Gravity Models in Air Transport Research : A Survey and an Application

Both trade theories and empirical evidence have provided strong support for the gravity model. However, its applications in air transport research remain relatively sparse. A review of the air transport literature employing gravity models in the last ten years shows that most of the studies have not accounted for the advances in empirical estimation techniques developed in international economics. Studies that compare the magnitudes of the elasticities of income and distance and the sizes of other cost variables between trade and air transport literature, and between various estimation approaches, are still lacking. We apply the gravity model in the context of China's aviation market using the Poisson Pseudo-Maximum Likelihood (PPML) approach with fixed effects. The results indicate an enormous positive effect of the continuous liberalisation in the air transport sector in promoting the demand for air travel. The emergence of high-speed rail (HSR) services has been a serious threat to China's airline industry and could result in a significant reduction in the number of air passengers when other factors are controlled for. Strategies need to be worked out to cope with the challenges of the HSR services. This research also suggests that the presence of low-cost carriers could increase the bilateral passenger flows by 19%