Europe's airports. Economic impact – 2 million jobs, EUR97 billion foregone; ACI Europe. Part 2

This is Part 2 of a two part summary. Note: The full 148-page report is not reviewed here; rather the Executive Summary and also some elements of the synopsis developed by ACI Europe and entitled The Impact of an Airport.

By 2035, a total of over 2 million jobs and EUR97 billion annually in GDP could be forgone, in the general economy

In concluding the Executive Summary of the report, attention shifts to the most pressing issue, namely the potential loss of jobs if airport capacity fails to keep up with demand. This ACI-sponsored report suggests that if airport capacity fails to keep up with demand, then by 2035, a total of over two million jobs and EUR97 billion in GDP across Europe could be "forgone" on an annual basis.

It refers to a separate report, released by EUROCONTROL as part of its Challenges of Growth series, in 2013, which forecast air traffic in Europe in 2035. In EUROCONTROL's most likely forecast, unconstrained passenger demand is set to reach over 1.5 billion departures in 2035. However, due to projected capacity constraints at European airports, only 1.3 billion departures are anticipated to be accommodated, leaving a gap (unfulfilled demand) of nearly 225 million departures.

As shown in the table below, the forgone economic impact associated with this unmet demand is estimated to be two million jobs, EUR47 billion in income and EUR96.7 billion in GDP, including direct activity at the airport, indirect and induced impacts, and the lost tourism, trade and investment due to low connectivity growth. This is roughly one sixth of the 2013 economic impact of airports in the EUROCONTROL countries. Furthermore, the majority of this loss is in the general economy, not the airports or aviation sector.

Foregone Economic Impact Due to Capacity Constraints at European Airports, 2035 Jobs

	Jobs	Income (EUR billions)	GDP (EUR billions)
Foregone Economic Impact in Scenario C: Regulated Growth (Most Likely)
Direct	313,000	9.3	14.3
Indirect	266,000	5.3	9.5
Induced	259,000	4.7	10.0
Catalytic	1,197,000	27.8	62.8
Total	2,035,000	47.0	96.7

Source: Economic Impact of European airports report
N.B. Geographic area covered in the EUROCONTROL forecasts is slightly different to ACI EUROPE, and does not include Russia or Israel.

European membership of the elite Aviation Mega Cities club is not assured.

Earlier in this CAPA report reference was made to the airport city or aerotropolis. In its own report, ACI Europe refers to a related concept, the Aviation Mega City (employing original material from Airbus) and under the banner headline "It pays to be connected."

Airbus defines an 'Aviation Mega City' as one with at least 10,000 long haul passengers per day. Currently there are 42 of them (compared to 85 aerotropolises). By 2033 it is estimated that there will be 91 and that they will have more than 2.2 million long haul passengers a day. More than 95% of their long-haul traffic will be to, from or via other Aviation Mega Cities. Together these cities will account for 35% of World GDP.

Average GDP per capita in these cities is four times the world average. However, membership is not assured - mirroring EUROCONTROL's outlook, all of the EU's Aviation Mega Cities are classified as having a level of airport infrastructure which makes it impossible to meet demand. These Aviation Mega Cities are facing a severe airport capacity crunch in the next 20 years, which will result in significant lost opportunity. ACI Europe concludes that decisive action to support airport expansion will be needed if Europe is to get the full benefit of its own Aviation Mega Cities.

However, there is another aspect to this that ACI Europe appears not to consider; namely that in supporting exclusively Aviation Mega Cities - of which London is the daddy of them all - direct job creation will in consequence be severely stifled elsewhere. This is a debate that is occupying minds extensively in the UK right now, as indicated later in this report.

Employment and GDP contribution arising out of activity at European airports cannot be taken for granted

In its concluding remarks (effectively a statement of policy), ACI Europe states that the employment and GDP contribution arising out of activity at European airports cannot be taken for granted. Even looking just at the loss of potential GDP and jobs associated with the looming "airport capacity crunch", the numbers are significant. And these say nothing about the range of other impediments and threats to the growth of air connectivity within Europe.

Air connectivity offers a clear means of delivering jobs and income in both the short and longer term. But this air connectivity does not occur naturally - it has to be courted, initiated and fostered. Fortunately Europe has a commercialised and dynamic airport sector which is ready and eager to work with other aviation parties to deliver these new connections.

But the policy climate needs to be right for this work to be facilitated. Otherwise Europe risks losing out on connectivity and becoming increasingly bypassed as a global aviation hub. Air connectivity needs to be actively promoted as one of the pillars of the EU's Growth and Job's Strategy. This should cover, in an aligned way, a range of policy issues, but should in particular focus upon:

1 Airport Capacity

Unless action is taken, Europe's top 20 airports will be fully congested by 2035. The economic impact of this will be huge, with EUR97 billion in lost GDP and two million jobs not created. The EU needs a long-term strategic plan, which is both ambitious and pragmatic, to ensure that airports are able to deliver this much-needed additional capacity. This long term strategy plan should be aligned with the Single European Sky (project) and should include EU ground capacity targets.

