COST PASS‐THROUGH IN COMMERCIAL AVIATION: THEORY AND EVIDENCE

The significant worldwide decline in crude oil price beginning in mid‐2014 through to 2015, which resulted in substantial fuel expense reductions for airlines, but no apparent commensurate reductions in industry average airfares has caused much public debate. This paper examines the market mechanisms through which crude oil price may influence airfare. Interestingly, and new, our analysis reveals that the crude oil price‐airfare pass‐through relationship can be either positive or negative, depending on various market and airline‐specific characteristics. We find evidence that airline‐specific jet fuel hedging strategy and market origin–destination distance contribute significantly to pass‐through rates being negative. (JEL L93, L13, Q40)