An economic analysis of risk management in the airline industry

The purpose of this article is to consider risk management in the airline industry using an economic model. An increase in the number of airlines can reduce the probability of passengers being unable to find substitutable flights, while it increases total entry costs. Thus, there is an optimal number of entries to the market, and we can evaluate whether the actual number of entries exceeds or falls short of the optimal level. On that basis, this article investigates the following two questions: (1)"Do excess or insufficient entries occur in the airline industry?" and (2)"If this is ambiguous, in what situations do excess or insufficient entries occur?" The conclusions of our analysis are as follows. First, it is ambiguous whether excess or insufficient entries occur. Second, the higher (lower) the cost of airfares, the probability of engine trouble, the number of flights and the number of passengers, the more likely is a situation of excess (insufficient) entries, while the higher (lower) the entry cost and flight cancellation cost, the more likely is a situation of insufficient (excess) entry.