2 Air Traffic Liberalisation

Precisely because Europe will not enjoy the economic growth that other regions of the world will experience, it is essential that it taps into these growth areas to remain globally relevant and connected. EU-negotiated aviation agreements implementing open sky regimes with key trading partners will be crucial in this respect.

3 Aviation Taxes

Europe should at least not 'shoot itself in the foot'. Aviation taxes may raise revenues in the short run, but these will come nowhere near to compensate for the resulting loss of connectivity. The experiences of countries such as the Netherlands, Denmark and Ireland made that clear. Taxes should remain off the agenda, and where they are in place, should be swiftly removed

4 Operating Costs

In a world of global competition, cost is a key selling point. Businesses know this, but they cannot control costs incurred by unnecessary red tape. Regulation has its place, but it should be proportionate, fit for purpose, and streamlined. Security - like in the US and many other parts of the World - is a public service and should be funded accordingly. At the very least, the aviation security regime should be reconsidered to make it risk-based and more focused, as presently done in the US.

UK debate tests the theories

Both the Intervistas report and the ACI synopsis have an academic flavour to them but there are timely and very real practical applications of the theory and conclusions of these reports evident in Europe right now and especially so in the UK.

Before going into detail, there are two key elements of the ACI report that should be borne in mind. The relevant parts of the text are repeated here:

1 Concerning catalytic impacts, and using data on the aviation connectivity and GDP per capita for 40 countries in ACI EUROPE between 2000 and 2012, the report shows a positive relationship between connectivity and GDP per capita; Econometric analysis was conducted to investigate further the relationship between connectivity and GDP per capita. This analysis found that a 10% increase in connectivity was associated with an increase in GDP per capita of 0.5%;

2 ACI Europe makes the point that tourism plays a huge role in countless communities across Europe. (Table repeated below).

Top Ranking European Countries by international tourism and air connectivity

Rank	International tourism ranking 1	Connectivity ranking 2
1	Spain	Germany
2	France	United Kingdom
3	Italy	France
4	Germany	Spain
5	United Kingdom	Italy

1 Based on International Tourist Receipts, 2013 US$, 'UNTWO Tourism Highlights 2014 Edition', United Nations World Tourism Organisation.
2 Based on Total Connectivity scores, from 'Airport Industry Connectivity Report', ACI EUROPE, June 2014.

(Hypothesis: there is a disconnect between the UK's perceived connectivity ranking and its tourism ranking. Refer to the reference to Birmingham Airport, below).

With a British general election due on 07-May-2015, the next government must face up to making a final decision on where a new runway will be constructed in the southeast of England (i.e. predominantly to service London and surrounding areas) or whether to bury its head in the sand yet again. Any decision was purposefully put off by the incumbent coalition government ostensibly to gain sufficient time to engender cross-party agreement - though the need to avoid in-fighting in the coalition itself no doubt played its part.

In the interim a mightily thorough investigation has been put in place by the independent Airports Commission, whose recommendations may or may not be heeded this coming summer.

Pressure is being ramped up all the time. This week a report was published by the pressure group Let Britain Fly which pointed out that whereas global airport construction is rampant (for confirmation of that refer to the relevant CAPA report https://centreforaviation.com/analysis/reports/the-worlds-biggest-airport-construction-projects-2015-total-value-over-usd500-billion-part-1-205200 et al) in fact the UK has not built a new full-length runway in the southeast of England since the Second World War, and currently has no confirmed plans to increase its capacity. It calls on all parties to commit to implementing the findings of the Commission. As its authors (KPMG) conclude, the report shows that the debate about new runways in the UK is not just about where to lay 3000 metres of concrete; it is a debate that is fundamentally rooted in how the UK secures its future economic prosperity.

Belated calls for protected and enhanced regional air connectivity dog the Commission in its final days

But even though the Commission long ago selected its shortlist (a new or extended runway at Heathrow and a new one at Gatwick) the economic situation is extremely fluid. The Commission has already been cajoled into additional research and a call for submissions on regional air connectivity through a 'National Connectivity Task Force' and recently the House of Commons Transport Committee embarked on a similar investigation of its own.

There are numerous reasons for this. One of them is the knock on effect of the Scottish independence vote in Sep-2014.

See the related report https://centreforaviation.com/analysis/reports/uk-air-transport-policy-post-scotland-vote-devolution-could-reshape-previous-aviation-plans-188827

This CAPA report anticipated a move towards English regional devolution, something that the Commission surprisingly did not (it did not even consider the impact of Scottish independence should it have happened - and it might still happen - before drawing up its shortlist). Already some powers have been divested to one English sub-region, Greater Manchester, with many others queuing up to follow in its footsteps.

