In Icarus’s slipstream: emissions mitigation and cost transmission in the airline industry

2017-02-09T05:02:21Z (GMT) by Özmen, Mehmet
This thesis examines the ways in which supply side cost pressures are expressed in the aviation industry. It is motivated by the desire to inform policy development efforts aimed at introducing mitigatory measures for aviation emissions. Studies undertaken to date to estimate the impacts of emissions policies have included an exhaustive discussion of demand side effects but have had little mention of supply side responses. The purpose of this thesis is to discuss the supply side reaction to cost changes and provide empirical findings to better inform simulation studies as well as to motivate more realistic theoretical models. This study starts by introducing the current administrative issues as well as the most recent technical knowledge concerning the mitigation of greenhouse gas emissions emanating from passenger aircraft. The structure and limitations of the Kyoto Protocol and European Emissions Trading System are discussed and the potential operational, technological and economic tools available for mitigation efforts are presented. In this context a review of the current carbon emissions simulation literature is conducted with particular attention to the treatment of carbon cost pass-through. The pass-through rate, which represents the proportion of cost changes passed through to ticket prices, is a key determinant of the equilibrium response. The simplified assumptions used in many studies are compared with a number of theoretical models and found to be at odds with the vast range of likely scenarios suggested under economic theory. Furthermore, it is found that the economic theory itself often results in indeterminate conclusions. Hence, on the basis that this cost pass-through is an empirical question, a unique dataset of directional itinerary level ticket price data is formed using U.S. DOT data which is combined with associated disaggregate data on aircraft; passenger; airline financial; scheduling; flight operations; economic; and demographic variables. The dataset is used to identifying the structural and operational responses of airlines to large increases in input costs. It is apparent that during the first decade of the 21st century in the U.S., airlines intensely resisted increasing fare costs in response to increased input costs but instead opted to pursue aggressive efficiency improvements. Further, these efficiency improvements were accompanied by quality and quantity changes to service offerings that transformed airlines’ final products. Where airlines did increase prices, these were generally realized through instruments such as fuel surcharges, ancillary fees and check-in charges that resulted in increased levels of information asymmetry experienced by passengers, which in turn enabled airlines to maintain low headline ticket prices while increasing total trip costs. Next, a dynamic GMM model is employed to produce the first empirical estimates of fuel cost pass-through using itinerary specific fuel costs onto passenger ticket prices. Pass-through rates are then presented for a variety of market conditions and the results are found to lend themselves directly to validating assumptions in future U.S. emissions impact studies and broader studies concerning cost transmission in the aviation industry. Finally, this thesis presents the first application of the asymmetric pass-through literature for the case of the aviation industry. Testing for three different types of asymmetry, the results from these models confirm that there are significant downward pressures on ticket prices with input cost decreases being passed through both more quickly and to a greater degree than input cost increases.