Economic impact assessment in the aviation sector:

• Why Cost-Benefit analysis (CBA)?• Why not just stick to a financial analysis?

• When to do a CBA?• Important elements and their factor prices• A few methodological problems

Norwegian Civil Aaviation Administration (AVINOR) as a public service enterprise:

• Limited liability company, owned by the State

• Financial responsibility• Revenues from user charges and airport shops (3000 million NOK 1998)

• Under political jurisdiction (the Ministry)

• Operates under international regulations (EUROCONTROL, ICAO)

• Responsible for buliding and operation of:

• Airports (airside, buildings, landside)• ATM/ATC• Security

CIVIL AVIATION ADMINISTRATION

Røst

Oslo/Gardermoen 1)

Sandefjord/Torp

Kristiansand/Kjevik1)

Haugesund/Karmøy

Stavanger/Sola 1)

Farsund/Lista

Fagernes/Leirin

Sogndal/HaukåsenBergen/Flesland

Sandane/AndaFlorø

Førde/Bringeland

Røros 3)Ørsta-Volda/ Hovden Ålesund/Vigra Molde/Årø

Kristiansund/Kvernberget Trondheim/Værnes

Ørland

Namsos Rørvik/Ryum

Brønnøysund/Brønnøy

Mosjøen/KjærstadSandnessjøen/Stokka

Mo i Rana/Røssvoll

Bodø

Narvik/Framnes Harstad-Narvik/Evenes

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2) Bardufoss

Tromsø

Alta Lakselv/Banak Kirkenes/ Høybuktmoen

Vadsø

BerlevågMehamnHonningsvåg/Valan

Svalbard/Longyear

AVINOR owned Main Route Airports 1)

with Military Sector

State owned Military Airports -with Civilian Sector 2)

without Main Route Traffic

AVINOR owned regional airports 3)

with Main Route Traffic 4)

Heliport

Dagali

Skien/ Geiteryggen

Notodden

Stord/Sørstokken

Hasvik Hammerfest Vardø Båtsfjord

Røyken

Rygge

Værøy4)

Military Airport

Oslo ATCC Røyken

Airports not owned by the State/AVINOR

State owned Military Airports partly run by Local Authority

Sørkjosen

AndøyaStokmarknes/Skagen

LeknesSvolvær/Helle

Economies of scale and “Financial responsibility”: Efficiency loss?

Traffic (X)

Price, costs

Xm Xa Xf

Pm

PaS

PfMC

Average costs (AC)

DemandGI

A

B C

D

0

E

F

NEW PROJECT:

Passengers (network included) Airline NCAA

Changes intravel time +Changes inexpenses = IN CBA, CHANGES IN Changes in operating Changes inChanged PASSENGERS' BENE- costs and capital + in operating costsgeneralised FITS ARE TO BE CAL- costs and capital coststravel costs. CULATED AGAINST - Network effects on the airport - operators + CNS/ATM Changedaccident risk

External effects(the environment)

+

Costs and benefits, new project:

R R

Traffic (X) Traffic (X)X0 X1 Xo X1

DD

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G1

P

Go

G1

P

B B

Price, costs Price, costs

Revenues and consumer surplus: No unambiguous link

The most important economic effects to be analysedwithin the aviation sector are:

Changes in generalised travel costs, often in terms ofchanges in time costs. If present, changes in air ticketcosts and transport costs to/from airports should also betaken into consideration.

Environmental effects, like noise and emissions.

Effects on safety.

Investments and operating costs.

IMPACTS TO BE CONSIDERED– FOR VARIOUS GROUPSPassengers, changes in:

Travel time costs Air ticket costs Cost of travel to/from airport

Air freight, changes in: Time costs

Other expensesAirlines, changes in

Fee payments to NCAA and the State Airccraft and crew costs Revenues from air tickets

NCAA, changes in: Investment costs Operating costs Fee revenues Revenues from airport shops (for cash flow analysis only)

Third parties (external effects), changes in: Number of citizens affected by aircraft noise Emissions:

Local/regional air emissions Global air emissions Contamination of soil and water

Flight safety, changes in: Expected loss of statistical lives Expected costs of material damage

Network effects to be considered in large projects like: Rearrangements of the airport structure Rearrangement of ATM (Air Traffic Management) services

Changes in travel costs in the air network Changes in operation costs for NCAA and the airlines

Measures affecting other transport modes

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VOT for the aviation sector, travelling time:

Private travel Businesstravel

Travel time 106 240Waiting time between departures 22 80Value of time for air travel (NOK/h, 2003)

The VOT for delays are assumed to be 50 % higher thanthe VOT for travelling time (Algers & al 1995).

