The Economic Contribution of the Aviation Industry in the UK

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Oxford Economic Forecasting
121, St Aldates, Oxford, OX1 1HB
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: www.oef.com



Oxford
Economic
Forecasting










The Economic Contribution of the
Aviation Industry in the UK







October 2006







2
KEY POINTS

• The aviation industry directly contributed £11.4 billion to UK GDP in 2004 and
employed 186,000 people.
• Over 520,000 jobs in the UK in total depend on the aviation industry.
• Visitors arriving by air contribute over £12 billion a year to the UK tourism
industry, generating a further 170,000 jobs.
• 55% by value of the UK’s manufactured exports to countries outside the EU are
transported by air.
• Air services are particularly important for UK trade with fast-growing emerging
economies, such as China, and for trade in high value goods and services.
• Air services are also very important for the growth sectors on which the UK’s
future economic success will depend, such as high-tech companies and financial
& business services.
• Air services help to improve the competitiveness of almost all aspects of
companies’ operations, including sales, logistics and inventory management,
production and customer support.
• By expanding the market in which firms operate, air services also act as a spur to
innovation, increased sales and profits, and improved efficiency.
• A quarter of companies report that access to air services is important in
determining where they locate their operations in the UK.
• Implementing the proposals in the government’s airports White Paper would
generate substantial wider economic benefits from improvements in productivity
throughout the economy that would result from increased business use of air
services.
• We estimate that the wider economic benefits of full implementation of the White
Paper runway proposals would generate additional GDP of over £13 billion a year
in today’s prices by 2030, with a Net Present Value of £81 billion – equivalent to
over £1,300 per head of the population.
• Congestion costs have been rising over the past decade as passenger numbers
have grown more rapidly than the capacity of the air transport system to handle
them. Costs to airlines and passengers from congestion are estimated to have
been £1.7 billion in 2005, and could exceed £5 billion a year in today’s prices by
2015 if current trends continue.
• The economic benefits of the White Paper runway proposals remain substantial
even after allowance is made for the climate change costs of additional
emissions.


3
The Economic Contribution of the
Aviation Industry in the UK



EXECUTIVE SUMMARY


1 INTRODUCTION............................................................................................................. 9
1.1 Purpose.................................................................................................................... 9
1.2 Our approach............................................................................................................ 9
1.3 Structure of report..................................................................................................... 9
2 THE SIZE AND SCOPE OF THE AVIATION INDUSTRY ............................................ 11
2.1 Introduction............................................................................................................. 11
2.2 Output or Value-added........................................................................................... 12
2.3 Employment............................................................................................................ 13
2.4 Productivity............................................................................................................. 16
2.5 Investment.............................................................................................................. 17
2.6 Profitability & Taxes................................................................................................ 19
2.7 Balance of Payments.............................................................................................. 20
2.8 Aerospace .............................................................................................................. 21
2.9 Social impacts ........................................................................................................ 22
3 HOW AVIATION SUPPORTS TOURISM..................................................................... 24
3.1 The importance of tourism...................................................................................... 24
3.2 Visits to the UK by air ............................................................................................. 25
3.3 Visits from the UK by air......................................................................................... 27
3.4 Tourism in the future............................................................................................... 30
4 AVIATION SUPPORTS TRADE ................................................................................... 32
4.1 The benefits of trade............................................................................................... 32
4.2 Air freight................................................................................................................ 33
4.3 The importance of aviation for exports ................................................................... 34
4.4 The importance of aviation for imports ................................................................... 38
4.5 The future of UK trade............................................................................................ 40
5 AVIATION SUPPORTS INVESTMENT ........................................................................ 41
5.1 Factors affecting where companies invest ............................................................. 41
5.2 How much difference do good air transport services make?.................................. 43
5.3 The impact of air services on location within the UK.............................................. 46
6 HOW AVIATION SUPPORTS GROWTH SECTORS................................................... 49
6.1 Growth sectors ....................................................................................................... 49
6.2 Growth sectors and aviation................................................................................... 50
6.3 The City of London................................................................................................. 53
7 THE IMPORTANCE OF CONNECTIVITY .................................................................... 55
7.1 Introduction............................................................................................................. 55
7.2 The importance of hub airports............................................................................... 55
7.3 The importance of regional airports........................................................................ 57
7.4 The impact of interliners ......................................................................................... 58


4
8 AVIATION SUPPORTS BUSINESS EFFICIENCY AND ECONOMIC GROWTH........ 61
8.1 How aviation raises productivity............................................................................. 61
8.2 How firms would be affected by a deterioration of air services............................... 64
8.3 Estimating the impact on productivity econometrically........................................... 65
8.4 Results.................................................................................................................... 67
8.5 Other results........................................................................................................... 67
9 QUANTIFYING THE OVERALL ECONOMIC IMPACT OF AIRPORT DEVELOPMENT
69
9.1 Overall approach.................................................................................................... 69
(a) Re-estimation...................................................................................................... 69
(b) Updating the model ............................................................................................. 70
(c) Defining the scenarios ........................................................................................ 70
(d) Analysing the results........................................................................................... 70
9.2 Impact of mixed-mode operation at Heathrow........................................................ 71
(a) Passenger assumptions...................................................................................... 71
(b) Results................................................................................................................ 71
9.3 Impact of a 3
rd
Runway at Heathrow...................................................................... 72
(a) Passenger assumptions...................................................................................... 72
(b) Results................................................................................................................ 72
9.4 Impact of Full Implementation of White Paper Runway Proposals......................... 73
(a) Passenger assumptions...................................................................................... 73
(b) Results................................................................................................................ 73
9.5 Conclusions............................................................................................................ 74
10 THE COSTS OF CONGESTION IN UK AVIATION.................................................. 76
10.1 Congestion in UK aviation...................................................................................... 76
10.2 Costs for airlines..................................................................................................... 78
10.3 Costs for passengers.............................................................................................. 79
10.4 Wider impacts of congestion .................................................................................. 81
10.5 Congestion costs in the future................................................................................ 81
11 CLIMATE CHANGE COSTS .................................................................................... 83
11.1 Introduction............................................................................................................. 83
11.2 Potential impact on climate change........................................................................ 84
11.3 Impact on climate change of alternative development scenarios........................... 85
ANNEX A: OUR APPROACH TO THE STUDY................................................................... 87
(a) Survey................................................................................................................. 87
(b) Case studies ....................................................................................................... 88
(c) Model .................................................................................................................. 88
ANNEX B: SECTORAL USE OF AIR SERVICES............................................................... 92
ANNEX C: ECONOMETRIC TESTS.................................................................................... 94

ANNEX D: QUESTIONNAIRE AND SURVEY RESULTS



5
EXECUTIVE SUMMARY

Aviation is a substantial UK industry in its own right. But its key contribution to the UK
economy is in helping other sectors to operate more efficiently and to compete in the global
economy, supporting productivity and economic growth across UK plc as a whole.

Aviation is a substantial industry
• The aviation industry generated £11.4 billion value-added in 2004 – in other words, it
contributed £11.4 billion to GDP, 1.1% of the overall economy.
• It directly employed 186,000 people (full-time equivalents) in 2004. And it helped to
support over 520,000 jobs in total including those employed in its supply chain and in
travel agents, and the jobs dependent on the spending of its employees.
• The industry generates much higher output per worker than the UK average, reflecting
high levels of investment, thereby contributing to the government’s aim of a high
productivity, high income economy.
• On a conservative estimate, the industry contributed £3.6 billion to the Exchequer in
2004/05.
Aviation supports tourism…
• The tourist industry makes a large and growing contribution to the UK economy.
• Nearly three-quarters of international visitors to the UK arrive by air. Spending by
visitors who arrive by air is equivalent to 1.1% of GDP and generates around 170,000
jobs in the UK.
• Air services also allow UK tourists to enjoy a much wider range of overseas holidays
than would otherwise be accessible.
• Increased air services capacity is likely to be needed if the government is to achieve its
objective for the tourism industry to grow by a third by 2010.
…and trade
• International trade promotes growth and raises living standards by allowing countries to
specialise in producing the goods and services for which they have a comparative
advantage.
• The aviation industry plays a central role in fostering UK trade. 55% of the UK’s exports
of manufactured goods to countries outside the EU are transported by air.
• Many key imports depend on air services too. More than 60% of imports of machinery,
mechanical appliances and electric equipment from outside the EU are carried by air.
• Passenger services also play an important role in supporting trade - nearly two-thirds of
companies report that passenger services are either vital or very important for sales and
marketing.
• Air services are particularly important for the UK’s trade with the fastest-growing regions
of the world economy, such as India and China, and over time are likely to become even
more important to the UK’s ability to compete in the world economy.


