Aviation report finds: “claims about the economic benefits of connectivity are not founded on solid evidence”

Economics of Airport Expansion – short commentary (2 pages)

Aviation report “claims about the economic benefits of connectivity are not founded on solid evidence”

22.4.2013

Major new aviation report argues “claims about the economic benefits of connectivity are not founded on solid evidence”

A major new report, launched today in the House of Commons, challenges the view that improved international air connectivity will necessarily bring significant benefits to the UK economy.

The report The Economics of Airport Expansion by the independent Dutch consultants CE Delft, and commissioned jointly by WWF, RSPB and the Heathrow campaign group HACAN, argues that “claims about the economic benefits of connectivity are not founded on solid evidence.”

The report was launched at packed meeting hosted by Zac Goldsmith MP.The speakers included Jasper Faber from CE Delft, the main author of the report.

The report is timely.  The Airports Commission, set up by the Government under Sir Howard Davies, has been charged with looking at whether the UK, and in particular London and the South East, requires additional airport capacity in order for the UK to maintain its first rate international links over the coming decades.  At present the Commission is actively “seeking evidence on aviation connectivity” with a discussion paper

CE Delft concluded: “many studies find a positive correlation between aviation and economic growth, but no causal relationship between connectivity and economic growth was found”.  Their analysis of the evidence shows that increasing connectivity is less beneficial for developed countries than for developing economies.  They also found that extra connectivity in cities that are already well-connected, like London, does not necessarily deliver measurable or substantial economic benefits.

The report also challenges the way that the costs and benefits of airport expansion have traditionally been measured.  It points out gaps in the Cost Benefit Analysis (CBA) which should “provide an overview of current and future pros and cons of a particular project for society as a whole (public, private sector and government) as objectively as possible.”        It argues that the DfT’s current Cost-Benefit Analysis method still omits key social or environmental costs, resulting in an overestimation of economic benefits.

There are also enormous uncertainties in CBA work as it must predict future demands and costs. For example, the Department for Transport estimated that Heathrow expansion would produce £5 billion in economic benefits but when the New Economics Foundation re-ran their figures using different predictions for growth and oil prices but the same models they found that Heathrow expansion would result in a £5 billion loss (1).

This report also looks at some of the economic arguments being used by proponents of airport expansion and finds them to be miscalculated and exaggerated, distorting the aviation debate (2).

RSPB economist Adam Dutton said, “This report highlights the uncertainty surrounding the economic benefits of aviation expansion. New airport infrastructure could destroy internationally important and increasingly scarce habitat, such as that found in the Thames estuary, and jeopardise the UK’s legally binding greenhouse gas emissions targets, all for uncertain economic benefit and a net loss to society. More specifically, this report urges caution about automatically linking improved connectivity with economic performance. While some base level of connectivity is important for any economy, this report demonstrates that the benefits of extra connectivity in a city as well connected as London are doubtful and difficult to demonstrate with certainty”.

Jean Leston, head of transport policy at WWF, said, “The methods for assessing the benefits and costs of new runways and airports are hopelessly inadequate and open to gross manipulation.  CE Delft has instilled a dose of reality into the airports debate.  We hope that the Airports Commission and the Department for Transport will adopt the better SCBA methodology and require development proposals to do the same.”

HACAN Chair John Stewart said, “This report could not be more timely.  It comes just as the Airports Commission is asking the hard questions about airport capacity and connectivity.  And its message is clear:  new runways may not be nearly as important for our economy as is commonly assumed.”

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The economics of airport expansion  (55 pages)

Airports Commission seeks evidence on aviation connectivity:  http://www.gov.uk/government/news/airports-commission-seeks-evidence-on-aviation-connectivity

1.    NEF: Grounded: A new approach to evaluating Runway 3: www.neweconomics.org/publications/grounded

2.    Economic arguments that were scrutinized include those by Frontier Economics, Oxford Economics, as well as the Confederation of British Industry (CBI), all were found to be faulty and misleading, based on an overestimation of economic benefits, false comparisons or selective use of data.

