Airport economics: how much value does a hub really hold?
From London to Sydney, the primary argument for airport expansion is always economic, usually through increased number of jobs and billions pumped into the regional economy. But how does a hub airport rake in money, and how does it trickle down into the wider economy?
The aviation sector is one of the biggest drivers to the global economy, supporting nearly 63 million jobs and providing $2.7 trillion in GDP.
Airports in particular have long been recognized as key contributors to the region they are positioned in, supporting a flurry of direct and indirect jobs, not to mention tourism, trade and business.
In 2009, Oxford Economics found that for every ten jobs directly supported by the UK aviation industry, another 26 are supported indirectly in the supply chain. Research done by Massachusetts Institute of Technology (MIT) in 2013 also found that over 50% of Fortune 500 headquarters are located within ten miles of a hub airport, and 84% of headquarters located within just 20 miles.
Across the world, entire countries can rely on the activity of airports as one of their main sources of income – the Maldives, for example, relies on aviation-enabled tourism to support 42% of its economic output.
Another way to look at it is to analyze what happens when the system is disrupted. In 2010, when Iceland’s Eyjafjallajökull volcano erupted, the chaos that followed heavily impacted the country’s aviation services.
During that period, around 10 million passengers were disrupted and over 100,000 flights cancelled, which amounted to a loss of $5bn in Iceland’s lost GDP over the course of just one month.
The hub airport as a prized possession
Although all airports will play their part in attracting employment, investment, development and business to their location, not all are created equal.
Hub airports are the buzzwords of the industry. These operate around the ‘hub and spoke’ way of modelling a network, offering a lot of direct journeys from one single central point. They aggregate passenger demand from the entire area, offering a multitude of options equally for holidaymakers, business passengers and freight trade.
Some of the world’s best-known hub airports include Singapore Changi, Dubai International, Madrid Barajas, Amsterdam Schiphol, Paris Charles De Gaulle and Frankfurt Airport.
In Europe, the combined direct, indirect and induced employment generated by airports is estimated at nearly 4.5 million jobs, earning a total of €146.9bn in income through wages, salaries, bonuses and other remuneration.
"[Hub airports] operate around the ‘hub and spoke’ way of modelling a network."
A study compiled for ACI Europe in 2015 splits their contribution into direct, indirect, induced and catalytic economic impact, all revolving around the number and types of jobs they support. The direct jobs, such as airport operators, air traffic control, ground handlers, security, immigration, customs and aircraft maintenance, are also accompanied by wholesalers, oil refining activities for jet fuel, companies providing accounting and legal services to airlines, travel agents and so on. Overall, the study found that a 10% increase in connectivity was associated with an increase in GDP per capita of 0.5%.
While the study highlights that airports cannot be solely credited with expanding the European economy, it does conclude by saying that “without the diverse and affordable connectivity supported by these airports, the economies of these countries would not be as large, affluent or diverse as they are today.”
A look at the world’s biggest hubs
The world’s best known and biggest hub airport is undoubtedly Dubai International (DXB), which welcomed 51 million passengers during the first seven months of the year, a 6.2% increase compared to last year.
Professor John Kasarda of University of North Carolina’s Business School described Dubai as a “global aviation hub with a city-state attached”.
Analysis by the International Air Transport Association (IATA) helps back that argument: DXB opens up foreign markets to exports from the United Arab Emirates (UAE), lowers transport costs, particularly over long distances, and increases the flexibility of labor supply. It is estimated that a 10% improvement in connectivity relative to GDP would see a $444m increase per year for the UAE economy.
Australia’s Sydney Airport offers a breakdown of the airport’s contribution as well: $10bn from the activities of businesses operating on the airport grounds and $20bn from tourism and freight amounted to 2.0% of Australia’s GDP.
In the UK, Birmingham Airport recently revealed that West Midland’s economy received an investment boost thanks to initiatives by the airport and Indian airlines to forge stronger links with India.
Birmingham recognized that 10% of the region’s population have links to Asia, and as a result launched a number of initiatives to attract business and leisure visitors from India to the city. Over a few years, this has created an additional 4,000 local jobs and £174m input to the local economy per year.
A case study: Heathrow’s airport expansion
In the UK, Heathrow’s planned expansion with a third runway can serve as a good case study on how the promised financial benefits can sometimes be shaky, not to mention widely disputed by the community surrounding it.
