Capacity Utilization and Its Impact on Airline's Financial Performance: Evidence From the U.S. Airline Industry

ABSTRACT Capacity utilization, operationalized as passenger load factor, is the airline industry's primary efficiency metric, yet evidence on its financial return remains inconsistent. We attribute the contradictions to two deficiencies: econometric methods that conflate cross‐sectional with longitudinal variation, and the absence of a theory of operational limits. Applying a between‐within specification to a panel of U.S. carriers (2004–2019) and drawing on organizational slack and the theory of performance frontiers, we separate differences across carriers from changes within them. Load factor and operating profit over operating revenue (OPOR) are related by a robust inverted U with a profit‐maximizing turning point at 88%. Past that threshold, the revenue from an additional passenger is outweighed by a congestion penalty: the convex escalation of delays, service recovery costs, and schedule padding that saturation requires. The penalty is symmetric and material. At 92.8% load factor, the highest we observe, predicted OPOR falls 1.5 percentage points below its maximum, about $24 million of operating profit per carrier‐quarter; operating at 83.4% costs the same. These findings challenge the prevailing practice of aggressive overbooking toward full occupancy and recommend 88% as an explicit operating target.