6

Aviation influences where companies invest…
• Better air transport services encourage more businesses to locate in an area as well as
affecting investment decisions by existing companies.
• A quarter of companies report that access to air services is an important factor in
influencing where they locate their operations within the UK
• Nearly one in ten companies report that the absence of good air transport links has
affected their organisation’s decisions to invest in the UK. Of these, 30% chose not to
make the investment in the UK.
• In addition, 10% of companies say they would relocate some operations from the UK if
next day international express delivery services – which rely on night flights from
selected UK airports – ceased to be available.
…and is particularly important for key growth sectors
• The government recognises “from experience that the best way – indeed the only
effective way – to respond to globalisation is to build a strong, modern knowledge
economy
1
.”
• Many of the growth sectors on which the future of the UK economy depends are
particularly dependent on air services for competing effectively in the global economy.
• London’s successful cluster of international financial services is a key example of a
knowledge-based sector that is heavily reliant on aviation. But high-tech sectors within
manufacturing also report a much higher proportion of sales are dependent on air
services than other manufacturers.
• The UK economy is therefore set to become increasingly dependent on aviation as the
structure of the economy evolves.
Users depend on network connectivity
• Aviation users depend on a network of services providing connectivity to a wide range of
destinations.
• Heathrow scores well on most measures of connectivity. But the range of destinations
served has been narrowing as the need to meet demand on heavily used routes has
crowded out less profitable routes with more limited demand.
• Nine out of every ten companies in London or counties close to Heathrow regard the
airport as either vital or very important to their organisations.
• Elsewhere in the UK, Heathrow is still considered to be very important by more than 40%
of companies, although regional airports are the airport of choice for many when feasible
– they are used very frequently for direct short-haul flights by half of all companies.
• Passengers transferring between flights at a hub airport increase the viability of services
that benefit direct passengers too, allowing a greater frequency and range of services.

1
‘Creating Wealth from Knowledge’, DTI November 2005.


7
Aviation supports business efficiency
• Air services help to improve the competitiveness of almost all aspects of companies’
operations, including sales, logistics and inventory management, production and
customer support.
• By expanding the size of the market that can be served, aviation acts as a spur to
innovation, increases sales and profits, allows more scope to exploit economies of scale
and enhances competition.
• Earlier econometric work
2
on the impact of business use of air services on productivity in
the rest of the economy has been updated with new data and refinements to the
estimation methodology. Unlike the previous study, a distinct effect on productivity from
changes in air transport usage is now found rather than just an effect from transport
usage in aggregate.
• The results imply that if growth in business use of aviation services (both passenger and
freight) was held back by 1 percentage point a year over a thirty year period there would
be loss in potential GDP of 1.8% a year by the end of the period.
Airport development would have wider GDP benefits…
• Our UK Industry-Aviation model allows us to use the results of the relationship we have
estimated between business aviation use and the overall level of productivity in the
economy in order to estimate the wider economic benefits of different scenarios for
future airport development.
• Our results should be regarded primarily as illustrative of the possible wider economic
benefits, since there is inevitably considerable uncertainty over some of the assumptions
made – the model is particularly sensitive to assumptions about the scale of business
use of aviation in the different scenarios.
• We estimate that mixed-mode operation at Heathrow would generate wider economic
benefits of £2.5 billion additional GDP a year in today’s prices by 2015 (0.2% of GDP).
The wider economic benefits generated would have a total Net Present Value over the
period to 2030 of £35 billion.
• A third runway at Heathrow would generate wider economic benefits estimated at £7
billion additional GDP a year in today’s prices by 2030 (0.3% of GDP) with a total Net
Present Value over the next 25 years of £27 billion. This is lower than the NPV
calculated for mixed mode operation, reflecting the later date at which a new runway
would be available and GDP benefits start to accrue. By 2030, though, the annual GDP
benefits are nearly twice those of mixed mode operation – estimating NPVs over a
longer period than to 2030 would therefore alter the comparison.
• Full implementation of the White Paper runway proposals would generate wider
economic benefits of over £13 billion additional GDP a year in today’s prices by 2030
(0.6% of GDP).
• The Net Present Value of the wider benefits from the full White Paper runway proposals
is estimated to be £81 billion – equivalent to over £1,300 per person in the UK.



2
‘The Contribution of the Aviation Industry to the UK Economy’, OEF 1999 (available at
www.oef.com/AviationUK.html).


8
… and reduce congestion costs
• Congestion imposes costs on both airlines - increasing the cost of providing planned
services - and users, whether through the extra time taken to pass through airports or
the time wasted when flights do not leave or arrive on time.
• Congestion costs have been rising over the past decade as passenger numbers have
grown more rapidly than the capacity of the air transport system to handle them. Our
estimates show congestion costs (to both airlines and passengers) have more or less
tripled from nearly £600 million in today’s prices a decade ago to £1.7 billion in 2005.
• If these trends continue, congestion costs could exceed £5 billion a year in today’s prices
by 2015, and approach £20 billion a year by 2030.
• There are a range of possible investments – eg introduction of mixed mode operations,
improvements in air traffic control, new runway and terminal development – that would
reduce congestion, with substantial potential benefits to the economy.
Environmental impacts are smaller than GDP benefits
• In addition to congestion, there are three other main environmental impacts arising from
aviation: noise, local air quality, and climate, of which the last is by far the most important
in quantifiable terms.
• The combined cost of CO
2
and the potential non-CO
2
climate impacts from UK aviation is
estimated to have amounted in aggregate to £1.4 billion in 2000, and could reach £4
billion a year in today’s prices by 2030.
• The growth in air services in the alternative scenarios for runway development we have
analysed would have implications for emissions, with an estimated cost ranging from an
additional £100 million a year for mixed mode operation at Heathrow to an additional
£700 million a year in today’s prices by 2030 for full implementation of the White Paper
proposals.
• But the economic benefits of the White Paper runway proposals remain substantial even
after allowance is made for the environmental cost of additional emissions.


9
1 Introduction
1.1 Purpose
Oxford Economic Forecasting was commissioned by a range of organisations from
different parts of the aviation industry, together with DfT and VisitBritain, and working with
the CBI, to update its 1999 study
3
on the economic contribution of the aviation industry in
the UK, and to extend the analysis in a number of ways. This study therefore builds on
our 1999 report and on a number of related studies undertaken since then to look in
particular at the so-called ‘catalytic’ impacts of the aviation industry in more detail – ie the
importance of the aviation industry in helping other sectors to operate more efficiently
and to compete in the global economy, supporting growth across the UK economy as a
whole. We are grateful for comments and assistance in putting the report together from
several sources, but the views and analysis presented in the report remain those of OEF
rather than those of the sponsoring organisations.
The opportunity to update and extend our analysis is timely for several reasons. First,
the government is planning a progress report on the implementation of proposals
contained in the Aviation White Paper, three years after it was produced. Second, the
aviation industry has experienced considerable turmoil and change in the past few years.
Third, a team under Sir Rod Eddington has been tasked with looking at the issue of the
impact of the transport infrastructure on productivity and economic growth more widely,
and our earlier study found that aviation contributes substantially to that impact. Finally,
a variety of questions were raised in response to our 1999 study, and this update
provides the opportunity to clarify and expand a number of key points.
1.2 Our approach
The current study reinforces the conclusions of the 1999 study about the size and
importance of the aviation industry in the UK. In doing this, part of the analysis draws on
existing datasets that contain relevant information on the aviation industry and on
previous studies of the industry. The main developments in the analysis have been in
looking more closely at the impact of the industry on productivity and growth. In order to
get a better understanding of the ways and the extent to which other sectors of the
economy use and depend on aviation, we have undertaken both an extensive survey of
UK companies and more detailed case studies with a variety of organisations. And as in
our earlier study we have used econometric evidence of the relationship between air
transport usage and productivity in the wider economy in order to model the potential
impact of alternative scenarios for runway development in the UK on overall economic
performance.
Annex A contains more information on our approach to the study, including both the
business survey we conducted and the model used for the scenario analysis.
1.3 Structure of report
The remainder of this report is structured as follows:

3
‘The Contribution of the Aviation Industry to the UK Economy’, OEF 1999 (available at
www.oef.com/AviationUK.html).


