For air transport there are five main levels (for the scope of the market) for which demand elasticities can be estimated:
Price Class Level.• This is the most disaggregate level, where passengers make a choice between different price classes (e.g. first class, business class, economy class) on individual airlines. At this level, the elasticities are arguably highest, with passengers easily able to switch between price-class levels and airlines, while also (in some cases) having the option to use another mode of travel or simply to choose to not travel (i.e. other activities act as a substitute for air travel).
Airline / Air Carrier Level.• This reflects the overall demand curve facing each airline on a particular route. Where there are a number of airlines operating on a route , the demand elasticity faced by each airline is likely to be fairly high. If an airline increases its price unilaterally, it is likely to lose passengers to other airlines operating on that route.5
Route / Market Level.• At the route or market level (e.g. London Heathrow–Paris CDG or London-Paris), the elasticity response is expected to be lower than at the price class or carrier level. Travellers faced with a travel price increase on all carriers serving a route (e.g. due to an increase in airport fees and charges), have fewer options for substitution. However, they can still choose to travel on an alternative route, while also (in some cases) having the option to use another mode of travel or simply choose to not travel.
National Level.• At the national level, travel price elasticities are expected to be lower, as travellers have fewer options for avoiding the price increase. For example, if a national government imposed a new or increased tax on aviation, travellers could only avoid this increase by travelling elsewhere, using another mode (which may not always be possible), or choosing not to travel. For example, if the UK government imposed an increased tax on aviation departures, UK residents travelling to mainland Europe could respond by travelling by Eurostar or by ferry, or choose not to travel. Similarly, travellers in France could respond by travelling to the UK by another mode or by switching their destination to another country, such as Germany or Spain.
Supra-National Level.• This represents a change in prices that occurs at a regional level across several countries. For example, an aviation tax imposed on all member states of the European Union. In this case, the elasticity is expected to be even lower, as the options for avoiding the price increase are even further reduced.
The evidence and discussion provided in this report focus on the appropriate elasticities for the route, national and supra-national level of aggregation.
The Interaction between Own-Price
and Cross-Price Elasticites
In each of the five levels of aggregation, different cross-price elasticities exist, reflecting the availability of substitute options. For example:
At the price class level, an increase in the full economy • price could increase the demand for both business class tickets and discount tickets.
At the airline level, a unilateral increase in the travel • price of one particular airline on a route can increase the demand for other carriers on the route (and the demand for connecting alternatives).
At the route level, an increase in the price of travel • from London Heathrow to Paris CDG can increase the demand for travel on London Gatwick to Paris CDG or London Heathrow to Paris Orly.
At the national level, an increase in the price of air • travel to/from a given country may increase demand for air travel to/from other countries.
At the supra-national level, an increase in the price • of air travel to/from a particular region may increase demand for air travel to/from other regions (e.g. an increase in the cost of air travel to the EU may increase demand for air travel to the US).
At all levels of aggregation, there may exist cross • elasticity effects with other modes of transport. An increase in the price of air travel may increase demand for ground transportation and vice versa.
There may also be cross elasticity effects between • air travel and other leisure or consumption activities. In some cases it may not exist at all (e.g. there is generally no substitute for air travel on long-haul routes).
The own price elasticity at one level of aggregation can reflect both the own price and cross price elasticities at other levels of aggregation. For example, the price elasticity at the route level is a function of the own price and cross price elasticities at the price class and carrier levels of aggregation6 . The interaction between these effects adds significant complexity to the analysis, requiring clarity on which own price and cross price elasticity were measured and controlled for. For example, an analysis of route-level elasticities which does not control for route substitution effects may be more appropriate for a national-level elasticity.