Route Level: -1.4
• National Level: -0.8
• Supra-National Level: -0.6
Route Level. The review of previous research found route
level elasticities ranging from -1.2 to -1.5. Regressions
using the US DB1A data, which allows the use of route
dummies and variables to capture the price of route
substitutes, produced a similar air travel price elasticity
of -1.4. This elasticity estimate is applicable to a situation
where the price of an individual route changes (e.g.
higher airport charges at Paris CDG raising the price of
travel from London and diverting leisure traffic to another
destination, such as Frankfurt). Using distance as an
instrument variable within the 2SLS (Two Stage Least
Squares) statistical model produces results that further
support this elasticity, though there still is some concern
over the use of distance in this way due to its perceived
exogenous influence on demand.
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 cost of travel from elsewhere
unchanged. Its value reflects a combination of the route
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.