The next time you hear the airline industry complain that fuels prices are driving up ticket sales, take that excuse with a grain of salt. A previous post looked at cycles in airline prices and traffic, which made some claims about the likely increase of future ticket prices. However, that post did not consider the other determinants of ticket prices. This post will report that capacity is the most economically and statistically significant variable in the short-term.
The table below presents results from a regression of growth rates of various components of ticket prices using 205 months of observations. This aggregate data comes from the Bureau of Transportation Services and Energy Information Administration. I use growth rates lagged growth rates instead of levels to avoid a spurious correlation, and I include a lagged ticket price growth to account for some of the additional factors that I may not have included.
For a 1 percentage point increase in capacity (number of available seats) ticket price growth falls a little over a tenth of a percentage point. Amusingly fuel prices yield a small coefficient with a high p-value. Thus, one can conclude that the previous months fuel prices have a lower impact on current ticket prices than a decline in the number of available seats.
Why is that important? Well, airlines have control over the number of available seats, and less control over the price of fuel. This analysis suggests that they can more than make up for the short-term changes in fuel prices by managing their available seats.
The major caveat in this analysis is that pesky qualifier: short-term. It may certainly be the case that the long-term impacts of fuel prices may have significant economic and statistical impacts on ticket prices. In fact, it seems quite likely, but that would require a larger and more detailed data set than the free data I was able to obtain.
Last July a little over 66 million passengers traveled via plane within the US up from a little less than 62 million in 2015. With the summer fast approaching, one might wonder if we will have another robust travel season. This post describes how the strong demand for air travel has been driven by a steady decline in ticket prices.
The graph above shows the cyclical component of the number of passengers on domestics flights in the US. (The graph including international flights is similar.) Not surprisingly the financial crisis depressed air travel, but the industry recovered well hovering around the trend from 2011 until late 2014. More recently, however, air traffic has hit a bit of a boom, driven, in most part, by a decline in ticket prices.
The graph above displays the cyclical component of tickets prices for domestic airline tickets. Since 2014 ticket prices have been consistently below trend, only recent showing signs of reversing course. This corresponds nicely to the above trend cycle in the number of passengers. Consumers are currently taking advantage of relatively low ticket prices, but the increased demand should increase pressure for a gradual increase in future ticket prices.