Excess Capacity in U.S. Passenger Airlines

presented at the Midwest Economics Association meetings, March 1999.

U.S. passenger airlines experience variability in both demand and availablility of new capital, which contribute to excess capacity at times. The industry responsed to the 1990-91 recession, supply shock of higher fuel prices and the concern for safety in airline travel during the Gulf War by moving a significant portion of their aircraft fleet into storage. Using data on stored aircraft and aircraft utilization rates, an estimate of the short-run cost function for the airline industry is used to measure the extent of excess capacity.
Estimates are used to determine whether the airlines were adjusting to cycles with minimum loss, and to evaluate the practice of storing rather than continuing to operate aircraft. Excess capacity has implications for firm behavior, by providing incentive for firms to engage in price discrimination or affecting the likelihood of consolidation or expansion.

James P. Keeler
Kenyon College
March 1999

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