# Presentation: 642382

## Socioeconomic Drivers for

**Socioeconomic Drivers for**
**Transformation of the**
**Nation’s Air Transportation System**
***30******th****** Annual FAA Aviation Forecast Conference***
***Industry Restructuring and the Future of Global Aviation***
***National Airspace Systems Planning—Government Panel***
***March 18, 2005***

**Richard Golaszewski**
**GRA, Incorporated**
**115 West Avenue • Jenkintown, PA 19046 • USA**
****** ****215-884-7500 • ******** 215-884-1385**
****** ****richg@gra-inc.com**

## Overview

- Policy framework
- Air travel and the economy
- Economics of production/consumption
- SEDF evaluation framework
- Measurement
- Results
- Implications

## Specific Policy Questions 

**Specific Policy Questions **

- How does JPDO interact with airport and ATM infrastructure policies?
- Status quo
- Potential changes
- Time horizons (short/medium term vs. longer term)
- Will private sector accomplish transformation alone?
- Why should government be involved?
- How should government role be structured?
- Incentives for private sector participation
- OMB/OSTP assessment criteria
- Public goods and services
- Evaluation and Analysis Division (EAD) of JPDO conducting multidimensional assessment
- What are costs if transformation does not take place?

## Air Travel and the Economy

## Air Transportation and Travel Sectors

**Air-Based Travel and Tourism**

- Travel Services
- Hotels
- Meals
- Local Transportation
- Entertainment

**Air Transportation**

**Air Operators**

**Factors of**
**Production**
- Labor
- Capital
- Other

**International**
**Trade/**
**Trade Balance**

**Aircraft and**
**Aerospace**
**Manufacturing**

**Airports**

**Air**
**Traffic**
**Management**

- Source:  John Cavolowsky and Lee Olson, _Socio Economic Demand Forecast Study_, presented to Joint Planning and Development Office (JPDO) January 2004.

## Broad Measures of Air Transport’s Share in National Economy

- Air transportation represents around one percent of total GDP
- Revenues to U.S. air carriers total just under $100 billion annually
- Air transport services contribute positively to net exports
- Less than one percent of merchandise, but 40 percent of U.S. merchandise imports and exports by value shipped by air
*The Economic Impact of Civil Aviation on the U.S. Economy**
- $172 billion direct impact from civil aviation
- $514 billion total GDP impact (5% of GDP)
- 11.5 million jobs supported by U.S. civil aviation
- *Conducted for FAA in 2002 using year 2000 data

## Some Fundamentals

- Air transportation integral to our way of life
- Business (e.g., day trip WAS-ATL-WAS, two career families, etc.)
- Leisure (Las Vegas, Orlando and rest of world)
- Family and friends
- Growth fueled by increased productivity, safety, accessibility, environmental compatibility
- Economic impact measures resources consumed
- Reduced impact per unit of output is good
- Economic value measures well-being
- Resources to consume other goods and services
- Changes in quality of life (free time, security, environment, health and safety, among others)

## As Real Prices Fall, The Market Expands

## Commercial Aviation Growth is Linked to Economic Growth

## Real Domestic Passenger Yields and Costs Have Fallen Steadily

## Domestic Revenue Enplanements Per Capita

## Economics of Production and Consumption

## Airline Production/Demand

- Production

- Demand

- Frequency

- Distance

- Aircraft
- Size

- RASM

- CASM

- RPM

- Load
- Factor

- ASM

- Schedule

- Fare

- Travel
- Time

- Yield
- (Fare/RPM)

## Travel Choices Underlie Demand

- Passenger
- Destination

- Airport A
- Origin

- Airport D
- Destination

- Airport B
- Origin

- Passenger
- Origin

- Airport C
- Hub

- Auto

-        Choice Variables
- Fares and access cost
- Travel time
- Access
- Intercity
- Service frequency/schedule
- On vehicle and other amenities
- Flexibility and reliability

-        **Example  **
-      Choice Set
-       2 Origin airports
**	**Non-stop air
- 	Connect air
- 	Auto

## Economic Analysis Methods

## Socioeconomic Demand Framework

**Value of Air Transportation**
- Derived demand
- Location specific
- Imperfect substitutes

**Future Air Transportation Demand**
- Economic growth
- Population growth
- Airfares
- Service quality

**Capacity/Demand Assessment **
- Social costs
- Willingness to pay
- Productivity

**Start**

**Stop**

## The Shortfall:  What Happens if Supply Doesn’t Keep Up with Demand

- Decreased real wealth of travelers and shippers leaving fewer resources that can be spent on other goods and services
- Reverse trends of lower cost travel and increased mobility made possible by deregulation, innovation and technological advances:
- Some who rely on affordable air transportation may be priced out of the market when average fares rise (higher prices)
- Travelers forced to less desirable times or locations because flights are added in less attractive time blocks (reduced product quality)
- Increased transportation and shipping costs
- Economy less competitive in global markets

