•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.
ii) Short-Haul vs. Long-Haul
The review of previous research found consistent • results showing that air travel price elasticities on short-haul routes were higher than on long-haul routes. This largely reflects the greater opportunity for inter-modal substitution on short haul routes (e.g. travellers can switch to rail or car in response to air travel price increases). While the geographical breakdowns outlined in the next section capture some variation by length of haul, there is still considerable variation within each market. In particular, very short-haul flights (approximately less than 1 hour flight time) are subject to greater competition from other modes.
On this basis an elasticity multiplier of 1.1 is used • to adjust air travel price elasticities for short-haul markets. This does not apply to the analysis of trans-Atlantic or trans-Pacific markets, which are entirely long-haul, with virtually no opportunity for modal substitution.
iii) Geographic Market Analysis
The econometric analysis of the IATA PaxIS Plus data found statistically significant differences between different geographic air travel markets. The estimated elasticity multipliers for each market, along with the reasons for why it is needed, are:
Intra North America• . This is our reference point with an elasticity multiplier of 1. The market is well established with relatively high levels of capacity and traffic. Prices tend to be low, while distances are short to medium haul.
Intra Europe• . Traffic in this region is estimated to be more elastic, with an elasticity multiplier of 1.4. Intra European routes typically have shorter average travel distances, strong competition from other transport modes and the use of very low prices in several markets. The high market share of charter airlines is being eroded by very low fare LCCs.
Intra Asia• . Moderately more inelastic estimates were found in this region, with an elasticity multiplier of 0.95. LCCs are now emerging in Asia but average distances are longer, and the key middle class is still relatively small in many markets in this region.
Intra Sub-Saharan Africa• . This region is estimated to have a relatively inelastic demand compared to North America, with an elasticity multiplier of 0.6. African economies have a much smaller middle class. Travel is concentrated among higher income individuals who are less price-sensitive.
Intra South America• . This region is estimated to be at the more elastic end of the scale, with an elasticity multiplier of 1.25. There is an emerging middle class making the region more price elastic plus LCCs are emerging in Brazil, Chile and Mexico.