Using VAR for strategic capacity allocation: an airline perspective

Steven Leon, Joseph Szmerekovsky and Denver Tolliver

International Journal of Services and Operations Management, 2015, vol. 21, issue 2, 127-149

Abstract: We consider a value-at-risk (VAR) approach to allocating seat miles for airlines. The US global airline industry is used to demonstrate this approach. Using OLS regression, we estimate the expected profit and the variance of profit based on the seat miles allocation. A non-linear optimisation model is then used to devise a portfolio of available seat miles distributed to global regions using the mean-value-at-risk technique. A comparison between the results and actual airline operating profits is conducted. Given the substantial operating profit improvements observed, there is promise in pursing this method for strategic airline seat allocation.

Keywords: airline industry; airlines; portfolio theory; resource allocation; value-at-risk; mean VAR; capacity; ordinary least squares; OLS; regression; route networks; transport services; seat miles; nonlinear optimisation; modelling; operating profits; airline seat allocation; strategic allocation. (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijsoma:v:21:y:2015:i:2:p:127-149

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