A Study of Commercial Aviation Demand and Revenue Responses to Changes in Ticket and Segment Tax (2005)

Author: Stephanie Pei-Hua Chung

The Strategy Simulator project, funded by the Federal Aviation Administration (FAA), strives to find a tax structure that will support the National Airspace System (NAS) and maintain revenue neutrality, where taxes can be adjusted and the FAA can still attain the same revenue amount if taxes had not changed. Virginia Tech's role in the project is to analyze the effects of different tax structures on passenger demand. Virginia Tech focuses on ticket and segment taxes and runs different tax scenarios through the Transportation Systems Analysis Model (TSAM) and the TSAM Aggregation for the Strategy Simulator (TASS) model. TSAM provides a more microscopic analysis of demand by including spatial representation and mode choice in the model. TASS is a work in progress that aggregates the TSAM analysis in order to reduce computation time so that scenarios can be tested quickly.

Based on data from literature review, TSAM results provides the smallest combined percent error for demand and revenue, followed by TASS, then the Strategy Simulator. TSAM and TASS also provide a detailed analysis of demand behavior in response to tax changes. In general, demand decreases as taxes increase, and demand increases over the years due to a fare scaling factor applied to reduce fares over the years. Revenue increases both over increasing taxes and over the years, indicating that increases in taxes does not harm revenue collection and actually increases revenues for the ticket and segment taxes tested. Revenue increases over the years because demand increases over the years, and the revenue generated from this increased demand more than makes up for decreased fares.

[Full Text]