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The demand for air travel is sensitive to changes in air travel prices and incomes. However, the degree of sensitivity (i.e. its demand elasticity) will vary according to different situations.
The correct elasticity value to use in analysing an air transport policy decision depends on the type of question being asked. What is the price that is being changed? What is the unit of demand that is being assessed (e.g. demand for an individual airline or demand for total air travel)?
New econometric analysis, undertaken by InterVISTAS Consulting Inc, provides a set of appropriate elasticities that can be applied to the analysis of different air markets. The analysis found that at the route level (where competition between airlines or city-pair markets is high) the sensitivity of demand to price is very high. However, at the national or regional level, air travel is relatively price insensitive.
The results support demand elasticities for price of:
- Route Level: -1.4
- National Level: -0.8
- Supra-National Level: -0.6
In addition to these base elasticities, multiplicative estimates were developed to adjust the elasticities to reflect specific geographical markets (e.g. an elasticity multiplier of 1.1 for short-haul markets).
Air transport policy decisions run the risk of being ineffective, or even counter-productive, if the correct demand elasticity is not used. For example:
- A revenue-raising policy to raise the price of travel on a route (e.g. higher airport charges) will be ineffective if the price elasticity of demand is underestimated. A price elastic response to air travel price increases at the route level means that demand falls at a proportionately higher rate than the increase in price.
- An environmental policy to raise the price of travel (e.g. a national aviation tax) on a national or supra-national basis will be ineffective if the price elasticity of demand is overestimated. A price inelastic response at the national or supra-national demand means that the impact in terms of reducing demand will be proportionately less than the increase in price.
Reliable estimates for demand elasticities are essential in order to ensure that air transport policies are effective.