The Economic Aspects of Airlines - Case Study Example

Table of Contents Introduction 2. Heathrow Airport and the recent expansion Economic aspects Social and Environmental aspects Political aspects Technological 3. Conclusions The Economics of Airlines and airport Introduction Heathrow Airport is London's largest airport. It commenced operations in 1946, with the first flight taking off on January 1st for Buenos Aires via Lisbon. The airport has four main terminals, with a fifth terminal being commissioned on 20th November 2001, recently completed.(Air Transport Intelligence). The volume of passenger traffic being handled by the airport has been steadily increasing, rising from 63,487 million to 68.069 as depicted graphically below: (Source: Air Transport Intelligence) The total revenues that have accrued from airport operations also reflect a steady increase over this five year period from 2003 to 2007, as shown in the table below1: Finance 2007 2006 2005 2004 2003 Currency USD USD USD USD USD Period start 1 Jan 2007 1 Apr 2006 1 Apr 2005 1 Apr 2004 1 Apr 2003 Period end 31 Dec 2007 31 Dec 2006 31 Mar 2006 31 Mar 2005 31 Mar 2004 Aeronautical Revenue 1,227.0 959.0 Total Revenue 2,486.3 2,422.3 1,912.7 1,987.3 1,683.7 Operating result 1,118.6 793.8 824.8 680.3 Additional Notes 2007 Unaudited.Change of accounting period and reporting currency. Operating result is EBITDA 2006 9 months result. Change of accounting period. Heathrow Airport and the recent expansion Economic aspects The expansion of Heathrow airport through the construction of Terminal 5 has been controversial. It was approved by the Government on the basis of figures that were provided by Oxford Economic Forecasting in two reports commissioned by the aviation industry, and which projected economic benefit to the UK of 5 billion pounds over a period of 70 years (BBC report). The benefits from the use of all existing runways before expansion was estimated to be 6.7 billion pounds, with costs being 1.9 billion pounds and net benefits being 4.9 billion pounds.(Dept of T, 2003). Estimated investments made into Heathrow were 3599 million in the last ten years, with projected investments over the next ten years being 6398 million, with a net economic contribution of 5 billion pounds to the economy(www.heathrowairport.com). However, with the expansion of Heathrow airport to include one additional terminal, the economic benefits were projected as follows: (Source: DT, 2003). In the graph above, Series 1 represents the total benefits of the construction, Series 2 represents the costs associated with the construction, while Series 3 represents the new benefits of the construction. The Government finally commissioned one new terminal at Heathrow airport, which has just become functional and this expansion was justified on the basis of the projected gains of 5 billion pounds. The arguments that have been advanced suggest that an expansion of Heathrow through the additional terminal will contribute to better management of passenger traffic and provide effective transportation with other European airports, which are emerging as attractive destinations (www.stopheathrowexpansion.com). But a Report on the Heathrow expansion questions whether it is really necessary and concludes that the competitiveness of the airport will not necessarily be impacted negatively without it (www.stopheathrowexpansion.com). Social and Environmental aspects The Department of Transport in 2000, produced forecasts for air traffic and according to this, there are likely to be 400 million passengers per annum by 2020.(Department of Transport, 1997). Most of these passengers are expected to pass through south east England. The construction of Terminal 5 at Heathrow Airport is geared towards catering to effectively to these increasing passenger volumes. The Government, in its report titled: The Future Development of Air Transport in the United Kingdom: South East A National Consultation- 2003, has also recognized that developing a sustainable airport policy requires a balance between the social and economic benefits of air travel and the environmental effects of development. From a social perspective, the expansion of Heathrow airport is controversial. As identified in Reports prepared by the department of Transport, the beneficial effects are spread out across society, while the detrimental effects have to be borne by a minority of the public that lives near the airports. They have to tolerate the high levels of noise, congestion of nearby roads and air quality problems. The Department of Transport has computed the rise in Carbon dioxide emissions combining data from the Department's own forecasts with the European Environment Agency's CIRINAIR methodology, which is used to