Airline Transportations on Economy Impacts of Airline Essay

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Airline

Transportations on Economy

Impacts of Airline Transportations on Economy

INTRIDUCTION

The rapid rise in the use of air transportation since deregulation in 1978, coupled with the unprecedented financial crisis in the airline industry after the September 11 terrorist attacks raises questions on how vulnerable the nation is to significant interruptions to its air transportation system[footnoteRef:1]. In an attempt to better understand its national importance; this paper examines some aspects of how the air transportation system has had an impact on the economic structure and social behavior in the United States. To help identify these economic and social impacts, a conceptual model of these interdependencies was developed to structure the analysis of this paper. In light of this framework, two major changes in the air transportation system are evaluated. The first change was the deregulation of the airline industry in 1978. Fundamental changes in airline services occurred after the Civil Aeronautics Board eliminated restrictions on routes and fares[footnoteRef:2]. The second major change was the dramatic downturn in the U.S. airline industry following the attacks of September 11, 2001. Although revenues had been declining at the major airlines well before the 9/11 attacks, the subsequent changes in travel behavior led to a reduction in national air transportation capacity by 10 to 20% in just a matter of weeks. This dramatic change has highlighted the key interdependencies between the economy and the airline industry. [1: Air Transport Association, Annual Passenger Prices (Yield), U.S. Scheduled Airlines. Washington: ATA, September 4, 2002. Available online from: http://www.airlines.org/Air Transport Association, Annual Traffic and Capacity: U.S. Scheduled Airlines. Washington: ATA, 2003.] [2: Air Transport Association, Annual Passenger Prices (Yield), U.S. Scheduled Airlines. Washington: ATA, September 4, 2002. Available online from: http://www.airlines.org/Air Transport Association, Annual Traffic and Capacity: U.S. Scheduled Airlines. Washington: ATA, 2003.]

LITERATURE REVIEW

Most analyses on the economic impact of air transportation typically only address the direct financial effects from aviation employment and spending. The FAA has estimated that the U.S. aviation industry accounts for some 11.6 million direct, indirect, and induced jobs and over $316 billion dollars in earnings[footnoteRef:3]. These methods, however, may underestimate the true impact of air transportation by failing to take into account the Enabling Effects of air transportation and how high quality air connectivity affects access to markets, capital, ideas, and people. To examine the relationship between the economy and the air transportation system, a review of economic and social trends in the U.S. since deregulation was conducted. Increases in air travel, GDP growth, population geography, and travel behavior were analyzed[footnoteRef:4]. [3: Air Transport Association, Annual Passenger Prices (Yield), U.S. Scheduled Airlines. Washington: ATA, September 4, 2002. Available online from: http://www.airlines.org/Air Transport Association, Annual Traffic and Capacity: U.S. Scheduled Airlines. Washington: ATA, 2003.] [4: Air Transport Association, Annual Passenger Prices (Yield), U.S. Scheduled Airlines. Washington: ATA, September 4, 2002. Available online from: http://www.airlines.org/Air Transport Association, Annual Traffic and Capacity: U.S. Scheduled Airlines. Washington: ATA, 2003.]

Growth in air travel: In order to fully document the changes in the supply of air transportation, the growth in passenger traffic data, airline capacity and airline fleets were analyzed. The growth in domestic capacity was measured in terms of Available Seat Miles (ASMs), while Revenue Passenger Miles (RPMs) were used to measure traffic. RPMs grew considerably faster after deregulation than in the period between 1954 and 1978. Between 1954 and 1978 U.S. domestic RPMs grew at an average rate of 750 million RPMs per year.

Between 1978 and 2000, RPMs grew at average rate of 1.8 billion RPMs per year. Reflecting this increase in demand, Figure 3 shows that the domestic scheduled ASMs increased from 300 billion in 1978 to over 700 billion by 2000. Figure 4 shows that the growth in capacity and traffic was achieved by a major increase in the size of airline fleets. The number of aircraft used in commercial airline service increased from 2,000 aircraft to over 7,000 aircraft between 1978 and 1995[footnoteRef:5]. [5: Air Transport Association, Annual Passenger Prices (Yield), U.S. Scheduled Airlines. Washington: ATA, September 4, 2002. Available online from: http://www.airlines.org/Air Transport Association, Annual Traffic and Capacity: U.S. Scheduled Airlines. Washington: ATA, 2003.]

