Using an equilibrium model to forecast airline behavior in response to economic or regulatory changes

Abstract

Government and industry are exploring approaches, such as technology (e.g. SESAR/NextGen) and market-based methods, to address the pervasive delays in the air transportation system. Resistance to some of the proposed market-based strategies are based on uncertainties of the societal and economic outcomes; specifically, there is a concern that fewer markets might be served, that service within existing markets might be decreased, that airfares might rise significantly and that airline profitability will suffer. This paper describes a comparison of the behavior of the air transportation system (e.g. markets served, airfares, delays, load factors, aircraft size) during the recent run-up in fuel prices at capacity-limited New York airports and non-slot controlled San Francisco and Philadelphia airports. The results of the modeled airline behavior shows: i. Airfares change in proportion to changes in fuel prices. ii. Flights per day and markets served change in proportion to changes in airport capacity limits. iii. Average aircraft size changes in proportion to changes in airfares, number of markets served, and number of flights per day. iv. Airline profitability changes in proportion to flights per day, airfares, and average aircraft size. The implications of these results are discussed in this paper.