Are Flights Becoming Non-Luxury Commodity? An Evaluation on the Elasticities of the Product of the Turkish Air Transportation

Year 2013, Volume: 2013 Issue: 12, - 26, 22.03.2016

Onur Tutulmaz

Abstract

Air transportation sector has achieved an impressive success changing the structure of the tranportation permenantly in the second half of the last century. Important elements of this success are its getting through structural changes by the means of important liberalization process and also the success of the airline companies elected as best ones through the competition of economical competitiveness. In the literature, there is a argument over the change of the microeconomical properties of the sectoral product while the sector is changing structurally. For example, it is being proposed that the air transportation can not be classified as luxury commodity. Our study analyze that allegation by using Turkey case application for an important after-crisis period. Our study, however, did not find any supporting proof for the allegation. In contrast, this study found the price and income elasticities of the product stay higher than the unity, i.e. in elastic region. The finding of the results of Turkey application is compatible with the result of the general analysis of the Turkish air transportation sector. According to these results the effects of the global developments take some time to come into effect in the local sector. Therefore it is possible to evaluate that the studied period is early for Turkish air transportation to have a structural change in its product.

Keywords

Transportation economics, Demand Elasticity, Turkey, Air Transportation, Luxury goods. R40, L93, C93

Uçuşlar Lüks Mal Olmaktan Çıkıyor mu? Türk Havayolları Ulaştırmasının Ürününün Esneklikleri Üzerine Bir Değerlendirme

Abstract

Havayolu ulaştırması, geçen yüzyılın ikinci yarısında ulaştırmanın yapısını değiştirecek bir başarıya imza atmıştır. Bu başarıda, önemli serbestleştirme açılımlarıyla hayata geçirilen rekabetçi ortamda ayakta kalan havayolu işletmelerinin başarısı önemlidir. Bu değişim içerisinde, sektörün ürününün de mikroekonomik özelliklerinin ve esnekliklerinin değişerek, örneğin ürünün artık bir lüks mal olmaktan çıktığı konusu tartışılmaktadır. Bu durum, Türk havayolu ulaştırması için önemli değişikliklerin olduğu 2001 krizi sonrası dönem için bir Türkiye uygulamasıyla sınanmaktadır. Çalışmamız, esneklik değerlerinde birim değerlerin altına inecek değişimlere rastlamamış, tam tersine fiyat ve gelir esnekliklerinin hala birim değerin üzerinde ve esnek bölgede olduğu saptamalarına ulaşmıştır. Bu durum, çalışmamızda Türk havayolu ulaştırması sektörüne yönelik yapılan genel analizle uyumlu olup, sektördeki global gelişmelerin Türkiye’ye yansımasında gecikmeler yaşandığı sonucunu desteklemektedir.

Keywords

Ulaştırma ekonomisi, Talep Esnekliği, Türkiye, Havayolu Ulaştırması, Lüks mallar. R40, L93, C93.

