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Demand uncertainty and capacity utilization in airlines

  • Diego Escobari

    ()

  • Jim Lee

    ()

This paper studies the relationship between demand uncertainty—the key source of excess capacity—and capacity utilization in the US 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. Copyright Springer-Verlag Berlin Heidelberg 2014

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File URL: http://hdl.handle.net/10.1007/s00181-013-0725-2
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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 47 (2014)
Issue (Month): 1 (August)
Pages: 1-19

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Handle: RePEc:spr:empeco:v:47:y:2014:i:1:p:1-19
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