Airport Economic Impact Methods and Models (2008)

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21 This study identified a number of limitations in how existing methods are applied, as well as trends and recent develop- ments, which are summarized here. Some survey recipients addressed the high cost of conducting economic impact studies as a potential limitation. In general, there is a basic trade-off between the cost and complexity of a study. At the same time, a more complex study need not be more effective, as some sur- vey responses disclosed that complex studies can hamper com- prehension. One reported limitation is that airport economic impact studies can be difficult for the average reader to under- stand and that the results can be misinterpreted. Other limitations can be summarized as belonging to one of three categories: limitations affecting the collection of inputs, limitations affecting the application of the model, and limita- tions affecting the use of the output. Examples of these are summarized in the following sections. LIMITATIONS AFFECTING COLLECTION OF INPUTS A recurring theme appears to be that airport economic impact studies frequently suffer from insufficient data or data quality issues. This is caused at least in part by a lack of participation by airport tenants or operators. To measure the flow of money properly, corporate users need to be identified and origin– destination data must be made available. These areas are par- ticularly challenging because of confidentiality concerns. As a result, it can be difficult to identify the mechanisms of spend- ing or the geographic scope of economic impacts. There are a number of comments in the survey indicating other challenges in obtaining data for economic impact studies. The survey responses indicated that the data collection process is cumbersome, that the data are frequently outdated, or that the data are otherwise of questionable value. In the worst case, the use of old data (e.g., outdated multipliers) may result in inaccurate results. LIMITATIONS AFFECTING APPLICATION OF THE MODEL Although traditional methods for conducting economic impact studies can be relatively cost-effective to implement, they also suffer from a number of limitations in how they are applied. These limitations can lead to misapplication of the method, which in turn can result in misstating the results. The key lim- itations affecting the application of airport economic impact studies include: • Lack of standardization: This appears to be the key theme describing the limitations affecting the application of traditional models. The literature review conducted for this synthesis report identified a smorgasbord of vari- ables and indices used to measure economic contribu- tion. One risk is that studies select the most favorable definition for the airport in question, so that there is an upwards bias in the results. The literature review also shows that the economic impact studies do not employ standard definitions for either impact areas or variables measured. This lack of standardization is also borne out by comments on the survey. One example is the possi- ble misstating of economic impact by assuming that the entire output of the firm tied to an airport contributes to the impact of the airport. Finally, there are large varia- tions in how multipliers are defined and applied. • Omission of offsetting impacts: In addition to positive economic impacts, airports also have offsetting impacts which, if measured, manifest themselves as negative dollar impacts. Such impacts include increased conges- tion, environmental impacts, and other so-called exter- nalities. They can also include the outflow of dollars from the local economy through airport-enabled leisure travel (although it can be argued that increased access to leisure travel is a positive impact in its own right). The literature review indicates that such offsetting impacts are rarely included, except in catalytic impact studies. • Static results and lack of information on trends: In most cases, economic impact analyses create a snapshot in time, often placed considerably in the past. There are several survey responses indicating that results quickly become outdated. This may limit the value of economic impact studies, as it prevents the detection of trends and does not allow for a predictive capability. • Lack of validation and ongoing assessment: Only a minority of survey recipients reported conducting follow- up efforts that could be classified as an ongoing assess- ment of their economic impact studies. The user com- ments suggest that follow-up activities primarily consist of periodic updates of the data or model calculations. There does not appear to be a working practice of corrob- orating model results against other evidence or providing an assessment of how well the model performs over time. A related problem is that economic impact reports CHAPTER FIVE TRADE-OFFS, LIMITATIONS,TRENDS, AND RECENT DEVELOPMENTS

