Imperfect reversibility of air transport demand - effects of air fare fuel price and price transmission
1. Imperfect Reversibility of
Air Transport Demand:
Effects of Air Fare, Fuel Price & Price Transmission
Zia Wadud
Centre for Integrated Energy Research
Institute for Transport Studies
TRB Annual Meeting, January 2015
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Background Conclusions
Results
Methodology
Objectives
Structure
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Background Conclusions
Results
Methodology
Objectives
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Background
โข Air transport demand: an important planning parameter
โข Traditional demand models perfectly reversible
โข In practice demand could be โimperfectlyโ reversible:
โข Asymmetry and/or
โข hysteresis
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Background
โข Asymmetry: magnitude of response during a rise of the
factor is different from that during a similar fall
P
Q Q
P
Y
Q Q
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Background
โข Hysteresis: response depends on previous history
P
Q
P
Y
Q Q
Y
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Background
โข Why โimperfectlyโ reversible:
- Prospect theory
- Habits and practices
- Asset fixation
โข Is air transport demand perfectly reversible
w.r.t. income and jet fuel prices?
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Background
โข Air transport demand imperfectly
reversible w.r.t โ
Income &
Jet fuel price
โข Both asymmetry & hysteresis effect โ
for both variables
โข Fuel price to ticket price/air fare?
Wadud (2014) the asymmetric effect of income
and fuel price on air transport demand
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Background Conclusions
Results
Methodology
Objectives
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Role of price transmission?
Fuel price Ticket price
Passenger
demand
Imperfectly
reversible reversible
Imperfectly
Imperfectly reversible
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Role of price transmission?
Fuel price Ticket price
Passenger
demandReversible reversible
Imperfectly
Imperfectly reversible
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Role of price transmission?
Fuel price Ticket price
Passenger
demand
Imperfectly
reversible Reversible
Imperfectly reversible
Reversibility in
price transmission
Reversibility in
Behavioural response
Objective
โข Is air transport demand imperfectly reversible wrt air fare?
โข Is air fare imperfectly reversible wrt jet fuel prices?
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Background Conclusions
Results
Methodology
Objectives
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Methodology
Fuel price Ticket price
Passenger
demand
Imperfectly
reversible Reversible
Imperfectly reversible
Demand Elasticityfuel price = Fare elasticityfuel price ร Demand Elasticityair fare
๐๐๐ท = ๐ผโฒ
๐๐๐ + ๐พ๐๐๐ + ๐ฝโฒ
๐ฟโฒ ๐๐๐ท = ๐ผ๐๐๐ + ๐ฝ๐๐๐น๐ด๐ ๐ธ + ๐ฝ๐ฟ
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Methodology
โข Time series econometric modelling
โข 1979-2012 monthly data for US: RPEN/capita/day
โข Decompose the explanatory factors into three series:
โข All variables in logarithms- Cobb-Douglas
โข Two demand equations: jet fuel price & air fare
๐๐ก
๐๐๐ฅ
= ๐๐๐ฅ(๐0, โฆ . , ๐๐ก)
๐๐ก
๐๐๐
= ๐๐๐ฅ 0, (๐๐โ1
๐๐๐ฅ
โ ๐๐โ1) โ (๐๐
๐๐๐ฅ
โ ๐๐)
๐ก
๐=0
๐๐ก
๐๐ข๐ก
= ๐๐๐ 0, (๐๐โ1
๐๐๐ฅ
โ ๐๐โ1) โ (๐๐
๐๐๐ฅ
โ ๐๐)
๐ก
๐=0
Historical maximum
Recovery/rise,
below maximum
Fall/cut
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Methodology: Decomposition
Air fare decomposition
Income decompositionFuel price decomposition
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12
Fuelpriceanditsdecomposition(inlog)
Time
fuel price - recovery series
fuel price - cut series
fuel price (right axis)
fuel price - maximum series (right axis)
5.3
5.4
5.5
5.6
5.7
5.8
5.9
6.0
6.1
6.2
6.3
-5
-4
-3
-2
-1
0
1
2
3
4
Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12
Airfareanditsdecomposition(inlog)
Time
airfare - recovery series
airfare - cut series
airfare (right axis)
airfare-maximum series (right axis)
10.0
10.1
10.2
10.3
10.4
10.5
10.6
10.7
-1.0
-0.5
0.0
0.5
1.0
Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12
Incomeanditsdecomposition(inlog)
Time
per capita income - recovery series
per capita income - cut seires
per capita income (right axis)
per capita income-maximumseries (right axis)
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Methodology: Model Specification
๐ ๐๐ธ๐๐ก
๐๐
= ๐ + ๐ผ ๐๐๐ฅ ๐๐ก
๐๐๐ฅ
+ ๐ผ ๐๐๐ ๐๐ก
๐๐๐
+ ๐ผ ๐๐ข๐ก ๐๐ก
๐๐ข๐ก
+ ๐พ ๐๐๐ฅ ๐๐ก
๐๐๐ฅ
+ ๐พ๐๐๐ ๐๐ก
๐๐๐
+ ๐พ๐๐ข๐ก ๐๐ก
๐๐ข๐ก
+ ๐ ๐๐ก + ๐๐ ๐ท๐๐ก
4
๐=1
+ ๐ ๐ ๐๐ท๐๐ก
12
๐=2
+ ๐พ๐ ๐ ๐๐๐กโ๐
๐๐
๐
๐=1
+ ๐๐ก
Income decomposition Price/Fare decomposition
Unemployment
Event dummies
9-11 attack etc.
