Assessing tourism impact of aviation

Exercises

In no more than 400 words, briefly answer the following questions:

Describe how one might consider using the IO approach to estimate the tourism
impact of an ‘open -sky’ between two nations. What are the limitations of the IO
approach in assessing the economic impact? Discuss the use of CGE and its
advantages in this context. Is the application of the CGE approach warranted in all
circumstances?

The following reference may assist with this exercise. The first article looks at the
economic impact of air transport liberalisation in Hamburg, while the second article
looks at Australia. Don’t forget to the consult Readings 1 – 3 of this Unit.

Gillen, D. and Hinsch, H. (2001) Measuring the econo mic impact of liberalisation of
international aviation on Hamburg airport, Journal of Air Transport Management 7,
p.25 -34

Forsyth, P. (2006) Martin Kunz Memorial Lecture. Tourism benefits and aviation
policy, Journal of Air Transport Management 12, p.3 -13

Unit Structure

This unit considers the economic impact of aviation and tourism (Unit 9 focuses on
the valuation of the environmental impact of aviation and tourism). In particular,
to urism is considered as a key channel through which air transport contributes to the
economy, as well as the general well -being of our society . Specifically, by end of this
Unit, students should be:

• Familiar with the key channels through which air transport contributes to the
economy
• Understand direct, indirect, induced, catalytic and multiplier effects of air
transport
• Appreciate the different approaches in modeling these effects, and the
approaches’ advantages and limitations
• Appreciate the releva nce of the choice of methodologies in the understanding
of aviation’s economic impact, in particular with respect to tourism

This   Unit   introduces   advanced   concepts   such   as   Computable   General
Equilibrium   (CGE)   models.   While   you   are   not   expected   to   fully   gr asp   the
technical   details   of   this   approach,   it   is   important   to   be   informed   of   the   various
modeling   approaches   used   in   tourism   and   transport   policy   arena.   Also,   it   is
important   to   be   able   to   know   where   to   find   more   information   about   these
methods   (and   thence   the   interpretations   of   the   results)   when   called   upon.   This
Unit   can   be   an   important   starting   point.

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Air transport and the economy

One of the key ways through which transport influences the economy is trade.
Reduction in transport cost paves way for specialisation in the production of services
and goods with comparative advantage. Tourism is a form of trade. Unlike other
traded products, however, tourism involves consumers traveling to the place of
‘production’. In systems of national accounts, for instance, inbound tourism is
considered as an export sector. Low air travel costs stimulates tourism trade, which is
a significant generator of income and employment in many economies.

The effect of transport can be compounding over time. The effects of transport
improvements such as through infrastructure investments can be both temporary and
permanent.

– Temporary effects: during the construction phase
– Permanent effects: maintenance and operations, effects on productivity,
effects on location of activities, trade

Moreover, o ver time, “improvement of transport infrastructure not only leads to larger
trade flows … also to a more transport intensive way of organization of production
and distribution having distinct effects on the spatial distribution of pr oduction and
distribution of activities” (Rietveld and Bruinsma 1998: 62).

In international air transport and aeropolitical context, Raguraman (1997) aptly
summarised the (economic) benefit of air transport, stating,

implementation of new or additional services may have an effect, in the presence of
other complementary factors, of stimulating new investment in the city where the
carrier is flying to. Such new services also contribute to an increase in consumer
welfare in the sense that greater choice is afforded to travelers in that country and net
savings in waiting time result from additional flights. There is also scope for
increased trade in the sense that opportunities for export are presented for local
companies using airfreight services (Raguraman 1995) … The most significant
benefits, however, are apparent in the impacts of air services on the air transport and
tourism sector (Raguraman 1997:660).

Defining the net expenditure can be challenging, and it is impor tant for the
appropriate appraisal of economic benefits and costs of air services. As argued by
Raguraman,

In bilateral negotiations, it is often observed that the most keenly contested issue
relates to capacity provisions on passenger traffic (O’Connor 1971). Given that the
primary concern in bilateral agreements is the volume of passenger traffic, it is
argued here that a correct appraisal of the net economic benefits of air service should
weigh the injection of expenditures by visitors and the foreign carrier into the local
economy against the leakages of expenditures of local travelers out of the country on
that foreign carrier’s services. Such an exercise may in fact show that even if the local
carriers are unable to mount reciprocal services, it actually may be beneficial to allow
5
foreign carriers to do so if the demand for such services exists on the negotiated
routes. (Raguraman 1997: 660 – 661)

At this point it is important to make a distinction between injection of expenditures
and economic impact . Consider the following story from Australian Broadcasting
Corporation (ABC) (n ote: in the coming weeks we will be using multimedia,
including videos):

Multimedia 1. This is available from the RMIT TV database (via UNSW Library).

Accessing this video clip can be done in three steps (these files are ~ 40mb):
(1) go to UNSW Library Catalogue, then search for “ TVnews”.
(2) Access online link.
(3) Once in the database search engine, search for the following video “ Flying
High: The Far North Queensland economy is improving with the resumption
of direct flights between Japan and Cairns next year ”

The story tells of the potential tourism benefits from the new air services by Jetstar
International between Cairns and Japan. It is expected that ea ch Japanese visitor will
inject $2,000 per trip. The figure can be calculated based on surveys, such as through
the type of data introduced in Unit 1. While a measure of monetary value, expenditure
does not provide a complete account of the economic impact. Economic impact can
be substantially less or more than that suggested by expenditure figures alone.

To economic impact we now turn.

Reading 1 is International Civil Aviation Organisation (2005) The Economic
Contribution of Civil Aviation, Volume 1, Circular 292 -AT/124. Although the
entire document is very informative (albeit slightly out -of -date), if you are
pressing for time, the key pages are 2-1 to 2-9. The best way to find this
document is to search for “ The Economic Contribution of Civil Aviation ,
Volume 1, Circular 292-AT/124” in a searchengine.

The e conomic impact of aviation is decomposed into four effects.

• Direct economic co ntributions (or direct effect) are expenditures made by
aviation industries for the provision of air trav el and freight services.
• Indirect effects are transactions between direct suppliers and other suppliers in
the supply-chain
• Induced effects occur when the profits and extra income earned by households
and producers from the direct and indirect effects are re -spent, and thence re -injected into the economy, as consumers.
• Catalytic effect is generated by the off-airport expenditures of air transport
users such as by tourists in destinations.