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The relation between aviation activity and economic performance has
attracted more attention. A review of the academic literature suggests there
is a two-way causal relation between aviation activity and regional economic
performance, with an increase in aviation activity causing an increase in GDP,
and vice versa. This relation appears to be stronger for remote regions and
stronger for poorer regions and countries than for well-developed ones.

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Capacity refers to the ability of an airport to handle a given volume or
magnitude of traffic (demand) within a specific period of time, often
expressed as a maximum number of aircraft that an airport is able to process
per unit of time.

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London’s capacity versus other European airports
London has one hub airport (Heathrow) and 5 point-to-point airports. In total,
London’s capacity is determined by 7 runways, which is, together with Paris
(Orly and Charles de Gaulle), the highest amount of runways compared to
other European cities. Amsterdam (Schiphol) has 6 runways and the airports at
Madrid (4) and Frankfurt (3) operate with substantially less runways. Heathrow
(2012) states that it operates at almost full capacity. However, this refers to
slots during the busiest period of the year. Heathrow does not run at full
capacity outside the summer period and Eurostat data (2012) show that the
load factor of airplanes is less than 75%. Regarding Heathrow’s terminals,
capacity can be expanded by another 20 million passengers. The new Terminal
5, opened in 2008, increased Heathrow’s capacity up to 90 million passengers
maximum.

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Seat capacity
Also regarding seat capacity, London is the largest airport system in Europe
with 172 million to/from seats in 2012 (OAG data)9. It has 50% more seat
capacity than the next largest European airport system, which is Paris. In
2012, Heathrow reached seat capacity of 94.5 million to/from seats retaining
its position as the 3rd largest airport in the world.

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Expanding capacity
Regarding capacity, or actually the lack of it, the only solution that often
seems to be considered is expansion in terms of building new infrastructure
(new runways or terminals). However, there are different ways in which an
airport’s capacity can be expanded without building new infrastructure, such
as by extending operating time, more efficient use of runways, use of larger
aircraft, or changing the fleet mix. Extending operating times and changes in
the fleet mix will however have noise and environmental consequences.

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Definition of connectivity
In its broadest context, connectivity refers to the density of connections of a
country or city with the rest of the world and the directness of those links.
Connectivity encompasses centrality, the degree to which a country or city is
linked to other destinations. Connectivity further embodies the ease and speed
in which those destinations can be reached. This includes all types of transport
modes such as aviation and rail or transport replacement such as
videoconferencing.

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In the aviation context, connectivity is defined as “a combination of the range
of destinations served and the frequency of flights” (DfT, 2012b).

The broader the range of destinations and the higher the frequency of flights,
the better connected an airport, city or country is. This includes direct
connections, but also indirect connections by transfer. Very often however,
a very narrow definition of connectivity is used, implying that connectivity is
only related to direct flights between two destinations. This also neglects the
economic importance of the destination and omits the importance of key
business centres.

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(Connectivity in number of destinations)

Between 2003 and 2010, Heathrow served the lowest number of (direct)
destinations (139). It also had the smallest increase in new destinations (8.6%)
between 2003 and 2010 compared to Schiphol (12.4%), Paris CDG (25.5%) and
Frankfurt (15.9%).
It must be mentioned that these figures only show the total number of
destinations and do not say anything about the importance of the destinations.
Most of the destinations are domestic or minor destinations. What matters for
economic growth and employment is the number of flights to the key business
destinations.

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Connectivity: in frequency of flights
Although Heathrow had the lowest amount and smallest increase in
destinations compared to the other main European airports, between 2003
and 2010 it had the highest frequency per destination, with an average of
3,467 flights in 2010. Table 5 shows the average frequency of flights per
destination between 2003 and 2010.

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Heathrow’s strategy for the last decade has been
to focus on a limited amount of destinations, but with a very high frequency.
Where other airports focussed on a more widespread network, Heathrow
focussed on a small number of destinations with a high frequency. Looking at
load factor it appears that 26% of the seats is unused, which gives some scope
for improvement. The question is whether Heathrow is constrained by capacity
restrictions or whether UK demand for air travel has decreased over time.

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there is a large body of literature on the relationship between aviation demand and economic growth, but very little on the causal relationship between connectivity and economic growth.

