National
Level.
Estimates of national elasticities using all
three datasets found that, without the route substitution
term, elasticities fell to around -0.8. This inelastic result
was found over a range of model specifications which
excluded route dummies. The national level elasticity
applies to a situation such as the doubling of a national passenger departure tax, affecting all departing routes
equally but leaving the price of travel from elsewhere
unchanged. Its value reflects a combination of the route’s
own price elasticities with cross price elasticities, when
all national routes have prices which vary in the same
way. The inelastic result is consistent with observations
that part of the price elasticity observed from low cost
carriers (LCCs) involves substitution from other routes.
When this is controlled for, LCCs have a lower level of
market stimulation, consistent with less elastic national
elasticities.
Supra-National
Level.
At the supra-national level
(e.g. the European Union) estimates show an even less
elastic air travel price elasticity of -0.6. This is because
as the number of routes covered expands, the number of
choices for passengers to avoid any travel price increase
diminishes. There is less opportunity for traffic to be
diverted.
ii) Short-Haul Vs Long-Haul
The review of previous research found consistent results
showing that air travel price elasticities on short-haul
routes were higher than on long-haul routes. This largely
reflects the greater opportunity for inter-modal substitution
on short-haul routes (e.g. travellers can switch to rail or
car in response to air travel price increases). While the
geographical breakdowns outlined in the next section
capture some variation by length of haul, there is still
considerable variation within each market. In particular,
very short-haul flights (approximately less than 1 hour
flight time) are subject to greater competition from other
modes.
On this basis an elasticity multiplier of 1.1 is estimated
and used to adjust air travel price elasticities for short-
haul markets. This does not apply to the analysis of trans
Atlantic or trans Pacific markets, which are entirely long-
haul, with virtually no opportunity for modal substitution.
iii) Geographic Market Analysis
The econometric analysis of the IATA PaxIS Plus data
found statistically significant differences between
different geographic air travel markets. The estimated
elasticity multipliers for each market, along with the
reasons for why it is needed, are:
Intra
North
America.
•
This is our reference point
with an elasticity multiplier of 1. The market is well
established with relatively high levels of capacity and
traffic. Air travel prices tend to be low, while distances
are short to medium haul.
Intra
Europe.
•
Traffic in this region is estimated to be
more elastic, with an elasticity multiplier of 1.4. Intra
European routes typically have shorter average travel
distances, strong competition from other transport
modes and the use of very low prices in several
markets. The high market share of charter airlines is
being eroded by very low fare LCCs.
Intra
Asia.
•
Moderately more inelastic estimates were
found in this region, with an elasticity multiplier of
0.95. LCCs are now emerging in Asia but average