Demand uncertainty and capacity utilization in airlines

Escobari, Diego; Lee, Jim
August 2014
Empirical Economics;Aug2014, Vol. 47 Issue 1, p1
Academic Journal
This paper studies the relationship between demand uncertainty-the key source of excess capacity-and capacity utilization in the US 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.


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