industry it is very important to manage the level of operating leverage.

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