10
• Chapter 2 looks at what aviation contributes to today’s economy in terms of
employment, output, investment, government finances, the balance of payments and
social impacts.
• Chapter 3 discusses the impact of aviation in supporting tourism, both bringing
foreign tourists into the UK and enabling UK residents to visit a wider range of
destinations abroad;
• Chapter 4 covers the role of air services in supporting trade;
• Chapter 5 focuses on the impact of aviation in affecting company location and
investment decisions;
• Chapter 6 looks specifically at the importance of aviation for sectors that are likely to
be key to generating future growth in the UK economy;
• Chapter 7 discusses the importance of connectivity and the respective roles of hub
and regional airports;
• Chapter 8 looks at evidence of the impact of aviation on productivity in the rest of the
economy, including both survey and econometric evidence;
• Chapter 9 provides some quantification of the potential overall economic impact of
airport development by analysing alternative scenarios using our UK Industry-Aviation
Model;
• Chapter 10 discusses the costs of congestion in UK aviation;
• Finally, Chapter 11 covers aspects of the environmental impact of airport
development, including the cost of carbon emissions associated with additional air
traffic.
Some detailed tables have been included as Annexes to the report to avoid cluttering the
main chapters, while the final Annex contains the questionnaire used in our survey and a
summary of the answers to each question.



11
2 The Size and Scope of the Aviation Industry

2.1 Introduction
The most important contribution that the aviation industry makes to the UK economy is as
a facilitator of growth for the economy as a whole. This role is discussed in detail in this
report. However, aviation is also an important industry in its own right and so this chapter
looks at its overall size and significance. In aggregate, the results support our previous
research about the contribution of aviation to the UK economy, despite the turmoil and
change that the industry has been through since then. Indeed, the industry has emerged
from a very difficult period significantly more productive than before, with many more
passengers handled by a similar number of staff.

The aviation industry is defined as activities that are directly dependent upon transporting
people and goods by air to, from or within the UK. This covers airline and airport
operations and includes scheduled and charter flights for passengers and freight, general
aviation, airport maintenance, air traffic control and regulation, and activities directly
serving air passengers, such as check-in, baggage-handling, and on-site retailing and
catering facilities. Not all of these activities necessarily take place at an airport – for
example, some airlines have head office functions or ticketing centres at other locations.
4


This definition of the aviation industry does not directly correspond to any definition in
official UK statistics. The activities of airlines are covered under the Standard Industrial
Classification heading division 62, called “air transport”. Similarly the activities of airport
operators, ground service personnel and air traffic control form SIC subclass 63.23,
called “other supporting air transport activities”. However, it is not possible to identify
separately from the official statistics activities such as air cargo handling, retailing,
catering and hotels at airports and surface transport links to airports. We have therefore
used a range of sources to provide best estimates of these.

4
This is the same definition as used in our 1999 report.
Key points
• The aviation industry generated £11.4 billion value-added in 2004, 1.1% of the
overall economy.
• It directly employed 186,000 people (full-time equivalents) in 2004, and helped
to support over 520,000 jobs in total including those employed in its supply
chain and in travel agents, and the jobs dependent on the spending of its
employees.
• The industry generates much higher output per worker than the UK average,
reflecting high levels of investment, thereby contributing to the government’s
aim of a high productivity, high income economy.
• On a conservative estimate, the industry contributed £3.6 billion to the
Exchequer in 2004/05.


12
2.2 Output or Value-added
As the world economy becomes increasingly “global”, the contribution of the aviation
industry to the UK’s transport infrastructure continues to grow in importance. In 2004 it
handled 210 million passengers, of which around 35 million were business passengers.
And it transported around 2.5 million tonnes of freight. Freight carried included an
estimated £63 billion of UK exports in 2005, around 30% of all UK exports by value, and
£60 billion of imports (about 22% of the total). Passenger numbers have grown by over
30% since 1998 (ie the data in our previous report), with very rapid growth in travel on
low-cost airlines in particular.

The aviation industry represents a substantial part of the UK economy. However,
calculating the exact size of the contribution to GDP is complicated by the fact that the
National Accounts does not include a category that corresponds to the aviation industry
as a whole.

There are three elements to our calculation of the contribution of aviation to GDP
5
:

• The output of airlines (ie SIC division 62) for 2003 is officially put at £5.4 billion in
current prices and at £5.6 billion in 2002 prices. An estimate of the current price
figure for 2004 can be made by using the returns to the Annual Business Inquiry
(ABI), the main survey used to calculate the GDP figures. This suggests that value
added in 2004 was £6.5 billion in current prices. Separately available figures put the
level of real output at £6 billion in real terms.
6

• National accounts estimates of value added for air transport supporting activities are
not available. However, ABI figures are available and these suggest that value
added in 2004 was £3.4 billion in current prices and £3.1 billion in real terms.
• We assume that value-added per employee in the rest of the aviation industry
(covering employees in areas such as retail and catering concessions, or in hotels on
airports) is equal to the value-added per employee in the national distribution, hotels
and catering sector. This implies that value-added in this area was equal in 2004 to
£1.5 billion in current prices or £1.4 billion in real terms.

Putting these figures together implies that total value-added by the aviation industry in
2004 was £11.4 billion in current prices
7
or £10.6 billion in real terms. This is equivalent
to around 1.1% of GDP (Table 2.1).

It is worth noting that the calculation of the value-added of airlines in current prices has
been based on official National Account statistics, which show little or no increase in
value-added over the period 1998-2003. In contrast, other sources such as the ABI, the
main original source for National Accounts data, show a substantial increase in both

5
GDP is a measure of “value-added”, that is to say it is the value of output net of the goods and services
used up during the production process. All the numbers given here are measures of “value-added”.
6
All references to real terms refer to 2002 prices unless otherwise stated, ie the National Accounts reference
year when this analysis was carried out (although this has since been moved on to 2003 under ONS’s policy
of annual changes to the reference year).
7
The estimate of the aviation industry’s value-added for 1998 is about £1 billion pounds lower in current
prices than the estimate published in our 1999 report. About a third of this is explained by lower estimates
for air transport and other supporting activities than in the previous figures. These changes are due to new
and more accurate figures now being available to ONS. The other two thirds is due to a lower estimate for
other activities, which has been proxied using the latest output and employment estimates of the distribution,
hotels and restaurant industries nationally, weighted by airport employment in these areas. By its nature this
particular calculation can only be an approximation, but we believe the assumptions made in calculating this
are appropriate.


13
turnover and value-added. Moreover, figures for passenger numbers also imply a
substantial increase in output, if not value-added, over this period. If we took account of
this alternative evidence it is possible that the estimate of the value-added of the aviation
industry would be significantly higher than £11.4 billion. In addition, the growth of low-
cost airlines and the downward pressure on airfares in general in recent years has
generated substantial benefits to consumers that are not fully captured in the National
Accounts.


