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by Oliver Wojahn

The airline industry has suffered from insufficient profitability for many years, and since 2000, it has failed to cover its cost of capital. These results, however, appear to be somewhat incompatible with another feature of the industry - the continuous growth in airline capacity. Oliver Wojahn provides his analysis of some of the reasons behind why capital markets and managers have supported capacity expansion. He discusses and tests potential reasons such as principal agent problems, where separate ownership and control of publically listed companies can result in investment decisions that diverge from the interests of shareholders. He also considers high barriers to exit, economies of scale, and the non-economic motivations of state-owned airlines as reasons behind the continued investment in capacity.  We are not sure that this research answers all the questions on this issue but it is an interesting read.