Another is the identification by the government of a projected 'Northern Economic Powerhouse,' connected by two sets of high-speed rail lines, to help rebalance the economy away from an overreliance on London. This NEP will be anchored on Manchester and Leeds but will cover the entire north of England, with a population of over 15 million, more than that of Belgium and slightly less than the Netherlands.

Regions of England

The North of England comprises the Northwest, Northeast and Yorkshire and the Humber

To the south, in the West Midlands region, Birmingham Airport, which fought a long, hard but ultimately unsuccessful case for substantial inclusion in the Commission's shortlist recommendations, authorised a study by the consultant Oxera, which questioned whether the Commission has properly investigated the potential economic effect on the country's regions of the shortlisted runway options. The study said the methodology underplays the negative effect that Heathrow expansion could have on some UK regions.

But it is not only highly populated English regional areas that are pressing for greater air connectivity. The Chief Secretary to the Treasury, Danny Alexander, has created a three-year GBP56 million Regional Air Connectivity Fund because, as an MP for the highly unpopulated Scottish Highlands he "appreciates the immense value of regional air routes to people living in remote communities across the UK". The fund has already supported services like the Newquay (Cornwall, southwest England) and Dundee (Scotland) - London routes.

As the ACI report said, air connectivity needs to be actively promoted as one of the pillars of the EU's Growth and Jobs Strategy. Both of these cities, and especially Newquay/Cornwall, were in danger of being left out of any economic recovery. (And it should be noted that Cornwall has a strong independence movement, let alone one for economic devolution).

Parliamentary committee concurs that the airport is crucial to a region's 'well-being'

Turning to the intervention of the House of Commons Transport Committee, it held an inquiry meeting on 19-Jan-2015 regarding the future of the country's regional and business airports with an emphasis on economic impact. The committee heard evidence on the impact of regional airports on the economy of local communities, with particular interest on the impacts of Plymouth (Devon, southwest England, close to Newquay); Manston (Kent); Coventry (West Midlands); and Blackpool (Lancashire, northwest England) airports; all of which have closed to commercial traffic. It was pointed out that such small airports do not have the capability to absorb costs associated with regulatory protocols and that the next runway project to be developed in the London region should, as a priority, serve the UK's regional aviation industry, with preferred slot provisions at reduced tariffs.

The inquiry discussed the definition of a small airport, having previously followed UK Department for Transport and European Commission guidelines, which defined smaller airports as airports having "fewer than five million passengers per annum". This placed 40 airports in the scope of its inquiry. Evidence was provided that argues for a figure of three million ppa as the definition threshold on the basis that costs per passenger decline quite significantly as the figure comes down towards three million and that profitability is achievable at that figure.

(By comparison, in Spain, the centralised management of airports has been usually justified on the basis that small airports are not able to exploit scale economies. This situation agrees with the traditional view on airport operations, which regards small airports [i.e. serving less than one million passengers] as unprofitable given their apparent inability to recover costs under increasing returns to scale, so approximately one million is considered to be the threshold. This also applies broadly throughout mainland Europe).

The inquiry concluded that smaller airports have suffered more than larger ones since the 2008 recession and would continue to do so as they had lost their ability to 'bounce back.' But in terms of economic benefit the airport is crucial to a region's well-being; whether it is jobs, business growth or local enterprise partnerships stimulating more activity.

The examples were offered of Newcastle Airport, which contributes 3,200 jobs on site, and supports 8,000 in the northeast England region. It makes a GBP650 million economic contribution. Also Aberdeen International airport, which provides 2,000 jobs on site, and supports a further 4,000 Scottish jobs (in a region hit by falling oil prices). Liverpool John Lennon airport has over 2,000 people working on site and its expansion since the late 1990s (which has latterly stalled) can be linked to a significant drive for prosperity in the Liverpool city region, contributing GBP170 million to the local economy.

Another example, which was not discussed in the hearing, is Norwich Airport, which will benefit from government funding secured by the counties of Norfolk and Suffolk to boost the region's skills, and improve transport and infrastructure. As part of the additional funding deal a GBP3 million Aviation Academy will be developed at Norwich International Airport.

Local governments recognise the wider economic benefits of smaller regional airports better than does central government

The inquiry also made the point that local governments recognise the wider economic benefits of smaller regional airports considerably more so than does central government and that the development of attendant brown field sites as either aeronautical or non-aeronautical development platforms (manufacturing, service industries etc) is usually down to the efforts of those local governments rather than Whitehall or the private sector airport owners (almost all UK airports have at least an element of private sector ownership).

It questioned whether the Airports Commission had paid enough attention to 'smaller' airports noting that a discussion paper and request for evidence on regional airports and their connectivity (referred to earlier in this report) had been produced after the drawing up of the Commission's Interim Report and shortlist which inevitably framed the final part of its considerations.

