Pass-Through with Endogenous Quality: An Empirical Study of Per-Passenger and Per-Flight Airport Charges

Abstract

This study empirically investigates the pass-through rates and incidence in the airline industry to understand how airport charges affect airfares, service quality (flight frequency), and welfare. It estimates a structural model endogenizing airfares and flight frequency by using data on Japanese domestic routes and conducts simulation analyses. It is found that while per-flight charges hardly affect airfares, an increase in per-passenger charges significantly raises airfares with the average pass-through rate of 97.5 percent. The pass-through rates are overestimated when flight frequency is treated as exogenous. Both types of charges decrease flight frequency. In addition, on nearly 80 percent of the routes in the sample, while per-passenger charges are superior to per-flight charges from the viewpoint of airline profits, the order is reversed from the viewpoints of the passenger and social surpluses.