Dan Elliott, founder and director of the leading economics consultancy Frontier Economics, makes the case for the value of network development.
As worldwide recovery from the global financial crisis gathers pace, demand for aviation is growing strongly and is expected to continue to do so. Asia – together with Central and South America, and Africa – is likely to be a main source of this growth, driven by its high economic potential. Estimates show that, over the next 20 years, nearly half of the world’s air traffic growth will be driven by travel to, from or within the Asia-Pacific region.
While the practical challenges of facilitating this growth are often discussed, in Frontier Economics’ experience, the economic benefits that growth in aviation brings to an airport’s region are often neglected or poorly expressed.
This is particularly true when it comes to the growth in transfer traffic at major hub airports. It has been said that, to the local economy of the hub airport, transfer passengers are worth no more than the price of a cup of coffee in the transfer lounge. This fallacy shows that, as an industry, we have not been effective at articulating the economic benefits that aviation brings to a region.
Therefore, the key question is: how we can better describe and estimate the economic benefits from air connectivity?
A unique contribution
The starting point for most studies of the economic impact of aviation is to focus on the jobs created serving the airport or airlines themselves. Clearly, airports and airlines are important generators of activity and employment, but, by limiting the measure of economic impact in this way, we drastically undersell the value that aviation helps to create for the economy as a whole.
In order to capture the truly unique benefits that air connectivity brings, we need to focus on the ‘catalytic’ effects that air travel has on the economy; these are the benefits that are created by, rather than within, aviation.
In many ways, this is an obvious step. The appraisal of surface transport investments such as rail and road focuses on the time savings that the new infrastructure will bring to business and private users, and the benefits that will come from those savings. In the case of aviation, however, the benefits to business users rarely get quantified.
These benefits take many different forms. Obviously, in the field of air freight, air cargo, either carried belly-hold on passenger flights or on dedicated freighters, is a key logistical input into international supply chains, but, in business and commerce more widely, the value of air travel has much wider importance. Air travel remains a vital part of establishing and maintaining business relationships, and managing international supply chains.
For many years, it has been argued that telecommunications, from email to videoconferencing, would substitute for the need for business air travel, but the reverse has proved to be true.
Even now, 20 years after the birth of the internet, the growth in aviation shows no sign of abating. In our connected world, the communications revolution allows businesses of all sizes to think about the globe as their marketplace, not just their domestic market. But having made that leap, there is still no substitute for face-to-face contact for establishing relationships and cementing trust.
That is where air travel makes its vital contribution, especially on journeys where road or high-speed rail cannot offer a viable alternative. The greater the ability for business communities to connect, the more trade and investment is facilitated.
There is ample evidence to show that higher levels of trade and foreign direct investment bolster productivity and can lead to higher rates of economic growth, so we can conclude that the truly unique contribution air connectivity can make to an economy is through facilitating international trade and investment, which ultimately increases productivity.
Does causality matter?
While economists sometimes talk about the effects of business air travel in qualitative terms, they have often shied away from attempting to quantify them. Part of the reason for this is concern over what economists like to call ‘causality’. There is no dispute that business activity and air connectivity tend to increase hand in hand – but is it economic growth driving the demand for air travel or travel driving growth?
In fact, this argument misses the point, because causality runs both ways. This does not devalue the unique contribution that airports make to their local economy, though. The best way of thinking about this is that connectivity represents an element in a virtuous circle of economic activity and growth (see figure).
The connectivity enabled by an airport is not a sufficient condition on its own for creating economic activity, but the role the airport plays in the economy is a necessary condition in facilitating a well-functioning economy to achieve its full potential.
So how does this effect work? In practice, in much the same way that improved road or rail infrastructure facilitates economic activity: by making journeys easier, reducing their cost or the time they take, and so boosting demand.
When a destination is not served directly from a given airport, this does not mean that business people cannot travel to and from that destination, just that it will take longer and be more costly, at least in terms of time, to do so, because an indirect route has to be taken.
Opening a new destination makes this journey more efficient for businesses and can be expected to boost demand. In regard to the contribution to economic activity, the new destination widens the options available to local business people.
From the point of view of the outside world, the new destination puts your city on the map. Businesses looking for potential trading partners, considering locations for regional headquarters or looking for locations for part of their supply chain are more likely to consider your city if they can reach it directly by air, and if other partners and suppliers can do the same.
The value of transfer passengers
This leads us back to the transfer passengers. The reason transfer traffic contributes so much more than that cup of coffee is down to the economics of hub airports. By allowing airlines to consolidate passengers from many origins at one hub and then dispatching them to many destinations, a hub airport is able to provide its home city with a far greater number of direct destinations than would be feasible from a point-to-point airport only serving the domestic market, and, as we have shown, connectivity to more destinations is the key to an airport facilitating trade, investment and growth.
The hub airport, as well as providing a great service for those long-distance travellers, is also of great benefit to its own city and country. By allowing it to connect directly to a greater proportion of the world, it widens the geographic scope of the markets your economy can do business with, and, in return, attracts commercial interest from those looking to trade with and invest in other countries.
Finally, there is the ‘gateway effect’. If the facilities on offer at your airport are impressive, this can make an impact on the traveller too, so, even if they are on their way somewhere else today, they may think to come back and explore opportunities to do business in your city in the future.
Describing the economic benefits of air connectivity in these terms captures the unique nature of air travel, and provides strong arguments for policymakers and local communities to support their local airport, particularly if it is a hub.