Effects of macroeconomic variables on domestic passenger airlines: Evidence from low-cost and full-service carriers in Mexico

This paper examines the impact of economic growth, inflation rate, interest rate, oil prices, and exchange rate on domestic air passenger travel in Mexico. The analysis covers the entire industry with a distinction made between full-service and low-cost carriers. The study utilizes monthly data and spans from January 2000 to December 2023. The estimates suggest that some variables are cointegrated, leading to the implementation of a Vector Error Correction Model (VECM). The findings reveal that domestic air passengers negatively respond to increases in fuel prices, as well as to increases in the inflation rate, and depreciations in the domestic exchange rate. Conversely, increases in economic growth and interest rates have a positive effect on domestic air passengers. Furthermore, results in a Granger Causality test indicate that fuel prices, inflation rate, exchange rate, and interest rate are effective predictors of air passengers' demand for low-cost carriers, while the inflation rate is the only statistically significant predictor in passengers demanding full-service carriers. Lastly, the impulse response function demonstrates that passenger reactions typically lag by approximately two or three months after changes in these macroeconomic factors. © 2024