Swedish Companies' Willingness to Pay a Price Premium for Flights
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Swedish Companies’ Willingness to Pay a Price Premium for Flights using Bio Jet Fuel - a survey based on companies flying via Bromma Stockholm Airport Louise Goding Master’s thesis · 30 hec · Advanced level Environmental Economics and Management – Master´s Programme Degree thesis No 1055 · ISSN 1401-4084 Uppsala 2016 iii Swedish Companies’ Willingness to Pay a Price Premium for Flights using Bio Jet Fuel - a survey based on companies flying via Bromma Stockholm Airport Louise Goding Supervisor: Carl Johan Lagerkvist, Swedish University of Agricultural Sciences, Department of Economics Examiner: Sebastian Hess, Swedish University of Agricultural Sciences, Department of Economics Credits: 30 hec Level: A2E Course title: Independent Project/Degree Project in Economics E Course code: EX0537 Programme/Education: Environmental Economics and Management: Master’s Programme Faculty: Faculty of Natural Resources and Agricultural Sciences Place of publication: Uppsala Year of publication: 2016 Cover picture: UOP Name of Series: Degree project/SLU, Department of Economics No: 1055 ISSN 1401-4084 Online publication: http://stud.epsilon.slu.se Keywords: bio jet fuel, Bromma Stockholm Airport, companies, payment card, willingness to pay Abstract An important source of carbon dioxide emissions is the aviation industry, which accounts approximately for 2 percent globally. Therefore, reducing these emissions has become a major challenge for air travel authorities worldwide. One solution to the problem is the deployment of bio jet fuel, which is a green alternative to the traditional jet fuel and can result in an 80 percent reduction in carbon dioxide emissions. The production of bio jet fuel, however, is to date more expensive relative to the production of traditional jet fuel and leads, as a result, to a higher price of flight tickets. Consequently, this study investigates Swedish companies’ willingness to pay for flying with 50 percent bio jet fuel by employing the contingent valuation method. The results obtained show that the average price premium is 11.5 percent, and that significant differences in the level of willingness to pay are found for different flight destinations; a result that provides valuable insights into pricing strategies for airlines operating on these destinations. The fact that companies employ certain booking policies have as well significant impacts on the estimated willingness to pay. Overall, the results of this study will increase airlines’ awareness about the economic possibilities for them to begin the process of implementing the green alternative. iii Acknowledgements This study is the result of my thesis and hence the final assessment for the MSc in Environmental Economics at the Swedish University of Agricultural Sciences. I had the opportunity to conduct this study in collaboration with Swedavia, Braathens Regional Airlines, Stockholm Chamber of Commerce and Fly Green Fund, and I would like to thank all for giving me the opportunity in making this study possible. Special thanks to Sammy Albery Hellqvist, my Swedavia supervisor, for giving me valuable advice and support, and to Maria Fiskerud at Fly Green Fund for her help and innovative ideas. Moreover, I would like to thank my academic supervisor, Carl Johan Lagerkvist, for his insights and knowledge. Lastly, I want to thank my friend, Daniel Westerling, for his IT expertise and help with designing the survey. I hope you will enjoy reading my study. Uppsala, June 2016 Louise Goding iv Table of Contents Chapter one – Introductory Summary ........................................................................................ 1 1.1 Introduction ................................................................................................................................... 1 1.2 Background ................................................................................................................................... 1 1.2.1 Aviation and Bio Jet Fuel ....................................................................................................... 1 1.2.2 Bromma Stockholm Airport ................................................................................................... 2 1.3 Problem Statement ........................................................................................................................ 2 1.4 Research Method ........................................................................................................................... 3 1.5 Social and Academic Relevance ................................................................................................... 4 1.6 Structure of Thesis ......................................................................................................................... 4 Chapter two – Bio Jet Fuel in Commercial Air Travel .............................................................. 5 Chapter three – Previous Literature............................................................................................ 7 Chapter four – Conceptual Framework ...................................................................................... 9 4.1 Welfare Economics ....................................................................................................................... 9 4.2 Contingent Valuation Method ..................................................................................................... 11 4.2.1 Elicitation Method ................................................................................................................ 12 4.2.2 Reliability and Validity of the Payment Card Format .......................................................... 12 4.2.3 Survey Mode ........................................................................................................................ 13 4.3 Company Characteristics’ Effect on Willingness to Pay ............................................................. 14 Chapter five – Valuation Approach.......................................................................................... 17 5.1 Literature and Bio Jet Fuel Research ........................................................................................... 17 5.2 Data Collection ............................................................................................................................ 17 5.2.1 Pilot Test ............................................................................................................................... 17 5.2.2 Main Survey ......................................................................................................................... 18 Chapter six – Results ................................................................................................................ 19 6.1 Preliminary Analysis ................................................................................................................... 19 6.1.1 Sample Characteristics ......................................................................................................... 19 6.2 Willingness to Pay ....................................................................................................................... 20 6.2.1 Determinants of Willingness to Pay ..................................................................................... 21 6.2.2 Internal Validity ................................................................................................................... 23 Chapter seven – Discussion and Conclusion ............................................................................ 24 7.1 Discussion ................................................................................................................................... 24 7.2 Conclusion ................................................................................................................................... 25 7.3 Recommendations and Future Research ..................................................................................... 25 References ................................................................................................................................ 26 Appendix A .............................................................................................................................. 29 v A.1 Introduction of Partner Companies ............................................................................................................ 29 Appendix B .............................................................................................................................. 31 B.1 Descriptive Statistics .................................................................................................................................. 31 B.2 The Explanatory Variable “Environmental Concern” ................................................................................ 32 B.3 Testing the Assumptions: linear mixed-effects model ............................................................................... 33 B.4 Testing the Assumptions: multiple linear regression model with OLS estimation .................................... 35 B.5 Share of Companies Willing to Pay a Price Premium ................................................................................ 35 B.6 Linear Mixed Models: full models, and fixed-effects model ..................................................................... 36 B.7 Willingness to Pay a Price Premium: top-1 destination ............................................................................