Using VAR for strategic capacity allocation: an airline perspective

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.