Modeling Demographic and Unobserved Heterogeneity in Air Passengers' Sensitivity to Service Attributes in Itinerary Choice

Modeling passengers' flight choice behavior is valuable to understanding the increasingly competitive airline market and predicting air travel demands. This paper estimates standard and mixed multinomial logit models of itinerary choice for business travel, based on a stated preference survey conducted in 2001. The results suggest that observed demographic and trip related differences get incorrectly manifested as unobserved heterogeneity in a random coefficients mixed logit model that ignores demographic and trip-related characteristics of travelers. Among demographics, gender and income level have the most noticeable effects on sensitivity to service attributes in itinerary choice behavior, but frequent flyer membership, employment status, travel frequency, and group travel also emerge as important determinants. However, there is significant residual heterogeneity due to unobserved factors even after accommodating sensitivity variations due to demographic and trip-related factors. Consequently, substitution rates for each service attribute show substantial variations in the willingness-to-pay among observationally identical business passengers.