Imperfect reversibility of air transport demand

Imperfect Reversibility of

Air Transport Demand (Asymmetric Effects of Income and Fuel Price on

Air Transport Demand)

Zia Wadud Centre for Integrated Energy Research

Institute for Transport Studies

14th ATRS World Conference, Bordeaux, 18 July 2014

Centre for Integrated Energy Research


Background Conclusions

Results

Methodology

Definitions

Structure




Results

Methodology

Definitions



Background

• Aviation demand: an important planning parameter

• Traditional demand models perfectly reversible

• In practice demand could be ‘imperfectly’ reversible:

- Prospect theory

- Habits and practices

- Asset fixation

• Is aviation demand perfectly reversible

w.r.t. income and jet fuel prices?




Results

Methodology

Definitions



Definitions

• Imperfect reversibility: asymmetry and/or hysteresis

• Asymmetry: magnitude of response during a rise of the

factor is different from that during a similar fall

P

Q Q

P

Y

Q Q

Y



Definitions

• Hysteresis: response depends on previous history

• Does aviation demand show asymmetry and/or hysteresis?

P

Q Q

P

Y

Q Q

Y




Results

Methodology

Definitions



Methodology

• Time series econometric modelling

• 1978-2012 monthly data for US: RPM/capita/day

• Decompose the explanatory factors into three series:

• All variables in logarithms- Cobb-Douglas

𝑉𝑡𝑚𝑎𝑥 = 𝑚𝑎𝑥(𝑉0, … . , 𝑉𝑡)

𝑉𝑡𝑟𝑒𝑐 = 𝑚𝑎𝑥 0, (𝑉𝑖−1

𝑚𝑎𝑥 − 𝑉𝑖−1) − (𝑉𝑖𝑚𝑎𝑥 − 𝑉𝑖)

𝑡

𝑖=0

𝑉𝑡𝑐𝑢𝑡 = 𝑚𝑖𝑛 0, (𝑉𝑖−1

𝑚𝑎𝑥 − 𝑉𝑖−1) − (𝑉𝑖𝑚𝑎𝑥 − 𝑉𝑖)

𝑡

𝑖=0

Historical maximum

Recovery/rise,

below maximum

Reduction/cut



-1

1

3

5

7

9

11

Jan

-78

Jan

-80

Jan

-82

Jan

-84

Jan

-86

Jan

-88

Jan

-90

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Jan

-12

loga

rith

m o

f in

com

e d

eco

mp

osi

tio

n

Time

YYmaxYcutYrec

0

5

10

15

20

25

30

0

1

2

3

4

5

6

7

8

9

Jan

-78

Jan

-80

Jan

-82

Jan

-84

Jan

-86

Jan

-88

Jan

-90

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Jan

-12

RP

M/c

apit

a/d

ayx

10

,00

0

RP

Mx

10

,00

0,0

00

,00

0

Time

RPM

RPM per capita per day

Methodology: Decomposition of Fuel Price

RPM/capita

Income decomposition Fuel price decomposition



Methodology: Model Specification

𝑅𝑃𝑀𝑡𝑐𝑑 = 𝜇 + 𝛼𝑚𝑎𝑥 𝑌𝑡

𝑚𝑎𝑥 + 𝛼𝑟𝑒𝑐 𝑌𝑡𝑟𝑒𝑐 + 𝛼𝑐𝑢𝑡 𝑌𝑡

𝑐𝑢𝑡 + 𝛽𝑚𝑎𝑥 𝑃𝑡𝑚𝑎𝑥 + 𝛽𝑟𝑒𝑐𝑃𝑡

𝑟𝑒𝑐 + 𝛽𝑐𝑢𝑡 𝑃𝑡𝑐𝑢𝑡

+ 𝜅𝑈𝑡 + 𝜆𝑗𝐷𝑗𝑡

7

𝑗=1+ 𝜑𝑘𝑀𝐷𝑘𝑡

12

𝑘=2+ 𝛾𝑖𝑅𝑃𝑀𝑡−𝑖

𝑐𝑑𝑙

𝑖=1+ 𝜀𝑡

Income decomposition Price decomposition

Unemployment

Event dummies

Air controller strike, Deregulation,

Two gulf wars, SARS outbreak,

9-11 attacks , thanksgiving

Monthly dummies

Lagged dependent

• Dynamic model

• Cointegration tests αmax = αrec = αcut; βmax = βrec = βcut




Results

Methodology

Definitions



Results: Parameter Estimates

Parameter/short run Long run elasticity

RPM lag 1 0.643***

RPM lag 12 0.175***

Ymax 0.307*** 1.684***

Yrec 0.638*** 3.503***

Ycut 0.383*** 2.102***

Pmax -0.093*** -0.510***

Prec -0.010** -0.052**

Pcut 0.002 insig.

Full estimation results suppressed



Results: Tests for Reversibility

Hypothesis Test restrictions F-statistic

Imp. rev.: Income αmax = αrec = αcut 8.86***

Asymmetry: Income αrec = αcut 10.9***

Asymmetry: Income αmax = αcut 0.24

Hysteresis: Income αmax = αrec 6.38***

Imp. Rev.: Price βmax = βrec = βcut 8.02***

Asymmetry: Price βmax = βcut 15.78***

Asymmetry: Price βrec = βcut 5.28**

Hysteresis: Price βmax = βrec 16.01***



Results: Reversible vs. Imperfectly Reversible

Imperfectly reversible,

asymmetry + hysteresis

Perfectly

reversible

Asymmetry only

Ymax 1.684***

Yrec 3.503***

Yrise 1.803***

Ycut 2.102*** 1.381**

Y 1.821***

Pmax -0.510***

Prec -0.052**

Prise -0.089***

Pcut 0.009 -0.063*

P -0.099***

AIC/BIC -1898.6/-1785.1 -1879.3/-1782.0 -1877.0/-1771.6




Results

Methodology

Definitions



Summary

• Evidence of imperfect reversibility in air travel demand

- With respect to both income and fuel price

- Both asymmetry and hysteresis present



Implications

• Reversible elasticity estimates can be biased

- yet long run demand forecast okay-ish

• Larger income elasticity during post-recession recovery

- can be important for short-term forecasting,

planning, revenue management etc.

• Larger price elasticity for price increases above maximum

- important for pricing policies

• Fuel price fall has no implications for demand

- but, imperfect reversibility in price transmission?



Imperfect reversibility in price transmission?

Fuel price Ticket price Passenger

demand

Imperfectly

reversible reversible

Imperfectly

Imperfectly reversible


demand

Imperfectly

reversible

reversible



demand

reversible

reversible

Imperfectly


?



Thank you!

Vol. 65, July 2014

[email protected]

Environment

Imperfect reversibility of air transport demand