Abstract for: Modeling the Cyclical Nature of Aggregate Airline Industry Profits

The aggregate profits of the airline industry have been dominated by a cyclical mode since before deregulation in the 1970s. In this paper we discuss several dynamics that combine to cause profit cycles: The misperception of the delay around capacity acquisition, the pro-cyclical ticket price setting policy and the countercyclical effect of industry congestion on passenger demand. By adding numerous endogenous feedbacks, extensions of previously used standard structures and wholly new structures we quantify the strength of these feedbacks, replicate the past behavior of the industry, and prescribe policies that can help to mitigate the cycle in airline industry earnings.