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47 After completing all of the preparatory work described in Chapters 3, 4, and 5, the resilience team can get to the task of actually performing a risk analysis. Beyond the calculation methodologies described in Chapter 2, this chapter delves into specific topics related to financial feasibility and benefitâcost analyses in the context of risks and uncertainties associated with climate change. 6.1 Defining a Specific Scenario As with any analysis involving forecasts, both financial feasibility and benefitâcost studies may be subject to a fair amount of uncertainty, particularly for large projects where costs may be spread over many years into the future. But on top of this, the additional uncertainty related to climate projections can have a major impact on such studies. Specifically, climate uncer- tainty may well influence the choice of which specific alternative to select for further analysis. For example, deciding whether a proposed retaining wall should be built 5 ft or 10 ft tall may depend on an airportâs assessment of the relative likelihood of flooding under both scenarios. Depending on the specifics, it may be that both projects need to be analyzed (whether in terms C H A P T E R 6 Other Relevant Topics for Airports Addressing Climate Change About This Chapter Chapter 6 discusses a variety of topics that may be of interest to airports addressing climate change. The topics covered include: â¢ Defining a specific scenario, â¢ Benefitâcost versus financial feasibility analysis, â¢ Addressing hard-to-quantify impacts and direct environmental strategies, â¢ Addressing economic impacts not covered in a BCA, â¢ Considering the option to delay an investment, and â¢ Comparing results across different scenarios. About the Next Chapter Chapter 7 describes the case studies undertaken with individual airports to assess the usefulness of the approach and methodologies presented in this handbook to analyze risk-adjusted climate scenarios.
48 Climate Resilience and BenefitâCost Analysis: A Handbook for Airports of financial feasibility or benefitâcost) in order to properly assess which project can or should be undertaken. With this caveat in mind, the resilience team ultimately will have to decide on one or more specific scenarios to consider for detailed analysis. The scenario(s) should be completely defined in terms of relevant climate measures to be used, which assets may be affected, what specific adaptations or responses are to be evaluated, and which specific cost and benefit elements are to be included. 6.2 What Type of Analysis? As was stated in Chapter 2, BCAs and FFAs can use the same overall methodological tech- niques, but they differ in their treatment of which benefits and costs are included in the analysis and how benefits and costs are defined. For a BCA, all stakeholder benefits and costs directly attributable to the investment project under consideration must be considered. Who receives the benefits, or who incurs the costsâ whether it be the airport itself, airport users, the aviation public at large, or other entitiesâis immaterial. Benefits and costs may include direct monetary gains or losses, nonmonetary effects (e.g., reductions in passenger travel time), or gains and losses related to environmental impacts. On the other hand, an FFA evaluates an investment project based only on the cash benefits and costs accruing to the airport itself. Such accruals may not reflect net stakeholder impacts at all, even though they affect the airportâs finances. For example, cash benefits to the airport such as higher user fees or PFCs are not a benefit from societyâs point of view (since they must be paid for by someone elseâthey are a transfer). The focus of an FFA is on whether the airport can earn a return on the proposed investment and fund it; thus, the sources of funds and terms of repayment (if any) are critical components of the analysis. Both BCAs and FFAs account for the costs of mitigation. However, there are important differ- ences in how costs are treated. A BCA includes the opportunity cost of the project (net of what the airport would do otherwise). Opportunity costs might include an imputed cost for the use of airport land and any subsidy for the use of a resource. A BCA also excludes depreciation (except for the purpose of calculating salvage value), interest, and principal payments. Finally, a BCA is usually expressed in constant dollars and uses a discount rate meant to reflect either constant dollar private or public returns (depending on the application). An FFA will usually treat these items using standard accounting concepts that reflect cash flows in each time period, depreciation, financings, and the airportâs cost of capital. Again, a BCA assessment answers the question of whether the proposed investment is a good one from societyâs standpoint; the assessment may include a variety of benefits and costs that are external to the airport itself; a financial feasibility assessment simply addresses whether the project is fundable. It is certainly possible that there are projects with total social, environmental, safety, and efficiency benefits that outweigh their costs but that are not financially feasible. Exhibit 6-1 illustrates how the composition of variables considered could vary between the two types of assessments. The list of variables is illustrative and does not capture every possible impact type. Because an FFA considers only the costs incurred by the airport itself, costs such as airline operating costs or passenger delay costs typically would not be included. One exception would involve cases where commercial operators express a willingness to pay for an improvement because of the benefits they might gain; in these cases, the airport would pledge user fee revenues to repay the investments.
