Airfares adjustment to fuel price shocks: Evidence from the Brazilian airline market

Abstract

Between January 2017 and July 2024, aviation kerosene prices experienced fluctuations due to external shocks. When the World Health Organization classified Covid-19 as a pandemic, in 2020, fuel prices fell drastically. However, as the global health crisis receded and governments abandoned mobility restrictions, demand for air travel progressively recovered. As a consequence, there was a rapid increase in prices. Additionally, in 2022, the conflict between Russia and Ukraine further intensified pressure on aviation fuel prices. Considering that fuel expenses constitute approximately one-third of airlines' cost structure, this study aims to analyze the relationship between aviation kerosene prices and domestic airfares in Brazil. The initial hypothesis suggests that, in an environment characterized by imperfect competition, the pass-through of prices between fuel costs and airfares occurs asymmetrically. Specifically, positive shocks in fuel prices would be quickly and fully reflected in airfare adjustments, while negative shocks would be delayed or have lesser impacts on airfares. However, results from a nonlinear autoregressive distributed lag (NARDL) model combined with the derivation of asymmetric cumulative multipliers do not support this hypothesis. Instead, evidence of symmetric pass-through was found, indicating that airfares respond symmetrically to fuel price shocks in the short term. Despite the dominance of only three companies in the domestic aviation market in Brazil, there are indications of fierce competition among airlines in the analyzed period. During periods of crisis, companies face difficulties in passing cost increases onto prices.