Airline passenger fatality and the demand for air travel

Abstract

After the 11 September tragedy, 20% of the scheduled US airline flights were cancelled and the passenger load factor was down to 56% from 66.6% a year ago. Was the high death toll or the nature of the attack itself responsible for this dramatic decline? Using the US data, we find that the demand for air travel did fall in years of relatively high fatality rate, but the demand is not sensitive to whether the high fatality rate is due to any terrorist activities. Our estimation results suggest that even after controlling for the sharp increase in the fatality rate because of the 11 September tragedy, a considerable proportion of the decline in demand for air travel that year is still unexplained. This evidence could suggest that there has been a fundamental shift in consumers’ perception of air travel safety in the aftermath of the tragedy.

Acknowledgement

We are grateful to Paul G. Hooper for helpful discussions.

Notes

¹ It should be noted that not all the cancellations are due to the loss of demand. The US Federal Aviation Authority has grounded all commercial flights in the US after the tragedy and only partially reopened the sky at 4:00 PM, 14 September (DOT 97-01).

² US Airways Group and United Airline filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in August 2000 and March 2003, respectively.

³ According to Gowrisankaran (2002), before deregulation, the Civil Aeronautics Board controlled both the routes airlines flew and the ticket prices they charged. After deregulation, the primary regulatory role of the Department of Transportation (DOT) is to decide whether an airline is operating in accordance with safety standards and other operating procedures.

⁴ Because their sample has information on 13 accidents in the post-deregulation period, Borenstein and Zimmerman (1988, p. 927) warned readers about the danger of inferring a systematic demand response for that period.

⁵ Bosch et al. (1998) and Nethercutt and Stephen (1997) used daily stock price, while Borenstein and Zimmerman (1988) used monthly travel volume.

⁶ The data on air traffic volume and the annual passenger prices for domestic and international travellers are downloaded from http://www.airlines.org/public/industry and the safety related statistics are derived from http://www.airlines.org/public/industry/bin/safety.xls, which is compiled by the Air Transportation Association (ATA) from various publications of Civil Aviation Authority and Federal Aviation Administration.

⁷ In each of the 5 years, >300 lives were lost due to air travel incidents.

⁸ The Cobb–Douglas function is widely used to model the demand for air transportation (e.g. Bartlett, 1965; Brown and Watkins, 1968).

⁹ American Airline flew its first jet plane on 25 January 1959. Since the replacing of propeller plane with jet plane is a gradual process, there is no obvious solution on what is the best way to group our series into pre-jet plane era and jet-plane era.

¹⁰ We also considered to use total fatalities and the number of fatal incidents as measures of F. It turned out that neither of these two measures has any significant impact on air travel. The potential reason is that these measures rise as air travel volume increases for any given fatality rate. Rational consumers will discount these measures by the travel volume when they make their travelling decisions.

¹¹ The modified Dickey–Fuller t-test statistics proposed by Elliot et al. (1996) suggest that the residue of the OLS estimator of Equation 3 is stable.

¹² We only managed to find the oil price after 1972 and the cost index after 1978. Because a barrel of oil only costs $1.9 in 1972, the fuel cost is unlikely to be a major component of the airline industry. Hence, even if we have the pre-1972 oil price series, it is unlikely that the oil price can be a valid instrument for the price of air travel. In addition, the price of air travel was regulated before 1978, the cost variable might not be a good instrumental variable for the price of air travel before 1978.

¹³ Monthly fuel prices are only available for the period 1986 to 2001.