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Economic growth
Many studies have investigated the economic benefits of aviation and its
impact on economic growth. The relationship between connectivity and
economic growth is, however, less investigated and there remains much
uncertainty. We analysed the existing literature and tried to unravel the
impact of connectivity on economic growth step by step.

The aviation industry often portrays connectivity as the driver of economic
growth and innovation – it would generate wider economic benefits for
businesses, increase global trade and productivity.

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Connectivity is defined as the range of destinations and/or the frequency of
flights. When the number of destinations increases, this could open up new
markets and lead to new trading partners. Trade with distant markets
becomes easier and cheaper and goods and services can be marketed on a
global basis. The export from UK companies to foreign countries and import
from foreign business to UK increases.
More connectivity in terms of a higher frequency of flights, on the other hand,
will lead to more reliability and a more frequent supply of goods or services.
The question is however, whether more frequent flights will also increase
global trade. Trade could increase by industries for whom frequency of supply
is increasingly important (such as transport of flowers).
The relationship between connectivity and global trade assigns a large role to
business passengers. And although they pay in general higher fares (business
class, last minute booking) and hence contribute to a larger extent to the
aviation revenues, their role should not be exaggerated. Only 25% of London’s
air travel demand is for business, and 75% for leisure travel (Prime, 2012).

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Connectivity and economic growth (GDP)
Although there has been much research on the broader impact of aviation on
economic growth, so far, there has been no academic research carried out on
the specific relationship between connectivity and economic growth. The
aviation industry has published several reports on the impact of connectivity
on economic growth, of which the results are shown in Table 10.

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Most of the studies (on the impact of air travel on economic growth)  find a positive
correlation, but cannot find causality. In other words, it is not clear whether
connectivity causes economic growth or the other way around.

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CE Delft has critically assessed the framework used by Oxford Economics on two occasions (CE, 2008 and 2012).

Our main points of criticism are:

Oxford Economics presents gross impacts of aviation on employment, taxes and GVA. An
estimate of the net impacts on the UK economy would take account of the displacement of
jobs, changes in the wage and air freight rate.
Connectivity moves in both directions: an increase in tourism would lead to more spending of foreign visitors in the UK, but would also lead to higher spending of UK residents abroad.
Oxford Economics only addresses the first issue.
A loss of connectivity at Heathrow does not mean that trade and passengers are lost to the UK.  They could reach the country through other UK airports, by connecting flights from continental hubs or by other modes of transport. Alternatives travel modes are insufficiently addressed.
Scenarios used contain several unrealistic assumptions. Upper limits are applied for  projections on passenger and cargo growth and capacity. For instance, capacity during the busy summer period is used as an estimate for capacity throughout the year.

Air connectivity is confused with air centrality*, most losses reported by Oxford Economics are in all likelihood related to the latter rather than to the first concept.
Some impacts (e.g. the economic value of business trips, GVA of non-airliner entities at
Heathrow airport) are counted twice.
Taxes are treated as benefits to the UK economy, but this only applies to taxes paid by foreign entities in the UK. Taxes are transfers within the UK, with possibly distortionary impacts.
The value added of foreign airliners is incorrectly added to UK GDP.
The negative impacts of aviation (noise, pollution, congestion, lower property values) are not addressed.

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Causation or correlation?
This study investigates the relation between connectivity and economic
growth. In many of the studies discussed above a positive relation (correlation)
is found between connectivity and economic growth. However, it is important
to mention that a differentiation should be made between correlation and
causation. Correlation merely means that two variables appear to be related
to one another by some statistical function over the period examined.
Causation shows a clear relation and direction: a change in one variable causes
a change in the other variable but not the other way around. Often correlation
is misinterpreted for causation e.g. there is a clear correlation between shoe
sizes and the reading skills among children, but it is obvious that there is no
causal relationship between the two.

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Capacity constraints may in the long run affect connectivity in two ways:
fewer destinations or lower frequency of flights. What this implies for
economic growth remains unclear. Although connectivity is said to increase
global trade, and to contribute to competitiveness, productivity and
eventually economic growth, proof is extremely difficult to establish. There
remain large uncertainties and although many studies show a strong and
positive correlation, causation cannot be proven.