Monthly dummies
Lagged dependent
โข Dynamic model
โข Cointegration tests
ฮฑmax = ฮฑrec = ฮฑcut; ฮณmax = ฮณrec = ฮณcut
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Background Conclusions
Results
Methodology
Objectives
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Results: Parameter Estimates
Air fare model Fuel price model
RPEN lag 1 0.596*** 0.607***
RPEN lag 12 0.132*** 0.112***
Ymax (income, max series) 0.156*** 0.370***
Yrec (income, cum. recovery series) 0.826*** 0.716***
Yfall (income, cum. fall series) 0.635*** 0.436***
FAREmax/Pmax (fare or price, max series) -0.229*** -0.097***
FARErec/Prec (fare or price, cum. recovery
series) -0.143*** -0.014***
FAREcut/Pcut (fare or price, cum. fall series) -0.113*** -0.001
Full estimation results suppressed
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Results: Tests for Reversibility
Hypothesis Test restrictions F-stat
Fare model
F-stat
Price model
Imp. rev.: Income ฮฑmax = ฮฑrec = ฮฑcut
18.63*** 9.78***
Asymmetry: Income ฮฑrec = ฮฑcut
8.03*** 11.67***
Asymmetry: Income ฮฑmax = ฮฑcut
14.53*** 0.18
Hysteresis: Income ฮฑmax = ฮฑrec
33.17*** 7.20***
Imp. Rev.: Fare/Price ฮฒmax = ฮฒrec = ฮฒcut or ฮณโs 5.37*** 8.91***
Asymmetry: Fare/Price ฮฒmax = ฮฒcut or ฮณโs 7.54*** 7.52***
Asymmetry: Fare/Price ฮฒrec = ฮฒcut or ฮณโs 3.94** 17.80***
Hysteresis: Fare/Price ฮฒmax = ฮฒrec or ฮณโs 2.17 17.38***
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Results: The Elasticities
Demand elasticity
wrt fuel price (ฮณ)
Demand elasticity
wrt air fare (ฮฒ)
Air fare elasticity
wrt fuel price
Maximum series -0.097*** -0.229*** 0.423***
Sub-maximum
recovery series
-0.014*** -0.143*** 0.100***
Fall series Insig. -0.113*** Insig.
= ร
Demand elasticityair fare > Demand Elasticityfuel price
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Background Conclusions
Results
Methodology
Objectives
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Summary
With respect
to ..
Air transport demand Air fare (price transmission)
Asymmetry Hysteresis Overall Asymmetry Hysteresis Overall
Income Yes Yes Yes
Fuel price Yes Yes Yes Yes Yes Yes
Air fare Yes No? Yes
โข Evidence of imperfect reversibility in air travel demand
- With respect to income, fuel price, air fare
โข Evidence of imperfect reversibility in price transmission
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Implications
โข Reversible elasticity estimates can be biased
- yet long run demand forecast okay-ish
โข Larger income elasticity during post-recession recovery
- short-term forecasting, planning, revenue management?
โข Larger price/fare elasticity for increases above maximum
- fuel tax/carbon pricing policies
โข Falling fuel price benefits not passed on to consumers
- regulatory oversight?
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Future Work
โข Heterogeneity in market types lost in aggregation:
- travel purpose, travel class, travel distance, presence &
type of competition, business model, O-D type, etc.
โข Effect of fuel price hedging
โข Test in other countries
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Thank you!
Wadud (2015) Imperfect reversibility of
aviation demand: Effects of fuel prices, air
fare and price transmission
z.wadud@leeds.ac.uk
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Results: Reversible vs. Imperfectly Reversible
Imperfectly reversible,
asymmetry + hysteresis
Perfectly
reversible
Asymmetry only
Ymax 1.684***
Yrec 3.503***
Yrise 1.803***
Ycut 2.102*** 1.381**
Y 1.821***
Pmax -0.510***
Prec -0.052**
Prise -0.089***
Pcut 0.009 -0.063*
P -0.099***
AIC/BIC -1898.6/-1785.1 -1879.3/-1782.0 -1877.0/-1771.6