derive estimates from the aviation fuel burnt by specific aircraft types up to 2030. This method had forecasted a steep rise in carbon dioxide emissions from 37.5 MtCO2 to 59 MtCO2 in 2030 (D.T report at pp 5). After 2030, the rate of emission is projected to slow down, partly because the constraints on capacity may restrict demand. However, such a steep rise in carbon dioxide emissions poses a great risk to the environment. In respect of Heathrow expansion, an additional factor that muse be considered is that the runway at the new terminal will be used to host the bigger Boeing airbus planes, which generate higher levels of pollution. Political aspects The Department of Transport has also assessed the economic benefits of expansion of Heathrow and the increased passenger traffic, using the following tools: (a) the Trip End Modelling program, which forecasts travel demands on a detailed geographical basis (b) WEBTAG, which is a collection of advice and guidance on modeling and appraisal and (c) The National Model, which is a detailed progress report on the impact of traffic growth that also provides progress reports on 10 year plans.(www.dft.gov.uk). Heathrow airport has undoubtedly brought economic benefits to south east UK, with Heathrow contributing substantially to making London one of the top financial centers in the world. (www.stopheathroexpansion.com). The Government supported the economic benefits of Heathrow expansion, on the basis of the net economic benefit of about 5 billion pounds forecasted over the next 70 years (www.nes.bbc.co.uk). But the Report it relied on, produced by Oxford Economic Forecasting, was funded at least partly, by BAA and the aircraft industry, for whom there is an inherent advantage to be gained from the potential increase in the volume of flights and the possibility of opening up new routes and more flights. These economic findings have been contested in a report Ce Delft, an independent research organization, on the basis that the report is flawed in overestimating the level of suppressed demand that would be released by the Heathrow expansion. Technological Aspect Another projected benefit of the Heathrow expansion was the improved technological efficiency which was to have ensued. One of the state of the art facilities which were touted at Heathrow's terminal 5 were the self service check in kiosks. 80 to 90% of check in facilities at Terminal 5 is such self service kiosks which are available plentifully throughout the airport. These were designed to remove long frustrating queues at check-in desks, and reduce his costs of using the manual check-in process.(www.01.ibm.com). Additionally, super speed baggage escalators were constructed and the state of the art baggage system which can handle 12,000 bags an hour was designed to streamline operations and enable passengers to check in and recover their baggage speedily (news.bbc.co.uk:March 30). According to Paul Mijksenaar(news.bbc.co.uk: March 12), one of the signs of a good airport is proper orientation facilities. Passengers should be able to find their way using the signs which are posted. The signs should be color coded and use pictorials so that people speaking different languages can all understand how the airports are constructed and how its facilities are to be used. In the case of Terminal 5, the large curved roof is a major feature in its design which is geared to direct passengers efficiently to wherever they want to go. Large, clearly visible signs, which are color coded have been provided for the ease of passengers together with an abundance of retail areas, all of which were geared to facilitate the passenger experience. The reality of operations at Terminal 5 has proved to be somewhat different in practice. The super efficient, self service kiosks and check-in desks were all closed at 4.00 am GMT, when passengers first began arriving. As a result, they had to form long queues. (news.bbc.co.uk:March) .Baggage handlers' IDs were not recognized by the baggage system and could not be logged on to the handling system, as a result of such a technical glitch, flights had to take off without baggage. The new sophisticated baggage handling system got clogged up due to baggage handlers' failure to remove the bags quickly enough. One of the biggest problems experienced was in people and staff finding their way through the vast terminal. There were also delays in arranging parking, getting staff members through security clearances and getting them familiarized with their surroundings, all of which added to the delays in the handling of the baggage. The orientation at Heathrow' terminal 5 also thus appeared to have fared poorly, since staff members also found it difficult to orient themselves and find