Estimating Revenues Revenues and and Consumer Surplus Consumer - - PowerPoint PPT Presentation

Estimating Estimating Revenues Revenues and and Consumer Surplus Consumer Surplus for the for the German Air Transport German Air Transport Markets Markets

8th 8th Conference Conference on

• n Applied Infrastructure

Applied Infrastructure Research Research (INFRADAY) (INFRADAY) TU Berlin TU Berlin October October 10, 2009 10, 2009

• Prof. Dr. Richard Klophaus

Worms University of Applied Sciences

2 Richard Klophaus, October 09

Key issue

How to measure the impact of air transport on economic welfare beyond direct, indirect and induced impacts? Relevant for:

• (Further) liberalisation of air transport
• Investment in infrastructure (airports etc)
• Airport regulation (eg night curfews)
• Policy decisions to raise the cost of air transport (eg increase of

airport charges, inclusion in emissions trading schemes)

3 Richard Klophaus, October 09

Literature

Economic impact of air transport

ACI Europe (2004), The Social and Economic Impact of Airports in Europe MPD Group (2005), Assessing the Economic Costs of Night Flight Restrictions Oxford Economic Forecasting (2005), The Economic Catalytic Effects of Air Transport in Europe

Air transport demand elasticities

Gillen / Morrison / Stewart (2003) InterVISTAS Consulting (2007) Ernst & Young (2007)

4 Richard Klophaus, October 09

Benefits (and costs) of air transport

Air transport services (for business passengers, leisure passengers, airfreight, express deliveries etc) Revenues for companies in the air transport industry Catalytic Impacts Buy goods and services from suppliers Earn profits, pay taxes Employ

• wn staff

Environmental and social impacts Economic spillovers Consumer surplus of users Direct impacts Indirect impacts Spending by employees on

• ther goods and services

Induced impacts Negative eg outward investment,

• utbound

tourism Positive eg inward investment, inbound tourism Workplace counts Multipliers I/O analysis CGE models

5 Richard Klophaus, October 09

Consumer surplus

Consumer surplus as the difference between

the user‘s willingness to pay and the actual air fare and cargo rate respectively

In theory, consumer surplus is a convincing

montary measure of welfare, however, a practical method for implementation is needed

Requires specification of curvature of demand function, average (own) price elasticity, average price and sales volume

• f air transport market under consideration

Price Quantity Supply Demand Consumer surplus P* Q*

6 Richard Klophaus, October 09

Two illustrative air transport markets

Express freight

Relatively inelastic demand High catalytic impact

Low cost travel

Relatively elastic demand Low catalytic impact

Price Quantity Supply Relatively inelastic demand Consumer surplus P1* Q1* Relatively elastic demand Price Quantity Supply Consumer surplus P2* Q2*

7 Richard Klophaus, October 09

Curvature of demand function

Only data on average (constant) price elasticities for different air transport markets is available Demand curve with contant elasticity is non-linear, elasticity of linear curve changes from 0 to -infinity

Air travel demand (Business, short-haul to/from Germany)

500 1.000 1.500 2.000 2.500 3.000 1 2 3 4 5 6 7 8 9 Passengers (million) Airfare (Euro) Linear demand Demand with constant elasticity

Linear demand function leads to lower limit of consumer surplus Market equilibrium:

• 5.2 m passengers
• Average fare: 750 €
• Price elasticity: -0.8

8 Richard Klophaus, October 09

Specification of price elasticity estimates

Average own-price elasticities Varying elasticities for different air transport markets according to degree of

necessity and distance

National level elasticities, no consideration of differences between outgoing and

incoming air transport

Only long-term elasticities Elasticity values taken from Ernst & Young 2007

9 Richard Klophaus, October 09

Specification of quantities and prices

Passenger round-trips (RT) possibly containing several legs. Source: Annual report

• f DLR German Aerospace Center (2009)

Freight tonnage one-way (OW) to / from Germany. Source: Statistics provided by

German Airports Association (ADV 2009)

Shares of market segments: Business / Leisure. Interviews with German airlines Express freight / General cargo. Based on data provided by German airports Average airfares. Source: Interviews with German airlines Average freight rates: Interviews with German airlines

10 Richard Klophaus, October 09

Inverse demand functions for air travel to and from Germany 2008

Quantity Price (Euro) Own-price elasticity Inverse demand function 12.1 m Long-haul trips Ø airfare (RT) Business 20% 2.4 m 4,000 €

• 0.8

x p ⋅ − = 0020833 . 000 , 9

Leisure 80% 9.7 m 750 €

• 1.0

x p ⋅ − = 0000773 . 500 , 1

3.7 m t Airfreight Ø freight rate (OW) Standard 67.3% 2.49 m t 1,800 € / t

• 1.6

x p ⋅ − = 0004518 . 925 , 2

Express 32.7% 1.21 m t 2,900 € / t

• 0.8

x p ⋅ − = 0029959 . 525 , 6

11 Richard Klophaus, October 09

Consumer surplus for users of air transportation services to and from Germany 2008

Revenues Consumer surplus Long-haul trips Business € 9.6 B € 6.0 B Leisure € 7.3 B € 3.6 B Airfreight Standard € 4.5 B € 1.4 B Express € 3.5 B € 2.2 B

12 Richard Klophaus, October 09

Conclusions

• The wider economic impacts of aviation – also called catalytic impacts –

may exceed the direct, indirect and induced impacts

• Measuring these wider economic impacts is difficult
• Paper proposes the use of average price elasticities of air transport demand

to estimate consumer surplus Knowledge of price elasticities is essential

• Suggested approach also requires the specification of average price and

sales volume in the air transport market under consideration

• Use of linear demand functions results in lower limit of catalytic impact

Other types of demand functions more adequate?

13 Richard Klophaus, October 09

Thank You!

klophaus@fh-worms.de