Spring 2012 (Vol.51, No.1)

Disappearance of American Wealth and Its Impact on Air Travel: An Empirical Investigation

Abstract

Recently, the Federal Reserve reported that U.S. households net worth dropped by $17 trillion, a stunning 26% loss from the peak of the cycle to the bottom. The precipitous drop in home and stock prices that continued through the first quarter of 2009 accelerated the drop in household wealth. Meanwhile, U.S. air travel suffered tremendously. While the economy contracted by around 1% in 2008 and the first part of 2009, total domestic enplanement dropped more than 4% over its 2007 level. Gross domestic product (GDP) or some other measure of current income has been a good predictor of air travel in the past. While current income is considered to be a good proxy for current discretionary spending, of which air travel is only one small part, recent destruction of wealth has significantly reduced the average consumer’s traditional appetite for expenditure, including air travel. Interestingly, there is very little empirical analysis that establishes a link between wealth and air travel. The paper seeks to address this gap by asking and investigating two empirical questions: (a) Does wealth have any quantifiable impact on U.S. air travel, controlling for all other relevant variables such as current income, past wealth, fare, and credit availability? (b) What has been the quantitative impact of wealth loss on air travel? The paper finds that the household wealth loss of U.S. $17 trillion yielded a loss of air travel demand of 730,000 passengers; or a loss of revenue of $244 million. As household wealth improved during the last two years, air travel recovered. Some of the lost passenger demand has been recouped (435,000) but a complete wealth-induced recovery still seems to be far off. Results of this analysis are important for both understanding future transitions in U.S. air travel, and hence forecasting, and formulating policy responses that may be designed more narrowly and effectively.

by Dipasis Bhadra

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