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Impact of Wealth

Destruction onDemand

Linda Wu

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IntroductionRecent wealth destruction

Impact on the demand for air travel?Tentative ModelsIs there an income effect? How much?Changes in demand for other modes?

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Current vs Permanent Income

CurrentDisposable Income

Personal incomegenerated after taxes

Flow

PermanentHousehold Worth

Assets LiabilitiesAssets: Tangible,financial

Liabilities:mortgages

Stock

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From the Federal Reserves Flow of Funds http://www.federalreserve.gov/releases/z1/Current/

GDP Price Deflator: http://research.stlouisfed.org/fred2/data/GDPDEF.txt

DISPOSABLE HH INCOME

DollarsinB

illions

Quarter 1990 Q1

1990 Q41991 Q3

1992 Q21993 Q1

1993 Q41994 Q3

1995 Q21996 Q1

1996 Q41997 Q3

1998 Q21999 Q1

1999 Q42000 Q3

2001 Q22002 Q1

2002 Q42003 Q3

2004 Q22005 Q1

2005 Q42006 Q3

2007 Q22008 Q1

2008 Q4

0.000

2,000.000

4,000.000

6,000.000

8,000.000

10,000.000

12,000.000

Base Year 2005

Q3 1990 - Q1 1991

Q1 2001 - Q4 2001Q4 2007 - ...

http://www.federalreserve.gov/releases/z1/Current/http://www.federalreserve.gov/releases/z1/Current/

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Long Range Relationship BetweenGDP/Income and Consumption

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General upward trend,

Wealth destructionFrom the Federal Reserves Flow of Funds < http://www.federalreserve.gov/releases/z1/Current/ >

NET HH WORTH

Dollarsin Billions

Quarter 1990 Q1

1991 Q21992 Q3

1993 Q41995 Q1

1996 Q21997 Q3

1998 Q42000 Q1

2001 Q22002 Q3

2003 Q42005 Q1

2006 Q22007 Q3

2008 Q4$0.00

$100.00

$200.00

$300.00

$400.00

$500.00

$600.00

$700.00

Q3 1990 - Q1 1991Q1 2001 - Q4 2001Q4 2007 - ...

http://www.federalreserve.gov/releases/z1/Current/http://www.federalreserve.gov/releases/z1/Current/

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Net Worth / Disposable Inc

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

1991 Q11992 Q11993 Q11994 Q11995 Q11996 Q11997 Q11998 Q11999 Q12000 Q12001 Q12002 Q12003 Q12004 Q12005 Q12006 Q12007 Q12008 Q12009 Q1

Quar te r

Net Worth / Disposable Income

PercentC

hange

Quarter

Change in ratio Net Worth to Disposable IncomeEconomic worthinessMore volatility Uncertainty

Long-term economic well-being.

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Who Are Most Affected and theMain Drivers? Observations from LCurve

Source: Survey of Consumer Finances , Federal Reserve Board

http://www.federalreserve.gov/pubs/oss/oss2/scfindex.htmlhttp://www.federalreserve.gov/pubs/oss/oss2/scfindex.htmlhttp://www.federalreserve.gov/pubs/oss/oss2/scfindex.html

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Income and Wealth Distribution

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Few thoughts

Traditionally, air travel explained byincome and fare.Worked well when on trend line and

growingStructural breaks may require variablesWealth and related variables

When current income and consumption are notin balance

Households optimize present consumptionBorrow from future consumption

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-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

1 3 5 7 9 1 1 1 3 15 1 7 1 9 21 2 3 25 2 7 29 3 1 33 3 5 37 39 4 1 43 4 5 47 4 9 51 5 3 55 5 7 5 9 6 1 6 3 65 6 7 69 7 1 73 7 5

CHANG E IN PASSENGE

CHA NGE IN NET HH INC

CHANG E IN NET HH WO

Is there a correlation between change inpassengers, net HH income, and net HH worth?

Information collected from BTS Transstats

PercentChange

Time

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Passengers and Net HHWorth

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

-20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%

Q/Q Annual Change in Passengers

Average Airfare and Passengers

-1000.00%

-800.00%

-600.00%

-400.00%

-200.00%

0.00%

200.00%

400.00%

-20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%

Q/Q Annual Per cent Change in Passengers

Passengers and Net HH Worth

Average Airfare and Passengers

Y/Y Percent Change in HH Worth

Y/YPercentChangeinPassengers

Y/Y PercentChangein

Passengers

Y/Y Percent Change in Avg Airfare

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Inversely related

Downward sloping demand curve2002 and on affected by terrorism bias from 9/11

Note: This takes into account Nominal Average Airfare. Must take intoaccount Real Average Airfare

Average A irf are and Passengers ( % Change)

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

1991

Q1

1992

Q1

1993

Q1

1994

Q1

1995

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

Quarter

Airfare

Passengers

Average Airfare and Passengers (% Change)

PercentChange

Quarter

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Analyzing Preliminary Charts In

DepthWhat are we looking for?Take into account external factors, biasesHow do these affect the trends?More accurate modelsModels can be used/aid forecasting"Ultimately, we are interested in the question of relativestandards of living and economic well-being. We need toexamine trends in the distribution of wealth, which, morefundamentally than earnings or income, represents ameasure of the ability of households to consume." AlanGreenspan, chairman of the Federal Reserve Bank,2007

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Recently HH worth decreased, we see number of passengers alsodecreased dramatically starting from 2008.

