• Own price elasticity is a measure used to capture the sensitivity of consumers demand for a good or service in response to changes in the price of that particular good or service. Goods with elasticities less than one in absolute value are inelastic or price insensitive. Goods with elasticities greater than one in absolute value are elastic or price sensitive.
• Cross price elasticity measures the interaction or the sensitivity of demand for a particular good to changes in the price of another good. When the cross price elasticity is positive, the two goods are substitutes, when it is negative the goods are complementary.
• Income elasticity measures the sensitivity of demand for a good to changes in individual or aggregate income levels.
AIR TRAVEL DEMAND ELASTICITIES
The elasticity of air travel demand varies according to the coverage and location of the market in which prices are changed and the importance of the air travel price within the overall cost of travel. The appropriate elasticity to use will depend on the type of question being asked. What is the price that is being changed (e.g. an individual airline ticket price or prices within the market as a whole)? What is the unit of demand that is being assessed (e.g. demand for an individual airline or demand for total air travel)? Examining the traffic impact of a price increase on a given route requires a different elasticity than when examining the impact of an across-the-board price increase on all routes in a country or region.
There often appears to be some confusion in policy discussions about the sensitivity of airline passengers to the price of travel. This has increased as the industry has changed, with the Internet increasing price transparency, deregulated markets and no frill carriers increasing competition and corporate travel buyers becoming more price sensitive. In particular, there is an apparent paradox whereby:
• 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