Table 2.1: Gross Value Added (GVA) of the Aviation Industry
(£ billion)

1998 2004
Current Prices
(1) GVA of air transport (SIC 62) 5.3 6.5
(2) GVA of other supporting air transport activities (SIC
63.23)
2.6 3.4
(3) GVA of other parts of aviation industry 1.2 1.5

GVA of Aviation Industry (1)+(2)+(3) 9.0 11.4
Aviation GVA as % of GDP 1.2% 1.4%

Volume Measure(2002 Prices)
(1) GVA of air transport (SIC 62) 5.0 6.1
(2) GVA of other supporting air transport activities (SIC
63.23)
2.8 3.1
(3) GVA of other parts of aviation industry 1.3 1.4

GVA of Aviation Industry (1)+(2)+(3) 9.1 10.6
Aviation GVA as % of GDP 1.1% 1.1%
Source: ONS and OEF calculations
2.3 Employment
The aviation industry directly employed 186,000 people in 2004 (in terms of full-time
equivalents), the same number as employed in manufacturing motor vehicles and parts,
for example. This estimate, is based on airport surveys carried out for the Airport
Operators Association (AOA)
8
, which we believe provide the best available estimate of
total employment in the industry (Table 2.2).


8
Summarised in ‘The Economic and Social Impact of Airports’, AOA September 2005.


14

Table 2.2: Direct Employment in the Aviation Industry, 2004

Airport Total terminal passengers
(millions)
Direct employment
Aberdeen 2.64 2,716
Belfast City 2.13 807
Birmingham 8.86 9,071
Bristol 4.65 4,747
Cardiff 1.89 1,932
East Midlands 4.38 4,512
Edinburgh 8.02 2,300
Gatwick 31.47 23,761
Glasgow 8.58 5,442
Heathrow 67.34 68,427
Luton 7.54 7,756
Manchester 21.25 18,000
Newcastle 4.72 4,855
Stansted 20.91 10,592
Other Airports 20.63 21,116
Total 214.98 185,900

Source: AOA, OEF calculations

Reassuringly, these figures look entirely consistent with such data as are available from
ONS, which cover airlines and airports. If we were to assume that other aviation-related
employment was in the same proportion to these sectors as in our previous study then
the implied overall employment estimate for the aviation industry in 2004 would be within
3,000 of that derived from the AOA survey. In practice, we have estimated the
breakdown of employment between different activities by using ONS data where
available and constraining other parts of the industry to produce the total derived from the
AOA survey (Table 3.3).


Table 2.3: Employment in the Aviation Industry
(thousands)

1998 2004
Air transport (SIC 62) 81 71
Ancillary air transport services (SIC 63.23) 22 23
Other aviation-related employment 77 92

Total 180 186
Source: ONS, AOA & OEF estimates

There has been very little change in employment in the aviation industry since the 1998
estimates produced in our previous study, despite the 30%+increase in passengers over
this period, implying a substantial rise in passengers handled per person employed. In
part this has been driven by the style of no-frills service provided by the low-cost carriers.
But it also represents substantial efforts by traditional airlines to cut costs in the face of
difficult market conditions.

As well as creating employment directly, the aviation industry also supports a substantial
number of jobs elsewhere in the economy (Table 2.4):



15
• Indirect employment represents jobs created in the supply chain to the aviation
industry; and we estimate that there were 167,000 such jobs supported by
aviation in 2004. Examples include the jobs in the energy sector that are
dependent upon airline purchases of fuel; construction workers building additional
facilities at airports; the workers required to produce the meals served on airlines;
or those who produce the goods sold at airport retail outlets. Our estimates are
derived from a combination of survey data and calculations. For Heathrow, for
example, our methodology implies that 0.57 indirect jobs are created for every 1
direct job, the same indirect multiplier as in our 1999 study. However, work
carried out as background to our regional study following the 1999 report
confirmed that the indirect multiplier for Manchester of 1.85 was high, partly as a
result of extensive capital expenditure on the second runway and upgrading
terminal facilities during the period the relevant survey was carried out. It was
estimated that an equivalent multiplier for a more typical year would be 1.38, and
that has been used in this study. For all other airports the calculations have been
based upon weights derived from ONS ‘input-output’ tables. These imply a
slightly lower multiple than the survey data used last time and this, along with the
changed multiple for Manchester, explains why the estimate for indirect output is
now lower than that published in the previous report.

• Induced employment is the employment created by employees in the aviation
sector and those indirectly supported by the aviation industry using their income
to purchase goods and services for their own consumption. We estimate that
induced employment supported by aviation was 88,000 in 2004. The multiplier
used here is the same (0.25) as in our previous study, derived from a simulation
on OEF’s macroeconomic model of the UK economy.

• The aviation industry is also critical to most of the work of the UK’s travel agents -
perhaps 80% of the work of employees in travel agents is associated with the
arrangement of air travel or selling package holidays that include air travel.
According to the ABI there were about 129,000 workers in travel agents or related
activities in 2004, up from an estimated 110,000 in 1998. This implies that just
over 80,000 such full-time equivalent jobs are supported by aviation after allowing
for estimates of part-time jobs and the proportion of work that depends on
aviation.

In total, we estimate that 523,000 jobs in the UK were dependent on the aviation industry
in 2004, equivalent to 2.0% of total employment, and similar to our previous estimate for
1998.

Table 2.4: Jobs Supported by the Aviation Industry
(thousands)

1998 2004
Direct employment 180 186
Indirect employment 200 167
Induced employment 94 88
Travel agents 75 82

Total 549 523
Source: AOA, ONS & OEF estimates


16
2.4 Productivity
Productivity is a key engine of economic growth, and raising the UK’s productivity
remains one of the key aims of the government’s economic policies. As Chapter 8
discusses, the aviation industry plays a significant role in enabling other parts of the
economy to be more productive. However, it is worth noting that the aviation industry
itself remains a relatively high-productivity sector when compared with the rest of the UK
economy (Table 2.5). Value-added per worker in airlines (SIC 62) in 2004 was around
£66,000 in 2002 prices, while productivity in air transport supporting activities (SIC 6323)
was almost £85,000. Productivity has therefore risen significantly since 1998, when it
was £56,000 per worker for airlines and £80,000 per worker for airports
9
. As was the
case at the time of our last report these numbers are well above the average level of
productivity across all sectors of £22,600 per worker. Indeed, of the major divisions
identified in the National Accounts, only the oil and gas extraction industry and utilities
have higher levels of productivity. Productivity in the aviation sector is over three times
that in the economy as a whole and close to double that of manufacturing. So,
constraining the growth of aviation would be likely to hit the average level of productivity
in the UK and reduce the living standards the economy could sustain.

Table 2.5: Relative Productivity in the UK Aviation Industry, 2004

Value-added per worker
(£’000s, 2002 prices)
Air transport (SIC 62) 65.8
Air transport supporting activities (SIC 63.23) 84.7
Aviation industry 56.0
Aerospace
10
67.5

Extraction of oil and gas 295.7
Manufacturing 41.6
of which -

Chemicals 72.7
Motor vehicles 44.7
Mechanical engineering 40.9
Electrical engineering 40.6
Electricity, gas and water 123.4
Construction 27.1
Post & communications 46.9
Distribution 20.7
Real estate and renting 48.6

Whole Economy 22.6
Source: ONS, OEF calculations

9
The figures for 1998 differ from those quoted in the last report because of changes to official employment
estimates
10
Section 2.8 notes that the ONS measures of real and nominal output in the aerospace industry have
showed a very substantial degree of divergence in recent years. An alternative measure of productivity for
this industry using nominal output data shows output per worker of about £53,000 in 2004.


17
2.5 Investment
High productivity per employee is often a reflection of the capital stock available per
worker and the aviation industry is highly capital intensive. This reflects not only the
investment required in runways, airport terminals and aircraft but also in associated
computer systems, maintenance facilities and offices. According to ONS data, over the
five years between 2000 and 2004 UK airlines invested £21.2 billion in current prices,
while airports invested £6.0 billion and the aerospace industry around £3.4 billion (Table
2.6). Together these figures are equivalent to around 3.5% of total UK business
investment. It is worth noting, though, that the figures for investment by airlines appear
to be rather high when compared with the known investment behaviour of major UK
airlines. It appears likely that the total includes aircraft purchased by leasing companies
and then leased to non-UK airlines.