Other Relevant Topics for Airports Addressing Climate Change 49 Conversely, because a BCA considers only net societal costs, an up-front capital expenditure would be included fully in the year it was expended, but depreciation expenses associated with that expenditure (which might appear over time on an airportâs income statement) would not be included in a BCA. As discussed previously, an FFA brings a different set of criteria and objectives to the fore compared to a BCA. Financial feasibility studies are designed to demonstrate whether a pro- posed infrastructure investment can be paid for using available sources of funds, which may come from user fees, various government agencies, borrowing, or other sources. If borrowing is part of the equation, then the analysis must show that the airport has the ability to meet principal and interest payments. The FAA provides guidance relating to financial feasibility. Of particular importance is FAA AC 150/5070-6B, Change 2, which requires that each airport master plan include an achievable financial plan to support the implementation schedule for future capital projects (FAA 2015a). Sections 1202â1204 describe the various sources of funds and how the airportâs capital improvement program (CIP) can be shown to be financially feasible. In a financial analysis, an interruption of operations at the airport or part of it would result in lost revenues and potentially unplanned expenditures to make repairs and rehabilitate infra- structure. The airport would look at avoiding the loss of: â¢ Aeronautical revenue: airline rents, usage fees, and charges including terminal rents, landing fees, and other charges (e.g., jet bridges); â¢ Non-aeronautical revenue: concession rents and profit sharing, parking and airport access fees, and rental car operations; and â¢ PFCs collected. From this discussion, it should be apparent that FFAs may often ignore some of the most significant impacts that may result from certain types of climate change. For example, increases in the likelihood of extreme heat may lead an airport to consider a runway exten- sion project. While the construction and maintenance costs incurred by the airport from such a project would be captured in an FFA, it would likely ignore the benefits accruing to passengers (which would be in the form of avoided delay costs). It might also ignore the avoided cost benefits accruing to cargo users or airlines, although it might include them if these airport users were willing to, for example, pay increased landing fees to avoid delays caused by extreme heat. Consider another example, such as the increased likelihood of flooding due to storm surge, which causes the airport to consider a project that improves its drainage infrastructure. Here it is quite likely that the airport itself would realize benefits (in the form of avoided costs of flooded terminal buildings or other infrastructure). But it is still likely that there also would be economic benefits accruing to passengers, airlines, or others that might not be accounted for in a financial feasibility analysis. Candidate Variable Include in BCA Include in FFA Airport operating costs avoided Airport safety (accident costs avoided) Airline operating costs avoided Passenger injury or delay costs Profit and loss depreciation expenses Airport user fees Exhibit 6-1. Illustrative cost and benefit categories for BCAs and FFAs.
