ANALYSIS OF THE INTERACTION BETWEEN AIR TRANSPORTATION AND ECONOMIC ACTIVITY: A WORLDWIDE PERSPECTIVE Mariya A. Ishutkina and R. John Hansman This report is based on the Doctoral Dissertation of Mariya A. Ishutkina submitted to the Department of Aeronautics and Astronautics in partial fulfillment of the requirements for the degree of Doctor of Philosophy at the Massachusetts Institute of Technology. The work presented in this report was also conducted in collaboration with the members of the Doctoral Committee: Prof. R. John Hansman (Chair) Prof. John D. Sterman Prof. Ian A. Waitz Report No. ICAT-2009-2 March 2009 MIT International Center for Air Transportation (ICAT) Department of Aeronautics & Astronautics Massachusetts Institute of Technology Cambridge, MA 02139 USA Analysis of the Interaction Between Air Transportation and Economic Activity: A Worldwide Perspective by Mariya A. Ishutkina Submitted to the Department of Aeronautics and Astronautics on March 11, 2009, in partial fulfillment of the requirements for the degree of Doctor of Philosophy Abstract Air transportation usage and economic activity are interdependent. Air transportation provides employment and enables certain economic activities which are dependent on the availability of air transportation services. The economy, in turn, drives the demand for air transportation services resulting in the feedback relationship between the two. The objective of this work is to contribute to the understanding of the relationship between air transportation and economic activity. More specifically, this work seeks to (1) develop a feedback model to describe the relationship between air transportation and economic activity and (2) identify factors which stimulate or suppress air transportation development. To achieve these objectives this work uses an exploratory research method which combines literature review, aggregate data and case study analyses. First, this work uses data at the individual country level to identify different types of growth patterns between air transportation passengers and GDP for 139 countries. This analysis is then used to identify twenty-two representative countries which span a range of possible interaction behaviors, geographies and income categories. The case study analysis at the individual country level is performed to describe the air transportation impact for each individual economy. These findings help develop a feedback model which describes the relationship between air transportation and economic activity. Specifically, the analysis is used to describe (1) how air transportation flows of passengers and cargo enable the flows of goods, services, knowledge, tourism, investment, remittances and labor among economies and (2) how air transportation flows can affect the country’s factor, demand and business conditions. The feedback model is then extended to perform quantitative analysis of the evolution of the enabling impact of air transportation in a particular economy. Specifically, a quantitative system dynamics model is developed to describe the interaction between the demand for leisure travel and the resulting enabling impact of tourism on Jamaica’s economy. Case study analysis is also used to identify factors which may stimulate or suppress air transportation system development. The factors are identified both from the air transportation supply and demand sides. The following supply side change factors are identified: changes in the regulatory framework, infrastructure capability, vehicle capability and airline strategy. The air transportation demand is found to be directly affected by exogenous demand shocks, economic downturns, political and economic sanctions, and the de- velopment of other transportation modes. The analysis also identifies the following change factors which affect the demand indirectly by changing the country’s economic attributes: economic liberalization, institu- tional and political reforms, supporting infrastructure investment, exchange rate fluctuations, political and macroeconomic stability, growing consumer demand, and changes in management practices. This analysis of stimulating and suppressing factors helps to describe the role of government intervention in changing air transportation system development and its impact on economic activity. The results of this work can help guide further development efforts, investment and policy decisions pertaining to air transportation usage especially in developing economies. Thesis Supervisor: R. John Hansman Title: Professor of Aeronautics and Astronautics 3 4 Acknowledgments This work was supported by the MIT’s Global Airline Industry Program under the Alfred P. Sloan Foundation grants # 2002-12-7 and # 2006-3-7, by the U.S. Federal Aviation Administration (FAA) under the Joint University Program (JUP) grant # FAA 95-G-017 and by the U.S. Federal Aviation Administration (FAA) grant # DTFA01-C-00030. 