Why does the airline industry over-invest?
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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Volume (Year): 19 (2012)
Issue (Month): C ()
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