Airline capacity decisions under supply-demand equilibrium of Australia’s domestic aviation market

Abstract

Australia is especially reliant on air transportation because of the geographical distribution of the urban centers across the country. This paper seeks to identify the antecedents of the capacity decisions of the airlines operating in Australian domestic aviation market. We examine the factors on both sides of the supply-demand equilibrium using monthly data of twenty-one major domestic routes linking eight major cities between January 2004 and December 2015. To investigate the relationship between flight demand and the variables of capacity decisions (flight frequency, aircraft size, load factor, and available seats), the pooled series cross-sectional data are analyzed using a two-stage least-squares method to model the supply-demand interaction. The results statistically differentiate the airlines’ strategies regarding capacity decisions for the short-haul, medium-haul, and long-haul routes. The results suggest that competition would lead to more flights, smaller aircraft size, lower load factors, and more available seats in all markets. Low-cost carriers play a key role in the short-haul market. Higher jet fuel prices scales up aircraft size on all flight routes. Notably, the socio-economic parameters of population and employment rates affect flight demand more strongly on the long-haul routes than other routes.