At present, Heathrow Airport takes more than 75 million passengers to 194 destinations in 82 countries around the world, as well as shifting 1.54 million metric tons in cargo volume. It therefore acts as the UK’s only true hub airport and, according to its operator, currently brings in up to £35bn in total economic benefits.
Now the airport’s campaign to build a third runway comes with promises of much bigger gains. One of the highest figures coming from Heathrow’s corner is £211bn in region benefits across the UK by 2050, as well as 179,800 new jobs.
Economic growth by region shows that this would be split in £58bn for London and the South East, and £64bn for the rest of the country. Moreover, Heathrow’s expansion promised to “revolutionize UK construction industry” by pushing growth in the country’s off-site construction sector.
However, campaigners have long challenged these figures.
“This figure of £211bn in economic benefits is just utterly fanciful and it's absurd,” says Robert Barnstone, campaign coordinator for Stop Heathrow Expansion. “It's misleading and wrong for them to quote that figure.
“The Department of Transport (DfT) says that the maximum economic benefits for the wider economy would be £61bn over 60 years. And that sounds like a lot, but spread over 60 years, is it going to benefit as many people as it said?”
"Heathrow Airport takes more than 75 million passengers to 194 destinations."
Barnstone’s disbelief lies partially in the airport’s track record so far: “When Terminal 5 opened at Heathrow in 2008, communities around the airport and across the country were promised increased jobs, increased benefits, when actually Heathrow employs less people now that it did when Terminal 5 opened.”
“And we believe that when you take into account the dis-benefits, such as the illegal levels of air pollution, and the fact that that a quarter of a million people would experience aircraft noise, actually Heathrow expansion would have a negative effect,” he adds.
Similarly, Peter Willan from Richmond Heathrow Campaign takes issue with the number of international-to-international (I-I) transfers that the third runway would support.
“[Heathrow] has the facilities to act like a hub and it is aggregating passengers and transfers. But whether those transfers have any economic value to the UK, one has to be slightly careful.
“In fact, of all the 18.5 million international transfers [in 2011], 98% were on the higher frequency routes. These are supporting a relatively small number of business passengers, particularly ones on the long-haul – it just doesn't make any economic sense.”
The Airports Commission estimated in 2015 that, if a third runway is indeed delivered, I-I transfers would represent 22.1% of the total number of annual passengers, following the carbon capped scenario, and 16.7% in the carbon traded case.
Are hubs secure in the long-run?
Regardless of the final decision on Heathrow, the fact remains that almost a decade after Boeing launched its 787 Dreamliner aircraft, which at the time was dubbed the ‘hub-buster’, hub airports are thriving today more than ever. And going forwards, mobility and connectivity are only predicted to soar globally, along with the business and growth they automatically support.
But at the same time, the ways in which goods travel across borders, as well as the way people travel for leisure and choose to conduct business, are experiencing dramatic shifts.
Digital innovation promises to intrinsically change every sector and going forward, the Global Trade Review argues that “new technologies create fresh products and business models that can be adapted for different markets, undermining the importance of location.”
Looking ahead to 2050 and beyond, 3D printing is primed to be a game-changer for the supply chain, bringing cheap production of many goods closer to home. At the same time, a huge part of the remaining trade could start relying even more on shipping, driven by a combination of cheaper transit costs, larger vessels and expanded shipping lanes.
"Worldwide, flights produced 781 million tons of CO2 in 2015."
When it comes to emissions, aviation is one of the prime culprits: worldwide, flights produced 781 million tons of CO2 in 2015, compared with just over 36 billion tons produced globally by humans, according to the Air Transport Action Group (ATAG). Around 80% of the CO2 emissions from aviation were emitted from flights over 1,500 km long, for which there is no practical alternative yet.
At the same time, the industry does seem to clean up its act, with alternative fuels, particularly biofuels identified as excellent sources to help achieve industry targets. In addition, many airports around the world are initiating schemes for emission-free ground handling.
Airport hubs face challenges at home too, most of the time from those living nearby, who either live with the disruption of constant aircraft noise, or under the threat of relocating due to another expansion.
Amidst the challenges, it does look like one of the best ways for hubs to protect their position in the long-term is for them to act like good neighbors who heavily subsidise the communities they reside in.