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Imperfect reversibility of air transport demand

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Presentation given by Dr Zia Wadud at the18th World Conference of the Air Transport Research Society, Bordeaux, France, July 2014. atrs2014.org www.its.leeds.ac.uk/people/z.wadud
20
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 14 th ATRS World Conference, Bordeaux, 18 July 2014
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Page 1: 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

Page 2: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

Background Conclusions

Results

Methodology

Definitions

Structure

Page 3: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

Background Conclusions

Results

Methodology

Definitions

Page 4: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

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?

Page 5: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

Background Conclusions

Results

Methodology

Definitions

Page 6: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

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

Page 7: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

Definitions

• Hysteresis: response depends on previous history

• Does aviation demand show asymmetry and/or hysteresis?

P

Q Q

P

Y

Q Q

Y

Page 8: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

Background Conclusions

Results

Methodology

Definitions

Page 9: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

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

Page 10: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

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Time

RPM

RPM per capita per day

Methodology: Decomposition of Fuel Price

RPM/capita

Income decomposition Fuel price decomposition

Page 11: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

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

Page 12: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

Background Conclusions

Results

Methodology

Definitions

Page 13: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

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

Page 14: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

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***

Page 15: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

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

Page 16: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

Background Conclusions

Results

Methodology

Definitions

Page 17: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

Summary

• Evidence of imperfect reversibility in air travel demand

- With respect to both income and fuel price

- Both asymmetry and hysteresis present

Page 18: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

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?

Page 19: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

Imperfect reversibility in price transmission?

Fuel price Ticket price Passenger

demand

Imperfectly

reversible reversible

Imperfectly

Imperfectly reversible

Fuel price Ticket price Passenger

demand

Imperfectly

reversible

reversible

Imperfectly reversible

Fuel price Ticket price Passenger

demand

reversible

reversible

Imperfectly

Imperfectly reversible

?

Page 20: Imperfect reversibility of air transport demand

Centre for Integrated Energy Research

Institute for Transport Studies

Thank you!

Vol. 65, July 2014

[email protected]


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