Pass-Through of Firm-Specific and Sector-Wide Cost Changes in the Airline Industry

Cost pass-through is critical in understanding airline pricing responses to airport charges or passenger taxes, for example. This paper empirically investigates the hypothesis that sector-wide cost shocks are more fully passed onto passengers compared to firm-specific cost shocks, and examines how these shifts translate into passenger numbers. For identification, the variation in both national and airport-level cost increases across Europe from 2018 to 2024 is exploited, excluding the years most affected by COVID-19, 2020–2022. A two-way fixed-effects regression is applied to isolate the impact of nationwide and airport-level cost changes on airfares and passenger numbers. Results show similar pass-through for nationwide and airport-specific cost increases, thereby not confirming the theory that sector-wide cost increases are more fully passed onto passengers compared to firm-specific cost increases. However, price elasticity is higher for airport-specific cost increases, resulting in greater reductions in passenger numbers for the same cost increase compared to sector-wide cost increases.