MEASURING EXCESS CAPACITY IN U.S. PASSENGER AIRLINES

Industries experience macroeconomic cyclical downturns to varying degrees, and have heterogeneous responses to reduced demand. Measures of excess capacity in the U.S. passenger airline industry show that it is a cyclical industry, and raise the question of the extent of welfare loss during a decline in market demand. A translog short-run variable cost function which includes fixed aircraft capital is estimated and used to measure the extent of airline excess capacity in the recession of 1990-91. Estimates of the loss in producer surplus due to temporarily reduced demand for passenger service are about 1% of Variable Cost. The relatively small loss is attributed to the nature of the cost function. Characteristics of firms that parked aircraft are distinguished from others.