Price Elasticities in Aviation: Novel Estimates from Structural Gravity Modelling and Instrumental Variables Approach

This paper provides updated estimates of price elasticities of air passenger demand, using a comprehensive 10-year dataset from Sabre Market Intelligence (2010–2019). It expands the scope of previous research by incorporating global demand and price data at both the country and the city level and addressing key methodological issues, such as air fare endogeneity, using econometric techniques like Two-Stage Least Squares (2SLS) and fixed effects panel data analysis. The study reveals significant variation in price elasticity estimates, influenced by the choice of estimator, inclusion of fixed effects, and treatment of endogeneity of demand and ticket prices. While the global price elasticity is estimated at -0.87, travel originating from Europe exhibits a higher price sensitivity with an elasticity of -1.27. Moreover, medium-haul routes show a greater price elasticity than short-haul or long-haul routes. The findings offer valuable insights for policymakers to evaluate the impact of regulatory measures, for researchers to understand the cost sensitivity of demand for new technologies, and for airlines to optimize pricing strategies. Ultimately, this research contributes to a better understanding of the characteristics of air transport demand and its sensitivity.