Table 2.6: Investment in Aviation & Aerospace
(£ million)

2000 2001 2002 2003 2004 2000-2004
(Annual average)
Airlines
Current prices 3,380 4,172 5,751 4,493 3,392 4,238
Volume measure 3,423 4,192 5,751 4,462 3,364 4,239

Airports
Current prices 918 884 1,312 1,515 1,336 1,193
Volume measure 964 919 1,312 1,495 1,302 1,198

Total Airlines &
Airports

Current prices 4,298 5,056 7,063 6,008 4,728 5,431
Volume measure 4,387 5,111 7,063 5,957 4,666 5,437

Aerospace
Current prices 619 525 686 462 535 565
Volume measure 611 511 686 467 541 564
Source: ONS and OEF calc

This high rate of investment in aviation is likely to be one of the factors behind the
relatively high level of productivity in the aviation industry. As Chart 2.1 illustrates there
is some evidence in general that sectors with relatively high levels of capital also have
relatively high levels of productivity. This is perhaps even clearer in Chart 2.2, which is
based on the capital stock of each industry relative to its employment. By using high
levels of capital equipment per worker, the aviation industry generates the high levels of
output per worker that contribute to a high income, high productivity economy.


18
Chart 2.1: Productivity and Capital/Output Ratios, 2004


Chart 2.2: Productivity and Capital/Labour Ratios, 2004



Aviation
All
Education
Health
Public Admin
Fin Inter
Bus Serv
Distribution
Post & comms
Const
Elec,gas,water
Elec eng
Mech eng
Motor veh
Chemicals
Manf
Aerospace
Airports
Airlines
0
10
20
30
40
50
60
70
80
90
100
110
120
130
0 1 2 3 4 5 6 7 8
Source: ONS & OEF calculated
Capital/output
Productivity (2002 £000s per worker)
Aviation
All
Education
Health
Public Admin
Fin Inter
Bus Serv
Distribution
Post & comms
Const
Elec, gas,
water
Elec eng
Mech eng
Motor veh
Chemicals
Manf
Aerospace
Airports
Airlines
0
10
20
30
40
50
60
70
80
90
100
110
120
130
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
Source: ONS & OEF calculated
Productivity (2002 £000s per worker)
Capital/labour ratio (2002 £m per worker)


19
2.6 Profitability & Taxes
We do not have accounts covering the total aviation industry. Table 2.7, for example,
does not cover the activities of, amongst others, separate airport retailers and caterers or
freight and baggage handlers. However, airline operating revenues were over £14.3
billion in 2004 compared with operating income of a little over £2.6 billion for airports in
2004/05. Total operating profits were around £900 million for airlines and around £800
million for airports. In both cases these totals are around £200 million higher than the
corresponding profits in 1997 (1997/98 for airports) shown in our previous report.

Table 2.7: Profit & Loss Summary, Airports & Airlines
(£ million)

Major UK
Airlines 2004
Major UK
Airports
2004/05
Traffic 14,333 1,227
Commercial 1,357
Total operating income 14,333 2,622

Total operating expenditure 13,407 1,789

Total operating profit 926 833

Interest payable (Net) 190 140
Other expenses, etc 60
Profit on ordinary activities before taxation 676 693

Exceptional items 112 95
Taxation 180 197
Profit on ordinary activities after taxation 607 590

Dividends 99 292
Retained profit for the year 508 298
Source: CAA Airline Statistics & CRI, University of Bath “Airport Statistics 2004/2005”

The aviation industry directly contributed £3.6 billion to the Exchequer in 2004/05,
equivalent to around 1p on the basic rate of income tax (Table 2.8):
• Income tax revenues from employees in aviation are estimated to have been £1.4
billion in 2004/05
11
.
• National Insurance Contributions (both employees’ and employers’) are estimated
to have been over £850 million in 2004/05.

11
Income tax and National Insurance contribution receipts are estimated using figures from the ONS Annual
Survey of Hours and Earnings (ASHE) for 2004. This is the replacement for the New Earnings Survey that
was used in the last report. ASHE data show that average earnings in air transport services were 36%
higher than the UK average, earnings in supporting airport activities were 47% higher than the UK average
and earnings in retailing, hotels & catering were 45% below the UK average. Combining these figures with
employment weights based on Table 3.2 suggests that average earnings in the aviation industry as a whole
were 11% above average earnings in the UK. Estimates of income tax and NICs from aviation therefore
represent a 11% higher share of total receipts from these taxes than would be suggested by aviation’s share
of total employment.



20
• Corporation tax revenues from airlines and airports are estimated to have totalled
over £375 million in 2004/05. This understates total corporation tax revenues
from the industry, since it excludes equivalent figures for other companies in the
aviation sector, which are not readily available.

Table 2.8: Contribution of Aviation to UK Public Finances, 2004-2005
(£ million)

Income tax from aviation
1,410
National Insurance Contributions from
aviation
863
Corporation tax revenue from airlines 180
Corporation tax revenue from airports 197
Air passenger duty 900

Total Contribution to Exchequer 3,550
Source: ONS, CRI and OEF calculations

These estimates imply that the aviation industry contributed about 0.8% of total tax
revenues in 2004/05. However, they understate the total contribution to the Exchequer
since we have not been able to include all taxes in the calculation, such as business
rates, insurance premium tax on flights and VAT paid on either sales at airport shops or
spending elsewhere in the country by households employed in the aviation industry. And
we have not taken account of tax paid by workers in the aviation supply chain.
2.7 Balance of Payments
UK airlines sold £4 billion of tickets overseas in 2004 and earned £394 million in freight
charges, while UK airports and other members of the industry generated £2.6 billion of
exports, including costs incurred by overseas airlines in using UK airports (Table 2.9).
Total exports generated by the aviation industry therefore totalled £6.9 billion in 2004,
which accounted for 7% of the UK’s overall exports of services and 3% of all exports.

UK airlines produced a net export surplus of £0.9 billion, after allowing for £3.4 billion of
spending overseas on services such as airport charges, accommodation for flight crews,
advertising and commission. However, overseas airlines are also significant export
earners in their dealings with the UK and so the net result was that the UK had a balance
of payments deficit in air transport services of around £3.3 billion. This deficit is more
than double what it was at the time of our last report, reflecting the fact that exports have
shown little or no growth over this period, while imports have continued to rise
substantially. This deficit will in part reflect some reluctance on the part of foreigners to
travel to the UK post 9/11 but may also be because the strength of the pound has made
the UK a more expensive place to visit. Ironically, it also testifies to the relative strength
of the UK economy. Freights imports represent the payments made on imports of goods
that are carried by foreign airlines, which have risen strongly in recent years, while
passenger revenue imports reflect the fact that more UK residents are travelling abroad.



21
Table 2.9: Air Transport Contribution to Balance of Payments, 2004
(£ million)

Exports 6,913
of which:
Passenger revenue 3,950
Freight 394
Disbursements 2,302
Other revenue 267

Imports 10,186
of which:
Passenger revenue 6,088
Freight 681
Disbursements 3,417

Balance -3,273
of which:
Net exports by UK airlines 927
Exports by UK airports, etc 2,569
Imports by air users -6,769
Source: ONS
2.8 Aerospace
The aerospace industry is not a direct component of the aviation industry as defined in
this report. It is a very international business with the majority of its sales to foreign
companies (Table 2.10). However, UK airlines are major customers of the aerospace
industry and a successful domestic aviation industry provides a strong base from which
the UK aerospace industry can compete in international markets. This section looks
directly at the aerospace industry.

Table 2.10: Sources of Demand for Output of UK Aerospace Industry
% of total
Exports 88.5
UK investment in aircraft 6.3
Intermediate consumption 5.2
Source: ONS and OEF calculations (from input-output tables)

The aerospace industry had value-added of around £5.3 billion in current prices and £6.7
billion in real terms in 2004 (Table 2.11), equivalent to about 0.5% of GDP and 0.7% of
GDP respectively.
The nominal figure for value-added has risen by 20% since 2002 but in real terms it has
increased by only 0.2%. Moreover, there appear to have been substantial differences in
the movements of the real and nominal series over time. For example, between 1998
and 2002 the volume data fell by around 16% whereas the nominal data rose by about
30%, implying very considerable rises in the industry’s prices over this period. Then,
between 2002 and 2003 the volume figure rose by almost 9% whereas the nominal
series fell by about 7%, consistent with a very big fall in prices. In reality there is no
evidence to suggest that prices in the aerospace industry have been anyway near as


22
volatile as this suggests and so some alternative explanation is required. One possibility
is that it is simply very difficult to measure prices in this sector because of the differences
in quality between various goods produced and so consequently it becomes difficult to
produce an accurate price series that can be used to deflate the nominal data.
Alternatively the difference could be explained by some discrepancy between data
sources given that the real series is derived from a monthly inquiry whereas the nominal
series is based upon the more comprehensive ABI. We would recommend that the
volume numbers should be treated with caution and that more attention should be paid to
the nominal data that are based upon a much larger and more comprehensive survey.

