Runway capacity expansion planning for public airports under demand uncertainty

Flight delay is a significant issue affecting air travel. The runway system, frequently falling short of demand, serves as a bottleneck. As demand increases, runway capacity expansion becomes imperative to mitigate congestion. However, the decision to expand runway capacity is challenging due to inherent uncertainties in demand forecasts. This paper presents a novel approach to modeling air traffic demand growth as a jump diffusion process, incorporating two layers of uncertainty: Geometric Brownian Motion (GBM) for continuous variability and a Poisson process to capture the impact of crisis events, such as natural disasters or public health emergencies, on decision-making. We propose a real options model to jointly evaluate the interrelated factors of optimal runway capacity and investment timing under uncertainty, with investment timing linked to trigger demand. The findings suggest that increased uncertainty indicates more conservative decision-making. Furthermore, the relationship between optimal investment timing and expansion size is complex: if the expansion size remains unchanged, the trigger demand decreases as the demand growth rate increases; if the expansion size experiences a jump, the trigger demand also exhibits a sharp rise. This work provides valuable insights for airport authorities for informed capacity expansion decision-making.