AIR TRAVEL PRICES
AND TOTAL TRAVEL COSTS
There often appears to be some confusion in policy
discussions about the sensitivity of airline passengers
to the cost of travel. Some researchers have questioned
whether estimated air travel price elasticities are
consistent with changes in the total cost of travel (which
may also include hotel, ground transport to/from the
airport, food, entertainment, etc). 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.
The proportion of total spending on an overseas visit
by air will vary by country. In particular, air travel prices
are likely to represent a higher proportion of travel
spending in low income countries, especially where air
travel markets have not been liberalised. However, for
the bulk of air travel in liberalised OECD markets the
air travel price typically represents around 25% of the
total travel costs associated with leisure travel (though
the exact percentage varies depending on the length
and type of travel).
4
Therefore, assuming an air travel price elasticity of -1.5, a
10% increase in the cost of the air travel price will reduce
demand for travel by 15% (if the demand for air travel
declines by 15%, it is assumed that the demand for the
whole travel package will also decline by 15%). However,
a 10% increase in the air travel price represents a 2.5%
increase in the total cost of travel. This implies that the
price elasticity with respect to total travel costs is -6.0
(-15% / 2.5%), an extremely high elasticity and one
which is not matched by the much lower elasticities
estimated by previous quantitative research of tourism
AIR TRAVEL PRICES AND TOTAL TRAVEL COSTSThere often appears to be some confusion in policy discussions about the sensitivity of airline passengers to the cost of travel. Some researchers have questioned whether estimated air travel price elasticities are consistent with changes in the total cost of travel (which may also include hotel, ground transport to/from the airport, food, entertainment, etc). 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.The proportion of total spending on an overseas visit by air will vary by country. In particular, air travel prices are likely to represent a higher proportion of travel spending in low income countries, especially where air travel markets have not been liberalised. However, for the bulk of air travel in liberalised OECD markets the air travel price typically represents around 25% of the total travel costs associated with leisure travel (though the exact percentage varies depending on the length and type of travel).4Therefore, assuming an air travel price elasticity of -1.5, a 10% increase in the cost of the air travel price will reduce demand for travel by 15% (if the demand for air travel declines by 15%, it is assumed that the demand for the whole travel package will also decline by 15%). However, a 10% increase in the air travel price represents a 2.5% increase in the total cost of travel. This implies that the price elasticity with respect to total travel costs is -6.0 (-15% / 2.5%), an extremely high elasticity and one which is not matched by the much lower elasticities estimated by previous quantitative research of tourism
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