Table 2.11: Value-added and Employment in Aerospace Industry
1998 2004
GVA in current prices (£ billion) 4.4 5.3
GVA volume measure ( £ billion, 2002 prices) 6.7 6.8
Employment (thousands) 114 101
Source: ONS and OEF calculations
2.9 Social impacts
The indicators of the significance of the UK aviation industry presented so far are based
on standard economic measures of its market contribution. However, such estimates do
not capture the full contribution of the aviation industry because, like most industries, it
also generates significant additional non-market benefits for its customers and because
there are significant indirect welfare benefits to non-customers. For example:
• The availability of affordable and frequent flights from the UK to most of the world has
brought foreign travel and holidays within reach of the majority of the population. In
2004 UK residents took 42.9 million foreign holidays, compared to 31.5 million in
1998 and 7 million in 1977, and about 80% of these trips were by air. A further 8
million people were able to visit friends or relatives abroad, an opportunity that in
many cases would not be available without the existence of air transport.
• The aviation industry’s role in maintaining contact between UK residents and their
friends and relatives elsewhere in the world should not be underestimated. As the
UK becomes an increasingly multicultural society such links become increasingly
important. Around 7.9% of the UK’s population, or about 4.6 million people, belonged
to non-White ethnic groups at the time of the last Census in 2001 (Table 2.12). Of
course not all of these people will have been born outside the UK but it is likely that
most will still have extended family abroad. Moreover, some of the White population
will also have originated from outside the UK. In 2001, 4.9 million or 8.3% of the total
population of the UK was born overseas. This is more than double the 2.1 million
(4.2%) in 1951. Amongst this foreign-born population, around 53% classified
themselves as White.



23
Table 2.12: Population of the UK by Ethnic Group, April 2001
(% of population)

White 92.1
Mixed 1.2
All Asian or Asian British 4.0
All Black or Black British 2.0
Chinese 0.4
Other ethnic groups 0.4
Source: 2001 Census

• Immigrant labour represents an important economic resource to the UK. It is
estimated that in 2004 223,000 more people migrated to the UK than left to move
abroad. These figures are much higher than those for even the previous year, of
151,000, primarily reflecting the impact of the expansion of the EU in May 2004.
These people bring with them a range of skills that are beneficial to the UK. They are
drawn because of the economic opportunities offered by a relatively vibrant UK
economy but the figures would unlikely to be as a high as they are were it not for
good air transport links. As the domestic population ages over the course of the next
few decades, it is quite likely that the economy will become increasingly dependent
on non-indigenous workers. If the UK is to remain an attractive place for such people
to live and work it is vital that good air transport links are maintained.
• The aviation industry has also expanded the range of choices available to the
consumer – such as a wider range of foods or other products on sale in our high
streets, while the large number of overseas visitors has encouraged the provision of a
broader range of cultural and leisure activities.
• Excellent air transport links have helped Britain beat stiff competition to host major
international sporting events – such as the 2012 Olympics.



24
3 How aviation supports tourism


3.1 The importance of tourism
12

Tourism makes a major contribution to the UK economy. In 2005 the sector directly
generated an estimated £46.8 billion of output, equivalent to 3.9% of GDP, according to
OEF/World Travel & Tourism Council (WTTC) estimates. And this activity was
responsible for 1.08 million jobs – 3.5% of total employment
13
. However, this is just the
direct impact of travel and tourism in the UK. These 1 million+workers – which covers
those working at airports, in hotels and restaurants etc – do not reflect the full
contribution of travel and tourism to the UK economy. The firms directly involved in
providing travel and tourism goods and services spend money in their own supply chains
that support more jobs in other industries. This spending filters through the economy into
the sectors that provide the travel and tourism industry with the food provided in
restaurants, the fuel required to move people around, and a range of business services.
Allowing for the spending of the travel and tourism industry on bought-in goods and
services, the total number of jobs directly and indirectly supported amounts to 2.9 million
(9.3% of total employment).
Another way of looking at the significance of tourism to the UK economy is to look at the
number of people employed in tourism-related industries. Compared with the
OEF/WTTC estimates, the ONS definition of tourism-related employment includes some
people whose jobs are supported by non-tourist spending (for example, by local people
spending in bars and restaurants), but leaves out some of those in the supply chain
supporting tourism activities. On this basis, tourism-related industries provided jobs for
around 2.6 million people in 2004 (Table 3.1).

12
Tourism is defined here in accordance with international conventions, based on visitors travelling outside
their normal environment. As such, it includes visits for business purposes, as well as leisure visits and trips
to see friends and family.
13
These figures are derived from the most recent WTTC Tourism Satellite Accounts, for 2006 – there have
also been other studies of employment generated by tourism in the UK that have produced different,
although broadly comparable, estimates.
Key points
• The tourist industry makes a large and growing contribution to the UK economy,
directly contributing nearly 4% of GDP.
• Nearly three-quarters of international visitors to the UK arrive by air. Spending
by visitors who arrive by air is equivalent to 1.1% of GDP and generates around
170,000 jobs in the UK.
• Air services also allow UK tourists to enjoy a much wider range of overseas
holidays than would otherwise be accessible.
• Increased air services capacity is likely to be needed if the government is to
achieve its objective for the tourism industry to grow by a third by 2010.


25


Table 3.1: Employment in Tourism-related Industries in the UK, 2004
(thousands)

Hotels and other tourist accommodation 360
Restaurants 600
Bars 555
Travel agencies/tour operators/other transport 196
Libraries/museums and other cultural 88
Sport and other recreation activities 415
Total employees in tourism-related industries 2,213
Self-employment (estimated) 383
Total 2,596
Sources: ABI; OEF estimate for self-employment
3.2 Visits to the UK by air
Unsurprisingly, the aviation industry plays a major role in supporting the tourism industry.
During 2005, there were 30 million visits to the UK by overseas residents. These visitors
spent £14.3 billion. To put this in context, during 2004 (the latest year for which figures
are available) there were 126.6 million trips/visits by UK residents within the UK, with a
total spend of £24 billion. Although the numbers of trips made by UK visitors is over four
times greater than their overseas counterparts, the longer duration and higher spending
by overseas visitors means that these travellers account for over a third of all spending
on trips involving a stay away from home (and an estimated 21% of total tourism
spending in the UK if spending by day visitors is taken onto account as well).

Table 3.2: Overseas Visitors to the UK, 2005

Air Sea Tunnel All modes

Visits
Millions 22.0 4.7 3.3 30.0
%of total 73.5 15.7 10.9 100.0

Spending
£ billion 12.3 1.1 0.9 14.3
% of total 86.1 7.6 6.3 100.0
£ per visit 557.0 231.0 277.0 476.0

Source: International Passenger Survey, ONS



26
Of the 30 million visitors to the UK in 2005, 73.5% arrived by air. And aviation has played
a major role in boosting the UK’s tourist sector in recent years, bringing in more
passengers than ever. Since 1999, the number of overseas visitors to the UK has risen
18%, while the numbers arriving by air have jumped by over 27%. The growth of air
travel in terms of routes, and its relatively low cost, allows people to travel large distances
to visit the UK. Significantly, those travelling the furthest tend to be those who spend
most; the bigger spenders from just three places – namely the US, J apan and Australia -
provided 23% of all UK visitor spending in 2005, travelling into the UK almost exclusively
by air, with the exception of a few travellers that visited other places in Europe first.
The vast majority of the visitors arriving by air do so through one of the UK’s three
London airports. As Table 3.3 shows, 62.2% of arrivals are at Heathrow, Gatwick or
Stansted. Many of these arrivals stay in the South of England, with 78% visiting London.
However, a sizeable proportion of overseas visitors also make their way to other regions
and, when they get there, they spend significant sums.

