Demand Uncertainty and Capacity Utilization in Airlines

Diego Escobari and Jim Lee

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies the relationship between demand uncertainty—the key source of excess capacity—and capacity utilization in the U.S. airline industry. We present a simple theoretical model that predicts that lower demand realizations are associated with higher demand volatility. This prediction is strongly supported by the results of estimating a panel GARCH framework that pools unique data on capacity utilization across different flights and over various departure dates. A one unit increase in the standard deviation of unexpected demand decreases capacity utilization by 21 percentage points. The estimation controls for unobserved time-invariant specific characteristics as well as for systematic demand fluctuations.

Keywords: Demand uncertainty; capacity utilization; airlines; panel GARCH; GARCH-in-mean (search for similar items in EconPapers)
JEL-codes: C33 L93 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-tre and nep-tur
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Demand uncertainty and capacity utilization in airlines (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:46059

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