A RISK MITIGATION APPROACH TO STRATEGIC CAPACITY ALLOCATION: AN AIRLINE PERSPECTIVE

摘要

The global airline industry contends with unique political;;environmental andeconomic challenges which produce highly variable and inconsistent operating profits;;razorthin profit margins and unimpressive passenger yields. The objective of this research is toexplore whether operating profits will improve by taking a long term approach to capacityallocation through a focus on minimizing risk. Grounded in portfolio theory;;the objective ofthis empirical research is to develop a new approach to resource allocation in the airlineindustry by employing diversification as a risk mitigation technique. The U.S. global airlineindustry is used to demonstrate this approach by developing a portfolio of available seat milesdistributed globally. Inputs for a non-linear optimization model used to devise a portfolio ofavailable seat miles distributed to global regions using the Mean-Value-at-Risk (VaR)technique are obtained from OLS regression. A comparison of the results between the Valueat-Risk (VaR) technique and actual airline operating profits is conducted. Given thesubstantial operating profit improvements shown in this paper;;there is promise in pursingthese methods for strategic airline seat allocation.