The Role of U.S. Airports in the National Economy (2015)

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57 Term/Definition Adjusted R2/“Best Fit” Adjusted R2 indicates the amount of variation of the dependent variable that can be explained by the independent variable(s) where the adjustment is the num- ber of right hand side variables used. The highest adjusted R2 among regression multiple regression analyses using different selections/combinations of independent variables to explain the same dependent variable is often referred to as “the best fit.” (Please see the definition for OLS.) Airfare The amount paid by an air passenger for a one-way nonstop ticket, inclusive of fees and taxes. For the consumer surplus portion of this study, airfares were analyzed for per- sonal travel between U.S. airports and between U.S. airports to international destinations. Catalytic (Dynamic) These terms are used to indicate when changes in the airport network (i.e., change of connections between airports, amount of air cargo served, and cost of airfare) affect the U.S. economy. Coefficients In the results of a regression analysis, (one or more) coefficients are numbers used to multiply (one or more) significant independent variables to explain variations for a dependent variable. For example, if “airport output” is a dependent variable, and “length of runway” is a significant independent variable used to explain variation in airport revenues, then the coefficient is a way to interpret the mag- nitude of the effect of “length of runway” on-airport output. Confidence Level Confidence is defined in terms of the like- lihood the outcome being predicted will occur. It measures how well the variables used explain the variation in the data. For example a 95% confidence level means 95 of 100 times the dependent variable being measured (the dependent vari- able) can be explained by the independent variables used (the data elements that are being used to explain the differences in the dependent variable across all observations). Glossary Connectivity (this is the basis of the multifactor productiv- ity analysis) Connectivity refers to the total resource costs in time and out-of-pocket expenditure to move between two places. The connectivity analysis estimates the economic impacts by industry sector of cost changes due to changes in connectivity. This study looked at types of connectiv- ity changes among 20 U.S. regions (hosting 26 commercial airports) and of connections between those regions and 15 international markets (15 airports in Europe and Asia). Consumer Surplus (CS) CS is the difference between what consumers are willing to pay for a good or service and what they actually pay. In the context of air service, the difference in willingness to pay for air service and what is actually spent leaves money in households’ “wallets,” and is available to be spent in the general economy on non-aviation goods and services. Direct Effects The terminology around direct and multiplier effects are not uniform across studies. Defined in this study: direct effects take place in the industry immediately affected, whether it is on or off airport. These include on-airport activi- ties, spending by air visitors off-airport, and the production of air cargo. Dummy Variable A dummy variable is used in regression analysis to control for the influence of subgroups of a sample in a study. Dummy variables are categorical, meaning they take one of two values, e.g., gender. In this study, dummy variables were used to separate the influence of each year (1995, 2000, 2005, and 2010) on the value of MFP. There are likely factors that occur in a given year that affect the value of MFP (the dependent variable) but are not captured by any of the explana- tory variables. Therefore, for example, Dummy 1995 means this variable is coded 1 for all data that is 1995 data and is coded 0 for all other data. The coefficient estimated for this dummy vari- able will represent the shift up (if it is positive) or down (if the coefficient is negative) of the value of MFP. The dummy

58 variables act as a control so the influence of the connectivity variables on MFP is not biased upward or downward. Economic Footprint (Standard or Static Economic Analysis) This is a portrait of the economic impact of one or more airports for one point in time. These studies gener- ally measure jobs, labor income, value added, and business sales (total output) generated by: airport administration; businesses and government agencies on-airport; on-airport construction spending; off-airport spending by visiting passengers; and, at times, the contribution to industry by providing air cargo services, and the impact of off-airport aeronautical industries. In its simplest meaning it is the breadth of effect, in this study it is the extent of the effect of airports on the economy. Economic Impacts Economic impacts are effects on the level of economic activity in a given region, or in the case of this research, in this study it is the contribution of airports to the level of economic activity in the U.S. Economic impacts are shown as (1) jobs; (2) business output (essentially business sales and expenditures by public agencies); (3) labor income; and (4) value added (or GDP). Elasticity (or Elasticities) Elasticity is a measure of the degree of sensitivity of change between two variables; how much the quantity of one variable will change if another variable changes. Price elasticity of demand is used in the consumer surplus (air- fare) analysis to measure how the quantity demanded changes with price. Also, for example, elasticities associated with air service are used in the MFP analysis to show how value added of industries change if the quantity of nonstop flights, for example, changes. Empirical Model An empirical model attempts to verify assumptions and convert qualitative hypothesis into met- ric outcomes. In this study, connectivity among regions is hypothesized to yield economic benefits. The empirical model was developed to test whether the data would support the hypothesis. Hub Airports (Hubs) Colloquially, hubs are airports where passengers transfer from one airplane to another to reach their intended destination. By the FAA’s formal definition, a hub airport accounts for at least 0.05% of national passenger boardings. Large hubs account for at least 1% of all boarding; medium hubs account for at least 0.25%, but less than 1% of boardings; and small hubs account for at least 0.05% and less than 0.25% of boardings. Indirect and Induced Multiplier Effects The terminology around direct and multiplier effects is not uniform across studies. Defined in this study: multiplier impacts are made up of indirect and induced effects. Indirect effects measure the purchase of supplies and services needed to produce directly supplied products and services. Induced effects mea- sure the effects of the changes in household income, meaning the effects from the spending of wages earned by workers of directly and indirectly affected industries. Total impact is the summation of direct and multiplier (indirect and induced) effects. Input-output I-O tracks the relationships between the industries of an economy estimating the scale of what each industry sells to other industries and what each industry buys from other industries. This includes what industries sell to households, and what is purchased from industries by house- holds. The circulation of dollars from these purchases and sales is how multiplier effects are generated. Intermediate Commodities Intermediate commodities are imports that are used as part of a U.S. company’s production process, such as imported fabric used by furniture makers. They are not sold as final goods or services. Labor Income (gross) Labor income includes total compen- sation for work, including gross wages, salaries, proprietor income, employer provided benefits, and taxes paid to gov- ernments on behalf of employees. Log-linear Format Log-linear format is a type of specifica- tion of a relationship between variables. It explicitly restricts (or assumes) the relationship between two or more variables is linear in the logarithmic values of the variables. The nota- tion Ln is used to indicate that model results presented are from a log-linear model format. Metropolitan Statistical Area (MSA) MSAs are geographic entities delineated by the Office of Management and Budget (OMB) for use by federal statistical agencies in collecting, tabulating, and publishing federal statistics. An MSA contains a core urban area of 50,000 or more population. Each MSA consists of one or more counties and includes the counties containing the core urban area, as well as any adjacent coun- ties that have a high degree of social and economic integration (as measured by commuting to work) with the urban core. Multifactor Productivity (MFP) MFP estimates the growth in GDP in reaction to changes of all inputs into production processes. In this study, the research team estimated growth in net value added from: (1) strengthening nonstop connec- tivity among airports; and (2) increased use of air cargo by industries (net additional cargo, not modal shifts). NAICS (North American Industrial Classification System) NAICS is the means used by federal statistical agen- cies to classify business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. NAICS is organized by sec- tors and each sector is numbered. The specificity of a sector is analogous to the number of “digits” represented by that

