Forecasts of passenger demand are an important parameter for aviation planners. Air transport demand models typically assume a perfectly reversible impact of the demand drivers. However, there are reasons to believe that the impacts of some of the demand drivers such as fuel price or income on air transport demand may not be perfectly reversible. Two types of imperfect reversibility, namely asymmetry and hysteresis, are possible. Asymmetry refers to the differences in the demand impacts of a rising price or income from that of a falling price or income. Hysteresis refers to the dependence of the impacts of changing price or income on previous history, especially on previous maximum price or income.
The authors use econometric techniques using US data on Revenue Passenger Miles to provide evidence on imperfectly reversible demand responses to fuel price and income changes. There is evidence that elasticities with respect to increasing income or price are not the same as elasticities with respect to a reduction in those factors, which is an example of asymmetric demand response. As part of the demand asymmetry estimates, he find that fuel price cuts do not have any statistically significant impact on aviation demand. The authors also find that hysteresis effects, whereby the elasticities depend on previous history, are also present for income and fuel price. In particular, income elasticity during a rising income is larger if income remains below a previous maximum than if income is above the previous maximum. For price effects, the opposite happens: response to an increase in price above a previous maximum is substantially larger than to an increase in price below a previous maximum. In fact, the fuel price elasticityof air transport demand is very small in magnitude for price recoveries below a previous maximum price.
Hysteresis in the income effects of air transport demand implies that during the recovery phase after an economic recession, air travel demand is expected to grow quicker than predicted by the reversible demand models. This could be important for short term planning and operations including optimization of airlines’ revenue management, especially after a recession. The longer term implications for demand projection, at least for our dataset, do not appear substantially biased although there is a possibility of some overestimation. The presence of hysteresis in the price effects indicates that the impact of any taxation policy implemented to increase fuel prices will depend disproportionately on the resulting fuel price from the tax additions. A taxation structure that raises the fuel price above the previous maximum would have a substantially larger effect than one that leaves the increased fuel price still below a previous maximum. Hysteresis in price effects can also be important for airlines’ short term operational planning and pricing strategy. In addition, the authors find that ignoring the effects of hysteresis in the imperfectly reversible model can bias the findings on price or income asymmetry. They find statistical evidence of asymmetry and hysteresis – for both, prices and income – in air transport demand. Therefore, empirical investigation into the mechanism of asymmetry and hysteresis in air transport demand will therefore be useful
Collected and summarized from the source below by Quynh Hoa https://db.vista.gov.vn:2095/science/article/pii/S0965856414000822