Internet Penetration and Capacity Utilization in the US Airline Industry∗

Despite vigorous competition, airlines regularly fly their airplanes below full capacity. One reason for this is that airline fares are set before airlines observe demand. Moreover, even when airlines have accurate forecasts of demand, their ability to use prices and revenue management to smooth demand is constrained by the amount of information consumers have about prices and schedules, or more precisely, by consumers’ search costs. This suggests that the recent increase in the use of the Internet by consumers to purchase airline tickets can explain the recent increase in airlines’ capacity utilization. Consistent with this theory, we find strong empirical evidence that increases in Internet penetration in the metropolitan areas where passengers’ travel originates has led to increases in load factors. ∗We would like to thank Shane Greenstein, Bruce Meyer, and Scott Stern for extremely helpful comments. Jim Dana is a professor of Economics and Strategy at Northeastern University. He is also a visiting scholar at Harvard Business School. He can be reached via e-mail at [email protected] or [email protected]. Eugene Orlov is an economist at Lexecon and can be reached via e-mail at [email protected].