Table 3.3: Overseas Visitors by Air, Arrival Airport, 2004


Numbers
(million)
% of total

Heathrow 8.93 44.7
Gatwick 2.20 11.0
Manchester 1.22 6.1
Stansted 3.30 16.5
Other England 3.55 17.8
Scotland 0.64 3.2
Wales 0.16 0.8
Total 20.00 100.0

Source: Travel Trends 2004, ONS

While the relatively limited range of international flights to regional airports means that
most international visitors originally arrive at a London airport, the aviation industry
nevertheless facilitates tourism throughout the UK - 2.5 million visitors to Scotland, 1.0
million to Wales, 4.1 million to the South East and 2.3 million to the North West, for
example. And passengers visiting the regions who arrived by air typically account for 80-
90% of all foreign tourism spending (Table 3.4). This reinforces the conclusion that air
travel is bringing in relatively high-value tourists, who tend to give more of a boost to the
local economy than other tourists.



27
3.3 Visits from the UK by air
Aviation has opened up the UK economy to international tourists, but the flow of UK
citizens in the other direction is even more substantial. In the 2005 there were 66.5
million visits abroad by UK residents. This means the number of trips abroad is some
61% higher than in 1995, as cheaper airfares have made a much wider range of travel
destinations available to the UK consumer, enhancing choice and consumer satisfaction.
Of the visits taken in 2005, 44 million (66%) were holidays (the remainder being business
and visits to relatives), of which 36 million were by air. Around 82% of overseas holidays
involve air travel.
As growth in UK air travel abroad has outstripped that in overseas visitors’ air travel to
the UK, the gap between their spending has also grown – tourism spending abroad is
now more than twice foreign spending in the UK, with the difference equivalent to around
1.5% of GDP (Table 3.5). Running a current account deficit is often portrayed as a sign
of economic weakness or imbalance – or indeed a lack of competitiveness. But in this
case, it is hard to argue that the UK tourism industry is at a disadvantage as a result of
the availability of air services for UK tourists to travel overseas: according to the WTTC,
the UK has the sixth largest tourism industry in the world. It seems more likely that the
rise in the deficit mirrors the growth in choices available to UK consumers. In the past, a
lack of options acted to constrain tourism. So, rather than a structural problem, the
increasing number of UK outbound tourists is a reflection of the combination of improving
living standards, the reduction in the cost of aviation travel and the expansion in the
number of destinations served.
Table 3.4: Overseas Tourism and Spending by Region in 2005



Total
visits
(000s)
% arriving
in UK
by air
Spend
(£mn)
Spend
(% of
UK
total)
% of
spending
contributed
by air
passengers

North East 583 74 202 1.4 90
North West 2,317 78 877 6.2 90
Yorkshire and
The Humber 1,130 73 387 2.7 87
East Midlands 1,101 76 377 2.6 87
West Midlands 1,718 72 556 3.9 91
East of England 2,157 73 699 4.9 82
London 13,835 79 6,863 48.1 88
South East 4,129 69 1,462 10.3 82
South West 2,091 67 831 5.8 79
Wales 959 62 305 2.1 77
Scotland 2,458 88 1,248 8.8 92
Northern Ireland 310 131 0.9
Other/day trips 321 2.3

Total UK 29,972 73 14,259 100.0 84

Source: International Passenger Survey, ONS
Notes: Sum of visits is greater than UK total, reflecting visits to more than one region.


28
Table 3.5: UK Tourism and Travel Current Account
(£million)
1995 2005
Exports 11,763 14,259
Imports 15,386 32,188
Balance -3,623 -17,929

Balance as
% of GDP -0.5 -1.5
Source: International Passenger Survey, ONS

Having experienced these new opportunities, UK residents would be less likely to spend
all of the money they now spend on foreign holidays on UK holidays instead if the
availability of air services did not provide the opportunity to travel abroad - in many cases
people are looking for very different things in taking a foreign holiday from what is
available from a UK holiday. The weather is more reliable and often the cost of
accommodation and eating out is cheaper. If there were less scope to travel abroad by
air, the alternative might be to travel abroad some other way or to spend the money on
something else which itself might be imported (eg a car or home cinema system), rather
than to spend it on a holiday within the UK.
And having grown used to foreign holidays, it is easy to imagine that UK residents would
still seek to travel overseas if aviation were constrained. Indeed, the two most popular
holiday destinations for UK residents are France and Spain, both of which are accessible
by a combination of ferry, road and rail, albeit at greater cost or longer journey times.
The desire of many UK consumers to travel abroad for a holiday reflects a number of
factors. Would the likely determination of UK residents to enjoy foreign holidays be
mirrored by those currently visiting Britain if air services were not available? These
visitors have, literally, the whole world to choose from. If air travel to the UK was not
possible, but other parts of the world were unaffected, then the majority of visitors would
explore other possibilities. While visitors could still arrive from France (which provides
11% of visits to the UK), French people prefer in any case to holiday in their own country.
The same is true of Italians. At the margin, restricting air travel to the UK would reinforce
that trend. For long-haul travellers, who tend to spend the most money, the impact would
likely be far more severe.

Table 3.6: Pattern of Visits to/from the UK in 2005
Outbound Inbound
Short-haul 79% 72%
Long-haul 21% 28%
Source: International Passenger Survey, ONS

As Table 3.6 shows, UK incoming tourism is more dependent on long-haul trade than
outgoing tourism. And if travellers from the UK did not have the option of long distance
travel, they would have the choice of still travelling abroad by sea or rail. It is less clear
that incoming long-haul visitors would still make the trip to the UK as it would involve a
long flight presumably followed by a trip on the Eurostar or by ferry. Again, capacity
constraints would probably be an issue.


29
For overseas tourists the concept of “abroad” is a vast one, with the UK just one more
choice among many - they would find other places to visit if air travel were not possible.
It is therefore more plausible that maintaining a vibrant UK tourism sector depends on
good air services bringing visitors into the UK than hoping that reductions in air services
would increase demand for UK tourism from domestic residents.
The difference between the amount UK residents spend abroad and the value of the
spending on travel and tourism in the UK is itself the outcome of the choices made by
millions of individual travellers. Reducing consumer choice to try to help “cure” the trade
deficit would seem to be a strange prescription. Providing the UK is providing a quality
product at an attractive price, and providing overseas visitors are not prevented from
travelling here by inadequate transport links, then the gap is not a problem. Indeed, it
merely reflects the wider benefits of open trade – opening markets up for consumers
allows countries to specialise in areas where they have a comparative advantage, be it
tourism in Spain, or financial & business services in the UK.
In part, the UK deficit also reflects the nation’s relative wealth. Overseas tourism is the
sort of service for which demand rises more than one-for-one in response to an increase
in peoples’ incomes. Indeed, recent CAA estimates suggest demand for overseas air
travel rises by 1.5%-1.8% given a 1% rise in income. Chart 3.1 shows that the tourism
surplus will tend to diminish as the income per head of population increases. (It is worth
noting that it is of course impossible for all countries to have a tourism surplus.)
Chart 3.1: Tourism Trade Balance and GDP Per Head, 2005

Countries like Antigua, St Lucia and the Seychelles dominate the upper-left quadrant of
Chart 3.1 – ie less well off countries with big tourism sectors. And in the bottom left
corner there are a host of very poor countries that few people wish to visit. The UK is in
a similar position to Germany and J apan – all rich countries with strong demand for
tourism. But arguably, none of these countries is particularly resource rich (eg in terms of
either weather or beaches or both) when it comes to tourism. The home tourist sector
cannot satisfy local demand in terms of the characteristics that holidaymakers demand –
hence the tourism deficit exists. But other countries, like the US, France and Italy, are
St. Lucia
Seychelles
Luxembourg
Kuwait
The Bahamas
Antigua and Barbuda
-10
-5
0
5
10
15
20
25
30
35
40
45
0 10 20 30 40 50 60 70
-10
-5
0
5
10
15
20
25
30
35
40
45
Source: OEF\IMF\WTTC
Tourism trade balance as % of GDP
GDP per capita US$ 000s
Spain
US
Germany
Japan
Canada
Australia
France
UK
Italy


