Airfares and oil prices: ‘Feathers and Rockets’ adjustments

Robert Kaufmann

Energy Economics, 2017, vol. 68, issue C, 515-521

Abstract: One reason that the US Department of Justice is examining collusion within the airline industry may be the small (12%) decline in airfares that follows a large (57%) drop in crude oil prices. This relatively small response could be caused by three mechanisms related to the oil market; (1) slow rates of adjustment, (2) airfares adjust asymmetrically to changes in the oil market, or (3) asymmetric adjustments within the oil market that are communicated symmetrically to airfares. I evaluate these hypotheses by estimating a cointegrating vector autoregression model from monthly data and testing the error correction mechanism for asymmetry. Although small, estimated rates of adjustment indicate that the large reduction in oil prices has been passed to airfares. Tests of the error correction model do not provide evidence for asymmetric adjustments between airfares and oil market. Contrary to the relation between crude oil and motor gasoline prices, prices for jet fuel adjust faster to reductions in crude oil prices and so cannot be responsible for the relatively small decline in airfares. Although the CVAR model does not identify an oil-related mechanism that can generate the small decline in airfares relative to the large decline in the price for crude oil, this absence does not imply the converse, that airlines collude to set airfares.

Keywords: Airfares; Oil markets; Asymmetric adjustments (search for similar items in EconPapers)
JEL-codes: K21 L4 N7 Q40 R40 R48 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988317303523
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:68:y:2017:i:c:p:515-521

DOI: 10.1016/j.eneco.2017.10.011

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().