Capturing the Impact of Fuel Price on Jet Aircraft Operating Costs with Engineering and Econometric Models

Challenges in forecasting fleet development and deployment are in part due to fuel price uncertainty. To address this issue, a recent study developed an aircraft-specific Leontief technology operating cost model (LM) to compare aircraft costs under fuel price uncertainty. This model considers individual aircraft types to be Leontief technologies, such that the key drivers of cost must be used in fixed quantities. While asserted in the literature that models in this form can more accurately predict operating costs, the Leontief specification precludes a precise examination of how aircraft size will change due to economic forces. To this end, an econometric operating cost model (EM) is developed. The translog functional form is used to capture the effect of the key drivers of cost on jet operating costs and also allow for substitution between inputs. A comparison of the LM and EM shows that the Leontief technology assumption limits the LM to capturing operating costs in only a snapshot in time, while the EM captures the input substitution that occurs with factor price changes. The conclusion that the EM has strong predictive potential encourages a strengthening of the model towards capturing costs related to passenger preferences. This study takes a total logistics cost approach (TLC) and considers passenger value of frequency along with operating cost to be the total cost per operation. The cost-minimizing seat size is smaller and more reflective of existing conditions under TLC compared with operating cost alone, yet the difference diminishes as fuel price increases. This study highlights the predictive potential of econometric cost models and also the importance of considering passenger preferences in predicting future aircraft economics.