A Portfolio Approach to Allocating Airline Seats

Abstract

AbstractWhat else can airline managers do to reduce the likelihood of financial losses? The US global airline industry is characterized by highly cyclical and inconsistent operating profits, razor-thin profit margins, and unimpressive passenger yields. The objective of this research is to explore a new approach to airline seat allocation in global markets by employing a risk mitigation model, using portfolio theory to diversity an airline's route network. A portfolio of available seat miles distributed to global regions is determined using the Mean-Variance approach, followed by a second portfolio approach, the Mean-Value-at-Risk (VaR) approach. Last, a comparison is made between the two approaches in terms of actual airline operating profits. Given the financial improvements shown by the employed techniques, there is promise in pursing these methods for airline seat allocation.