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 aggregation 6 . 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.