Air Transport Capacity and Tourism Demand Interaction: A Vector Error Correction Model Approach
University of New South Wales (UNSW) - School of Aviation
School of Finance, Actuarial Studies, and Applied Statistics, Australian National University
David Timothy Duval
Faculty of Business and Economics, University of Winnipeg; School of Aviation, University of New South Wales; School of Business, University of Otago
July 31, 2011
The co-movement of air transport capacity and tourism demand are well-recognised. However, there exists a gap in understanding the relation between air transport capacity and demand such that the causal nature of these variables is rarely examined. The goal of this paper is to impose a cause-effect structure into the relation between tourism demand and air transport capacity. Specifically, we apply a vector error correction model (VECM) to help assess whether, and to what extent, capacity or passenger demand are first-movers that return long-run equilibrium following an event that punctuates the established equilibrium. Using data on international aviation between Australia and our test cases of China and Japan, we find that demand on Japan-Australia market correct for short-run deviations from the long-run equilibrium quicker than in the China-Australia market. Reasons for such variation in adjustment speeds are discussed and we show that the results are robust to the phenomenon of airlines pre-empting demand when setting capacity.
Number of Pages in PDF File: 21
Keywords: market equilibrium, vector error correction, air transport capacity, airlines, tourism, aviation, air transport
JEL Classification: C32, C53, L93
Date posted: August 2, 2011 ; Last revised: August 29, 2011
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