Investigation of the Impacts of Effective Fuel Cost Increase on the U.S. Air Transportation Network and Fleet

Abstract

The cost of aviation fuel increased 244% between July 2004 and July 2008, becoming the largest operating cost item for airlines. Given the potential for future increases in crude oil prices, as well as environmental costs (i.e. from cap and trade schemes or taxes), the effective cost of aviation fuel may continue to increase, further impacting airlines' financial performance and the provision of air service nationwide. We evaluate how fuel price increase and volatility affected continental US air transportation networks and fleets in the short-and medium-term using the increase in the 2007-08 and 2004-08 periods as a natural experiment. It was found that non-hub airports serving small communities lost 12% of connections, compared to an average loss of 2.8%, July 2004-08. It is believed that reduced access to the national air transportation system had social and economic impacts for small communities. Complementary analyses of aircraft fuel efficiency, airline economics, and airfares provided a basis for understanding some airline decisions. Increased effective fuel costs will provide incentives for airlines to improve fleet fuel efficiency, reducing the environmental effects of aviation, but may cause an uneven distribution of social and economic impacts as airline networks adapt. Government action may be required to determine acceptable levels of access to service as the air transportation system transitions to higher fuel costs.

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