50 Climate Resilience and BenefitâCost Analysis: A Handbook for Airports 6.3 Hard-to-Quantify Impacts and Direct Environmental Strategies As stated previously, the types of impacts associated with different types of climate change suggest that the benefits to making climate resilient infrastructure investments may often be difficult to quantify from a technical standpoint. For example, if climate change would increas- ingly cause aircraft to be weight-restricted on hot days, it is not necessarily a simple task to estimate the financial impact on carriers or passengers. The actual impact would likely depend on a variety of factors that may be difficult to pin down, including the specific flights affected, the projected flight schedule and alternatives available for the time period in question, how long the high temperatures last each day, downstream or cascading delay impacts that occur elsewhere because of delays at the subject airport, and whether cargo (which may be scheduled for overnight delivery) could be off-loaded. Analysts should be aware that such delay impacts are quite typical for FAA BCAs. The FAA is looking only for reasonableness, not perfection, in such estimates, and sensitivity analysis may be used to assess how changing the assumptions/ values may affect the estimates. The FAA addresses the issue in a broader context by identifying specific, hard-to-quantify benefits that cannot easily be evaluated in dollar terms. These are: â¢ Impacts on system-wide flight delay (both passenger and freight), â¢ Effects on airline passenger comfort or convenience, and â¢ Non-aviation related impacts that represent true macroeconomic or productivity gains or losses (FAA 1999b, p. 58). The first of these items would appear to be most relevant for disruptions related to climate events, and the FAA has added a section to its Economic Values document (FAA 2016b) that specifically addresses how to value these delays. The recommended approach involves use of what the FAA calls a âdelay propagation multiplierâ (FAA 2016b), which is essentially a measure of the change in system-wide delay as a result of a unit change in delay at a particular airport. For example, the recommended multiplier for LaGuardia Airport is 1.53 (as of September 2016), meaning that a 1-min delay at LaGuardia would lead to 1.53 min of delay system-wide. Analysts can use such system-wide delay estimates in BCAs as appropriate. In the present context, it may also be important to identify other potential hard-to-quantify impacts associated with climate resilience. Specific examples are: â¢ Stranded capacity if long-term climate trends induce future growth to move away from loca- tions with existing capacity toward other locations that are not fully prepared for expanded travel volumes, â¢ The rate at which climate change accelerates the depreciation of existing airport assets, â¢ Increased risk of bird strikes on takeoffs associated with the greater incidence of standing water, and â¢ Potential harm to nearby watersheds when flooding carries pollutants. For those items that cannot be reasonably quantified, one suggestion is to consider assigning them an ordinal ranking that reflects the magnitude of their likely impacts on the airport. This ranking could be used either for further evaluation purposes or to allocate limited resources. Even though such rankings may not be formally incorporated into a BCA, they may be useful in enabling decision makers to make a decision on a project with a benefitâcost ratio near or just below 1 or when comparing two alternative projects with similar ratios. In addition, as mentioned earlier, airports may also want to consider investments that directly combat climate change by reducing their own carbon emissions. Again, it may not be a simple
Other Relevant Topics for Airports Addressing Climate Change 51 matter to evaluate the environmental benefits of undertaking such an investment. One approach would be to use the economic concept of âwillingness to pay.â There have been multiple studies that have attempted to estimate how much (in dollar terms) people may be willing to pay for specific climate mitigation reductions. An interagency working group established by the federal government published estimates valuing such reductions at about $21 per metric ton of CO2 (Interagency Working Group on Social Cost of Carbon 2010). In principle, such valuations could be used in a BCA (again assuming that the relevant quantities could be reasonably estimated). 6.4 Economic Impacts While not the focus of this project, the subject of economic impacts may be an important issue for decision makers. Many airports will have access to an economic impact study that outlines the contributions of the facility to the local economy measured in terms of output, jobs, payroll, and tax contributions. Many states now produce periodic estimates of the economic impacts of their airport systems, and larger airports often undertake such studies as part of their effort to maintain local support for aviation in the area. In the following discussion, it is assumed that airports already have access to and are familiar with economic impact studies. For those less familiar with the methodologies, the FAA has published a guidance document that provides a very useful overview (Butler and Kiernan 1992). ACRP Synthesis 7 outlines modern approaches to these studies (Karlsson et al. 2008). An airport might choose to undertake a new economic impact study for a major mitigation project designed to offset the effects of climate, or it might rely on