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Volatility Spillovers and Nonlinear Dynamics between Jet Fuel Prices and Air Carrier Revenue Passenger Miles in the US

 
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Review of Economics & Finance Submitted on 02/Jan./2013 Article ID: 1923-7529-2013-03-01-18 Bahram Adrangi, Richard D. Gritta, and Kambiz Raffiee Volatility Spillovers and Nonlinear Dynamics between Jet Fuel Prices and Air Carrier Revenue Passenger Miles in the US Bahrain Adrangi and Richard D. Gritta Pamplin School of Business Administration, University of Portland 5000 N. Willamette Blvd., Portland, Oregon 97203, USA Tel: +1-503-943-7224 E-mail: adrangi@up.edu and gritta@up.edu Kambiz Raffiee Foundation Professor of Economics, College of Business University of Nevada, Reno, Nevada 89557, USA Tel: +1-775-682-9142 E-mail: raffiee@unr.edu Abstract: This paper investigates the nonlinearities in the behavior of jet fuel prices and air carrier yields as measured by revenue passenger miles(RPMs), where one RPM is defined as one passenger flown one mile in revenue traffic. It indicates that previous research might have overlooked the possibilities of nonlinear dynamics between these two series. Drawing on existing tests of nonlinearities and chaos, this paper first investigates the existence of chaotic behavior as the source of nonlinearities in the monthly prices of jet fuel and RPMs. The findings show strong evidence that the two series exhibit nonlinear dependencies. Evidence is found, however, that this behavior may be inconsistent with chaotic structure. We propose and estimate bivariate GARCH(1,1) and bivariate EGARCH(1,1) models to ascertain the flow of information between jet fuel prices and revenue passenger miles. Estimation results of the bivariate GARCH models offer evidence that the shock transmission between the two series is mainly asymmetric, that is that positive and negative shocks impart degree of volatility differently. It is shown that the positive shocks to jet fuel prices show a substantially higher reaction from the revenue passenger miles. The conclusion is that, RPMs are quite responsive to upward volatility in prices ofjet fuel, while falling jet fuel prices may not translate into efficiency gains. JEL Classifications: L93, L90, L91 Keywords: Nonlinear dynamics. Chaos, EGARCH, Asymmetric shocks 1. Introduction Given the airline industry’s heavy dependence on fuel, air carrier analysts, carrier financial managers, financial markets and regulators have now become increasingly interested in the volatility of fuel prices and its impact on carrier performance. The International Air Transport Association (IATA, 2013) estimates the global airline industry’s fuel costs were approximately $207 billion in 2012, or 33% of operating expenses at $1 10.0/barrel Brent crude. This is an increase of $3 1 billion over 201 1 and is almost 5 times the $44 billion fuel expenses in 2003. The spot price ofjet fuel in 2012 increased again to average just under $130 a barrel. This was partly due to increase in the crack spread, i.e., the difference between crude oil and jet fuel to 16%. The crack spread is tending toward 20% as demand for jet fuel and other distillates increase. Hedging ~ 1 ~
Title
Volatility Spillovers and Nonlinear Dynamics between Jet Fuel Prices and Air Carrier Revenue Passenger Miles in the US
Author
Bahram Adrangi, Richard D. Gritta, Kambiz Raffiee
Publication Date
2013
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