Title: Using VAR for strategic capacity allocation: an airline perspective

Authors: Steven Leon; Joseph Szmerekovsky; Denver Tolliver

Addresses: Department of Marketing, College of Business Administration, University of Central Florida, 4000 Central Florida Blvd., Orlando, FL 32816, USA ' College of Business, North Dakota State University, Richard H. Barry Hall, Office 350, NDSU Dept. 2420, P.O. Box 6050, Fargo, ND 58108-6050, USA ' Upper Great Plains Transportation Institute, North Dakota State University, NDSU Dept. 2880, P.O. Box 6050, Fargo, ND 58108-6050, USA

Abstract: We consider a value-at-risk (VAR) approach to allocating seat miles for airlines. The US global airline industry is used to demonstrate this approach. Using OLS regression, we estimate the expected profit and the variance of profit based on the seat miles allocation. A non-linear optimisation model is then used to devise a portfolio of available seat miles distributed to global regions using the mean-value-at-risk technique. A comparison between the results and actual airline operating profits is conducted. Given the substantial operating profit improvements observed, there is promise in pursing this method for strategic airline seat allocation.

Keywords: airline industry; airlines; portfolio theory; resource allocation; value-at-risk; mean VAR; capacity; ordinary least squares; OLS; regression; route networks; transport services; seat miles; nonlinear optimisation; modelling; operating profits; airline seat allocation; strategic allocation.

DOI: 10.1504/IJSOM.2015.069376

International Journal of Services and Operations Management, 2015 Vol.21 No.2, pp.127 - 149

Received: 02 Jan 2014
Accepted: 05 Feb 2014
Published online: 14 May 2015 *

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