the data and the economic model from an existing study to project these impacts. Typically such a study would attempt to assess how many jobs, how much income and tax revenue, and how much total output would be created in the local area as a result of the project. ACRP Synthesis 7 suggests that, via use of an inputâoutput model (or other related approach), the impact study would distinguish three types of impacts: â¢ Direct impacts: Result from spending in the local area by visitors who arrive by air, as well as spending in the local area for goods and services by airport tenants; â¢ Indirect impacts: The estimated flow of dollars generated from the supply of materials, goods, and services attributable to the airport by off-airport entities; â¢ Induced impacts: The multiplier effect of âre-spendingâ the dollars generated through direct and indirect activities. Spending resulting from direct and indirect activities is spent again by the recipient employees and local businesses (Karlsson et al. 2008, p. 6). It is important to distinguish between the life-cycle cost of the project (construction and operations and maintenance) and the consequences12 of the project (the jobs, income, and output it produces in the local economy). For example, a runway extension might make it possible for airlines to extend service to long-haul international destinations that otherwise would not be feasible or economically attractive because of exposure to high temperatures. The runway project would have life-cycle costs (to build and operate the runway extension) and consequences (new nonstop service to international destinations that bring in many new visitors and new spending to the community). Both costs and longer-term consequences of the projects are counted as economic impacts because they produce jobs, income, taxes, and output for the local community.
52 Climate Resilience and BenefitâCost Analysis: A Handbook for Airports Continuing with the example, the runway extension would create the following impacts as the airport incurred costs to build and operate the project: â¢ Direct impacts: Employment for construction and operations, which in turn would add income to the local community and would increase the regional output of construction services; â¢ Indirect impacts: Other key inputs (e.g., sand, concrete, equipment rentals, construction management) would be also be purchased within the community; â¢ Induced impacts: Some of the income created in the direct and indirect impacts would be re-spent in the local community. The same project could also have long-term consequences for the community if it were truly the case that (at least some) international service was not economically feasible due to increased exposure to high temperatures. Over time the project would produce: â¢ Direct impacts: jobs, income, and output at the airport due to incremental activity; â¢ Indirect impacts: local purchases by international travelers; â¢ Induced impacts: additional re-spending of local income within the community. Among these long-term effects, the indirect impacts would likely be the most consequential because international travelers generally stay longer and spend more than domestic travelers. Defining Consequences Correctly The FAA guidance document suggests that the analyst take care in attributing consequences to a project: Strictly speaking, direct impacts should represent economic activities that would not have occurred in the absence of the airport. If it were determined that, without the airport, some onsite employees would be doing comparable work elsewhere in the region without displacing other workers, their employment should not be part of the airportâs contribution to local economic activity. . . . Like direct impacts, indirect impacts should theoretically represent economic activities that would not have occurred in the absence of the airport. For this reason, it would be desirable to distinguish between tourists (and other visitors) who would not have traveled to the region if there were no airport and those who would have come anyway by some other form of transportation. Only the former are really relevant for the estimation of indirect impacts (Butler and Kiernan 1992, pp. 15â16). In the context of the runway extension example, it would be important to know whether the project was the key determinant in undertaking or keeping long-haul service (without it there would be no service) or instead if airlines might otherwise undertake the service but incur delay or cancellation costs on very hot days. If the former were the case, then all economic impacts would be properly attributed to the extension to offset very hot days. If the latter were the case, then the economic impacts could be defined as: (impacts from life-cycle costs) + R î° (impacts from project consequences) where R is the risk of delays or cancellations at the airport.13 The best way for an analyst to know how to attribute the consequences of a project would be to examine its financial feasibility. If airlines were willing to pay for all or part of the extension (depending on the way it is financed), then the feasibility study would likely include a forecast that examined the likelihood of long-haul service with and without the project. A benefitâcost study would also make this distinction. Distinguishing Economic Impacts from BenefitâCost and Financial Feasibility As noted previously, both costs and longer-term consequences of the projects are counted as economic impacts because they produce jobs, income, taxes, and output for the local community.
