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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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    Cited by:

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    2. Hofmann, Erik & Solakivi, Tomi & Töyli, Juuso & Zinn, Martin, 2018. "Oil price shocks and the financial performance patterns of logistics service providers," Energy Economics, Elsevier, vol. 72(C), pages 290-306.
    3. Cristhian Mellado & Diego Escobari, 2015. "Virtual integration of financial markets: a dynamic correlation analysis of the creation of the Latin American Integrated Market," Applied Economics, Taylor & Francis Journals, vol. 47(19), pages 1956-1971, April.
    4. Benjamin Eden, 2014. "Demand uncertainty and efficiency," Vanderbilt University Department of Economics Working Papers 14-00011, Vanderbilt University Department of Economics.
    5. 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.
    6. Diego Escobari & Mohammad Jafarinejad, 2019. "Investors’ Uncertainty and Stock Market Risk," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 20(3), pages 304-315, July.
    7. Daniel Huerta-Sanchez & Diego Escobari, 2018. "Changes in sentiment on REIT industry excess returns and volatility," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 32(3), pages 239-274, August.

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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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