Costs of accidents (1):

Consist of loss of statistical lives, injury costs, materialcosts and administration costs.

The cost of a statistical life: NOK 17.0 millions.

Material costs: 100% of aircraft value for fatalaccidents.

Material costs for non-fatal accidents: 50 % of aircraftmarket value.

Average material accidents for scheduled flights inNorway: NOK 44 millions.

Average administrative costs: NOK 4 millions.

Costs of accidents (2):

Example: Expected accident costs for an average accidentwith 60 passengers in the aircraft, a risk of fatal accidentof 0.16 and a mortality rate of 0.9. The material andadministrative costs are as stated above:

Loss of statistical lives: NOK 147 millionsMaterial costs: NOK 44 millionsAdministrative costs: NOK 4 millionsTotal: NOK 195 millions

The average cost of one accident should be calculatedseparately for each airport.

To calculate the expected reduction or increase inaccident costs, the cost of one accident must bemultiplied with the actual accident risk or by the changein risk due to the investment or the measures taken.

Costs in NOK per kilogram from local and

regional emission to air:

Denselypopulated areas

Sparselypopulated areas

NOX 70 35VOC 70 35Particles 615 0

For the airports in question, the average emissions arecalculated from composition of the air fleet that uses theairport.

The emission factors of each aircraft category is known.

AIRCRAFT NOISE:

• Basis for noise costs: WTP study from Oslo airport, Fornebu.

• WTP for a subjective noise reduction of 50% for people who claimed to be much annoyed.

• WTP approximately NOK 3 600/year, giving approx. NOK 72 for 1% reduction.

• WTP is assumed to be symmetric, i.e. equal for reductions and increases in noise levels.

• Maps of noise zones before and after the planned project is effectuated, together with population data give the total value of the change in noise level, measured in terms of the dwellers’ WTP.

The aviation authorities and decision-making:

• Up to now: Decisions mainly made by financial analyses alone. • New main airport OSL one important exception, where a ”quasi-

economic” analysis was made.

• Economic appraisals MAY (and probably WILL) give priority to other projects than those given by the financial analysis.

• Intangibles like VOT, environmental effects and accident risks contributes to this divergence.

• PROBLEMS when financial considerations do not coincide with the (at least politically stated) obligations to take the welfare of passengers, operators and the community into consideration.

Application: New/expanded terminal building at Stavanger airport (SVG)

• The terminal building is the limiting growth factor in the short run. Later on, the number of gates and the runway capacity may become growth limiting factors.

• Without an upgrade of the terminal, traffic is transferred to less attractive slots, later on to other transport modes, while traffic with less WTP is deterred from travelling.

• Main benefits of an upgraded terminal building: Travel time savings of avoiding transport to neighbouring airports/avoided traffic deterrence.

About Stavanger airport:

• 3 million passengers (pax) arrived/departed in 1999.

• Expected annual traffic growth: 4.5% in the period 1999-20003.5% in the period 2001-20102.0% thereafter

• The traffic growth calls for the following capacity expansion:

Year Measure2005 8000 m2 terminal building2010 7 gates2018 Extended runway capacity

Passengers

Year

T3

T2

T1

T0

5 10 18 30Terminal building No. of gates Runway

Traffic growth with sequential capacity constraints

USD

Year

R

5 10 18 30

Terminal building No. of gates Runway

0

I1 I2 I3

A

B

C

D

Costs and revenues - airport with sequential capacity constraints

The main benefits are saved travel time when travelling from Sola instead of using alternative routes. Without the new terminal, the capacity constraint will force people touse other routes (via road, rail or other airports)

The following main data have to be collected:

The share of business/other travellers and the VOT.

Origin/Destination matrix

Time costs and other costs on alternative routes.

The share of the market that give up travelling when the capacity constraint is in effect.

Reduced delays

Main benefits from terminal building:

Before we start the Economic Impact Assessment (EIA) work:

• The traffic forecasts are important as basis for the EIA. The effects on passengers, airlines, AVINOR and the environment are based on the traffic forecasts.

