If passengers are relatively insensitive to air travel prices at a national aggregate market level, and even less so at a supra-national level, this strongly suggests that falling real air travel prices have not been the main driver of air travel growth2. Falling real air travel prices are important in passengers switching from one airline to another, and from one destination to another, but are much less important in driving aggregate national-level air travel or tourism growth.
The growth of incomes, often proxied by GDP, has been found to be the fundamental driver of the demand for air travel. During the past twenty years global passenger traffic has expanded at an average annual growth rate of 5.1%, while global GDP grew by an average annual rate of 3.7% over the same period. That implies an average income elasticity of 1.4, similar to the average estimated above for developed economies. The implication is that economic growth can explain most of the expansion in air travel seen in the past twenty years. The fall in real air travel prices has played a part, but mostly in diverting travel between airlines and markets rather than significantly boosting overall travel volumes. In addition, economic growth is now increasingly being driven by developing economies, where income elasticities are higher. Therefore, the underlying drivers for overall air travel growth are likely to remain strong for the foreseeable future.
Inbound vs Outbound Price Elasticities
One further adjustment that may need to be applied to the price elasticity estimates in table 1 is for the case when the passenger flow of concern is inbound or outbound, not the total or average impact. This will be of particular importance when considering the impact on inbound tourism of, for example, a national passenger tax. It also matters when considering the diversion of inbound passengers and consequent reduction of effectiveness of a national or regional environmental tax.
The price elasticity estimates in table 1 are all averages of outbound and inbound passengers. Most databases of passenger numbers and fares do not distinguish between domestic residents travelling overseas then returning, and overseas residents visiting and then returning home. However, their sensitivity to travel prices including taxes will differ.
These estimates will be verified by future research. Meanwhile a reasonable rule-of-thumb multiplier to adjust the price elasticities in table 1 is as follows:
Inbound travel by overseas residents = -1.3/-1.0
= 1.3 * table 1 price elasticity
Outbound travel by domestic residents = -0.8/-1.0 = 0.8 * table 1 price elasticity