On the Relationship Between Jet Fuel Price and Air Passenger Traffic Growth in Western Europe

This paper estimates the effect jet fuel price changes have on air passenger traffic growth in Western Europe between 2007 and 2017. Fuel is the largest and most volatile input cost for airlines, that incorporate changes in the price via air fare adjustments and dilution/contraction of seat capacity to maintain positive profit margins. Passenger growth is affected indirectly through adjustments in ticket price facing a price-sensitive demand. A negative relationship is shown between fuel prices and air passenger traffic growth and a fuel lag is present. The effect of a fuel price change is delayed and greater a year later (medium-term) that 3 to 6 months later (short-term) due to fuel hedging practices and the time-consuming implementation of capacity modifications. During the most recent financial crisis (2008-2010), the magnitude of this effect is more substantial and only a marginal difference is found between the short- and medium-term effects