59 sector. For example, Sector 48–49 (considered a two-digit sector) is Transportation and Warehousing; Sector 481 is Air Transportation; and Sector 4811 is Scheduled Passenger Transportation. National Economic Impact As used in this study, national economic impact is a measure of the importance of airports in sustaining and expanding the national economy. This includes aviation, passenger services in terminals, and administrative/ operations activities required to maintain airports facilities and/or services. It also includes the role of airports in expand- ing hospitality industries by facilitating travel by international residents to the United States and by enabling U.S.-based busi- nesses to export goods and services to international custom- ers. It does not include recirculating sales from one region in the U.S. to another. NPIAS (National Plan of Integrated Airport Systems) The NPIAS identifies existing and proposed airports that are sig- nificant to national air transportation and thus eligible to receive federal grants under the Airport Improvement Pro- gram (AIP). It also includes estimates of the amount of AIP money needed to fund infrastructure development projects that will bring these airports up to current design standards and add capacity to congested airports. The FAA is required to provide Congress with a 5-year estimate of AIP eligible devel- opment every 2 years. The NPIAS contains all commercial service airports, all reliever airports, and selected GA airports. On-airport Activities occurring on an airport. These activities broadly include airside activities, terminal services to passen- gers (including concessions), air-related services by govern- ment agencies, construction, and airport administration. Ordinary Least Squares (OLS) OLS is a statistical method of estimating a “best” statistical relationship between observed sets of data by minimizing the sum of squared deviations between observed and expected values. For example, when try- ing to look at the economic impact for 3,330 airports and having economic impact studies for 1,000 airports, the 1,000 airports are observed values and OLS is used to estimate expected values (economic impacts) for the remaining 2,300 airports. Output Value added plus the cost of its intermediate inputs (including energy, raw materials, semi-finished goods, and services that are purchased from all sources). This is largely the value of sales or receipts and other operating income along with any inventory change. P-Value The p-value for each term tests the hypothesis that the coefficient has no effect. A predictor that has a low p-value (< 0.05) is likely to be meaningful because changes in the pre- dictor’s value are related to changes in the independent variable. Productivity Productivity is a measure of the efficiency of how well output is produced. It is an economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in revenues and other GDP component. In the MFP portion of this study, inputs are changes in regional and international connectivity through airports and the output measured is value added by industry. Regression Model Regression modeling is a statistical tech- nique used to investigate relationships between one variable (called the dependent variable) and one or more other vari- ables (independent variables). The intent is to ascertain the type and magnitude of effect of one variable upon another. Standard Deviation Standard deviation is a measure of the extent that a series of numbers are spread out from the mean average of the series, which is essentially how spread out numbers are. Statistically Significant Statistical significance is a mea- sure of the likelihood that a result or relationship is caused by something other than mere random chance. In regres- sion analysis, statistical hypothesis testing is traditionally employed to determine if a result, an estimated coefficient, is statistically significant or not. Statistical significance is generally measured at the 99, 95, and 90 percent level of confidence. Value Added/GDP The value added of a company or an industry consist of compensation of employees, taxes paid on production and imports, and gross operating surplus. Value added equals the difference between an industry’s gross out- put and the cost of its intermediate inputs. Value added for companies across industries and across the United States is a measure of GDP. Visitor Spending In this study, “visitor spending” is defined as off-airport spending by international visitors who arrive by air to the United States. Other studies may define visitor spending as international and domestic inter-regional visi- tors who spending money in the United States or in a speci- fied region. Still other studies include passenger spending in terminals, although this requires care not to double count the impacts of airport terminals. Typical spending categories are retail purchases, food and drink, entertainment, lodging, and off-airport transportation services (or may include car rental services on-airport). Generally, a visitor is considered someone is resides outside of the geographic area that is being studied. Welfare Benefit In the context of this study, welfare benefits are benefits derived by individuals from the consumption of good and services and are measured in dollar terms.