0 socioeconomic drivers for transformation of the nation’s air transportation system 30 th annual...

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Socioeconomic Drivers forTransformation of theNation’s Air Transportation System

30th Annual FAA Aviation Forecast Conference

Industry Restructuring and the Future of Global Aviation

National Airspace Systems Planning—Government Panel

March 18, 2005

Richard GolaszewskiGRA, Incorporated115 West Avenue • Jenkintown, PA 19046 • USA 215-884-7500 • 215-884-1385 [email protected]

2March 18, 2005GRA, Incorporated

Overview

• Policy framework• Air travel and the economy• Economics of production/consumption• SEDF evaluation framework

– Measurement– Results

• Implications


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 ofProduction• Labor• Capital• Other

InternationalTrade/

Trade Balance

Aircraft andAerospace

Manufacturing

Airports AirTraffic

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

Fares LowerSmaller A/C

More Frequency

Deregulation

Consolidation

LCC Entry

Consolidation

End State?

Large A/C Low Frequency

Fares LowerMore Frequency

Retain Older Aircraft

Fares Lower—LCCs GrowingLarge Networks/AlliancesRegional Carrier Growth

Smaller A/C More Frequency Point-to-Point

Fares Lower

Time1978

Market Phase Industry Structure

LCCs Set Pricing

Restructure


Commercial Aviation Growth is Linked to Economic Growth

Real GDP, Domestic Enplanements, Domestic RPMs and Domestic RTMS, 1950 - 2003 (1986 = 100)

0

50

100

150

200

250

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Year

Ind

exed

Val

ue

Enpl RPMs RTMs Real GDP Enpl RPMs RTMs Real GDP

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March 18, 2005GRA, Incorporated

Real Domestic Passenger Yields and Costs Have Fallen Steadily

Real U.S. Airline Domestic Yields and Real Costs, 1950 - 2003

0

5

10

15

20

25

30

35

40

45

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Year

2002

cen

ts

Real Yield -- Revenue per RPM (2002 cents) Real Costs per ASM (2002 cents)

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Domestic Revenue Enplanements Per Capita

-

0.50

1.00

1.50

2.00

2.50

1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

Year

En

pla

ne

me

nts

Pe

r C

ap

ita

Economics of Production and Consumption

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Airline Production/Demand

Production

Demand

Frequency

Distance

AircraftSize

RASM

CASM

RPM

LoadFactor

ASM

Schedule

Fare

TravelTime

Yield(Fare/RPM)

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Travel Choices Underlie Demand

PassengerDestination

Airport AOrigin

Airport DDestination

Airport BOrigin

PassengerOrigin

Airport CHub

Auto

Choice VariablesFares and access costTravel time

Access Intercity

Service frequency/scheduleOn vehicle and other amenitiesFlexibility and reliability

Example Choice Set 2 Origin airports

Non-stop airConnect airAuto

Economic Analysis Methods

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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

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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

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Capacity Shortfalls Have Real Economic Costs

2005 2015 2025

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.

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Notional Depiction of NAS Delay/Throughput Tradeoff

C

B D

Annual Average

Delay

Future Transformed Delay/Throughput Curve

Maximum Tolerable Delay

Intolerable Level of Delay

Current Delay/Throughput Curve

NAS Throughput (Operations)

A: Current NAS ThroughputB: Current NAS Throughput Consistent with Tolerable Delay (notional)C: Delay Impact of Serving Anticipated Future Demand in Current NAS (notional)D: Transformed Future NAS Accommodates Anticipated Future Demand with Tolerable Delay (notional)

A

C

B D

Annual Average

Delay

Future Transformed Delay/Throughput Curve

Maximum Tolerable Delay

Intolerable Level of Delay

Current Delay/Throughput Curve

NAS Throughput (Operations)

A: Current NAS ThroughputB: Current NAS Throughput Consistent with Tolerable Delay (notional)C: Delay Impact of Serving Anticipated Future Demand in Current NAS (notional)D: Transformed Future NAS Accommodates Anticipated Future Demand with Tolerable Delay (notional)

A

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Valuing Capacity Shortfall

UnconstrainedDemand

Price ChangesQuality Changes

Schedules Delays

Move Up DemandCurve

Shed Demand

TolerableDelays?

PriceIncrease to

Clear Market

N

Y Demand Served at Expected Yields

Loss of Consumer Surplus

Increased Costs

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Prior Results

Category2015

($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.

Implications

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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.

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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

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Questions?

Slides available at:

www.GRA-INC.com

Rich Golaszewski:

[email protected]

215-884-7500

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