Investments Under Uncertainty in Air Transportation: A Real Options Perspective

Due to the cyclical nature and the inherent technological, market and political uncertainties of the aviation industry, it is challenging to make air transportation infrastructure decisions. In such an environment, a flexible strategy for infrastructure delivery is suggested as a means of managing the risk. This paper uses an evaluation methodology based on system dynamics and Monte Carlo stimulation in a real options framework to evaluate different flexible capacity delivery strategies. A hypothetical yet common situation of an airport with limited capacity and uncertain demand growth is used to illustrate these strategies, which vary in terms of the timing of the investment, size of the capital expenditure and time to deliver the capacity expansion. Findings suggest that strategies with small capacity increases have a better chance of success, and that a short time to increase capacity results in a higher expected value. If capacity increases are large, a long maturity date is preferred. Flexibility is most valuable in uncertain situations or when large capacity expansions are planned.

Language

  • English

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Filing Info

  • Accession Number: 01005795
  • Record Type: Publication
  • Files: TRIS
  • Created Date: Oct 20 2005 11:11PM