So What’s The Price Elasticity Of Demand Of Domestic Air Travel?

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To be honest here I’ve no idea of the answer to that question. But I do know that it’s the right question to be asking. It also appears to be the question no one is asking.

FlyBe is pretty much bust. So, the deal is that they can pay the air passenger duty they have already collected in bits over time. Well, ho hum, whatever.

But now to the next bit. As Larry Elliott says:

The chancellor, Sajid Javid, has said he will consider scrapping air passenger duty (APT) on domestic flights as part of his March budget.

Would tossing this particular lifeline to Flybe allow Boris Johnson to escape the charge that he is a southern toff who is not remotely serious about levelling up the regions? Yes, it would. Would it be consistent with the aim of tackling the climate emergency? Not remotely.

The best tax systems are those that penalise things a country wants less of while encouraging things it wants more of. Scrapping APT would do the opposite: indeed it would be both environmentally damaging and regressive, since it is the better-off – on average – who fly intercity in the UK.

APT is not the world’s best-designed green tax, but at least it recognises that there are hidden costs to air travel, and that those doing the polluting should pay. Scrapping the £13 charge on domestic flights would, according to the basic laws of economics, encourage more people to fly. On the other hand, allowing Flybe to go to the wall would hack off a lot of voters, many of whom have just broken the habit of a lifetime and voted Tory.

But what’s the lifeline?

Abolishing APT would not mean that FlyBe could carry on charging the same (total) amount for a flight as it does now and then pocket the sum not being sent to the Treasury. It does actually face competition.

Rather, not charging APT will encourage, enabler perhaps, some who currently don’t fly to fly. It is the revenue from these extra passengers which will flow through into FlyBe’s pockets.

And how much is that? The answer being whatever is the price elasticity of demand of domestic air travel. How much extra domestic air travel will there be as a result of a cut in the price?

I dunno, perhaps no one does. But that is the actual question here. For without knowing the answer we don’t know whether reducing or eliminating APT will do anything at all for FlyBe’s finances.

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Mr Yan
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Mr Yan

How does saving FlyBe help the regions? Only flight from Robin Hood airport and removing it would leave local council with large loss?

The Mole
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The Mole

I thought the argument of why FlyBe is special and needs saving is that for many of their routes there isn’t competition (or perhaps won’t be if it goes under), the barriers for entry of new competition are also quite high, so it probably could protect at least some of that existing tax revenue as extra profit instead.

jgh
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jgh

Which prompts puzzlement over other airlines complaining to the competition authorities about the subsidy of removing APD. They aren’t competing in the first place, FlyBe is going bust because the routes just aren’t profitable enough for the others to be worth bothering with. If the others *had* competed with FlyBe, then FlyBe would have gone bust years ago. The very fact that non-FlyBe aren’t bothering to compete on the minor inland routes seems sufficient evidence that there’s no money to be made on them.

Phoenix44
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Phoenix44

No, the barriers to entry are very low – other carriers have aircraft and flybe generally doesn’t fly between slot-constrained airports. Flybe has to find routes that are not big enough to justify a 737/320 but big enough to make money. That’s very hard to do. If they grow a route, easyJet can just plonk a larger aircraft on it and undercut flybe. If they don’t grow it, they don’t grow.

It’s basically a very risky business model.

Bloke on M4
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Bloke on M4

Like where? Cardiff to Belfast? Sure, but there’s Bristol to Cardiff and it’s only another 30 minutes from Bristol Airport. Exeter is only another hour from Bristol.

And what’s the case of some obscure person who really has to fly to somewhere and can’t drive or take a train? Is there some heart surgeon that regularly needs to get to Newquay? Maybe put him in a private plane, or something.

Spike
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Spike

The good thing is that ending the £13 induces more travel. The bad thing is that ending the £13 induces more travel, coz “climate emergency.” Boris will not fight the notion that it’s urgent that government take steps to curtail our lives.

The £13 itself will let the airlines lower fares by that amount. OR increase salaries or increase management bonuses or increase dividends. We never know how much of each. Not all to fares, because travelers were okay paying the £13. Those other competitions might be more severe than the one for cheapest price.

Phoenix44
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Phoenix44

Probably not – flybe has a problem with load factors so more passengers would mean a negligible increase in emissions. It might even be net lower emissions if people fkyvrsther than drive.

Peter Moles
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Peter Moles

Well, there’s a 1997 paper by J.D.Jorge-Calderón in the Journal of Air Transport Management that concludes that for European airlines the unrestricted economy fare.
Hope this helps

Peter Moles
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Peter Moles

Sorry, left off key bit: the price is inelastic.

