This report uses new econometric research and a
review of previous studies to provide guidelines on the
appropriate level and type of demand elasticity to use
when analysing a policy proposal. It provides robust
elasticity estimates to ensure that policy decisions
related to issues such as liberalisation, airport charges,
taxation, and emissions schemes, are made on the
basis of appropriate and reliable evidence. It provides
important new estimates to ensure that price elasticity
estimates do not underestimate the sensitivity of
passengers to price and are used correctly.
Different air travel demand elasticities are associated
with different uses. When consumers are choosing
between airlines on a route, or even between
destinations for travel, there is a degree of price
elasticity for airline seats. However, if all competitors
on a route, or if a wide range of routes all experience
the same proportionate price increase, the demand for
airline services becomes less elastic. As a price increase
is extended to ever larger groups of competing airlines
or competing destinations, then the overall demand for
air travel is revealed to be somewhat inelastic.
The implications are:
• For an airline on a given route, increasing price is
likely to result in a more than proportionate decrease
in air travel. Lower travel prices will greatly stimulate
traffic and raise revenues. Airline specific travel price
charges are price elastic.
• If all airlines on a given route increase travel prices
by the same amount (e.g. due to the imposition of
passenger based airport fees that are passed on to
the consumer), then the decrease in traffic will be less
but still proportionately more than the change in price.
Route specific travel prices are price elastic.
• If all airlines on a wide set of routes increase travel
prices by roughly similar amounts (e.g. due to the
imposition of new market-wide taxes or to the working
through of higher fuel or security costs) then the
decrease in traffic may be less or much less than
proportional to the increase in fares. National or
Supra-National increases in airline travel prices, that
take place across a broad range of markets, are price
inelastic.
Thus, the particular elasticity value to be used for
analysing price effects in airline markets depends
on the question being asked. The narrower the
applicability of a price change, the more elastic (i.e.
larger) the change in demand. The more general the
applicability of a price change (perhaps due to higher
costs or taxes) the less elastic (i.e. smaller) the change
in demand.