• The cost estimates for AVINOR and the airlines should be according to ”best practice”. The investment costs should be based on expected values, and the aircraft operating costs should be standardised.

• The outcome of the EIA should be presented according to the decision makers’ needs, influencing the way we aggregate our numbers. Once we start to aggregate, e.g. groups of passengers, it may be a very demanding task to disaggregate later on!

Matters to be considered:

• Specification of the project:

• The base case: Traffic growth without capacity expansion • Relevant alternatives

• How do we deal with mutual dependency among projects?

• What are the passengers’ options when the airport capacity constraint is effective?

• Traffic growth with/without capacity expansion• Alternative routing

• Adjacent airports• Road or rail

• Traffic deterrence

• Safety and the environment

• Investment and operating costs

Main tasks:

• To calculate the benefits of avoiding delays and more expensive alternative transport

• For passengers• For operators

• To compare the monetised safety and environmental effects• Accident risks• Emissions

• To calculate the investment and operating costs for the base case and the relevant alternatives

• To present the results in an adequate way• Sensitivity analyses• Implications for various stakeholders (”winners and losers”)

Relevant economic effects:

• Passengers:

• Costs of alternative transport• No. of passengers deterred• Changes in accident risk• Costs of delays

• Operators (airlines):• Time costs and operating costs• Cost of delays• Accident costs

• AVINOR:• Investment costs• Operating costs

• Third parties• Environment costs

A selection of factors to be considered in the economic appraisal:

The travel purposes (business travels and others). The destinations from SVG. The level of diverted traffic, and the distribution between the

neighbouring airports HAU and KRS. Time costs and other costs for surface transport. The share of travels that are deterred because of higher transport

costs.

Investment costs (AVINOR) Operating cost (AVINOR) Operating costs (airlines)

Environmental costs (emissions) Changes in accident risks

BGO

HAU

SVG

KRS

OSL

TRD

Traffic from SVG via HAU and KRS

From SVG with surface transport

Alternative routes, travels from SVG

Traffic forecasts:

• Gives the volumes of traffic diversion/deterrence from capacity constraints.

• The distance between the curves gives the forecasted amount of traffic that will be will be served by expanded terminal capacity.

Traffic growth, with and without new terminal

0,00

1,00

2,00

3,00

4,00

5,00

6,00

Year

Mill

. pax With project1

Without project 1

MCA1

MCR

MCA2

D0

D1

Cost

Traffic (X)X0 X1 X2 X3

Benefits of new terminal building, measured as the benefits of “not having to use other airports”:

• Shaded area: Those who use the road network to adjacent airports.• Hatched area: Deterred traffic, people who give up travelling.

Diverted and deterred traffic from capacity problems:

1. Use traffic forecasts to calculate the no. of passengers that will have to use other routes without the new terminal building.

2. Find the share of business travels, and calculate the VOT per passenger.

3. Find the main origin/destinations from Sola.

4. Describe the alternative transport modes to the main destinations with respect to travel time costs and other costs.

5. Calculate the generalised travel costs on both the air travels from Sola, and on the alternative routes to/from the main destinations. The generalised travel costs consist of time costs, vehichle operating costs, costs of getting to/from the airport, and other payable costs (tolls, fares). This is done for 3 reasons:

We are going to calculate the level of traffic deterrence

We are going to calculate the benefits of avoiding traffic deterrence

We are going to calculate the benefits of avoiding alternative routes

Procedure for the Economic Impact Assessment (1):

6. Calculate the weighted average difference (between travelling from Sola and by using other routes/modes) in travel costs to the main destinations

We will end up with the average difference in travel costs for business travels and other travels. Both the economic and financial costs are calculated. The financial costs are used to estimate the traffic deterrence (see below).

7. Calculate the traffic deterrence for business travels and other travels. In this example, this is done by using a simple elasticity model, by using the formula

ei=(xi/xi)/(pi/pi)

ei = elasticity of demand (known) xi = deterred traffic (to be calculated)xi = unconstrained traffic volume (known)pi = increase in financial generalised costs, alternative routes (known)pi = financial generalised costs, travels from Sola (known)

More sophisticated models can of course be used.

