1. Economic impact assessment in the aviation sector: Why Cost-Benefit analysis (CBA)? Why not just stick to a financial analysis? When to do a CBA? Important elements and their factor prices A few methodological problems

2. Norwegian Civil Aaviation Administration (AVINOR) as a public service enterprise: Limited liability company, owned by the State Financial responsibility Revenues from user charges and airport shops (3000 million NOK 1998) Under political jurisdiction (the Ministry) Operates under international regulations (EUROCONTROL, ICAO) Responsible for buliding and operation of: Airports (airside, buildings, landside) ATM/ATC Security

3. CIVIL AVIATION ADMINISTRATION

4. Economies of scale and “Financial responsibility”: Efficiency loss?

5. Costs and benefits, new project:

6. Revenues and consumer surplus: No unambiguous link

9. DEFINER PROSJEKTET (Kap 2.3.1 - 2.3.3)

14. AIRCRAFT NOISE: Basis for noise costs: WTP study from Oslo airport, Fornebu. WTP for a subjective noise reduction of 50% for people who claimed to be much annoyed. WTP approximately NOK 3 600/year, giving approx. NOK 72 for 1% reduction. WTP is assumed to be symmetric, i.e. equal for reductions and increases in noise levels. Maps of noise zones before and after the planned project is effectuated, together with population data give the total value of the change in noise level, measured in terms of the dwellers’ WTP.

15. The aviation authorities and decision-making: Up to now: Decisions mainly made by financial analyses alone. New main airport OSL one important exception, where a ”quasi- economic” analysis was made. Economic appraisals MAY (and probably WILL) give priority to other projects than those given by the financial analysis. Intangibles like VOT, environmental effects and accident risks contributes to this divergence. PROBLEMS when financial considerations do not coincide with the (at least politically stated) obligations to take the welfare of passengers, operators and the community into consideration.

16. Application: New/expanded terminal building at Stavanger airport (SVG) The terminal building is the limiting growth factor in the short run. Later on, the number of gates and the runway capacity may become growth limiting factors. Without an upgrade of the terminal, traffic is transferred to less attractive slots, later on to other transport modes, while traffic with less WTP is deterred from travelling. Main benefits of an upgraded terminal building: Travel time savings of avoiding transport to neighbouring airports/avoided traffic deterrence.

17. About Stavanger airport: 3 million passengers (pax) arrived/departed in 1999. Expected annual traffic growth: 4.5% in the period 1999-2000 3.5% in the period 2001-2010 2.0% thereafter The traffic growth calls for the following capacity expansion: YearMeasure 2005 8000 m 2 terminal building 2010 7 gates 2018 Extended runway capacity

18. Traffic growth with sequential capacity constraints

19. Costs and revenues - airport with sequential capacity constraints

20. The main benefits are saved travel time when travelling from Sola instead of using alternative routes. Without the new terminal, the capacity constraint will force people to use other routes (via road, rail or other airports) The following main data have to be collected:  The share of business/other travellers and the VOT.  Origin/Destination matrix  Time costs and other costs on alternative routes.  The share of the market that give up travelling when the capacity constraint is in effect.  Reduced delays Main benefits from terminal building:

21. Before we start the Economic Impact Assessment (EIA) work: The traffic forecasts are important as basis for the EIA. The effects on passengers, airlines, AVINOR and the environment are based on the traffic forecasts. The cost estimates for AVINOR and the airlines should be according to ”best practice”. The investment costs should be based on expected values, and the aircraft operating costs should be standardised. The outcome of the EIA should be presented according to the decision makers’ needs, influencing the way we aggregate our numbers. Once we start to aggregate, e.g. groups of passengers, it may be a very demanding task to disaggregate later on!

22. Matters to be considered: Specification of the project: The base case: Traffic growth without capacity expansion Relevant alternatives How do we deal with mutual dependency among projects? What are the passengers’ options when the airport capacity constraint is effective? Traffic growth with/without capacity expansion Alternative routing Adjacent airports Road or rail Traffic deterrence Safety and the environment Investment and operating costs

23. Main tasks: To calculate the benefits of avoiding delays and more expensive alternative transport For passengers For operators To compare the monetised safety and environmental effects Accident risks Emissions To calculate the investment and operating costs for the base case and the relevant alternatives To present the results in an adequate way Sensitivity analyses Implications for various stakeholders (”winners and losers”)

24. Relevant economic effects: Passengers: Costs of alternative transport No. of passengers deterred Changes in accident risk Costs of delays Operators (airlines): Time costs and operating costs Cost of delays Accident costs AVINOR: Investment costs Operating costs Third parties Environment costs

25. A selection of factors to be considered in the economic appraisal:  The travel purposes (business travels and others).  The destinations from SVG.  The level of diverted traffic, and the distribution between the neighbouring airports HAU and KRS.  Time costs and other costs for surface transport.  The share of travels that are deterred because of higher transport costs.  Investment costs (AVINOR)  Operating cost (AVINOR)  Operating costs (airlines)  Environmental costs (emissions)  Changes in accident risks

26. Alternative routes, travels from SVG

27. Traffic forecasts: Gives the volumes of traffic diversion/deterrence from capacity constraints. The distance between the curves gives the forecasted amount of traffic that will be will be served by expanded terminal capacity.

