Airline Profit Maximisation, Cost Pass-through, and Scarcity Rents in Capacity-constrained Aviation Systems

Airport capacity limitations have been suggested to lead to reduced pass-through of airline cost changes, and increased airline profits. Theoretically, these outcomes arise from limited supply leading to profit-optimal passenger fares, determined only by available capacity. Practically, however, outcomes depend on real-world airline networks, fleet, and costs. We model airline competition across an existing network (Australian intercity domestic flights) with endogenously generated fares and frequency to investigate this. Consistent with theory, we find less pass-through at airports with more stringent capacity constraints and where airlines are unequally affected by cost changes. Per-passenger airline profit increases roughly linearly with constraint stringency.