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Why does the airline industry over-invest?

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  • 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.

Suggested Citation

  • Wojahn, Oliver W., 2012. "Why does the airline industry over-invest?," Journal of Air Transport Management, Elsevier, vol. 19(C), pages 1-8.
  • Handle: RePEc:eee:jaitra:v:19:y:2012:i:c:p:1-8
    DOI: 10.1016/j.jairtraman.2011.11.002
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    References listed on IDEAS

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    Cited by:

    1. Hu, Qiwei & Zhang, Anming, 2015. "Real option analysis of aircraft acquisition: A case study," Journal of Air Transport Management, Elsevier, vol. 46(C), pages 19-29.
    2. repec:gam:jsusta:v:9:y:2017:i:8:p:1295-:d:105757 is not listed on IDEAS
    3. Hooper, Paul, 2014. "Has liberalisation stalled?," Journal of Air Transport Management, Elsevier, vol. 41(C), pages 17-21.
    4. repec:eee:ejores:v:263:y:2017:i:2:p:639-651 is not listed on IDEAS
    5. Chiuling Lu & Ann Yang & Jui-Feng Huang, 2015. "Bankruptcy predictions for U.S. air carrier operations: a study of financial data," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 574-589, July.
    6. 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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