Direct air transport and demand interaction: A vector error-correction model approach

The goal of this paper is to impose a cause effect structure into the relation between tourism demand and air transport capacity. Specifically, we apply a vector error-correction model to assess if, and to what extent, capacity or passenger demand are first-movers that return to long-run equilibrium following short-run deviations. Using data on international aviation between Australia and our test cases of China and Japan, we find that demand on the Japan Australia market corrects for short-run deviations from the long-run equilibrium quicker than the China Australia market. Reasons for such variation in adjustment speeds are discussed and we show that the results are robust to the phenomenon of airlines pre-empting demand when setting capacity. (C) 2013 Elsevier Ltd. All rights reserved.