Other Relevant Topics for Airports Addressing Climate Change 53 In contrast, a benefitâcost study compares benefits to costs and provides information about whether the project makes economic sense from a national perspective. The benefits of the run- way extension project would be defined primarily as passenger (and cargo) time savings, while costs would be defined as the life-cycle costs of the extension. If the discounted present value of benefits exceed costs, the project would have economic merit. An FFA is designed to examine whether a project can be financed and produce an acceptable return; it has a narrower focus than a BCA. It would define costs in the same way as a BCA, but it would define returns to the airport (e.g., concession earnings, PFC revenue, incremental net rents, and incremental landing fees) as the main benefits. When airlines are willing to pay more in landing fees and rents to gain the runway extension (net of the other incremental airport cash flows), the project would make financial sense. 6.5 Option to Delay Investment Another important topic to address is that of optionality and timing. Many climate resil- ience projects will have very long-lived analysis periods. In these circumstances, it is appro- priate to examine the option of delaying the projects or only partially funding them with the anticipation that the project planning will be finalized or adjusted in the future depending on the circumstances and the availability of better information on actual risks and exposures. In principle, the option to delay a decision on an infrastructure investment project can be evaluated in a straightforward manner. For a BCA, this could be handled by specifying an alternative scenario where the investment is delayed X years out into the future, meaning that the benefits stream would also be delayed. Again, one could use Monte Carlo simulations, and the discounted benefitâcost ratios of the simulations from the alternative scenario would then be compared to those of the current scenario. FAA guidance in fact recommends that benefits and costs be evaluated for a period of at least 5 years beyond the expected project life for precisely this reasonâit allows direct comparison of NPVs under a scenario starting in year X versus year X + 5 with the same number of project years (FAA 1999b, p. 22). For an FFA, the decision may rely on a somewhat more informal process. The results of such an analysis may indicate that the proposed project may be a close call in terms of funding, and if the likely climate risks faced by the airport are thought to be fairly limited over the short term but increasing over the long term, then it may well make sense to delay the project and reassess in a few years. 6.6 Comparing Results Across Different Scenarios As noted in the FAAâs BCA guidance (FAA 1999b; discussed in Appendix G), it may not be possible to determine the best way to proceed until a full range of investment alternatives are identified and evaluated. FAA cautions against airports excluding potential alternatives just because of a predisposed preference toward a favored one. If it has in fact been decided to con- sider multiple alternatives, then each one should be self-contained (i.e., any identified incremen- tal benefits and costs should be unambiguously attributable to it). In such a situation, the analysis should be structured so that the evaluation period is the same across all alternatives.14 Having done so, the question then becomes how to compare results across scenarios. While a simple comparison of NPVs (or benefitâcost ratios) may be possible, the FAA also explicitly recognizes that the final recommendation arising out of a BCA should also consider possible impacts from hard-to-quantify benefits (and costs) and sensitivity of results to
54 Climate Resilience and BenefitâCost Analysis: A Handbook for Airports uncertainty (FAA 1999b, p. 90). The Monte Carlo method described in Chapter 2 can be used to directly assess comparative NPVs and how sensitive they are to estimates of climate uncertainty (as measured through different climate models). Combined with consideration of any hard-to- quantify impacts, the approach described in this handbook is well suited to the goal of assessing the potential impacts of uncertain future climate events on airport investment projects. Recall that the VaR interpretation of the Monte Carlo simulations expresses the probability of an airport (or its users) incurring at least a certain amount of damages due to climate events. Through mitigation, some of this risk can be reduced or even eliminated. But the project with the highest NPV may not be the one that leaves the airport with a tolerable amount of unmiti- gated risk. For example, if project X has the highest NPV, but its VaR chart indicates that the airport has a 25% chance of an unmitigated risk that could bankrupt it, the airport would be well advised to revisit alternatives that provide more comfortable risk profiles.