5 6 Contents 1 Introduction 27 1.1 Motivation . 27 1.2 Research Objectives . 31 1.3 Problem Definition . 31 1.4 Research Approach . 33 1.4.1 Literature Review . 34 1.4.2 Country-Level Data Analysis . 34 1.4.3 Case Study Analysis . 35 1.4.4 Quantitative Model Analysis . 35 1.5 Thesis Outline . 36 2 Literature Review 37 2.1 Studies Evaluating Impact of Aviation Using Input-Output Analysis . 38 2.2 Studies Evaluating the Enabling Impact of Aviation . 39 2.2.1 Eurocontrol Study . 39 2.2.2 Air Transport Action Group (ATAG) Study . 42 2.2.3 Additional Enabling Impact Studies . 42 2.2.4 Proprietary Models . 44 2.3 Studies Evaluating the Impact of Changes in Air Transportation Supply . 45 2.4 Limitations of Statistical Analysis . 47 3 Data Description 49 3.1 Economic Data . 49 3.2 Air Transportation Data . 50 3.2.1 Air Passenger Data Limitations . 50 3.2.2 Air Passenger Data Limitations: Examples . 51 3.2.3 Cargo Data . 55 3.3 Data Usage . 56 4 Analysis of Air Transportation and Economic Development Data 57 4.1 Worldwide Trend Analysis . 57 4.2 Mobility and GDP . 59 7 4.3 Country-Level Data Analysis . 62 4.3.1 Correlation Analysis . 62 4.3.2 Analysis of Growth Behaviors between Passengers and GDP . 64 4.4 Case Study Selection Criteria . 70 4.4.1 Countries with Stimulated Air Passenger Growth Rates . 70 4.4.2 Countries with Suppressed Air Passenger Growth Rates . 70 4.4.3 Countries with Average Air Passenger Growth Rates . 71 4.4.4 The List of Case Studies . 71 4.4.5 Data Sources for Case Study Analysis . 73 4.5 Case Studies Summary . 74 4.5.1 Case Studies Summary: The Enabled Flows . 75 4.5.2 Case Studies Summary: The Change Factors . 76 4.5.3 Case Studies Summary: The Interaction Behaviors . 76 5 Air Transportation System Change Factors 79 5.1 Air Transportation Supply Change Factors . 79 5.1.1 Regulatory Framework . 79 5.1.2 Infrastructure Capability . 89 5.1.3 Vehicle Capability . 95 5.1.4 Airline Strategy . 96 5.2 Air Transportation Demand Change Factors . 102 5.2.1 Factors Directly Affecting the Demand . 102 5.2.2 Factors Indirectly Affecting the Demand . 104 5.3 The Role of Government . 107 6 The Enabling Impact of Air Transportation 111 6.1 Description of the Enabled Flows . 112 6.2 Mapping Air Transportation Flows to Enabled Flows . 113 6.2.1 Enabled Flows of Goods . 114 6.2.2 Enabled Flows of Services . 115 6.2.3 Enabled Flows of Knowledge . 115 6.2.4 Enabled Flows of Tourism . 115 6.2.5 Enabled Flows of Investment . 115 6.2.6 Enabled Flows of Remittances . 115 6.2.7 Enabled Flows of Labor . 115 6.3 Describing an Economy Using Economic Attributes . 116 6.4 Enabling Impact of Business Passengers . 117 6.4.1 Impact of Inbound Business Passengers on Firm Strategy and Skilled Labor . 117 6.4.2 Impact of Inbound Business Passengers on Capital . 118 6.4.3 Impact of Outbound Business Passengers on Skilled Labor and Demand Conditions . 119 6.5 Enabling Impact of Personal Business Passengers . 120 6.5.1 Impact of Personal Business Passengers on Demand Conditions . 120 8 6.5.2 Impact of Personal Business Passengers on Unskilled and Skilled Labor . 120 6.5.3 Impact of Personal Business Passengers on Skilled Labor and Capital . 121 6.5.4 Impact of Personal Business Passengers on Skilled Labor . 122 6.5.5 Impact of Personal Business Passengers on Demand Conditions . 122 6.6 Enabling Impact of Leisure Passengers . 123 6.6.1 Impact of Leisure Passengers on Demand Conditions . 123 6.7 Enabling Impact of Cargo . 124 6.7.1 Impact of Cargo on Capital . 124 6.7.2 Impact of Cargo on Demand Conditions and Firm Strategy . 124 6.7.3 Impact of Cargo on Firm Strategy . 125 6.8 Summary of Air Transportation Impacts . 125 7 Model of Tourism Impact in Jamaica 127 7.1 Introduction . 127 7.2 Model Scope . 129 7.3 Model Structure . 130 7.3.1 Tourism Attractiveness . ..