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A strong and fair aviation sector is important for Australia’s economy. Air travel supports tourism and business and gives access to services in remote areas.
This paper is the most detailed study in Australia of how airfares affect passenger numbers. It covers more than 10 years of flights on both busy and remote routes. The study uses a model that takes changing habit into account. This gives more accurate results and supports better policy decisions.
The study finds that when airfares rise by 1 per cent, passenger numbers fall by about 0.5 per cent in the short run and by 2.5 per cent in the long run. We know from a previous study that when an airline enters a route, ticket prices usually drop by 5–10 per cent.
Together, this means that when an airline enters a route, there will likely be an extra 6.9–13.8 million passengers flying each year. The study treats routes as unidirectional, that is, Sydney to Melbourne is different from Melbourne to Sydney. The results are different depending on direction, because travel purpose and sensitivity to price can change based on direction.
The results show how strong competition helps lower prices and increases travel demand.