Post on 29-Mar-2015
Everyday Economics:Applications in Aviation and Tourism
Michael Fung and Fred KuDecision Sciences and Managerial Economics,
CUHK Business School
Aviation Economics
Michael Ka Yiu FungAviation Policy and Research Center,
CUHK Business SchoolAir Transport Licensing Authority,
HKSAR
Aviation Economics
Aviation Economics
Microeconomics in Aviation Macroeconomics in Aviation Environmental Economics in Aviation
Part I
Microeconomics in Aviation
Microeconomics in Aviation
Aviation Industry: Capital, Technology and Service Intensive Sector
Aviation Industry: Highly Regulated Industry
Microeconomics in Aviation
Scale Economies Scope Economies Network Economies Price Discrimination Vertical/Horizontal Integration Entry Barrier
Scale Economies
The average total cost decreases as the volume of output increases.
Short run or Long run ?? Fixed costs
Scale Economies
Hong Kong International Airport: Third Runway Expansion
HK$86.2 Billion (2010 prices)
Scale Economies
Airlines: A380US$390 Million (January, 2012)
Scale Economies
Why A380??A380: 524 (3-class); 644 (2-class); 853 (1-
class)Boeing 747-400: 416 (3-class); 524 (2-class);
660 (1-class)
Source: Airbus, Boeing
Scope Economies
Lowing average total cost in producing two or more products.
Cost-sharing
Scope Economies
Hong Kong International Airport:aeronautical and non-aeronautical activities
Scope Economies
Airlines: passenger and cargo
Network Economies
Kelly (1998) states that in a network economy, value is created and shared by all members of a network rather than by individual companies and that economies of scale stem from the size of the network - not the enterprise.
Source: Kelly, Kevin. 1998. New Rules for the Wired Economy.
Network Economies
A hub is a term used to refer to an airport that airlines use frequently for connecting passengers, and cargo. Cargo and travellers moving between airports not served by direct flights use a hub to change planes to get to their destination.
Source: http://www.seatplans.com/advice/plane-speaking/aviation-glossary
Network Economies
Hong Kong International Airport – International Hub“HKIA is connected to about 160 destinations, including around 40 in the Mainland, through about 900 daily flights by over 100 airlines.”
Source: HKIA
Network Economies
Cathay Pacific – Hub Carrier
“Over 111 destinations worldwide”
Source: Cathay Pacific http://aviationknowledge.wikidot.com
Price Discrimination
Price discrimination can exist when three conditions are met: consumers differ in their demands for a given good or service, a firm has market power, and the firm canprevent or limit arbitrage.
Price Discrimination
Airline industry is ideal for price discrimination: The seller has some control on the price, buyers have different price elasticities of demand, and resale of the ticket by the buyer is not possible.
Price Discrimination
Yield Management: Software can constantly calculate the empty seats remaining and price them while maximizing returns.
Price Discrimination Airline price discrimination represents an attempt
to charge the business traveler more than the leisure traveler, because business travelers typically have less elastic demand.
Price Discrimination By offering different tickets (Saturday night stay-
over restrictions, advance purchase discounts, and roundtrip discounts), airlines are attempting to have consumers sort themselves between business and leisure travelers.
Price Discrimination Cathay Pacific: First Class, Business Class
Business Standard, Business Flex), Premium Economy Class, Economy Class (Economy Core, Economy Standard, Economy Flex)
Vertical Integration Vertically integrated companies in a supply chain
are united through a common owner. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need.
Source: Wikipedia
Vertical Integration 100% owned by Cathay Pacific:1. Cathay Pacific Catering Services (HK) Limited – Airline Catering2. Asia Miles Limited – Loyalty Programme3. Cathay Pacific Service Limited – Cargo Terminal4. Hong Kong Airport Services Limited – Aircraft Ramp Handling5. Vogue Laundry and Cleaning Limited – Laundry and Dry Cleaning6. Cathay Holiday Limited – Travel Tour Operator
Source: Cathay Pacific Annual Report 2011
Horizontal Integration Horizontal integration occurs when a firm is being
taken over by, or merged with, another firm which is in the same industry and in the same stage of production as the merged firm.
