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Demand Uncertainty and Capacity Utilization in Airlines

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  • Escobari, Diego
  • Lee, Jim

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 46059.

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Date of creation: Feb 2013
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Handle: RePEc:pra:mprapa:46059

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Keywords: Demand uncertainty; capacity utilization; airlines; panel GARCH; GARCH-in-mean;

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