Procedure for the Economic Impact Assessment (2):

8. Calculate the passenger benefits by multiplying the difference in the economic generalised travel costs with the traffic volumes, both for the transferred and deterred traffic. The areas in the figure below is then calculated. The black area is the benefits of not being transferred to alternative routes becaused of constrained airport capacity. The hatched area is the benefits of not being deterred because of higher transport costs on alternative routes.

The passenger benefits are calculated annually over 25 years, and discounted to present value (PV).

Demand (ei = -0.8)

Passengers (X)

Generalised travelcosts (G)

1350

34646 474600

1765

Transferredtraffic

Deterredtraffic

Procedure for the Economic Impact Assessment (3):

9. Calculate the discounted investment costs.

10. Calculate the discounted changes in operating costs (AVINOR and airlines).

11. Calculate the discounted air emission costs.

The procedure for calculating the benefits of avoiding delays:

1. Calculate the delay time (no. of passengers during peak hours multiplied by the expected average delay time).

2. Calculate the delay costs by using the VOT for business and other travels.

3. Calculate the delay costs for the operators.

Procedure for the Economic Impact Assessment (4):

Procedure for the Economic Impact Assessment (5):

The procedure for calculating the value of safety implications:

1. Identify the accident risk for air transport and alternative modes.

2. Use the traffic forecasts to calculate the expected change in no. of life lost/injuries.

3. Calculate the value of the changed accident risk by using handbook values for accident costs (life/injury welfare costs, material damage costs, administration)

Finally, we present the results:

1. Present the cost benefit calculations2. Present the financial implications for AVINOR

3. Present the distributional aspects (”winners/losers”) 4. Present the sensitivity analysis (”what happens with the

profitability if….”)

Economic impacts Financial cashflowCosts and benefitsSVG example Benefits Costs Revenue CostC1 Passenger benefitsC1.1 Business travelsC1.2 OthersC1.3 DelaysC1.4 Ticket costs

3700

541550

S1 Accident costs 137S1.1 Statistical livesS1.2 InjuriesS1.3 Material damage and administration

n.a.n.a.n.a.

E1 The environmentE1.1 Local and regional emissions (NOx, VOC, particles)E1.2 Global emissions (CO2)

636

P1 The State/general taxesP1.1 Fiscal aviation taxesP1.2 VAT on NCAA investments and operating costs

9262

P2 Operators/airlines

P2.1 Operating costsP2.2 Aviation charges to the NCAAP2.3 Fiscal aviation taxesP2.4 Ticket revenuesP2.5 Delay costs 21

122

155021

1229592

SUM financial cashfloe operators/airlines 1571 309P3 Other commercial activities (shops, taxfree) n.a. 22

P4 NCAAP4.1 InvestmentsP4.2 Residual valueP4.3 Maintenance and operationsP4.4 Revenues from aviation taxesP4.5 Other commercial activities

223-7

1619522

275

171

SUM financial cashflow NCAA 117 446SUM economic impacts 582 541Net present value (NPV) 41NPV/Cost ratio 41/446 0,1

New terminal at Sola (SVG), economic impacts and financial cash flows

MAIN CONCLUSIONS:

• The terminal building is economically profitable:• NPV= NOK 41 millions • NPV/C = 0.10

• The main benefits are connected to saved inconveniences of not having to use alternative routes/modes (60 per cent of the benefits).

• AVINOR is responsible for 65% of the costs, the operators for 26% and the third parties carry the rest (9%, mainly emission costs).

• Sensitivity analysis:• The profitabiliy is exposed to increases in e.g. construction costs. An increase of 15% in the

expected construction costs makes the project unprofitable.

• Distributional aspects:• Business travellers and the airlines are winners• Travellers in other parts of the air network have to carry a share of the financial costs,

because of the financial loss of NOK 330 millions.• A certain increase in air emissions will result.

• Non-quantified impacts• Not significant.

Recommendations

The cost benefit analysis shows that the new terminal buildingis economically profitable, with a NPV>0. From thisperspective, the project is recommended.

The sensitivity analysis shows that the project is exposed tocost increases. Careful estimation of the cost uncertainty ishighly recommended.

The new terminal is unprofitable in the financial sense. Themain explanation is that the main part of the ”lost” revenuesfrom diverted traffic is generated to the CAA anyway, fromthe adjacent airports.

A final recommendation depends on the trade-off between theeconomic profitability and the financial loss. Using theKaldor-Hicks criterion, the project should be recommended.