Demand Uncertainty and Capacity Utilization in Airlines

Escobari, Diego and Lee, Jim (2013): Demand Uncertainty and Capacity Utilization in Airlines. Forthcoming in: Empirical Economics

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Demand uncertainty; capacity utilization; airlines; panel GARCH; GARCH-in-mean
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L93 - Air Transportation

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