Imperfect reversibility of air transport demand: Effects of air fare, fuel prices and price transmission

There are recent evidence that air transport demand may not have a perfectly reversible relationship with income and jet fuel prices, as is assumed in most demand models. However, it is not known if the imperfectly reversible effects of jet fuel price are a result of asymmetries in the supply side, i.e. asymmetries in cost pass through from fuel prices to air fare, or of demand side behavioural asymmetries whereby people value gains and losses differently. This paper uses US time series data and decomposes air fare and fuel price into three component series to develop an econometric model of air transport demand that is capable of capturing the potential imperfectly reversible relationships and test for the presence or absence of reversibility. We find that air transport demand shows asymmetry with respect to air fare, indicating potential imperfect reversibility in consumer behaviour. We also find evidence of asymmetry and hysteresis in cost passthrough from jet fuel prices to air fare, showing rapid increases in airfare when fuel prices increases but a slower response in the opposite direction.