JTTRI Seminar

A Keynote Presentation
The Future Transport Research Needs in the Changing Global
Economic and Political Environments: Some Focus on AirTransport© Prof. Tae Hoon Oum
Sauder School of Business, University of British Columbia
andPresident, the WCTR Society www.WCTRS-society.com© Prof. Tae Hoon Oum

1Agenda(A) Transport Research in the de-globalizing and new cold war world(B) Research Needs Arising from Covid Policy Responses:• Roles of Governments in Crisis Situations• Post-Covid Airline Industry Structure(C) Transport Sector and Climate Change• Research Needs for Electric Vehicle Adoption• Air Transport and Climate Change• Competition During the Course of Decarbonization(D) Chicago Convention and International Air Transport Policy(E) Issue on the Global Aviation Technology Leadership(F) Concluding Remarks© Prof. Tae Hoon Oum2(A) Effects of the Reshaping Globalization and Cold War II on
Supply Chain and Transport Network being caused by Putin
Invasion of Ukraine - 1/3

Petersen Inst. for International Economics (PIIE) calls it ‘Accelerated
Corrosion of Globalization’Corrosion began earlier in the USA; Trump admin became an outletfor anti-immigration, and anti-globalization forces.
Ukraine war and China-Taiwan issues turning the world into cold
war II: world market of democracies may emerge – expanding
competition while maintaining scale where possible.
China-Taiwan issue is 10 times more serious than Ukraine• China has long been a production factory for the world• In 2021, US-Russia trade, $36billion; US-Ukraine trade $4 billion• In 2021, US-China trade, $656billion; US-Taiwan, $114billion• Taiwan produces 70+% of the world’s high density semi-con• One of the busiest shipping channels in the world© Prof. Tae Hoon Oum3(A) Effects of the Reshaping Globalization and Cold War II on Supply Chain andTransport Network being caused by Putin invasion of Ukraine - 2/3

This will have major impacts on the way we need to organize int’llogistics and transport system: Just-in-Time (JIT) Supply Chain and transport – thrown out the window Strategic reserve inventories becoming increasingly important (e.g.,semi-conductors, oil, natural gas, etc.)
 Coldwar II and balkanization of the world economic system willchange spatial distribution of supply sourcing  reshaping global
transport networks
 Aviation – the 1st Freedom Right – Russia’s closing its airspace increased travel time, fuel consumption, and carbon emissions; raises
serious competition issues (e.g., favor Chinese carriers against N.
American, European carriers) Less efficient but necessary adjustments to the int’l transport network
will occur  Research needs for reshaping of the transport
network for changing supply sourcing© Prof. Tae Hoon Oum4

(A) Effects of the Reshaping Globalization and Cold War II – 1st Freedom Right - 3/3

Russia closes its airspace The Asia-Europe air route is greatly affected.
 Resulting in increased fuel consumption and carbon emissions.
 Less efficient but necessary adjustments to the int’l transport network
will occur  Research needs for reshaping of transport network
for changing supply sourcing
 Would inter-continental flight routings over Russian airspace go backsimilar to the cold war I situation (pre-1990s) ?

© Prof. Tae Hoon Oum

5(B) Roles of Governments in crisis situation,
forms of financial assistance to e.g., airlines

 The COVID crisis demonstrated that governments are the powers oflast resort to make sure that the private sector markets function whenfacing the scale of natural/economic disasters that the insurance
system cannot handle. e.g., Govts decided which firms to survive, andwhich firms to go bankrupt or be liquidated during the Covid pandemic.
 When govts invest in private firms at times of crisis:
for example, the ‘initial’ responses to airlines

 USA: allocated $62 billion to the airlines from CARES Act; $25b low-interest
loan; the rest are largely wage subsidies
 German govt bought 20% of Lufthansa ownership for €6 bn (+ €3bn loanguarantee)

 Research needs: How do we choose the bailout form: e.g. USA vs.
German style or some other forms?
© Prof. Tae Hoon Oum6