Jim
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Jim

There was quite a sensible chap interviewed on R4 yesterday, he said the problem for domestic airlines like FlyBe is that they can’t get into Heathrow, because of lack of capacity (and what capacity there is gets hogged by the more profitable international slots) He reckoned the market for them is in providing the first leg on international flights – there just isn’t enough intra-UK demand for flights to keep all the domestic airlines afloat. So they could then offer through tickets to worldwide destinations, via hookups with the larger carriers. So you could get on your flight at Exeter,… Read more »

Phoenix44
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Phoenix44

Partly, but BA’s long haul flights (at present) are not very dependent on transfer traffic. London is the world’s biggest point to point market by some distance. And BA and Heathrow can pull in transfer traffic when needed from Europe (because BA flies to those cities anyway) just as easily as from the UK, but on bigger aircraft than flybe uses, so Heathrow capacity is maximised. And unless flybe used BA’s terminal – which is full – you have to transfer between terminals, which is a pain and requires longer transfer times and costs (shifting baggage between terminals). Places like… Read more »

Jim
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Jim

The guys point was thats where the growth would be, encouraging people to use a domestic flight as the first leg of an international one. He was also (I think) the author of a report that was infavour of a new Heathrow runway, to create new capacity as well.

bloke in Germany in New Jersey
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bloke in Germany in New Jersey

KLM do this with mixed success at British regional airports. You’re never going to have a flight from Southampton or Birmingham to Heathrow, and BA cut their domestic service to flights out of LHR and LCY a long time ago. Flybe is actually the leftovers of BA connect, what used to be BA’s domestic network except London.

Bloke in North Dorset
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Bloke in North Dorset

Don’t we want to know if those extra passengers will increase economic activity in the regions, the government’s stated aims, or just be a displacement from rail and the same economic activity?

Gavin Longmuir
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Gavin Longmuir

That is an excellent point. The real way to save Flybe would be to move the UK Parliament to Newcastle or York; move the Bank of England to Inverness; move the Department of Climate Change, Feminism, and General Wokeness to Lerwick in the Shetlands. The other factor is that the hub-and-spoke Heathrow model of UK air transport is dying — the smart person flying from Edinburgh to Australia already transfers in Dubai, not London.

Bloke in North Dorset
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Bloke in North Dorset

I’ve been making the point that Govt should be moved out of London since at least ’73. Then I was proposing moving Parliament to York. When I was on a Govt contract with DCMS in 1 Parliament Sq I used to say that when the free market revolution came it would make a great hotel and we’d move the civil servants to Grimsby, the ones that remained. They thought I was joking. I also used to point out that at least half the staff there spent all their time writing answers to written Parliamentary questions or reading newspapers and providing… Read more »

Quentin Vole
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Quentin Vole

A transfer in the sandpit works if you’re near Brum or Manc or Glesga, but not Bristol, let alone Newquay.

Andrew Carey
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Andrew Carey

People might substitute one trip to the Canaries for two trips to Devon and Cornwall – CO2 emissions overall would go down. Unlikely for the equation to run this way but it could, and if I was Sajid I’d have a crack at making the argument. Should also make it easier to get accommodation in the UK. Devon and Cornwall have insufficient holiday lets, second homes being offered out – despite what the objections of the so-called ‘local’ people that holiday homes are driving up costs for them. I tried popping a suggestion on Spud’s web-site that Prince Charles’s properties… Read more »

james morgan
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james morgan

good point mr worstall!

bloke in Germany in New Jersey
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bloke in Germany in New Jersey

It’s dependent on too many constantly changing variables to work out. There are passengers who have total flexibility and those with none at all. I’ve paid €15 for a one way flight to London with easy jet, over €1000 for a walk up fully flexible business class return with lufthansa to London, and every price point in between. The competition on flybe routes is train and car, so they must be very reliable on time-poor day trippers for profitable seats, and stop losses with cheap fares on the rest. The day trippers need at least morning and evening flights in… Read more »

Bloke on M4
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Bloke on M4

What are domestic flights generally used for? I’d say that it’s mostly a business thing. People who go on holiday to Scotland generally have 1 or more people, maybe a family, some bags, and they’re going up for a week or more, so might as well drive as it’s a lot cheaper. I don’t imagine there’s a lot of tourism going from London to Newcastle or Cardiff to Belfast. So, beyond that, it’s £26 for someone going to see a client for some business. Along with all the other costs of time and so forth, I can’t see this making… Read more »

HJ777
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HJ777

I was listening to someone on Radio 5 this morning saying how essential the FlyBe flights are for his regional business and, as evidence for their necessity, he said that the flights are always packed.

It occurred to me that if this is true, then Flybe are probably undercharging and could simply raise their prices to return to profitability.

Bloke on M4
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Bloke on M4

They probably couldn’t raise prices. Airlines adjust ticket prices based on demand. If they notice sales are a little sluggish, they lower the price. If it’s selling like hot cakes, they raise it. A packed flight could include people who spotted a £60 bargain and did it for the fun of it.

HJ777
Guest
HJ777

He said they’re always packed. As you said, domestic flights are mostly a business thing. If you need to get somewhere on business, you’re not going to buy a seat just because it’s a £60 bargain.

Bloke on M4
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Bloke on M4

But there’s people who will also like a leisure flight and if the price is cheap enough, maybe they’ll do that trip to Belfast to see Giants Causeway and the Jamesons distillery. If you’re retired, you can fit around them.

Skyscanner even has tools for this. If you just want a bargain, you can say anywhere, for a whole month and it’ll find you cheap flights. £17 to Vilnius sounds good. Throw in Airbnb and you have a two night break for a couple for about £100.

Jimers
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Jimers

If you were flying to Belfast and on to see the Giants Causeway, you would visit the Bushmills distillery not Jamesons. And you would be better for it.