An interesting observation was made by the Group Director Regulatory Policy at the Civil Aviation Authority. In response to the question "why do some small airports close while others are successful?" he pointed out that the overall number of airports in the UK (probably too many) is the root cause, but it is not the proximate cause.

He said "The proximate cause is quite complicated, but the decisions of airlines are crucial. Flybe's success and strategy is essential to understanding Exeter Airport's success (while nearby Plymouth closed down). Similarly, Southend Airport has grown mainly on the basis of a commercial decision by easyJet. You cannot talk about airports separately from airlines in that respect".

Naturally such airline decisions have consequences for economic impact and it is of no surprise that Ryanair in particular is always keen to trumpet the job prospects arising from a new route or base.

He also pointed out that the airports that get into difficulties are usually not those that would leave passengers "high and dry" if they shut down. In the Highlands and Islands and other places, arrangements to ensure the continuation of air travel have been made because it is essential. The ones that get into difficulties are the ones that are very close to another thriving airport, and from the passenger point of view it does not make an enormous difference. It makes some difference because there is less competition, less choice and therefore a fragile system.

Smaller airports are diversifying to survive

The representative of the Airport Operators Association made reference to the degree of diversification adopted by several of the UK's smaller airports that relates directly to the concept of economic impact. Bournemouth Airport for example has one third commercial operations; one third cargo and one third general aviation. Humberside Airport has developed extensive North Sea helicopter operations (as have other airports along the east coast); while Biggin Hill and Farnborough airports in the southeast (neither of which hosts commercial services at this time) both have a strong aerospace component on their site.

Blackpool Airport closed to commercial operations last year but quickly reopened as a general aviation/business aircraft facility (which it always was), servicing gas operations in the Irish Sea and, potentially, extensive shale gas operations on the Fylde Coast should they commence.

With regard to ACI Europe's call, in its report summary, for aviation taxes "to remain off the agenda," and for where they are in place that they should be "swiftly removed," the UK parliamentary committee debated the situation in the UK -the most heavily aviation-taxed country in Europe - vigorously. The Committee heard that APD "comes back again and again" when airports are asked about what is their most pressing issue. Key issues include double taxation on domestic routes (for a return trip both journeys are subject to APD) and the prospect of the devolved Scottish Parliament reducing APD to the detriment of airports in northern England.

The UK Treasury says it would lose GBP3 billion if APD were to be abolished. The imposition of fuel tax on domestic flights was aired as an alternative (it is not permitted for international flights under the Chicago Convention) but the Committee chose to focus instead on a consultant's report that indicates APD reform could significantly boost UK GDP-by 0.46% in the first year, continuing to 2020, amounting to at least GBP16 billion in the first three years; 60,000 extra jobs would be created, and even after allowing for the loss of APD revenue, there would be an increase of GBP500 million in the first year. Over the course of a five-year Parliament, the government would not necessarily lose income; indeed it might end up at the end of that five years with more APD revenue by reducing it.

Concluding remarks: a strong link between air connectivity, trade and GDP

In conclusion, the ACI Europe consultant's report and its own supporting paper set out to quantify and document the economic contribution of the airport industry and produces convincing figures to underscore the theories. They emphasise the strong link between air connectivity, trade and GDP, noting that air transport is not merely following economic growth but also acting as a catalyst for growth. They insist that if airport capacity continues to lag demand it will have a serious impact on GDP growth and jobs.

But ACI Europe appears to be swayed by arguments in favour of huge aviation megacities and (by implication) supporting aerotropolis regions. Its own conclusion is that: decisive action to support airport expansion will be needed if Europe is to get the full benefit of its own Aviation Mega Cities.

As we point out though, airport expansion and associated 'economic impact' growth in one region can severely undermine prospects for the same in others. There is a delicate balancing act required.

In the UK, Heathrow Airport is currently claiming that over half the gains from forecast economic benefits and job creation as a result of an expanded Heathrow will be made outside of London and the southeast, a fact that is further endorsed by the public support Heathrow has already received from 26 Chambers of Commerce across the UK. Regional employment benefits as a result of foreign investment and trade could total 179,800 new jobs across the UK in 2050, as long haul connections and increased freight capacity at an expanded Heathrow bring more business to the UK.

The more distant and lesser populated regions typically support this thesis while rival primary airports in the bigger regions argue exactly the opposite; i.e. that it is more direct flights that will bring enhanced trade, pointing to some impressive figures to bear out their claims.

Who is correct? It is a difficult call but one that the Airport Commission in the UK needs to get right as the economic prospects of large parts of the country are heavily reliant upon it. As such the Commission's recommendations in a few months time will quite possibly go on to shape thinking on airports and their impact on economies not only in the UK but across Europe as a whole.