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Why does the airline industry over-invest?

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Author Info

  • Wojahn, Oliver W.

Abstract

This paper examines the causes for over-investment in the airline industry. Based on a data set covering all publicly listed airlines, we first provide evidence that returns on capital have structurally declined over the last 30 years and that airlines in all regions of the world fail to cover their cost of capital. At the same time, the airline industry has continued to add capacity. We thus explore different models of over-investment and find that the data supports multiple causes in the airline industry: agency problems like myopia and empire building, the shift toward low-cost and Asian carriers coupled with remnants of capital in legacy airlines, as well as economies of scale all are associated with over-investment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Air Transport Management.

Volume (Year): 19 (2012)
Issue (Month): C ()
Pages: 1-8

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Handle: RePEc:eee:jaitra:v:19:y:2012:i:c:p:1-8

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Web page: http://www.journals.elsevier.com/journal-of-air-transport-management/

Related research

Keywords: Airline investment; Commercial wars of attrition; Principal-agent problems; Economies of scale; Hysteresis;

References

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  1. Creel, Michael & Farell, Montserrat, 2001. "Economies of scale in the US airline industry after deregulation: a Fourier series approximation," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 37(5), pages 321-336, November.
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  7. Button, Kenneth, 2003. "Does the theory of the ‘core’ explain why airlines fail to cover their long-run costs of capital?," Journal of Air Transport Management, Elsevier, vol. 9(1), pages 5-14.
  8. Sjostrom, William, 1989. "Collusion in Ocean Shipping: A Test of Monopoly and Empty Core Model s," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1160-79, October.
  9. Douglas W. Caves & Laurits R. Christensen & Michael W. Tretheway, 1984. "Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 471-489, Winter.
  10. Severin Borenstein, 2011. "Why Can't US Airlines Make Money?," American Economic Review, American Economic Association, vol. 101(3), pages 233-37, May.
  11. Brueckner, Jan K & Spiller, Pablo T, 1994. "Economies of Traffic Density in the Deregulated Airline Industry," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 379-415, October.
  12. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
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Cited by:
  1. Akbar, Yusaf & Németh, Adél & Niemeier, Hans-Martin, 2014. "Here we go again…the Permanently Failing Organization: An application to the airline industry in Eastern Europe," Journal of Air Transport Management, Elsevier, vol. 35(C), pages 1-11.

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