Loosely related. Breaks in trends around 1996, 1998, 2002-2003 (post-9/11 attacks).

Note: Nominal values

Passengers and Household Worth (% Change)

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

1991Q1

1992Q1

1993Q1

1994Q1

1995Q1

1996Q1

1997Q1

1998Q1

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

Quarter

Passengers

Net HH Worth

Passengers and Household Worth (% Change)

PercentChange

Quarter

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Passengers and Worth

No general pattern up to 20012001-2009 asymmetrical response

Peoples thinking/behavior changedBusiness make structural adjustmentsWill these behavior revert back to ensure

long-observed secular trends? Or are wegoing to observe a fundamentally differentdemand structure?

P E R S O N A L S AV I N G S (% C h

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Only since the 2007 recession has saving started to go up, becausepeople need to compensate for the debt they are in.

Note: Evaluate Personal Savings RATE instead.

Could increased savings be affecting the consumption of air travel?

P E R S O N A L S AV I N G S (% C h

-500.00%

0.00%

500.00%

1000.00%

1500.00%

2000.00%

2500.00%

1991 Q11992 Q11993 Q11994 Q11995 Q11996 Q11997 Q11998 Q11999 Q12000 Q12001 Q12002 Q12003 Q12004 Q12005 Q12006 Q12007 Q12008 Q12009 Q1

Quar te

P ERSONAL SAVIN

PercentChange

Quarter

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HH credit peaked then decreased rapidly after remainingsteadily increasing up until 2007.

HH borrowing less since 2007 recession because too muchdebt accumulated over time.

HH Credit (% C hange)

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

1991 Q11992 Q1 1993 Q11994 Q1 1995 Q11996 Q1 1997 Q11998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q12003 Q1 2004 Q12005 Q1 2006 Q12007 Q1 2008 Q12009 Q1

Quarter

PercentChange

Quarter

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Credit and Savings

Net worth is enhanced by savingsHH credit decrease,

property assets across the country (ie:vacation homes)

Housing Bubble

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Housing BubbleReal estate property as safe investments,nationwide assetsSpeculative fever 2005 rise in prices, feel wealthier Subprime mortgage crisis2006-2007, teaser mortgages reset whenprices stop appreciating

High HH debt, drastic fall in price, foreclosuresincrease due to inability to refinance

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The economic impact of increased

savingsGrowing HH debt and falling savings rateFuel consumer spending but now reversingConsumption now to depend on income growth consumer spending falls,events:

Housing bubble burst,broad economic contraction,

Uncertain future, but scenarios:Income decreases, then saving increasesIncome increases, then debt burden is reduced, therefore continue to consume

Holding income constant, $100 billion less in consumer spending with each1% increase in savings rate

Therefore, income growth is difficult to overstate. HH can simultaneouslyreduce their debt, rebuild savings, and boost consumption. But withoutsignificant income gains, deleveraging could undermine consumption andthe economy.

*Atkins, Charles and Susan Lund. The economic impact of increased US savings. Economic Studies. Mar 2009. McKinsey&Company.

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CONSUMER EXPENDITURE

Consumer expenditure makes up 70% of GDPHow do people spend their money?

12.3% on food, 32.6% on housing, 1.9% oneducation, 3% on air travel

$14 trillion decline in spending 1% reductionin GDP

$98 billion will not be spent in personal consumptionFrom that, $2.94 billion will not be spent in air travel

Source: ftp://ftp.bls.gov/pub/special.requests/ce/share/2007/cucomp.txt

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Air Travel and Wealth: An Analytical Model

Air Travel

Current IncomeWealth

Air Travel

Air Travel = f(Income; wealth; Fare; )

Wealth effect

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A Simultaneous Model of Air Travel

and WealthPax = * Income + * average_fare + * Household_Worth + paxHousehold_Worth = * lnIncome + * Interest_rate + worth

Estimation Period: 1990:Q1 2009:Q1

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Summary and Conclusions

Current income is adominant factor; so isaverage fare;Household net worthappears to be animportant factor influencing air travel; so is

interest rate.

Should we incorporateeffect of wealth inestimating andforecasting air travel?What are policyimplications?How do other factors(e.g., other modes of travel) affect air travel?

VMT(%Change)

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VMT (%Change)

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

1 9 9 1

Q

1 9 9 1

Q

1 9 9 2

Q

1 9 9 3

Q

1 9 9 4

Q

1 9 9 4

Q

1 9 9 5

Q

1 9 9 6

Q

1 9 9 7

Q

1 9 9 7

Q

1 9 9 8

Q

1 9 9 9

Q

2 0 0 0

Q

2 0 0 0

Q

2 0 0 1

Q

2 0 0 2

Q

2 0 0 3

Q

2 0 0 3

Q

2 0 0 4

Q

2 0 0 5

Q

2 0 0 6

Q

2 0 0 6

Q

2 0 0 7

Q

Quarter

P e r c e n

t C h

VMT

Change in VMT fluctuates but generally decreasing toward 2009

Increase during 2001-2003 period post-9/11?Most likely not a good substitute for air travel since it fluctuates sorapidly and much, however how to explain drastic increase between2001-2003?Perhaps went down during 2007, because of recession? Gasprices?