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Some Airplane Energy Demand Economics

Thursday, December 1, 2016 11:40
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(Before It's News)

Before I talk about airplanes, I want to thank USC's media team for writing this very nice article about the The USC Economics Review (our new undergraduate economics journal).  Two weeks ago, Jerry Nickelsberg and I released a new NBER Working Paper titled “An Economic Analysis of U.S Airline Fuel Economy Dynamics from 1991 to 2015″

Airline transport generates a growing share of global greenhouse gas emissions but as of late 2016, this sector has not faced U.S. fuel economy or emissions regulation. At any point in time, airlines own and lease a set of durable vehicles and have invested in human and physical capital and an inventory of parts to maintain these vehicles. Each airline chooses whether to scrap and replace airplanes in their fleet and how to utilize and operate their fleet of aircraft. We model these choices as a function of real jet fuel prices. When jet fuel prices are higher, airlines fly fuel inefficient planes slower, scrap older fuel inefficient planes earlier and substitute miles flown to their more fuel efficient planes.

I want to thank Alessandro Gavazza of the LSE.  He shared some great data with us.

Our paper makes three empirical points;

1.  When the price of diesel fuel goes up, the lease price and the purchase price of fuel efficient commercial aircrafts increase.  This means that airlines have a greater incentive to respond to higher energy prices by reconfiguring their use of their current set of planes.

2. When the price of diesel fuel goes up, airlines fly their most fuel efficient vehicles more.

3. When the price of diesel fuel goes up, airlines fly their least fuel efficient planes more slowly to increase their fuel economy and thus to lower operating costs.

While a household has 2 or 3 cars and thus has limited portfolio reallocation when the price of gasoline goes up, an airline controls hundreds of planes and there are thus many more possibilities.  Our paper (while reduced form and simple) introduces a set of substitution effects that previous work hasn't explored before.

So, the fuel economy of cars as a function of gas prices has been well studied.  Jerry and I have built on this literature by studying this same dynamic for public sector buses and now for airplanes.  There is some continuity in my research agenda.




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