Horizontal Integration 100% owned by Cathay Pacific:
Hong Kong Dragon Airlines Limited
Network Economies
Entry Barrier
Capital Requirement? Regulatory Requirement: Air
Transport License – Bilateral Air Service Agreement, Capital Requirement
Incumbent Advantage: Brand Loyalty, Time Slots
Part II
Macroeconomics in Aviation
Related Links - HKIA Master Plan 2030 Executive Summary:
(Chinese) (11 pages) http://www.hkairport2030.com/tc/information/publications.html
(English) (11 pages) http://www.hkairport2030.com/en/information/publications.html
Videos: (Chinese)
http://www.hkairport2030.com/tc/information/videos.html (English)
http://www.hkairport2030.com/en/information/videos.html
Additional Reference Materials Airport Authority Hong Kong (2012). Press release at
March 20, 2012. Retrieved from http://www.hongkongairport.com/eng/media/press-
releases/pr_1060.html (with PowerPoint presentations downloadable)
馮嘉耀 2010。「香港機場需要『第三跑道 ?』」《信報財經新聞 》, 2010年 4 月 15日。
馮嘉耀、袁志樂、陳家欣 2011。「本港機場擴建借鑑德國成功經驗」《信報財經新聞》, 2011年 8 月 13日。
馮嘉耀、袁志樂、陳家欣 2011。「興建第三跑道─如何達至社會共識﹖」 《信報財經新聞》, 2011年 9 月 1 日。
馮嘉耀、林艷虹 2012。「香港航空業的經濟貢獻」《信報財經新聞》 2012年 3 月 1 日。
Facts about HKIA1998 2010
Passengers 28.6m 50.9m
Cargos 1.6m tonnes 4.1m tonnes
Air Traffic Movements (ATMs)/Day
450 850
Number of Destinations
120 160
% of transfer/Transit passengers
25% 35.1%
*m = millionSource: HKIA MP 2030 Summary; Annual Reports of HKIA
Facts about HKIA (cont’d)
1: Directly cited from the HKIA Master Plan 2030 Summary2: financial services, trading and logistics, tourism, and producer and professional services
CompetitionAirport Nos of
RunwaysPlanned number of runways
Beijing Capital 3 Planning to build a 2nd airport
Guangzhou Baiyun 2 5
Shanghai Pudong 3 5
Singapore Changi 2 3
Seoul Incheon 3 5 by 2020
Tokyo Narita 2 3
Shenzhen Bao’an 2 3
Source: HKIA MP2030 Summary; various airports’ websites
Reasons for Third Runway
Source: HKIA MP2030 Executive Summary
By 2030, it is expected to have 97m passengers, 8.9m tonnes of cargo, 602,000 flight movements/year
Traffic may be lost to other airports due to “capacity crunch” and increasing connectivity
3rd runway allows aviation network to continue to grow without constraints and enhanced connectivity
that supports Hong Kong’s competitiveness
Details of the 3rd Runway The forecasted flight movements at 2030 = 602,000 Current capacity (as at 2010) = 360,000
HKIA under 3-runway system
Length of the 3rd runway 3.8 km
Design capacity 620,000 ATMs per year
Construction time About 10 years
Construction costs HK$86.2 billion (in 2010 dollars)
Source: HKIA MP2030 Summary
Schedule of the Third Runway
Source: HKIA’s press release at March 20, 2012
Funding Borrowing
Significant borrowing may adversely affect the credit ratings of AAHK
User pays Significant levy on user fees may adversely affect the air
traffic in the future, thus the forecasted traffic volumes and projected revenue become unreliable
Dividends The withheld dividends still need to pay back the
stockholders IPO
The goal for HKIA would become profit-maximization Hinder investment on infrastructure which lead to short-
term loss in accounts
Costs & Benefits Economic net present value 2012-2061:
HK$912 billion (in 2009 dollars) Direct employment: 141,000 jobs by 2030 Indirect + Induced employment: 199,000
by 2030 Construction costs: HK$86.2 billion (in
2010 dollars) / HK$ 136.2 billion (at MOD prices)
Source: HKIA Master Plan 2030
Costs & Benefits Analysis (i) Enright, Scott & Associates, Ltd (ESA). 2011.
Airport Master Plan 2030 Economic Impact Study for the Hong Kong International AirportAvailable at: http://www.hkairport2030.com/en/information/publications/consultancy_reports.html
(ii) Aviation Policy and Research Center (APRC), Chinese University of Hong Kong. 2012. Economic Contribution of Aviation Industry
Economic Impact Study by ESA
CatalyticIndirect +Induced
CatalyticDirect
Induced
Indirect
Direct
Benefits
Direct Aviation-related business Non-aviation-related business at
HKIA Indirect
supplies of goods and services to the activities at the airport
E.g. utilities, fuel suppliers, construction
Induced Spending of incomes by the
direct & indirect employees on local goods & services
Catalytic Direct Direct contribution of aviation-
related tourism & trade Catalytic Indirect + Induced
Induced contribution of aviation-related tourism & trade
Tourism Aviation-facilitated tourism impacts
Tourism exports When calculating the economic impact, consider only
outbound tourism Net tourism*
Net tourism equals tourism exports minus tourism imports minus tourism spending on the airport island
“The net tourism impacts on Hong Kong’s economy were estimated by subtracting the tourism import impact estimates from the tourism export impact estimates.”
