This report uses new econometric research and a review of previous studies to provide guidelines on the appropriate level and type of demand elasticity to use when analysing a policy proposal. It provides robust elasticity estimates to ensure that policy decisions related to issues such as liberalisation, airport charges, taxation, and emissions schemes, are made on the basis of appropriate and reliable evidence. It provides important new estimates to ensure that price elasticity estimates do not underestimate the sensitivity of passengers to price and are used correctly.
Different air travel demand elasticities are associated with different uses. When consumers are choosing between airlines on a route, or even between destinations for travel, there is a degree of price elasticity for airline seats. However, if all competitors on a route, or if a wide range of routes all experience the same proportionate price increase, the demand for airline services becomes less elastic. As a price increase
is extended to ever larger groups of competing airlines or competing destinations, then the overall demand for air travel is revealed to be somewhat inelastic.
The implications are:
•For an airline on a given route, increasing price is likely to result in a more than proportionate decrease in air travel. Lower travel prices will greatly stimulate traffic and raise revenues. Airline specific travel price charges are price elastic.
•If all airlines on a given route increase travel prices by the same amount (e.g. due to the imposition of passenger based airport fees that are passed on to the consumer), then the decrease in traffic will be less but still proportionately more than the change in price. Route specific travel prices are price elastic.
•If all airlines on a wide set of routes increase travel prices by roughly similar amounts (e.g. due to the imposition of new market-wide taxes or to the working through of higher fuel or security costs) then the decrease in traffic may be less or much less than proportional to the increase in fares. National or Supra-National increases in airline travel prices, that take place across a broad range of markets, are price inelastic.