Dynamic Interdependence in Jet Fuel Prices and Air Carrier Revenues

Abstract

Volatility in fuel prices and its impact on air carrier firms has drawn interest from the air transport industry and financial markets. According to the International Air Transport Association (IATA), the global airline industry’s fuel cost is estimated to be $207 billion in 2012, constituting 33 % of operating expenses at $110/barrel Brent of oil. This is an increase of $31 billion over 2011 and is almost five times the $44 billion fuel expenses in 2003. Our paper is motivated by three issues. First, transportation economists, as well as policy makers, are interested in sources and causes of efficiency in the air carrier industry. Second, the volatility in financial and commodities markets, including crude oil and its distillates, has triggered interest in applying nonlinear methodologies, including chaos theory, to these markets. Third, developments in the econometrics of nonlinearity in the last three decades offer researchers powerful tools for detecting relationships that are inherently nonlinear and may not be conducive to various methodologies that are seeking to impose linear modeling on nonlinear relationships. This paper investigates the effects of shocks to jet fuel price per gallon on the yield for the air carrier industry as measured by dollars per passenger revenue miles. We suggest that previous research might have overlooked the possibilities of nonlinear dynamics between the two series. Drawing on existing tests of nonlinearities and chaos, we first investigate the existence of chaotic behavior as the source of nonlinearities in themonthly prices of jet fuel and a measure of yield in the air carrier industry, dollars per revenue passenger miles. To accomplish this task, we estimate AR (1) and GARCH (1,1) models Atl Econ J (2014) 42:473–474 DOI 10.1007/s11293-013-9388-9