THE ECONOMIC CONTRIBUTION OF AVIATION TO THE UK: PART 2 - ASSESSMENT OF REGIONAL IMPACT FINAL REPORT OXFORD ECONOMIC FORECASTING May 2002 Acknowledgements Like our earlier report on the Contribution of the Aviation Industry to the UK Economy, this follow-up report has been funded by a consortium of companies in the industry, together with the (now) Department for Transport, Local Government and the Regions. We are grateful for comments and assistance in putting the report together from a steering group comprising representatives of DTLR, BAA, Manchester Airport, Newcastle Airport, British Airways, the Airport Operators Association, and the British Air Transport Association. The views and analysis presented in the report remain those of OEF rather than those of the sponsoring organisations. Oxford Economic Forecasting May 2002 2 THE ECONOMIC CONTRIBUTION OF AVIATION TO THE UK: PART 2 - ASSESSMENT OF THE REGIONAL IMPACT OXFORD ECONOMIC FORECASTING CONTENTS Executive Summary Page 3 Introduction Page 5 I. What Does Aviation Contribute to Today’s Regional Economies? (i) Employment in aviation Page 6 (ii) Aviation output Page 11 (iii) Employment dependent on aviation Page 11 II. The Importance of the Aviation Industry to Economic Growth in the Regions A. The direct contribution of aviation to growth in the regions Page 18 B. The wider contribution of aviation to growth in the regions Page 24 C. The role of aviation in each region Page 26 III. Modelling alternative scenarios for aviation in the regions Page 35 Annex A – Supporting tables Page 39 Annex B – An example of the impact of different passenger numbers Page 50 Notes Page 54 3 Executive Summary · In November 1999 Oxford Economic Forecasting (OEF) issued a report on ‘The Contribution of the Aviation Industry to the UK Economy’. This report presents the results of follow-up work OEF has undertaken on the regional breakdown of that contribution. · In 1998, aviation directly provided 180,000 jobs in the UK, 0.8% of total employment. 40% of these jobs were in Greater London, where the industry accounted for 2.1% of all jobs. In regions outside the ‘Greater South East’ (London, the South East and Eastern region), where the various ‘London’ airports are located, the share of jobs provided directly by aviation varied from 0.7% in the North west to 0.l% in Yorkshire & Humberside. · Aviation accounted for value-added of £10.2 billion in 1998, 1.4% of the UK total, ranging from an estimated 3.2% of London’s GDP and 1.8% of the South East’s, down to 0.2% of GDP in Yorkshire & Humberside, and 0.3% in the South West on the basis of our methodology. · The benefit of direct employment is not felt just in the region where the jobs are located – looking at the allocation of jobs on the basis of where people live rather than where they work, aviation actually provides the biggest share of employment to workers who live in the South East, rather than those who live in Greater London. · We estimate that indirect employment supported by aviation was 200,000 in 1998 over the UK as a whole. Our estimates suggest that it is more evenly distributed across the country than direct employment, since large airports in one region also support jobs through the supply chain in other parts of the country. · Including ‘induced employment’ supported by the spending of direct and indirect employees, total aviation-related employment in 1998 ranged from an estimated 3.6% of all jobs in London and 3.3% in the South East, to 0.9% in Yorkshire & Humberside and in Wales. · Assumptions about productivity trends at individual airports are very important to projections of the contribution aviation is expected to make to jobs in each region. Our main assumptions are based on the same rate of productivity growth in the industry in each region – in practice there are several factors that will affect productivity growth differentially across regions, but it is very hard to quantify these. On our base assumptions, direct employment in aviation is projected to grow from 183,000 in 1998 to 242,000 by 2030. The largest absolute increase in jobs is projected in the Eastern region, where 20,000 new jobs in aviation are projected, primarily as a result of high demand growth predicted at 4 Stansted. · There may be substantial regional variations in rates of productivity growth, which could give rise to substantially different contributions to growth in different regions, particularly as airports reach critical mass enabling them to support a wider range of on-site and local support activity. · Including indirect and induced jobs, total aviation-related employment is projected to rise by 240,000 between 1998 and 2030, to 2.4% of all jobs. By 2030, aviation-related employment is projected to be as high a share of total employment in Eastern region as it is in Greater London, in contrast to today when the share is around 50% higher. A similar increase is projected in the North West, though from a somewhat lower share, while all other regions outside London and the South East are also expected to see some increase in the share of employment accounted for by aviation-related employment. · The contribution of aviation to GDP is projected to rise from 1.4% in 1998 to around 2% by 2015, before stabilising around that level as the industry matures and passenger growth is assumed to slow. Once again the biggest increase is expected in the Eastern region, where the contribution is projected to rise from 1.6% of GDP in 1998 to 3.1% in 2030. All other regions, with the exception of Northern Ireland, are also projected to see some increase in the share of GDP contributed by aviation. · It is not just the direct contribution of aviation to regional economic growth that is important. Sectors seen as the main sources of economic growth, for example in regional economic strategies, are typically among the most dependent on aviation. · Good air transport links are one of the important factors in encouraging inward investment into particular parts of the UK, as well as helping retain inward investment and high value- added activities that may be footloose if competitive advantage is being threatened. Within the manufacturing sector, foreign-owned firms have historically been most important to investment in Scotland, the West Midlands, the North East and Wales. However, developing and improving good air transport links will be equally important for regions that have been less successful in the past at attracting inward investment, whether to help attract additional inward investment or to improve the prospects for indigenous investment. · More fundamentally, the aviation industry is part of the transport infrastructure on which many other parts of the economy depend, and the Part 1 national study revealed the role that improvements in transport infrastructure can have in boosting productivity growth across firms that can use it or that compete with other firms using it. We expect such effects to be strongest in those regions with the best links, both to other parts of the UK and to other parts of the world. 5 Introduction In November 1999 Oxford Economic Forecasting (OEF) issued a report on ‘The Contribution of the Aviation Industry to the UK Economy’. This report presents the results of follow-up work OEF has undertaken on the regional breakdown of that contribution. The rest of the report is organised as follows: · Chapter I looks at what aviation contributes to today’s regional economies. This includes both the direct contribution of the industry to employment and output in each region, and also the support the industry provides to employment in other sectors of the regions’ economies that depend on aviation. · Chapter II looks at the importance of aviation to economic growth in the regions. Once again it covers both the direct contribution aviation might make to employment and output, and also the wider contribution it can make to growth in the regions through its impact on other sectors. · Chapter III describes work OEF has carried out to build a model of the interaction of aviation with regional economies. The model incorporates elements both of OEF’s existing Regional Model1 (which has also been used to project forward the economic structure and growth in each region against which the contribution of aviation is measured) and of the model OEF built as part of the earlier report to assess the impact of aviation on the economy at the national level. It is designed to allow an assessment of the overall potential economic effect on each region of alternative scenarios for the development of the aviation industry that may imply different regional concentrations of growth in passenger movements. · Annex A contains the detailed results from which the summary tables in the report are drawn, while Annex B describes an example of the impact of different passenger numbers on the model built for scenario analysis. Although the final version of this report is being released in 2002, the majority of the work was carried out in the months following our first report, and the figures presented here reflect the situation at that time. More recently, there have been adverse short-term effects on aviation in the UK from the impact of last year’s outbreak of Foot & Mouth Disease on tourism and from the impact of the terrorist attacks of 11 September on confidence in flying. But these events do not affect the validity of the medium and long-term analysis in this report and our earlier work. 6 I. What Does Aviation Contribute to Today’s Regional Economies? Key points · In 1998, aviation directly provided 180,000 jobs in the UK, 0.8% of total employment.