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

1. 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

2. Centre for Integrated Energy Research
Institute for Transport Studies
Background Conclusions
Results
Methodology
Definitions
Structure

3. Centre for Integrated Energy Research
Institute for Transport Studies
Background Conclusions
Results
Methodology
Definitions

4. 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?

5. Centre for Integrated Energy Research
Institute for Transport Studies
Background Conclusions
Results
Methodology
Definitions

6. Centre for Integrated Energy Research
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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

7. 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
P
Y
Q Q
Y

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Background Conclusions
Results
Methodology
Definitions

9. Centre for Integrated Energy Research
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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
𝑉𝑡
𝑚𝑎𝑥
= 𝑚𝑎𝑥(𝑉0, … . , 𝑉𝑡)
𝑉𝑡
𝑟𝑒𝑐
= 𝑚𝑎𝑥 0, (𝑉𝑖−1
𝑚𝑎𝑥
− 𝑉𝑖−1) − (𝑉𝑖
𝑚𝑎𝑥
− 𝑉𝑖)
𝑡
𝑖=0
𝑉𝑡
𝑐𝑢𝑡
= 𝑚𝑖𝑛 0, (𝑉𝑖−1
𝑚𝑎𝑥
− 𝑉𝑖−1) − (𝑉𝑖
𝑚𝑎𝑥
− 𝑉𝑖)
𝑡
𝑖=0
Historical maximum
Recovery/rise,
below maximum
Reduction/cut

10. Centre for Integrated Energy Research
Institute for Transport Studies
-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
logarithmofincomedecomposition
Time
Y
Ymax
Ycut
Yrec
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
RPM/capita/dayx10,000
RPMx10,000,000,000
Time
RPM
RPM per capita per day
Methodology: Decomposition of Fuel Price
RPM/capita
Income decomposition
Fuel price decomposition

11. Centre for Integrated Energy Research
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Methodology: Model Specification
𝑅𝑃𝑀𝑡
𝑐𝑑
= 𝜇 + 𝛼 𝑚𝑎𝑥 𝑌𝑡
𝑚𝑎𝑥
+ 𝛼 𝑟𝑒𝑐 𝑌𝑡
𝑟𝑒𝑐
+ 𝛼 𝑐𝑢𝑡 𝑌𝑡
𝑐𝑢𝑡
+ 𝛽 𝑚𝑎𝑥 𝑃𝑡
𝑚𝑎𝑥
+ 𝛽𝑟𝑒𝑐 𝑃𝑡
𝑟𝑒𝑐
+ 𝛽𝑐𝑢𝑡 𝑃𝑡
𝑐𝑢𝑡
+ 𝜅𝑈𝑡 + 𝜆𝑗 𝐷𝑗𝑡
7
𝑗=1
+ 𝜑 𝑘 𝑀𝐷𝑘𝑡
12
𝑘=2
+ 𝛾𝑖 𝑅𝑃𝑀𝑡−𝑖
𝑐𝑑
𝑙
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 testsαmax = αrec = αcut; βmax = βrec = βcut

12. Centre for Integrated Energy Research
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Background Conclusions
Results
Methodology
Definitions

13. Centre for Integrated Energy Research
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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

14. Centre for Integrated Energy Research
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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***

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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

16. Centre for Integrated Energy Research
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Background Conclusions
Results
Methodology
Definitions

17. Centre for Integrated Energy Research
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Summary
• Evidence of imperfect reversibility in air travel demand
- With respect to both income and fuel price
- Both asymmetry and hysteresis present

18. Centre for Integrated Energy Research
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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?

19. Centre for Integrated Energy Research
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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
?

20. Centre for Integrated Energy Research
Institute for Transport Studies
Thank you!
Vol. 65, July 2014
z.wadud@leeds.ac.uk