## Capacity Shortfalls Have Real Economic Costs

- Economic Value of Air Transport ($)

- Cumulative loss in economic value if capacity is unable to serve growing demand over time ($144 billion for baseline demand)

- “The Wedge”

- Annual loss in economic value for 2015 ($6.5 billion for baseline demand)

- Annual loss in economic value for 2025 ($19.6 billion for baseline demand)

- SEDF Study, op cit.

## Notional Depiction of NAS Delay/Throughput Tradeoff

## Valuing Capacity Shortfall

- Unconstrained
- Demand

- Price Changes
- Quality Changes
- Schedules
- Delays

- Move Up
- Demand
- Curve

- Shed
- Demand

- Tolerable
- Delays?

- Price
- Increase to
- Clear Market

**N**

**Y**

- Demand Served at
- Expected Yields

- Loss of
- Consumer Surplus
- Increased Costs

## Prior Results

| Category | 2015
($billions) | 2025
($billions) |
| --- | --- | --- |
| Loss of consumer surplus in the domestic air travel market | $3.3 | $13.1 |
| Loss of consumer surplus in the international air travel market  | $0.3 | $0.8 |
| Value of general aviation passenger miles lost  | $0.1 | $0.2 |
| Cost of incremental passenger delay experienced | $2.9 | $5.5 |
| Total  | $6.5 | $19.6 |
| Cumulative Impacts 2015 through 2025 | $143.6 |  |

**Values are in constant, undiscounted 2002 dollars**

- SEDF Study, op cit.

**Notes:**
Consumer surplus losses due to increases in market clearing fares include increased airline operating costs of $3.06 billion in 2015 and $5.82 billion in 2025.  These costs are due to increased delays and are assumed to be passed on to passengers as part of higher fares. Changes in consumer’s surplus depend upon the yield elasticity used; here we report the most conservative case considered. Cumulative impacts estimated by linear interpolation of annual impacts for years between 2015 and 2025. High and low forecasts of Domestic RPMs developed using Monte Carlo simulations of variability in annual domestic RPMs, based on historical variation and co-variation of annual GDP growth and changes in real airline yields.  Losses of value associated with capacity shortfall impacts on international RPMs and general aviation passenger transport are included, based on historical relationships between domestic passenger activity and activity for international commercial and general aviation operations. 

## Implications

**Notes:**
Consumer surplus losses due to increases in market clearing fares include increased airline operating costs of $3.06 billion in 2015 and $5.82 billion in 2025.  These costs are due to increased delays and are assumed to be passed on to passengers as part of higher fares. Changes in consumer’s surplus depend upon the yield elasticity used; here we report the most conservative case considered. Cumulative impacts estimated by linear interpolation of annual impacts for years between 2015 and 2025. High and low forecasts of Domestic RPMs developed using Monte Carlo simulations of variability in annual domestic RPMs, based on historical variation and co-variation of annual GDP growth and changes in real airline yields.  Losses of value associated with capacity shortfall impacts on international RPMs and general aviation passenger transport are included, based on historical relationships between domestic passenger activity and activity for international commercial and general aviation operations. 

## The Value Proposition for NAS Transformation

- An ATM system capable of meeting projected demands for NAS capacity has value for the nation in terms of:
- Improved safety and security
- Enhanced quality of life
- Contribution to the economy
- Aviation has substantial impacts on national life in the areas of:
- Mobility and Accessibility
- The Environment
- Safety, Security and National Defense
- Post-transformation service attributes and prices represent “economic cost”
- Consumer costs
- Service quality (delays, schedules, travel time, airport access, etc.

## Implications

- A system unable to accommodate expected growth in demand, while maintaining quality, will impose tangible costs on those who rely on the NAS
- Increased air fares
- Decreased passenger trips
- Commercial aviation
- General aviation
- Less productive use of time
- Less frequent service
- Increased time in and around airport
- Increased costs for goods that are moved by air
- EAD developing multiple measures using NAS stimulators and related models
- Safety and environment
- Security

## Slides available at:www.GRA-INC.comRich Golaszewski:  richg@GRA-INC.com 215-884-7500

**Slides available at:**_**[www.GRA-INC.com](http://www.gra-inc.com/)**_**Rich Golaszewski:  **_**[richg@GRA-INC.com](mailto:richg@GRA-INC.com)**__** 215-884-7500**_