Cost Pass-through in Commercial Aviation: Theory and Evidence

Philip Gayle () and Ying Lin

MPRA Paper from University Library of Munich, Germany

Abstract: The significant worldwide decline in crude oil price beginning in mid-2014 through to 2015, which resulted in substantial fuel expense reductions for airlines, but no apparent commensurate reductions in industry average airfares has caused much public debate. This paper examines the market mechanisms through which crude oil price may influence airfare, which facilitates identifying the possible market and airline-specific characteristics that influence the extent to which crude oil price changes affect airfare. Interestingly, and new, our analysis reveals that the crude oil-airfare pass-through relationship can be either positive or negative, depending on various market and airline-specific characteristics. We find evidence that airline-specific jet fuel hedging strategy and market origin-destination distance contribute significantly to pass-through rates being negative. Specifically, the value of pass-through rate decreases with airline fuel hedging ratios and with market origin-destination distance, but increases with competition in origin-destination markets. Even when the pass-through relationship is positive, suggesting that a portion of airlines’ fuel cost savings is passed on to consumers via lower airfares, this research reveals the market and airline-specific factors that limit the size of these savings passed on to consumers via lower airfares.

Keywords: Crude oil price-Airfare Cost Pass-through; Jet fuel hedging (search for similar items in EconPapers)
JEL-codes: L13 L93 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-com, nep-ene, nep-ind, nep-rmg and nep-tre
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/102018/1/MPRA_paper_102018.pdf original version (application/pdf)

Related works:
Journal Article: COST PASS‐THROUGH IN COMMERCIAL AVIATION: THEORY AND EVIDENCE (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:102018

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