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Air Transport Capacity and Tourism Demand Interaction: A Vector Error Correction Model Approach

21 Pages Posted: 2 Aug 2011 Last revised: 29 Aug 2011

Tay Koo

University of New South Wales (UNSW) - School of Aviation

David Tan

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

Date Written: July 31, 2011

Abstract

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.

Keywords: market equilibrium, vector error correction, air transport capacity, airlines, tourism, aviation, air transport

JEL Classification: C32, C53, L93

Suggested Citation

Koo, Tay and Tan, David and Duval, David Timothy, Air Transport Capacity and Tourism Demand Interaction: A Vector Error Correction Model Approach (July 31, 2011). Available at SSRN: https://ssrn.com/abstract=1899128 or http://dx.doi.org/10.2139/ssrn.1899128

Tay T.R. Koo (Contact Author)

University of New South Wales (UNSW) - School of Aviation ( email )

570 Airport Ave
Bankstown Aerodrome, NSW 2200
Australia

David Tan

School of Finance, Actuarial Studies, and Applied Statistics, Australian National University ( email )

Canberra, Australian Capital Territory 0200
Australia

HOME PAGE: http://cbe.anu.edu.au/staff/info.asp?Surname=Tan&Firstname=David

David Timothy Duval

Faculty of Business and Economics, University of Winnipeg ( email )

Winnipeg, Manitoba R3B 2E9
United States

School of Aviation, University of New South Wales ( email )

Sydney, NSW 2052
Australia

School of Business, University of Otago ( email )

P.O. Box 56
Dunedin, Otago
New Zealand

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