*This part’s information is quote directly from ESA’s Economic Impact Study for HKIA.
Indirect and Induced Impacts Economic multipliers are used
provided by Economic Analysis and Business Facilitations Unit, Hong Kong Financial Secretary’s Office
Economic Multipliers
Regional Input-output Models
Economic multipliers are generated
Indirect & induced benefits are projectedfor 2009-2030
Ripple effects on each industryare shown
Source: ESA’s Economic Impact Study for HKIA
Economic Multipliers 2006-2008 – used for projections 2009-2030
Industry Multiplier Direct Revenue to Direct + Indirect Value Added Multiplier
Air Transport 0.311
Tourism 0.563
Trade (re-exports) 0.128
Trade (retained imports) 0.111 Induced Value Added to Induced Revenue Multiplier
0.605
Source: ESA’s Economic Impact Study for HKIA
Economic Multipliers - Assumptions Perfect elasticity of supply of inputs No capacity constraints No rising salaries and input costs due to
the large investment No technological change from 2009-2030
Total Economic Impact with 3rd Runway – Value AddedValue Added ( HK$ Millions) 2008 2030
Direct Benefits Value added 29,446 93,764
Share of GDP 1.75% 2.57%
Indirect Benefits Value added 32,040 42,211
Share of GDP 1.91% 1.16%
Induced Benefits Value added 16,101 31,497
Share of GDP 0.96% 0.86%
Catalytic Benefits Tourism Value added 10,272 (-12,644) 18,273 (-26,269)
Share of GDP 0.61% (-0.75%) 0.50% (-0.72%)
Trade Value added 61,588 146,555
Share of GDP 3.67% 4.02%
Catalytic Indirect + Value added 107,012 257,843
Induced Benefits Share of GDP 6.37% 7.07%
Overall Value added 256,459 590,143
Share of GDP 15.27% 16.18%
GDP 1,679,000 3,647,000
Note: (i) Year 2008 dollar values are in 2008 dollars, the following years are in 2009 dollars. (ii) The figures in brackets are from net tourism.Source: ESA’s Economic Impact Study for HKIA
Total Economic Impact with 3rd Runway – EmploymentEmployment (Persons) 2008 2030
Direct Benefits Employment 61,604 141,141
% of labor force 1.69% 3.66%
Indirect Benefits Employment 66,455 95,416
% of labor force 1.83% 2.48%
Induced Benefits Employment 57,399 104,075
% of labor force 1.58% 2.70%
Catalytic Benefits Tourism Employment 32,116 (-39,532) 62,917 (-90,450)
% of labor force 0.88% (-1.09%) 1.63% (-2.35%)
Trade Employment 78,402 218,574
% of labor force 2.16% 5.68%
Catalytic Indirect + Induced Benefits
Employment 263,506 645,480
% of labor force 7.24% 16.76%
Overall Employment 559,482 1,267,603
% of labor force 15.38% 32.91%
Employment 3,637,200 3,851,300
Note: (i) Employment in 2030 are obtained from the forecasted 2009 employment in “Hong Kong Labor Force Projections for 2010 to 2029” issued by the Hong Kong Census and Statistics Department. (ii) The figures in brackets are from net tourism.
Source: ESA’s Economic Impact Study for HKIA
Economic Impact Breakdown
0.96
1.911.75
6.37
4.28
Direct
Indirect
Induced
Catalytic Direct
Catalytic Indirect + Induced
1.160.86
4.52
7.07
2.57
Direct
Indirect
Induced
Catalytic Direct
Catalytic Indirect + Induced
2008 Value added breakdown(% of GDP)
2030 Value added breakdown(% of GDP)
Economic Contribution by APRC
Travel agents&
Airline ticketagents
Air Transport& incidental
Services
DirectBenefits
Inbound Tourism
Logistics
Trade Services
IndirectBenefits
Courier Services
Miscellaneous Services
Land Transport
Value Added of the Aviation Industry at Current Prices
Unit: HK$ million (unless otherwise specified)
2005 2006 2007 2008 2009
Direct benefits
Air transport and incidental services
Value added 44,661 43,786 46,489 32,075 42,422
Share of GDP 3.29% 3.01% 2.94% 2.01% 2.74%
(b.p. and curr. p.)