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• Transportation sector in a modern economy constitutes itself an important part of economy. Transportation is also in relation with many other sectors or it forms an understructure for them. Air Transportation sector has achieved an impressive success in the second half of the last century and it changed the structure of the transportation permanently. Important elements of this success are its getting through structural changes by the means of important liberalization process and also the success of the airline companies elected as best ones through the competition of economical competitiveness. On the other hand, the effects of the global developments take some while to diffuse into the local sector. Being closely connected to technology puts the air transportation sector down into a continuous changing and developing structure. In the literature, there is an argument on the issue over the change of the microeconomical properties of the sectoral product while the sector is changing structurally. For example, it is being proposed that the air transportation can not be classified as luxury commodity anymore. Our study analyzes that allegation by using an application case of Turkey for an important after-crisis period of the Turkish air transportation. In order to figure out if the studied period which is identified as opening out period for Turkish air transportation can be alleged to be early to have a structural change in its product, the study first starts a general analysis of the Turkish air transportation sector. Then a qualitative and quantitative elasticity analyses are conducted. The results of the analyses are compared. The developments of the period are also tried to be explained graphically by using simple economical phenomenons. ANALYSIS METHOD and TIME PERIOD Before applying technical analysis on elasticity, the development statistics of Turkish air transportation are introduced. Moreover, the general structure of the sector for the studied period of the beginning of the 21st century is put under quantitative scrutiny. The inferences of the general analysis are used to compare with the results of the following technical analysis on the elasticity changes. Elasticity Analysis Income elasticity of demand is calculated using Eq. 1. Y Y Q Q E d d Y / ¨    Q d : (satisfied) demand, Y: income (Eq. 1) Here the real price should be constant. All the other variables are also assumed constant according to ceteris paribus assumption. Another important assumption here is that all the demand from consumers is met with the sectoral actors, here airline companies. Thus the passenger traffic values represent here both the output of the sector and the total demand for the product. The prices of the product is calculated in Table 4 by using different flight line prices weighted according to their traffic weights out of the total traffic. The prices are deflated using different price indexes. The deflated price series are showed in Figure 10 .The deflated prices are close each other so it means here we might have just a minor deviations caused by deflating process. Figure 10 shows the nominal prices have same path with the price of the weighted output price, i.e. the real prices can be assumed constant until 2004.
• The changes happened in the 2004 are, however, more complicated. The monopolistic structure in the domestic market is abolished and the number of the companies serving scheduled flights in the domestic market has increased from 1 to 4 at the end of the 2003 so its results became effective in the 2004 (see Figure 6). The competitiveness created by supply shift brings a fall in the prices but at the same time the income has continued to rise. That means two variables changed at the same time so more complicated change has occurred in two different planes instead of one plane (see Figure 9). Hence, we use partial differential or partial elasticity concept to analyze the events of the 2004.
• If we define a closed function among quantity of product, income and price we can show that, F= (Q, Y, P) or, Q= Q(Y, P) By using partial derivative we can reach the Eq.4 which uses partial elasticities to form total percentage change in the output quantity. P P Y Y Q Q P Q Y Q        , ,   (Eq. 4) Q: quantity or output (here traffic values which is defined as number of total incoming and outgoing passengers measured in the airports, used as DHMI definition) P: output prices which is weighted prices from different flight lines in the Table 4 Y: income series, used from HM statistics, HM (2004). See Table 4 Time Period
• Elasticity analysis is hold for the period between 2000 and 2004. The period is very important for the Turkish air transportation sector; therefore it should be scrutinized closely. In the 2001, one of the deepest economical crisis happened in Turkey. 2002 was election year and after then the deregulations which were called then ‘regional aviation’ have come into effect. These deregulations were effective especially for the domestic market.
• In our study, the period of one of the Turkey`s biggest income contraction of 2000-2001; the period of income expanding of 2002-2003 and finally the period of income expanding with decline of real prices as a result of the supply shift after abolishing monopolistic structure by the ‘regional aviation’ policies. After crisis, effects of such a deep income contraction and its direct and indirect psychological effects might come into effect with time lag. The period of 2001-2002 in which an income expansion and output rise are seen together because of the time lag mentioned here, are assumed an exceptional and therefore excluded from the analysis. RESULTS
• The results of the elasticity calculations for the analyzed periods are as followed (see Fig.11): 58 , 2 096 , 246 , 53447 / ) 53447 48351 ( 13339 / ) 13339 10058 ( / / 01 2000 ,            Y Y Q Q E d d Y 99 , 0498 , 0491 , 52111 / ) 52111 54710 ( 8698 / ) 8698 9125 ( / / 03 2002 ,          Y Y Q Q E d d Y
• For 2003-2004 periods we calculate the elasticity using partial derivatives. Different partial compositions have been reached applying possible values for income elasticities judging from the calculations from the previous years. The possible partial elasticity compositions are like following: ε Q,Y =58;thus ε Q,P =-16 ε Q,Y =5 ;thus ε Q,P =-54 ε Q,Y =1 ;thus ε Q,P =-72
• The results show that even for the exceptionally high value of ε Q,Y =58 for the crisis year we have ε Q,P =-16 namely greater than unit elasticity. If we think 2.58 value is very high that can be encountered just temporarily, we can conclude here that the price elasticity clearly stays above the unit elasticity for the flights. If we analyze then from the counter direction we can see that for higher than 1.72 price elasticity values, the income elasticity can go under the unit elasticity. As we see on the Figure 9, we don`t have several cases in which the real prices are changing. To conclude to reliable results more case studies having real price changes should be carried on. On the other, evaluating that even the 1.72 level price elasticity is too high, we can conclude here that the price level in our study stays above the unit elasticity and between 1-1.5 and therefore the respective income elasticity continue to stay above the unit elasticity. CONCLUSION The results of the quantitative elasticity analysis show that both the price and the income elasticities remain above the unit elasticity level. The microeconomical interpretation of that value can say that the flights as output of the air transportation sector continue to be luxury good for the studied period between 2000 and 2004.
• The elasticity calculations are in conformity with the results of the qualitative analysis reached from Figure 9. From Figure 9 we can also qualititively concluded that to reach the enormous increase (by 58 %) we need very elastic response from both the price and income components of the output function. The results are also suitable with the results of the general analysis on Turkish air transportation, carried out in the Second Section. The general analysis shows that the impressive success of the global air transportation sector had some delays to come into effect for Turkey case. Entering to the new century the modest development of the sector is driven mainly by the foreign markets which analyzed as closely connected with the tourism sector. The domestic market depended on just the flag carrier airline (THY) of the country and the opening out regulations for domestic market, i.e. deregulations, had to wait for extended period in Turkey case because of the economical crises and political weakness. Therefore, the ongoing development in the Turkish market can be concluded to coming into effect with some delays. Same conclusion also can be reach for the changes of the properties of the sectoral output.