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

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

40 C H A P T E R 6 Consumer surplus is defined as 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. Economic effects are generated by the net of: (1) savings accruing to air travelers from the reduction in fares, which is then spent on other consumer goods and services; and (2) the new spending on air travel induced by price reductions, where dollars are taken from other goods and services and spent on air transportation. Derived economic impacts are more robust from household spending on goods and services other than air transporta- tion than they are for air transportation itself. Thus, dol- lars spent redirected from non-aviation goods and services to induced air travel have a negative economic impact (the impact of the purchase of air transportation minus the impact of other household spending). On the other hand, the consumer surplus dollars are equivalent to additional household income. These dollars are available to be spent on non-aviation purchases, which generate a positive eco- nomic impact when compared with the impact if the dollars were spent on air travel. The number of domestic O&D passenger trips in each airport-pair market28 together with the average airfare paid by those passengers was obtained from the 10% O&D Survey data reported to the U.S. Department of Transportation by U.S. airlines, also referred to as Database 1B (DB1B). Although the international DB1B dataset provides data on passenger traffic in international airport-pair markets, the DB1B data is only reported by U.S. airlines and, there- fore, excludes passenger traffic on foreign flag airlines, unless those travelers flew part of their itinerary on a U.S. airline or were traveling on a ticket issued by a U.S. airline (such as passengers on a code-sharing flight). In many markets, this could omit a significant proportion of the traffic, particularly markets that are only served by foreign flag airlines. However, both U.S. and foreign flag airlines report segment passenger count data on Schedule T-100 for flight segments beginning or ending in the United States. Therefore, that dataset was used to identify the top 30 international nonstop airport-pair markets from U.S. gateway airports, based on the on-flight O&D rather than the true O&D of the passengers. The inter- national DB1B dataset was used to determine the average airfare paid by air passengers in each international nonstop airport-pair market. In order to estimate the proportion of passenger trips in a given market that were undertaken for personal purposes (since only personal travel is included in the consumer surplus analysis), data from the most recent air passenger surveys performed at 10 airports that were available to the research team were analyzed to determine the split between personal and business travel in the markets included in the sample. These surveys included respondents who were mak- ing trips in many of the sample domestic markets. For other domestic markets between airports for which air passenger surveys were not available, or where the number of responses in the surveys was considered too small to be representative, the proportion of personal trips in the markets was estimated from similar markets for which data was available. For the international markets, the proportion of personal trips was estimated from the results of a survey of international air trav- elers departing from U.S. airports that is undertaken annu- ally for the Office of Travel and Tourism Industries (OTTI) of the U.S. Department of Commerce. A full discussion of the methodology behind the consumer surplus calculations is found in Appendix 2. As illustrated in Figure 2, change in consumer surplus is non-linear since part of the change is due to the attraction of additional passengers, which varies with the change in fare.29 In the current analysis, consumer surplus is calculated based on an assumed 1% drop in fares for both domestic and inter- national travel. Findings: Consumer Surplus

41 The research team estimated the number of air pas- sengers by analyzing a representative sample of domestic and international airport-pair markets (See Appendix 2A). In the sample travel, the average airfare for domestic per- sonal travel is $162 and the average fare for international personal travel is $686. A 1% drop in airfare produces average ticket price declines of almost $2 for domestic personal travelers and $7 for inter- national personal travelers. Table 24 illustrates the changes in consumer surplus and dollars spent on induced travel based on this 1% change in airfares. The 1% airfare reductions are expected to create an aggregate of $991 million in passen- ger welfare31 that translates into an aggregate of $671 million and $320 million in new demand for domestic and interna- tional air travel, respectively. Moreover, the consumer surplus accruing to air travelers amounts to $815 million, $506 mil- lion for domestic travelers and $310 million to U.S. resident international travelers. The calculated change in air travel expenditures for inter- national trips is much smaller than that for domestic trips. In addition, the increased expenditure for the induced trips is almost completely offset by the savings to the existing travelers.32 Two sets of calculations were applied for the consumer sur- plus findings: The impact of household spending. The ACRP Proj- ect 03-19 study includes a survey of air travelers to document the distribution of household incomes by income cohort of air travelers. In this analysis, the ACRP Project 03-19 study’s survey results were used to estimate the household income of personal air travelers who are expected to ben- efit from the estimated change in consumer surplus. The IMPLAN model package was used to analyze the economic impact of changes in household spending for eight income cohorts. The survey results were used to adjust the percent- age of households in each income cohort in the model to reflect the income distribution of air travelers. In addition, the research team adjusted the spending patterns in each cohort by deleting air transportation purchases. Accounting for the different spending patterns in each income cohort, and excluding purchases of air transportation services, Table 25 shows that more than seven direct jobs and 14.5 total jobs (including direct effects, and indirect and induced economic multipliers) are generated by every $1 million of household spending. The impact of the purchase of air transportation services. Household spending on general goods and services returns more economic impact than the purchase of air travel services in terms of jobs, payroll, and value added. As an illustration, Table 25 shows that the purchase of $1 million of air services generates 2.7 direct jobs and 8.3 jobs including multipliers. These are lower impacts than the spending on general house- hold services. Thus, the overall economic impact of redi- recting $1 million from general household spending to air Consumer Surplus of Induced Travelers Change in Consumer Surplus of Existing Travelers Figure 2. Illustration of consumer surplus.30 Market Change in Consumer Surplus ($m) Total Induced Air Travel Expenditure ($m) Effect of a One-Percent Fare Decrease Domestic $505.8 $670.5 International $309.5 $320.3 TOTAL $815.3 $990.8 Sensitivity Test Based on a Five-Percent Fare Decrease Domestic $2,599.2 $3,378.1 International $1,581.0 $1,602.8 TOTAL $4,180.2 $4,980.9 Table 24. Consumer surplus and induced expenditure based on 1% drop in domestic and international airfare.

