Sustainability Practices and Financial Performance in Low-Cost Airlines: A Panel Analysis Using a Sustainability Disclosure Index

Abstract

The aviation industry faces growing pressure to address its environmental and social impacts as climate regulations tighten and stakeholders, including investors, regulators, and civil society, demand greater transparency from firms operating in emissions-intensive sectors. Although sustainability disclosure has expanded significantly across industries, its financial implications remain contested, particularly in sectors where competitive advantage depends on cost efficiency. Low-cost carriers provide a distinct context for examining this relationship because their business models prioritize cost leadership, high aircraft utilization, and lean operational structures. In such settings, firms face institutional pressure to communicate sustainability commitments while operating under structural constraints that limit discretionary investment. Drawing on stakeholder theory, and specifically the salience framework developed by Mitchell et al. (1997), this study conceptualizes sustainability disclosure as a selective organizational response to differentiated stakeholder demands, where the depth and structure of disclosure reflect which stakeholder pressures are most financially proximate and most compatible with the operating logic of the low-cost business model. Using sustainability and annual reports from 20 global low-cost carriers between 2015 and 2024, the study develops a Sustainability Disclosure Index (SDI) to measure the depth of Environmental, Social, and Governance (ESG) disclosure. The SDI is constructed through systematic content analysis of corporate reports, applying a structured coding framework aligned with Sustainability Accounting Standards Board (SASB) sustainability topics. The resulting dataset is used to examine whether sustainability disclosure depth is associated with financial performance through panel regression analysis. The findings indicate that while sustainability disclosure depth among low-cost carriers has increased steadily over the study period, greater overall disclosure depth is not associated with improved financial performance. Disaggregated analysis reveals that environmental disclosure is positively associated with return on assets, consistent with the interpretation that investor and regulatory demands converge most directly on the environmental dimension and that the underlying practices overlap with the operating economics of the low-cost model. Social disclosure is associated with a negative short-run relationship with profitability in the full sample, a pattern concentrated in financially distressed airline-years rather than representing a general feature of the LCC segment. Governance disclosure shows no statistically significant association with financial performance, consistent with its threshold-driven nature and limited cross-firm variation. The results suggest that the financial relevance of sustainability disclosure in the low-cost airline industry is conditional on which stakeholder demands the underlying practices address and how closely those demands are connected to the operating economics of the business model.