How Do Sustained Changes in Cost of Airlines Influence Air Traffic



How Do Sustained Changes in Cost of Airlines Influence Air Traffic

Authors

T Toru, Toulouse School of Economics, FR

Description

This paper focuses on the analysis of cost items and examines the extent to which European air traffic is affected by the potential scenarios on structural and regulatory changes (e.g. rising fuel prices and increasing focus on environmental issues).

Abstract

The whole air transport industry hinges upon a subtle balance between supply and demand, costs and prices. With oil prices doubling in the past year, fuel now accounts for 30 percent to 50 percent of airlines? cost. Moreover, the European Commission announced the Directive 2008/101/EC (dated 13 January 2009) concerning the inclusion of aviation in the EU Emission Trading Scheme to reduce the climate change impact from aviation activities. The EC and their member states are seeking for an international measure to reduce emission. In the context of directive, all the aircraft operators (airlines, private owners and other operators) would be obliged to hold allowances for to arrive and depart from European aerodromes. Considering those issues, a change in airlines? cost is inevitable. The important issue is how the European air traffic will be affected by those structural and regulatory changes.
This paper focuses on the analysis of cost components and examines the extent to which air traffic is affected by the possible changes in cost components by using a panel data of 14 European Airlines for the period of 1990-2006. In order to have the most complete accounts of these supply side effects on air traffic, we will disentangle supply side effects from demand side effects. To do so, we specify a symmetric generalized McFadden cost function (developed by Diewert and Wales (1987) and Kumbhakar (1990)) and extend the standard cost analysis to include an output demand equation specified according to a nested-logit model derived from a random utility framework by applying the methodology of Berry (1994). This approach allows us to derive prices and quantities under pure strategy Nash equilibrium (see Gayle (2004), Lederman (2004) and Berry, Carndall and Spiller (2006) for further information). Market equilibrium results are driven by solving these two equations. Then, we simulate some possible scenarios about the changes in the cost structure of airlines in order to measure the effects of those changes. (Ivaldi and Vibes, 2005). This study differs from previous studies in the way that we jointly estimate a generalized McFadden Cost Function which satisfies global concavity in input prices conditions and an output demand function for European airlines. Obtaining the market equilibrium conditions, we simulate potential scenarios on structural and regulatory changes (e.g. fuel prices and emission fees), which allows to evaluate respective effects of those changes on air traffic.

Acknowledgement: This research is being performed under the European Organisation for the Safety of Air Navigation (EUROCONTROL) fellowship managed by Patricia Cauwenbergh. The content of the work does not necessarily reflect the official position of EUROCONTROL on the matter.

Publisher

Association for European Transport