Internet Penetration and Capacity Utilization in the US Airline Industry

Abstract

Airline capacity utilization, or load factors, increased dramatically between 1993 and 2007, after staying fairly level for the first 15 years following deregulation. We argue that consumers’ adoption of the Internet, and their use of the Internet to investigate and purchase airline tickets, explains this increase. We find that differences in the rate of change of metropolitan area Internet penetration explain differences in the rate of change of airline-airport-pair load factors. Consistent with our explanation, we also find that, all else equal, changes in Internet penetration have a bigger impact on load factors on flights in more competitive markets and on flights with fewer total passengers. We argue that a significant part of the associated $2.7 billion reduction in airlines’ annual capacity costs, represents a previously unmeasured social welfare benefit of the Internet.

Keywords: Internet, Airline Industry, Industrial Organization, Revenue Management, Peak Load Pricing