parking and clear security clearance. Hence, the very delays that the new terminal was supposed to address through improved technology didn't fare so well in practice. Conclusions On the basis of the above, it may be concluded that the functioning of an airport is a combination of many complex factors. Facilitating passenger experience is an important aspect of airport design, mechanics and economics; however this cannot be at the expense of social and environmental aspects. The case of Terminal 5 illustrates how airport economics is impacted by other issues including political and social concerns. While the benefits of an airport stream out to society, the adverse impacts are borne by a few people who live near the airport areas. The use of the new Boeing jumbo jets is a further cause for concerns where pollution is concerned. These aspects impact upon all airports, where the economic benefits of tourism have to be balanced against social and environmental issues. In the case of Heathrow airport, it must be noted that the airport was functioning as a viable economic unit before the expansion. While there were problems of congestion and delays at the airport, these may be attributed to the large numbers of local flights - 60 flights to Paris stream out of Heathrow every day (stopheathrowexpansion.com). Moreover, most of the passengers are transfer passengers, who do not contribute to the economy, but only use Heathrow as a hub airport. It appears that better efficiency could have been achieved by streamlining the airport operations accordingly. The proposal for terminal 5 construction has been controversial because it has been politically motivated, and the economic benefits have not been substantiated economically. Moreover, when balancing the question of facilities or passengers against the enormous increase in carbon dioxide emissions, the Terminal is even more controversial. The technology which was included to eliminate problems of delays does not appear to have materialized so far. Thus, in conclusion, Terminal 5 is an example of how airport economics can be adversely impacted through a failure to take all factors into consideration. References 1. www.rati.com. 2008. "Air Transport Intelligence Report. History, Profile News, finance", Retrieved March 26, 2008 from: http://www.rati.com/frameset/frameset_f.asp'target=../news/news.asp 2. www.bbc.co.uk. 2008. "At a glance: Heathrow expansion", Retrieved March 29, 2008 from: http://news.bbc.co.uk/2/hi/uk_news/politics/7107415.stm 3. British Airways: Self service check in improves customer service, gives competitive advantage", Retrieved March 30, 2008 from: http://www.ibm.com/software/success/cssdb.nsf/cs/BTHD7BCL5J'OpenDocument&Site=gicss67trav&cty=en_us 4. The Economic Benefits of Heathrow expansion: An assessment. Retrieved March 28, 2008 from: http://stopheathrowexpansion.com/file_download/3/Economic+4+pager.pdf 5. Ce Delft . 2008. "The Economic of Heathrow Expansion", Retrieved March 29, 2008 from: http://www.hacan.org.uk/resources/reports/4504.final.report.pdf 6. www.dft.gov.uk. 2008. The National Transport Model: Summary. Retrieved March 27, 2008 from: http://www.dft.gov.uk/pgr/economics/ntm/pdfntmoverview 7. Department of Transport. 1997. "Air traffic forecasts for the United Kingdom 1997", Retrieved March 26, 2008 from: http://www.dft.gov.uk/pgr/aviation/atf/airtrafficforecastsfortheuni2845'page=11 8. Department of Transport, 2003. "The future development of air transport in the United Kingdom: South east", Retrieved March 26, 2008 from: http://www.pleiade.org/projectzone/LOX/pdf/The_Future_Development_of_Air_Transport_in_the_United_Kingdom_South_East.pdf 9. www.heathrowairport.com. 2008. Facts and Figures. Retrieved March 29, 2008 from: http://www.heathrowairport.com/portal/page/General/Heathrow%5EGeneral%5Our+business+and+community%5EMedia+centre%5EFacts+and+figures/3cff846 3bba2010VgnVCM100000147e120a____/448c6a4c7f1b0010VgnVCM20000037e120a____/ 10. UK air Passenger demand and carbon dioxide forecasts. 2008. Retrieved March 27, 2008 from: http://www.dft.gov.uk/pgr/aviation/environmentalissues/ukairdemandandco2forecasts/airpassdemandfullreport.pdf 11. www.bbc.co.uk. 2008. What did go wrong at terminal 5'; BBC News Report. March 30, 2008. Retrieved March 30, 2008 from: http://news.bbc.co.uk/2/hi/uk_news/7318568.stm Appendix A Source:http://maps.msn.com/(4y0kgufl3jx5xn2mqjej2045)/map.aspx'src=FP&lats1=50.4573&lons1=4.46343&alts1=215®n1=2&name=A%c3%a9roport+Charleroi-Bruxelles+%5bCharleroi+Airport%5d+(airport)%2c+Belgium Appendix B Source: Bureau of Transportation Statistics web site. Appendix C Source: Bureau of Transportation Statistics web site. Bibliography 1. Doganis, Rigas. 2002. 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