COST PASS‐THROUGH IN COMMERCIAL AVIATION: THEORY AND EVIDENCE

Philip G. Gayle · Ying Chou Lin

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Aviation Industry Analysis and Trends Merger and Competition Analysis Market Dynamics and Volatility

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. Interestingly, and new, our analysis reveals that the crude oil price‐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. (JEL L93, L13, Q40)

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1996Goods Prices and Exchange Rates: What Have We Learned?2000A Practitioner's Guide to Estimation of Random-Coefficients Logit Models of Demand 1989Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry 2009Market Structure and Multiple Equilibria in Airline Markets 1993MERGERS AND MARKET POWER -- EVIDENCE FROM THE AIRLINE INDUSTRY.1980Market Structure and Behavior 2008How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines *2006Does Hedging Affect Firm Value? Evidence from the US Airline Industry

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