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Cost Pass‐Through In Commercial Aviation: Theory And Evidence

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  • Philip G. Gayle
  • Ying Lin

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)

Suggested Citation

  • Philip G. Gayle & Ying Lin, 2021. "Cost Pass‐Through In Commercial Aviation: Theory And Evidence," Economic Inquiry, Western Economic Association International, vol. 59(2), pages 803-828, April.
    • Handle: RePEc:bla:ecinqu:v:59:y:2021:i:2:p:803-828
    DOI: 10.1111/ecin.12949
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    Cited by:

    1. Frondel, Manuel & Thiel, Patrick & Vance, Colin, 2024. "Heterogeneous pass-through over space and time: The case of Germany's fuel tax discount," Ruhr Economic Papers 1087, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    2. Gayle, Philip & Lin, Ying, 2020. "Appendix to “Cost pass-through in Commercial Aviation: Theory and Evidence” – Theoretical Derivations," MPRA Paper 101973, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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