Cost Pass-Through Mechanism in the Aviation Industry

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Journal Title
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Volume Title
School of Business | Bachelor's thesis
Date
2021
Major/Subject
Mcode
Degree programme
Taloustiede
Language
en
Pages
4+27
Series
Abstract
Knowing the effect of cost changes for an airline on airfare is important for politicians and economists, as fuel taxing effects can be estimated more precisely. This thesis analyzes theoretical cost pass-through predictions within a contestable market and oligopoly markets. The following empirical part focuses on two questions: (1) what is the in-sample pass-through and (2) what are the main determinants of it? Lin and Gayle (2021) find that a 1% crude oil price increase is expected to cause a 0.065% decrease in ticket prices, mainly because of airline fuel hedging strategies and the market origin-destination distance. Shi et al. (2020) calculate that a 1% increase in fuel prices due to an airline’s hedging strategy is associated with a 0.66% increase in ticket prices.
Description
Supervisor
Liski, Matti
Thesis advisor
Kitti, Mitri
Keywords
microeconomics, cost pass-through, aviation industry, fuel hedging
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