Transitioning the U.S. Air Transportation System to Higher Fuel Costs

Abstract

The air transportation system enables economic growth and provides significant social benefits. Future increases and volatility in oil prices, as well as climate change policies, are likely to increase the effective cost of fuel. This paper investigates the expected impacts of higher fuel costs on the U.S. domestic air transportation system and discusses policy options to reduce negative economic and social effects. The 2004 to 2008 fuel price surge is used as a historic case study. A stochastic simulation model is developed with the use of price elasticity-of-demand assumptions and flight leg fuel burn estimates to understand the impacts of higher fuel costs. It was found that a 50% increase in fuel prices was expected to result in a 12% reduction in available seat miles if all cost increases passed through to passengers. System revenues are expected to decrease marginally for fuel price increases up to 50%, but higher increases may result in significant revenue reductions. Small airports are expected to experience relatively larger decreases and greater volatility in traffic. Older aircraft, flying sectors significantly below their optimal fuel efficiency range, are expected to experience the greatest reductions in capacity. An airline case study demonstrates that a regional carrier may be less sensitive to increased fuel prices than other business models. Policy options to maintain small community access, to manage airport traffic volatility, and to improve fleet fuel efficiency are discussed. To transition the U.S. air transportation system to higher fuel costs, stakeholder action will be required.