• Passengers are becoming increasingly sensitive
to price, led by the boom in low cost travel, the
transparency brought by the Internet and the intense
competition on deregulated markets.
• But, passengers are also becoming less sensitive to
price, as increasingly lower air travel prices, in real
terms mean that the air travel price itself becomes a
smaller and less important part of the total cost of a
typical journey.
There appears to be an inconsistency between the
size of price elasticities estimated for the air transport
industry and those estimated for the overall travel and
tourism industry. But there are two main explanations
for this. Firstly, as the air travel component of the
journey can be relatively easily substituted between
airlines, routes, modes, etc, the price elasticity for the
air travel price can be much higher than suggested by
the price elasticity of the overall journey cost. Secondly,
passengers (especially for short leisure journeys) can
use a “two-stage” decision-making process, selecting a
flight destination based on the level of air travel price
offered and then considering the other costs associated
with the journey.
The appropriate value of a demand elasticity will vary in
accordance to the context in which they are considered.
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 the most disaggregate level,
where passengers make a choice between different
price classes (e.g. first class, business class, economy
class) on individual airlines.
• Airline / Air Carrier Level. This reflects the overall
demand curve facing each airline on a particular route.
• Route / Market Level. At the route or market level
(e.g. London Heathrow–Paris CDG or London–Paris),
travellers faced with a price increase on all carriers
serving a route (e.g. due to an increase in airport fees
and charges), and have fewer options for substitution.
• National Level. At the national level, travel prices are
increased on all routes to and from a particular country
(e.g. due to a higher national departure tax), giving
travellers fewer options for avoiding the price increase.
• Supra-National Level. This represents a change in
travel prices that occurs at a regional level across
several countries (e.g. an aviation tax imposed on all
member states of the European Union). In this case,
the options for avoiding the price increase are even
further reduced.
In each of the five levels of aggregation, different
cross-price elasticities exist, reflecting the availability of
substitute options. The own price elasticity at one level of
aggregation can reflect both the own price and cross price
elasticities at other levels of aggregation. The interaction
between these effects adds significant complexity to the
analysis, requiring clarity on which own price and cross
01 - Air Travel Demand 5
price elasticities 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.
The evidence and discussion provided in this report
focuses on the appropriate elasticities for the route,
national and supra-national level of aggregation.