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Demand uncertainty and capacity utilization in airlines

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  • Diego Escobari
  • Jim Lee

Abstract

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

Suggested Citation

  • Diego Escobari & Jim Lee, 2014. "Demand uncertainty and capacity utilization in airlines," Empirical Economics, Springer, vol. 47(1), pages 1-19, August.
  • Handle: RePEc:spr:empeco:v:47:y:2014:i:1:p:1-19
    DOI: 10.1007/s00181-013-0725-2
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    6. Benjamin Eden, 2014. "Demand uncertainty and efficiency," Vanderbilt University Department of Economics Working Papers 14-00011, Vanderbilt University Department of Economics.
    7. Harold Glenn A. Valera & Mark J. Holmes & Gazi M. Hassan, 2018. "Is inflation targeting credible in Asia? A panel GARCH approach," Empirical Economics, Springer, vol. 54(2), pages 523-546, March.

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    More about this item

    Keywords

    Demand uncertainty; Capacity utilization; Airlines ; Panel GARCH; GARCH-in-mean; C33; L93;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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