How Do Changes in Economic Activity Affect Air Passenger Traffic? The Use of State-Dependent Income Elasticities to Improve Aviation Forecasts.

11 October 2021
Daniel Hanson and Dr. Tuba Toru Delibasi

The COVID-19 pandemic has had a massive impact on air travel. As travel restrictions ease, airlines, airports, policymakers, regulators, and investors need accurate and reliable forecasts of the demand for air travel. Will demand rebound quickly, or will growth be slower? The answer could have profound impacts on many players in the sector.

Aviation forecasts have traditionally been based on the relationship between income and the demand for transport—the “income elasticity of demand”—and conventional forecasting approaches generally assume this relationship is constant, regardless of the state of the economy.

NERA Director Daniel Hanson, Consultant Dr. Tuba Toru Delibasi, and former NERA analysts Matteo Gatti and Shamai Cohen explore the causal relationship between income and air travel demand in a paper for the Journal of Air Traffic Management. The paper provides insights for the future growth of the aviation industry, particularly during the recovery period after a crisis.

They find that:

  • The use of long-run and short-run state-dependent income elasticities can improve upon existing air traffic forecasting models.
  • Long-run income elasticities are lower than short-run elasticities, and the short-run elasticities are lower during the recovery period following an economic downturn.
  • The increase in precautionary savings during a recovery period aligns with the reduction in income elasticity of demand.
  • The impact of COVID-19 on air travel could last longer than its impact on economic growth.

The authors conclude that their approach of using state-dependent income elasticities—together with other techniques to control for other likely changes in demand and supply in a post-COVID world—could be crucial for many players in the sector. A key future area of research will be to explore how these results vary by route, passenger class, and reason for travel.