Choosing Forms of Govt Financial Assistance – cont’d When Government invests in equity shares, should it be voting
shares (e.g., Germany-Lufthansa) or ‘non-voting’ shares (USDelta) e.g., US govt agreed on a $1.6 billion 10-year low interest loan
to Delta in exchange for Delta giving the warrants that allow thegovt to buy up to 1% of Delta’s non-voting shares at $24.39 overthree years so that the taxpayers may profit from taking the risk;
Delta share price increased to $46.57 (3rd May 21) – Taxpayers profit
while saving Delta!
 Research needs: Which form of govt bailout is better? For airlines,
to the industry and for the country as a whole including strategicneeds? USA vs. Germany?

© Prof. Tae Hoon Oum

7(B) Post-Covid Airline industry structure: some comments
 Many airlines went bankrupt worldwide; many LCCs and regional carriers
with weaker Balance Sheet went bankrupt; e.g., Flybe (Europe’s largest regionalairline co) and Latin America’s three major carriers (Avianca, LATAM Airlines
Group, Aeromexico, filed for bankruptcy protection in 2020 (have resumedoperations).
 Post-Pandemic market structure depends significantly on what the national
govt did to help FSA vs. LCC (e.g., UK helped EasyJet as much as IAG (BA) USA: more bankruptcies of LCCs than major airlines  reduced LCC
competition as compared to the pre-pandemic period;
 China: during the Pandemic, LCCs were allowed to enter trunk routes to major
hub airports while they were strictly restricted in pre-Pandemic era; As a result,more frequent market contacts and increasing head-to-head FSC-LCC competitionin the mainland China market.
 The impact of the pandemic on air cargo was less severe than on passenger market
 Research needs: In the medium to long term, would the market structure return tothe pre-pandemic situation?
© Prof. Tae Hoon Oum

8(C) Transport Sector and Climate Change:
Research Needs for Electric Vehicle Adoption
 California passed the law: cannot sell combustion engine cars from 2035; manyother countries including Canada adopted similar policy;
 Policies for promoting EV adoption• EV Purchase subsidy• Subsidy for charging station infrastructure• R&D subsidies for battery cost reduction and charging speed (e.g., Palentir –Steady State EV Battery development) Recent finding: Gasoline price appears to be the most important factor for
determining EV purchase; US central and state govts face a major dilemma – while
trying to lower fuel prices for political reasons, the lower fuel prices slow down EV
adoption – contradicting climate change policy goal.

© Prof. Tae Hoon Oum9

Global Aviation Emission Reduction Target (IATA)

SAF, Hydrogen, E-aircraft< 200 M t CO2 in2005

Source: IATA (2019)10© Cranfield University

(C) Transport Sector and Climate Change:

Net Zero - Global Aviation Emission Reduction Effort

 UN FCCC (Framework Convention on Climate Change) was formed to establish the international framework
for attacking the human interaction to climate change at the 1992 Rio de Janeiro Earth Summit
 Aviation became part of the EU ETS in 2012; Major world powers opposed; EC had to take the ‘stop theclock’ decision.
 The Global MBM lead by ICAO was finalized in 2016 as the Carbon Offsetting and Reduction Schemes forInternational Aviation (CORSIA) for aiming to achieve the Aviation part of the Paris Convention Agreement.
 3 stages of CORSIA implementation:• Pilot phase 1: 2021-2023 (2019 CO2 emissions as baseline); Phase 1: voluntary2024-2026 (85% of 2019 CO2 emissions as baseline)• Phase 2: Mandatory from 2027 (85% of 2019 CO2 emissions as baseline) Aviation operators are required to purchase the carbon credit established byICAO; But they can reduce the requirement using SAFs (sustainable aviationfuels) defined by CORSIA eligible fuels (CEFs)

 many not-clearly defined areas  meaning serious researchneeds© Prof. Tae Hoon Oum

11© Prof. Tae Hoon Oum

12Transport Sector and Climate Change:

Competition during the course of decarbonization< very few research papers on this topic>
Based on Hotelling demand model, Jiang et al. (2023 working paper) find that Cost inflation and mandatory quota rate of SAF impact more to FSC’s
cost, price and profit than to LCCs;
With the introduction of SAF, LCC market share to increase at theexpense of FSC’s market share
LCCs gain competitive edge over FSC, but this could also reduce LCC
absolute traffic and profits as well
Passengers’ stronger green concern (and passengers willingness to payfor SAF) helps both LCC and FSC. Again, this profit effect on LCC islikely to be higher than on FSC.
© Prof. Tae Hoon Oum13

Transport Sector and Climate Change:

Competition during the course of decarbonization - 2/2
With a focus on the European Commission’s proposal for a blending mandate, Grimme (2023)
discusses economic issues associated with the introduction of SAFs.

 Long-haul itineraries and the competition with hubs and airlines outside the scopeof the EU’s blending mandate: European airlines would face disadvantage
predominantly in long-haul travel.

 In case of the Frankfurt-Singapore itinerary, the full flight distance is subject to to blendingmandate.
 In comparison, in case of the Frankfurt-Istanbul-Singapore itinerary, only 20% of the flight
distance is subject to the mandate.

 Intra-EU holiday traffic would be affected by traffic flows shifting to non-EUlocations.

 e.g., diverted to Tunisia or Turkey, instead of Spain, Italy and Greece, where the return segment
is not subject to the mandate.
© Prof. Tae Hoon Oum14

(D) Chicago Convention and Air Transport Policy issues
The regulatory system for governing int’l airline services is hopelessly
outdated and needs a major reform:
The 1944 Chicago Convention on Civil Aviation sets out the system of bilateral Air
Service Agreement (ASA) between each pair of countries. This bilateral negotiation
system has shown major limitations for forming a unified global leadership to deal with
the issues for opening air services as the Covid-19 gets eased.
This is the time for the global community to work together for creating a better
regulatory system for int’l air services suitable for the modern world.
Air transport should be included in GATS (General Agreement on Trade inServices) within the WTO multilateral system.

ATRS is the only organization that can take this as a longterm policy initiatives. I encourage the ATRS to establish aTask Force as a contribution to the world economy.
© Prof. Tae Hoon Oum15

(E) Issue on Global Aviation Technology Leadership Since ICAO does not have enough expertise on aircraft technology, FAA
has served as a global technology leader for a long time. ICAO by andlarge followed FAA’s technological leadership.
 FAA’s policy of alloweing Boeing experts to do ‘de facto’ aircraft
certification was responsible for the Boeing 737 Max’s catastrophic
accidents (Indonesia and Ethiopia)  FAA lost credibility as theaviation technology leadership in the eyes of the world
 Given that, USA, Europe, Japan and China are contenders of aviation
technology leadership, there may be a need for forming a globalorganization for aircraft certification instead of relying on a single
country to do their own aircraft certification. This requires serious
research and political considerations.
© Prof. Tae Hoon Oum

16(F) Concluding Remarks
 Less efficient but necessary adjustments to the int’l transport network will occur
 Research needs for reshaping of transport network for changing supply
sourcing
 Roles of Governments in crisis situation  How do we choose the bailout form:
USA vs. Germany?
 Aviation operators are required to purchase the carbon credit established by ICAO;
But they can reduce the requirement using SAFs (sustainable aviation fuels) defined byCORSIA eligible fuels (CEFs)  many not-clearly defined areas  meaning
serious research needsFaster EV adoption requires comprehensive research: Gasoline price, optimal
subsidy levels (EV churchase and Charging Infrastructure), Standardization ofcharging infrastructure There is a need for forming a global organization for aircraft certification insteadof relying on a single country to do the certification.
© Prof. Tae Hoon Oum

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The 16th Triennial World Conference (17-21 July, 2023 in Palais de Congres in Montreal, Canada
Hosts: The WCTR Society and Montreal Politeknique, CIRRELTProf. Catherine Morency and Prof. Martin Trepanier© Prof. Tae Hoon Oum18

감사합니다© Prof. Tae Hoon Oum

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