22 do not always contain sufficient detail to allow the results to be reproduced. This limits the ability of other parties to reproduce results to review their validity. Other limitations were also identified. For example, when an economic impact study is prepared for an airport, it gen- erally attempts to measure what net change there would be on the economy if the airport were to disappear. This ignores substitution effects and opportunity costs; that is, what the economic impact would be of activities that relocate to other communities and of the non-aviation replacement activities at the airport site. This is an underlying assumption that is often not made explicit. The extent to which individually calculated impacts can be added is also a potential limitation. Economic impact studies frequently include impact areas that either have over- laps or cannot be added because it would not be meaningful. This is potentially confusing to the reader and a possible source for misapplication of the results. For example, there is a risk of adding economic impact computations to the benefit side of a cost-benefit analysis and of using this sum to offset con- struction and maintenance costs. Potential limitations of the application of economic impact studies that have been identified by other authors include the following (5): • The question that the analysis is intended to answer is not clear. • The base case is not properly defined or is not relevant. • An improper method is enlisted. • The relevant study area and time frame are not identified. • The findings of the analysis are not presented in a con- vincing manner. Also, owing to the large variation in methods and models, and as no two airports are identical, it is difficult to make valid comparisons between different studies and comparable airports. This is in part the result of a lack of standard defini- tions noted previously. The survey effort and literature review were unable to document any existing guidelines that would support airport-to-airport comparisons. LIMITATIONS AFFECTING USE OF THE OUTPUT The use of the output can suffer from several limitations. As previously discussed, the results are usually static and quickly become outdated. Only a few studies feature periodic updates that are desired to detect trends. There is also the potential for presentation problems that can manifest themselves in several ways. The finished reports can be too complex to be effective, or there can be a knowledge gap between the reader and the author, raising unreasonable expectations about the meaning of the results. In short, the studies are easily misinterpreted. This problem is not unique to economic impact studies, but may be worsened by the readers’ lack of familiarity with the methodologies applied. Finally, there may be a need for a discussion of the moti- vation for conducting an economic impact study. The moti- vation can range from advocacy purposes to conducting an academic study that can stand up to peer review. TRENDS AND RECENT DEVELOPMENTS Traditional methods still dominate the field of airport economic impact studies, especially the use of input–output models. However, the increasing extent to which airports are embed- ded in the economy means that determining the economic impact of airports has become a more challenging propo- sition. Consequently, traditional methods may need to be improved. This synthesis study has documented a relatively modest number of such improvements and most of these can be categorized as evolutionary developments to the tra- ditional methods. Clearly, the practitioners of airport economic impact studies are aware of the issues identified in this study, and have incor- porated a number of refinements to address them. Examples include carefully delineating which impacts actually are tied to the airport; relying more heavily on direct impacts as a mea- sure of an airport’s economic contribution, thereby moving away from the multiplier-driven analysis; addressing opportu- nity costs and focusing more on the incremental value of the airport; defining which impacts are additive; and assessing adverse impacts in addition to positive impacts. An example of a method that addresses the issues of out- dated results and periodic updates is a new index developed for Stockholm’s Arlanda airport, the city’s major international gateway. The Arlanda Index correlates various measures of airport statistics with economic activity, particularly spending by tourists. It has the benefit of being easy to update, simple to explain, and provides a predictive capability, although it is relatively narrowly defined to measuring tourism impacts (6). An alternative approach to what is usually adopted in tra- ditional economic impact studies is to highlight the effects of airport constraints on the regional economy. An example of this is the 2001 study prepared for the San Diego Association of Governments (7 ). This study projects the point at which constrained airport capacity limits future growth and then relates that limitation to changes in overall economic devel- opment and value. This approach attempts to measure oppor- tunity cost, and may represent an improvement compared with a study that measures airport economic activity in the absence of constraints. The measurement of catalytic impacts is a possibly sig- nificant development, which specifically attempts to address the notion that aviation has become increasingly intertwined with general economic development. A catalytic impact study documents the extent to which air transportation contributes to overall economic success. Catalytic impacts quantify many

23 impacts of airports that previously have been addressed only in anecdotal ways, if at all. A catalytic impact analysis reviews the net economic effects primarily on the supply-side of the economy, including the impacts of tourism, transportation of exports, business investment, and productivity. As an exam- ple, Eurocontrol has estimated that these aviation-related catalytic impacts have contributed to a 4% annual increase in GDP levels in the European Union (4). Figure 5 conceptually illustrates how air transportation affects the economy in a broader way than that measured by traditional input–output models. The figure and the mecha- nisms it illustrates are described in a report by Oxford Eco- nomics Ltd., which measures the impact of air transportation on the economy of the United Kingdom (8). These mecha- nisms include: • Reduced competitiveness among companies that make heavy use of air transportation if prices of aviation ser- vices increase owing to restrictions leading to higher fares or longer transport times (or vice versa). • Long-run identifiable impact of aviation on productivity growth in other sectors of the economy. • Impact of changes in productivity growth on investment and hence the amount of capital equipment available for production in other sectors of the economy. • Types of jobs and industries that can be attracted in the long term, as well as the living standards they can sup- port, as a result of air transportation. In principle, the catalytic impact method can be applied to any geographic unit for which economic output can be defined. In practice, however, the aviation-related catalytic impact studies that exist today focus on country-size regions (e.g., the United Kingdom) or multinational regions (e.g., the European Union). Another noteworthy feature of catalytic impact analyses is that they address both favorable and adverse impacts. Exam- ples of adverse impacts include ground congestion caused by aviation growth and the outflow of dollars through airport- enabled tourism. The total estimate of catalytic impacts is the net of positive and negative dollar impacts. It should be noted that catalytic impact analyses do not replace the need for traditional methods, as they do not in and of themselves measure direct, indirect, and induced effects on the demand-side of the economy. Also, several of the ques- tions facing traditional methods must also be addressed for the catalytic impact method including the question of standard- ization and the potential lack of periodic updates, validation, and assessment. Price of air transport Competitiveness Intermediate/final demandProductivity Investment Availability of air transport Indirect/induced effects FIGURE 5 Catalytic impacts (reproduced with permission of Oxford Economics Ltd.).