28. Benefits of new terminal building, measured as the benefits of “not having to use other airports”: Shaded area: Those who use the road network to adjacent airports. Hatched area: Deterred traffic, people who give up travelling. Diverted and deterred traffic from capacity problems:

29. 1. Use traffic forecasts to calculate the no. of passengers that will have to use other routes without the new terminal building. 2. Find the share of business travels, and calculate the VOT per passenger. 3. Find the main origin/destinations from Sola. 4. Describe the alternative transport modes to the main destinations with respect to travel time costs and other costs. 5. Calculate the generalised travel costs on both the air travels from Sola, and on the alternative routes to/from the main destinations. The generalised travel costs consist of time costs, vehichle operating costs, costs of getting to/from the airport, and other payable costs (tolls, fares). This is done for 3 reasons:  We are going to calculate the level of traffic deterrence  We are going to calculate the benefits of avoiding traffic deterrence  We are going to calculate the benefits of avoiding alternative routes Procedure for the Economic Impact Assessment (1):

30. 6. Calculate the weighted average difference (between travelling from Sola and by using other routes/modes) in travel costs to the main destinations We will end up with the average difference in travel costs for business travels and other travels. Both the economic and financial costs are calculated. The financial costs are used to estimate the traffic deterrence (see below). 7. Calculate the traffic deterrence for business travels and other travels. In this example, this is done by using a simple elasticity model, by using the formula e i =(  x i /x i )/(  p i /p i ) e i = elasticity of demand (known)  x i = deterred traffic (to be calculated) x i = unconstrained traffic volume (known)  p i = increase in financial generalised costs, alternative routes (known) p i = financial generalised costs, travels from Sola (known) More sophisticated models can of course be used. Procedure for the Economic Impact Assessment (2):

31. 8. Calculate the passenger benefits by multiplying the difference in the economic generalised travel costs with the traffic volumes, both for the transferred and deterred traffic. The areas in the figure below is then calculated. The black area is the benefits of not being transferred to alternative routes becaused of constrained airport capacity. The hatched area is the benefits of not being deterred because of higher transport costs on alternative routes. The passenger benefits are calculated annually over 25 years, and discounted to present value (PV). Procedure for the Economic Impact Assessment (3):

32. 9. Calculate the discounted investment costs. 10. Calculate the discounted changes in operating costs (AVINOR and airlines). 11. Calculate the discounted air emission costs. The procedure for calculating the benefits of avoiding delays: 1. Calculate the delay time (no. of passengers during peak hours multiplied by the expected average delay time). 2. Calculate the delay costs by using the VOT for business and other travels. 3. Calculate the delay costs for the operators. Procedure for the Economic Impact Assessment (4):

33. Procedure for the Economic Impact Assessment (5): The procedure for calculating the value of safety implications: 1. Identify the accident risk for air transport and alternative modes. 2. Use the traffic forecasts to calculate the expected change in no. of life lost/injuries. 3. Calculate the value of the changed accident risk by using handbook values for accident costs (life/injury welfare costs, material damage costs, administration) Finally, we present the results: 1. Present the cost benefit calculations 2. Present the financial implications for AVINOR 3. Present the distributional aspects (”winners/losers”) 4. Present the sensitivity analysis (”what happens with the profitability if….”)

34. New terminal at Sola (SVG), economic impacts and financial cash flows

35. MAIN CONCLUSIONS: The terminal building is economically profitable: NPV= NOK 41 millions NPV/C = 0.10 The main benefits are connected to saved inconveniences of not having to use alternative routes/modes (60 per cent of the benefits). AVINOR is responsible for 65% of the costs, the operators for 26% and the third parties carry the rest (9%, mainly emission costs). Sensitivity analysis: The profitabiliy is exposed to increases in e.g. construction costs. An increase of 15% in the expected construction costs makes the project unprofitable. Distributional aspects: Business travellers and the airlines are winners Travellers in other parts of the air network have to carry a share of the financial costs, because of the financial loss of NOK 330 millions. A certain increase in air emissions will result. Non-quantified impacts Not significant.