How do jet fuel shocks shape Australian domestic airfares?

This paper examines the impact of structural jet fuel price shocks on domestic airfare prices in Australia, focusing on three fare classes: business class, restricted economy class, and best discount class. Using a regression model that treats fuel price shocks as predetermined, the study investigates how different types of fuel price shocks—supply shocks, aggregate demand shocks, and jet fuel-specific demand shocks—affect airfare prices across these classes. The analysis employs a block bootstrap method to address potential serial correlation in the data. The findings indicate that fuel supply shocks do not significantly impact airfares, suggesting that airlines may hedge against such shocks. Aggregate demand shocks, however, lead to higher airfares, particularly for business and restricted economy classes, as economic growth increases travel demand. Jet fuel-specific demand shocks, caused by events such as geopolitical tensions or climate-related issues, lead to short-term decreases in business class airfares, while restricted economy fares remain stable and discount fares increase due to greater demand from budget-conscious travelers. These results highlight the differentiated effects of fuel price shocks on airfares and underscore the need for airlines to adopt flexible pricing strategies to respond to changing economic conditions and passenger behavior.