The effect of 9/11 on the airline industry ECON 240C – Project 2 Hao Jin ChingChi Huang Bryan...

The effect of 9/11 on the airline The effect of 9/11 on the airline industryindustry

ECON 240C – Project 2

Hao JinChingChi HuangBryan WatsonVineet SharmaHilde Hesjedal

The effect of 9/11 on the airline The effect of 9/11 on the airline industry industry

After the incident on sep. 11. the After the incident on sep. 11. the revenue per passenger miles revenue per passenger miles dropped $22.5 billion within just one dropped $22.5 billion within just one month.month.

This paper look into how much the This paper look into how much the drop actually was if we correct for drop actually was if we correct for time trend and seasonality and other time trend and seasonality and other econometrical issues.econometrical issues.

The effect of 9/11 on the airline The effect of 9/11 on the airline industryindustry

The airline industry have gone from The airline industry have gone from being reasonable profitable to tough being reasonable profitable to tough and turbulent with low margins and and turbulent with low margins and high losseshigh losses

Can the incident on sep. 11 be the Can the incident on sep. 11 be the reason for some of the difficulties the reason for some of the difficulties the industry is facing today?industry is facing today?

Revenue Passenger Miles Revenue Passenger Miles

Definition “Revenue Passenger Definition “Revenue Passenger Miles”: One revenue passenger Miles”: One revenue passenger transported one mile in revenue transported one mile in revenue service. Revenue passenger miles service. Revenue passenger miles are computed by the summation of are computed by the summation of the products of the revenue aircraft the products of the revenue aircraft miles flown on each inter-airport hop miles flown on each inter-airport hop multiplied by the number of revenue multiplied by the number of revenue passengers carried on that hop. passengers carried on that hop.

The effect of 9/11 on the airline The effect of 9/11 on the airline industry industry

There are various reasons for the There are various reasons for the difficulties within the business, difficulties within the business, however we have examined the however we have examined the revenue passenger miles in the U.S. revenue passenger miles in the U.S. from 1996 and onwards and looked from 1996 and onwards and looked at the effect the incident on at the effect the incident on September 11 had on total revenue September 11 had on total revenue in the industry. in the industry.

Revenue Passenger MilesRevenue Passenger Miles

First Differenced SeriesFirst Differenced Series

Seasonal&First Differenced Seasonal&First Differenced SeriesSeries

Unit Root TestUnit Root Test

ARMA ModelARMA Model

Modeling the EventModeling the Event

Step functionStep function

Conditional Heteroskedasticity Conditional Heteroskedasticity

ARCH TestARCH Test

Correlogram of Residual Correlogram of Residual SquareSquare

Add ARCH(1) and GARCH(1) Add ARCH(1) and GARCH(1)

Add ARCH(1),GARCH(1) and GARCH(2)Add ARCH(1),GARCH(1) and GARCH(2)

The series is more noisy right after The series is more noisy right after 9/119/11

ForecastForecast

Re-coloringRe-coloring

95% Confidence Interval95% Confidence Interval

ConclusionConclusion

The loss directly associated with 9/11 The loss directly associated with 9/11 is $12.8 billion (instead of $22.5).is $12.8 billion (instead of $22.5).

The total revenue in the industry today The total revenue in the industry today would most likely have been higher if would most likely have been higher if not for the incident.not for the incident.

However, other factors have also However, other factors have also influenced the airline industry.influenced the airline industry.