Capturing the impact of fuel price on jet aircraft operating costs with Leontief technology and econometric models

Keywords: Jet aircraft Fuel price Operating cost Leontief technology Translog a b s t r a c t Investigation of the airline response to a fuel price increase is in effect an investigation of the role of variable interactions in aircraft cost models. We examine the impact of fuel price on aircraft costs and airline operational strategies by developing two classes of operating cost models for jet aircraft and comparing the results. The translog operating cost model is a flexible functional form that provides a detailed representation of the empirical relationship between fuel cost and operating cost, allowing for substitution, scale, aircraft age, and variable interactions to be captured. The simpler Leontief model assumes that inputs of a cost model must be used in fixed proportions regardless of their prices. While it does not capture variable interactions, the Leontief model is more transparent, requires fewer inputs, and allows the contribution of a single factor, such as fuel price, to operating cost to be more easily isolated. An analysis of the translog operating cost model reveals that as fuel price increases, airlines will take steps to use fuel more efficiently by leveraging other inputs; a comparison of the translog and the Leontief technology models, however, show that the potential for this supplier input substitution for fuel is rather modest. By building the two operating cost models and comparing their predictions, we illustrate a method to determine the prediction potential of a Leontief technology model and assess the importance of input substitution at the vehicle level. As 2008 jet fuel prices reached levels more than three times those of 2004, airlines responded in a number of ways to control costs. Airlines reportedly flew slower to reduce fuel consumption and decreased the common practice of tankering fuel. 1 Additionally, there were reports of airlines ceasing operations on older, less fuel efficient fleet and upgauging where possible (spike demonstrated uncertainty in the magnitude of future fuel prices. Furthermore, the scope and timeline of a future climate change policy threatens the stability of fuel prices. As a result, the impact of fuel price on aircraft costs and airline operational strategies remains a question of great practical importance. This question is, in effect, a methodological question as to how aviation costs should be modeled: are aircraft operating costs best captured with complex models that allow for input substitution or by simpler models that assume inputs are …