Addressing the correct elasticity
to the appropriate question
This report shows how the sensitivity of air travel demand
to prices and incomes can vary according to different
situations. Therefore, the appropriate elasticity to use will
depend upon the level of aggregation and the location of
an air transport policy proposal. For example:
• At the Route level. To examine the impact of an
increase in airport landing fees on a particular shorthaul
market in South America, the price elasticity
would be derived as:
Base elasticity -1.4 (route)
multiplied by 1.25 (intra South America)
multiplied by 1.1 (short-haul multiplier)
which equals -1.93
A 10% rise in the airport landing fee would reduce
passenger numbers on short-haul markets serving that
airport by over 19%.
• At the National level. To look at the impact of the
doubling of UK passenger tax on trans Atlantic traffic,
the price elasticity would be derived as follows:
Base elasticity -0.8 (national)
multiplied by 1.2 (trans Atlantic geographical multiplier)
which equals -0.96
For outbound traffic from the UK this implies the resulting
3.7% rise in the cost of long-haul travel will cut demand
by 3.6%. For inbound traffic from N America the UK only
represents a 20% market share, so while the UK will
lose inbound tourists many will just be diverted to other
destinations.
• At the Supra-national level. To look at the demand
impacts of higher travel costs caused by extending the
EU Emissions Trading Scheme just to intra-EU travel
i.e. short-haul markets, the relevant price elasticity
would be derived as follows:
Base elasticity -0.6 (supra-national) multiplied by
1.4 (intra-Europe geographic multiplier) multiplied
by 1.1 (short-haul multiplier) which equals -0.92
So a 10% rise in intra-EU travel costs would lead to a
relative inelastic 9.2% reduction in air travel.
Demand Elasticities and Environmental Policy
The focus of existing policy to reduce CO2 emissions
from air travel has been on trying to manage air travel
demand by raising the price of travel for passengers.
Even the recent debate on emissions trading in Europe
has focused on the costs it will impose on airlines and
their passengers.