On the impact of jet fuel cost on airlines' capacity choice: Evidence from the U.S. domestic markets. (March 2018) - Sibdari, Soheil
Highlights: We study impact of fuel cost, passenger demand, and unemployment rate on airline capacity. Capacity measures include flight frequency, aircraft size, and load factor. We show higher fuel costs are associated with larger aircraft and less frequent flights. We also study the impact of fluctuations in fuel cost on capacity decisions. We show that airlines adjust capacity to maintain load factors in response to swings in fuel cost. Abstract: Using publicly available datasets, we analyze three capacity decisions (flight frequency, aircraft size, and load factor) of seven major airlines and address their relationship with the level and fluctuations of three exogenous factors (fuel cost, total passenger demand, and unemployment rate). Our results show that increased passenger demand is associated with smaller aircraft and more frequent flights, while higher fuel costs are associated with larger aircraft and less frequent flights. Overall, our results indicate that airlines adjust both flight frequency and aircraft sizes to manage capacity and maintain load factors in response to fluctuations in passenger demand and fuel cost.