Indirect benefits
Trade services
Value added 59,151 60,962 66,530 64,070 59,549
Share of GDP 4.35% 4.20% 4.21% 4.02% 3.84%
(b.p. and curr. p.)
Tourism
Value added 7,952 9,333 9,904 9,949 8,026
Share of GDP 0.59% 0.64% 0.63% 0.62% 0.52%
(b.p. and curr. p.)
Logistics
Value added 6,363 6,330 6,599 6,047 6,286
Share of GDP 0.47% 0.43% 0.42% 0.38% 0.41%
(b.p. and curr. p.)
Overall
Value added 118,127 120,411 129,523 112,141 116,283
Share of GDP 8.69% 8.29% 8.20% 7.04% 7.50%
(b.p. and curr. p.)
GDP (b.p. and curr. p.) 1,359,200 1,452,800 1,580,100 1,592,900 1,550,900
Part III
Environmental Economics in Aviation
Social Costs – Pollution
Air Pollution Aircraft engine emissions approximately
consists of 70% carbon dioxide (CO2)
< 30% water vapor (H2O) < 1% each of
nitrogen oxides (NOx) carbon monoxide (CO) oxides of sulfur (SOx) volatile organic compounds (VOCs) particulates
Source: Federal Aviation Administration
Air Pollution
Emissions at ground level affect health: lung diseases, respiratory diseases,…
Emissions at higher altitudes may cause global warming and climate change
% of emissions CO2, H2O, NOx, SOx, Particulates
VOCs , CO
airport ground level operations and Landing & Take-Offs
10% 30%
higher altitudes 90% 70%
Source: Federal Aviation Administration
Quantification of Air Pollution Carbon Tax
Australia charges carbon tax at a fixed price of AUD23/tonne of CO2 for ~500 companies from July, 2012
New Zealand charges NZD25 for 2 tonnes of emission until 31 Dec 2012. Carbon credits can be exchanged in open market afterwards
EU Emission Trading Scheme (ETS): Governments issue permits which are tradable privately, OTC or over EU’s climate exchanges. Permit price ~ € 10 per tonne on March 2012
Quantification of Air Pollution EU Allowance (EUA): permit to emit one metric
tonne of CO2 under EU ETS throughout the period of the contract
National Allocation Plans determine the total quantity of EUAs that Member States grant to their companies, which can then be sold or bought by the companies themselves.
Source: Bloomberg
EU ETS – Aviation Q&A 1 How are the aviation emissions allowances
determined? The European Commission (EC) calculates the number of
aviation allowances from 2012 based on the average annual aviation emissions by aircraft operators to and from European airports 2004-2006.
2004-2006 average emission 219,476,343 tonnes of CO2
No of allowances in 2012 97% of 2004-06 average:212,892,052 tonnes of CO2
No of allowances from 2013 onwards 95% of 2004-06 average: 208,502,525 tonnes of CO2
Target: Cut 50% carbon by 2030 1 allowance can emit 1 tonne of CO2
Source: European Commission
EU ETS – Aviation Q&A 2 How are the allowances allocated?
82%: given for free to aircraft operators and 15%: allocated by auctioning 3%: allocated to a special reserve for later
distribution to fast growing airlines and new entrants into the market.
Source: European Commission
EU ETS – Aviation Q&A 3 How can the allowances be traded?
Private transactions Market
Currently through the national registry by EU member states
Migrating to the Union Registry which will be fully activated after June 2012
Note: More information about the national registry of each member state,Please check: http://ec.europa.eu/environment/ets/registrySearch.do
Noise Pollution Causes regional annoyance and interferes
with communications, children’s learning, and enjoyment of the outside world.
Health impact: depression, sleep disturbances and hypertension.
Property prices of areas affected by the aircraft noise may decrease in value
Quantification of Noise Pollution To quantify the effects of noise pollution, hedonic
pricing is developed Hedonic pricing
A technique that derives values for non-market goods such as environmental quality using information on the value of market goods such as residential property.
By analyzing a large set of properties that are exposed to varying levels of noise annoyance, while controlling for other relevant characteristics, one can obtain an implicit price for the characteristic peace and quiet.
Reference:Schipper, Nijkamp, Rietveld. 1998. Why do Aircraft Noise Value Estimates Differ?
Thank you!