42 transportation services is the subtraction of 7.2 jobs (from non-air services household spending) and the addition of 2.7 jobs generated by the purchase of air transportation services, which is a net -4.5 direct jobs. In terms of total economic impacts, redirecting $1 million in purchases from general household spending to air transportation services results in an overall loss of 6.2 jobs. The research team determined the economic impacts of the consumer surplus generated by a one-percent reduction in airfares by summing these two modeling approaches noted above. First, the $991 million paid for induced air travel due to the lower fares are considered to be dollars diverted from the general economy to air transportation. This switch in spend- ing produces a negative economic effect because, as noted in Table 25, the impacts of the purchase of air transportation services is less than the impacts of the equivalent amount of general household spending. Second, the $815 million of consumer surplus is recognized as money that travelers are able to spend on goods and services; this is, in effect, money left over “in their pockets.” The net impact of the additional consumer surplus is derived from adding the money diverted from household spending to air travel (which is negative) to the impacts of spending $815 million on goods and services other than air transportation (which is positive). The calculated national economic direct effect of the $991 million in induced air transportation and $815 million in consumer surplus is $553 million in direct output, $249 mil- lion in value added and about 1,400 direct jobs. Total impacts, including multiplier effects, are estimated at $1.3 billion in output, $657 million in value added and 5,800 jobs. These eco- nomic impacts are presented in Table 2633 and the calculations are displayed in Table 27. Impact Type Employment Labor Income Value Added 1. Household Spending on General Goods and Services Direct Effect 7.2 $302,000 $552,000 Total Effect 14.5 $677,000 $1,209,000 2. Purchase of Air Transportation Services Direct Effect 2.7 $217,000 $349,000 Total Effect 8.3 $508,000 $878,000 3. Redirected General Household Spending to Air Transportation Direct Effect -4.5 -$85,000 -$202,000 Total Effect -6.2 -$169,000 -$332,000 Modeling based on IMPLAN, LLC National Model, using 2012 structural matrix. Dollars are in 2010 value and rounded to the nearest thousand dollars. Table 25. Economic impacts based on $1 million household spending on goods and services and $1 million spent on air transportation. Impact Type Employment Labor Income Output Value Added Direct Effect 1,400 $162 $553 $249 Indirect Effect 1,800 $101 $361 $190 Induced Effect 2,600 $122 $367 $218 Total Effect 5,800 $385 $1,281 $657 Totals do not add due to rounding. Employment is rounded to the nearest hundred. Dollars are rounded to the nearest thousand and are in 2010 value using 2012 national IMPLAN model. Table 26. Economic impacts based on $991 million of induced travel expenditure and $815 million of additional consumer surplus.

43 Table 27. The economic impact of consumer surplus equals (A) the economic impact of spending the consumer surplus plus (B) the difference in removing dollars from consumer spending to purchase airline tickets and the lower impacts of purchasing in the air transportation sector. Impact Type Employment Labor Income Value Added Output A) $815.3 Million Consumer spending - bundle of goods except aviation services (Relates to Table 25, #1) Direct Effect 5,900 $247 $450 $728 Indirect Effect 2,400 $135 $231 $415 Induced Effect 3,600 $171 $305 $513 Total Effect 11,800 $552 $986 $1,655 B) $990.8 Million Induced Spending on Air Travel and $990.8 Million not Spent (or Invested) in the Rest of the Economy (Relates to Table 25, #3) Direct Effect (4,500) ($85) ($200) ($175) Indirect Effect (600) ($34) ($41) ($53) Induced Effect (1,000) ($49) ($87) ($146) Total Effect (6,000) ($167) ($329) ($374) C) $ Net Impact of Consumer Surplus (A + B) Direct Effect 1,400 $162 $249 $553 Indirect Effect 1,800 $101 $190 $361 Induced Effect 2,600 $122 $218 $367 Total Effect 5,800 $385 $657 $1,281