At a more local scale, found that in a survey of 32 Japanese companies with branches in the Chicago metropolitan area, 23 considered accessibility to O'Hare the most important factor in their locational decision, followed by highway access at ten companies, and the existence of customer companies at eight. While this finding might not explain why international firms are drawn to a particular metropolitan area, it does explain why they locate where they do within that region[footnoteRef:6]. [6: Air Transport Association, Annual Passenger Prices (Yield), U.S. Scheduled Airlines. Washington: ATA, September 4, 2002. Available online from: http://www.airlines.org/Air Transport Association, Annual Traffic and Capacity: U.S. Scheduled Airlines. Washington: ATA, 2003.]

Additionally, Kasarda's exploration of "Global Air Cargo-Industrial Complexes as Development Tools" goes so far as to say, "The combined thrust of [globalization and just-in-time manufacturing] is creating an entirely new economy where aviation and airports will ultimately supplant seaports, rail, and highway systems as the primary job and wealth generators for states and localities."

The 1987 report by Coley/Forrest, Inc., "Ready for Takeoff," comes closest to the aim of this study. It reviews "the timing, scale and type of business development that did occur in the airport environs" of what were the three most recent large-scale airport projects in the United States: Atlanta, Dallas-Ft. Worth, and Kansas City. The report listed nine major findings and described their applicability to Denver. First, a new airport will inevitably draw certain kinds of businesses, but it takes strong marketing to draw businesses that are not directly airport-related.

Second, international businesses follow international flights, something Denver is counting on. An upscale image and strong public sector economic development activity can draw businesses to the airport area even if it is in a traditionally underdeveloped sector of the city. Next, a definite order of development was observed: lodging, industrial/office/warehouse (first single-user, then small multiple-user, then large), multistory office buildings, and restaurants. Large-scale developments of over 1,000 acres can make a significant difference in attracting additional development due to their marketing efforts. Finally, air cargo can attract even more development than passenger flights and should not be overlooked as an economic development tool.

These are the types of studies that airport operators and cities often use to justify their need for increasing the size of an airport or relocating the facility altogether. It is undeniable that airports can have a powerful impact on metropolitan economies, both in and of themselves, and as catalysts for other kinds of economic growth. But only the Coley/Forrest study takes those economic impacts down to the local level, showing what types of land uses are and are not attracted to the airport environs, along with the potential influence that cities can exert over the development process. It is unfortunate that this study looked at only three airports[footnoteRef:7]. [7: Air Transport Association, Annual Passenger Prices (Yield), U.S. Scheduled Airlines. Washington: ATA, September 4, 2002. Available online from: http://www.airlines.org/Air Transport Association, Annual Traffic and Capacity: U.S. Scheduled Airlines. Washington: ATA, 2003.]

Direct impacts of liberalization (D) "arise immediately from the conduct of those entities performing the activity in question." In case of air transportation this means direct impacts include all the changes in employment, value added or total product that can be immediately attributed to changes in air traffic level. These changes affect airlines, airports, ground handling agents, aircraft producers, maintenance providers, ATC providers and other companies whose principal business involves commercial aviation[footnoteRef:8]. [8: Air Transport Association, Annual Passenger Prices (Yield), U.S. Scheduled Airlines. Washington: ATA, September 4, 2002. Available online from: http://www.airlines.org/Air Transport Association, Annual Traffic and Capacity: U.S. Scheduled Airlines. Washington: ATA, 2003.]

Indirect impacts (I) are defined as impacts "involving the supply chain of businesses or entities conducting the primary activity." Higher number of flights requires increased orders of fuel and in-flight services. Higher number of passengers boosts turnover of airport retail outlets. Higher demand for aircrafts supports the extensive network of sub-contractors. All in all, indirect impacts involve growth of purchases by airlines, airports, aircraft producers, airport retail outlets and hotels. They also include construction activity at the airports and services provided by call centers. It is obvious that the magnitude of indirect impacts is primarily influenced by the extent of direct impacts. Therefore indirect impacts are computed as I = a.D, where A is a market-specific coefficient. Induced impacts (N) emerge when "those employed directly and indirectly in air transport services use their earnings to buy other goods and services."

A pilot might use a part of his salary to buy computer. This represents income for the computer seller, who might subsequently spend it at a bookstore; the bookseller might spend it at a grocery store etc. The process will continue indefinitely in decreasing cycles. Thus, the initial increase in salary of one person is transformed into increase in salaries of many households. This process is known as the multiplier effect.…[continue]

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