30
both relatively rich in terms of national income and also in tourism resources. So, not
only are they attracting overseas tourists, but it is far more likely that their own residents
will holiday at home. Hence they enjoy tourism surpluses.
Ultimately, the value of UK outbound tourism lies in the fact that the chance to travel
overseas enhances peoples’ lives. But, there are several other benefits that arise from
UK tourism overseas. According to calculations made by PwC for the Federation of Tour
Operators, each UK tourist travelling abroad contributes £50 in tax to the UK Exchequer.
This includes the VAT paid on the holiday/flight, the tax on the air ticket and the income
tax and national insurance contributions of the person selling the ticket. And of course
not all the travel and tourism spending on a foreign holiday takes place abroad – there is
also spending at the airport in the UK, maybe an overnight stay at a hotel in the UK near
to the airport, travel to the airport, and so on.
The spending of UK holidaymakers also supports activity abroad. Although the spending
of UK tourists is not broken down by mode of travel, the total contribution to foreign
economies in 2004 was £32.2 billion. To put this figure into context, this represents 4.2%
of total consumer spending in the UK domestic economy in the same year. And it is
reasonable to assume, given the higher propensity to spend seen in the UK visitor
numbers on the part of air travellers, that over 80% (£25.8 billion) of this spending is
directly attributable to UK holidaymakers using air. Most of the spending by British
visitors is in the US (11.4%) and the rest of Europe (63.0%). But given the small
economic size of some destinations, and their dependence on tourism, the boost given
by UK spending is very significant in areas like the Caribbean. In 2005, total spending by
UK visitors (for all purposes) in Barbados was £132 million, equivalent to 7.6% of its
GDP.
Air services are vital for the majority of more distant destinations visited by UK tourists,
which are typically poor countries heavily dependent on tourism. Closer countries in
western Europe that would still be accessible without air services, albeit at greater cost or
inconvenience, are typically much richer countries with less dependence on tourism.
3.4 Tourism in the future
Tourism also brings more intangible benefits. As Tessa J owell, Secretary of State for
Culture, Media and Sport said in 2004: “There is a close relationship between the
successful development of tourism and the strengthening of the cultural assets of the
country – our heritage, the vibrancy of our communities, the natural beauty of our
landscapes, our attractive public spaces, and the openness and friendliness of our
people.
14
” J ust as this applies to the UK tourism industry, it is also true for UK visitors
abroad, who will learn and have their horizons broadened by exposure to other cultures.
Visitors from the UK are travelling further afield than ever, and are more likely to combine
their holidays with their hobbies – observing nature, walking or visiting sites of historic
interest. So, tourism is playing a positive role in cultural exchange and education.
Although it is likely that virtually all tourism “broadens the mind”, there has been a shift
towards more sustainable tourism in recent years with greater emphasis on leaving a
positive mark on local communities. The Association of British Travel Agents (ABTA) is a
founding member of The Travel Foundation, which aims to ensure that travellers and the
industry take steps to preserve the environments of the destinations they visit. At its
best, this entails helping protect local culture and tradition, creating new excursions to
support the local economy, helping suppliers produce local fresh food for the tourism
industry, supporting local crafts and protecting the environment and wildlife. However,

14
Introduction to ‘Tomorrow’s Tourism Today’, DCMS 2004.


31
so-called “eco-tourism” is still a fairly small market at the moment, albeit one that is
growing rapidly.
Looking to the future, the tourism industry will be key to the success of the hosting of the
Olympic Games by London in 2012. “Tomorrow’s Tourism Today” was published by the
DCMS in J uly 2004 to build on the Strategy document “Tomorrow’s Tourism” that was
published in 1999. The Introduction by the Secretary of State suggested that “if we are to
keep pace with world travel forecasts, we must be aiming for an industry turnover of £100
billion as a minimum by 2010.”
To meet this demanding aim, and then to hold a successful Olympic Games in 2012, the
appropriate travel infrastructure will be a sine qua non. Tourism depends on transport for
its fulfilment, and transport in turn depends on tourists to sustain its product.
The aviation industry is therefore key to the government’s tourism strategy and the aim of
raising the industry’s turnover by a third by the end of the decade. Given that the 73% of
overseas tourists arriving by air account for nearly a third of all tourism spending on visits
involving an overnight stay away from home whether by overseas or domestic residents,
this target will be very hard to meet unless there is the extra capacity in the aviation
industry to facilitate a significant increase from the 22 million visitors a year that currently
arrive by air.


32
4 Aviation supports trade

4.1 The benefits of trade
International trade is a key driver of global economic growth and rising living standards.
It allows countries to specialise in producing the goods and services in which they have a
comparative advantage and to exchange them for goods and services that are wanted by
domestic consumers or producers but can be produced relatively more efficiently
elsewhere. As a result, the overall value of goods and services available in an economy
can be increased. The increasing globalisation of the world economy has allowed
increasing specialisation to occur, with world trade persistently growing more rapidly than
global GDP. In the period 1994-2004, there was only one year (2001) when world trade
rose more slowly than GDP, and over the decade as a whole world trade doubled, more
than twice the rate of increase in world GDP.
The growth of trade has been a key factor behind UK economic growth too – over the
past 30 years UK exports have trebled in real terms and imports have quadrupled,
compared with a doubling of the overall economy. As a result, the UK economy has
become increasingly internationalised, with trade accounting for more than a quarter of
GDP by 2004. The UK was the world’s eighth biggest merchandise trade exporter in
2004, with a 3.8% share, and the second biggest services exporter, with an 8.1% share.
Without the ability to sell goods and services abroad and to import other goods and
services in return, the range of items available to UK consumers would be poorer and
prices would be higher.
Key points
• International trade promotes growth and raises living standards by allowing
countries to specialise in producing the goods and services for which they have
a comparative advantage.
• The aviation industry plays a central role in fostering UK trade. 55% by value of
the UK’s exports of manufactured goods to countries outside the EU are
transported by air.
• Many key imports depend on air services too. More than 60% of imports of
machinery, mechanical appliances and electric equipment from outside the EU
are carried by air.
• Passenger services also play an important role in supporting trade - nearly two-
thirds of companies report that passenger services are either vital or very
important for sales and marketing.
• Air services are particularly important for the UK’s trade with the fastest-growing
regions of the world economy, such as India and China, and over time are likely
to become even more important to the UK’s ability to compete in the world
economy.


33
4.2 Air freight
Although air freight represents less than 1% of total UK visible trade in terms of tonnage,
30% of exports by value are transported by air. And 55% of exports of manufactures to
destinations outside the EU are transported by air.
Exports by air amounted to an estimated £62.7 billion in 2005, 10.4% higher than in 2000
(Table 4.1)
15
. Of these exports, nearly three-quarters were to countries outside the EU,
including nearly a fifth to the fast-growing markets in the Far East. Imports by air are
comparable in size, and even more heavily focused on non-EU countries
16
. But with the
value of airfreighted imports falling by 9% between 2000 and 2005, exports by air
exceeded imports by air in 2005, the reverse of the position in 2000.

Table 4.1: Value of Trade Carried by Air Freight, 2000 and 2005


2000 2005 % change
£ billion % of total £ billion % of total 2000-05
EXPORTS UK airfreight UK airfreight
Total EU* 15.4 27.2 17.0 27.2 10.4
Total non-EU countries* 41.4 72.8 45.7 72.8 10.4
of which:
Africa 1.4 2.5 1.8 2.9 28.6
Middle East 4.0 7.0 7.6 12.1 90.0
Far East 10.6 18.7 11.6 18.5 9.4
Latin America and Caribbean 1.1 1.9 1.1 1.8 0.0
Total all countries 56.8 100.0 62.7 100.0 10.4

IMPORTS
Total EU* 7.5 11.4 9.7 16.3 30.2
Total non-EU countries* 58.1 88.6 49.9 83.7 -14.1
of which:
Africa 3.4 5.2 4.2 7.0 23.5
Middle East 2.0 3.1 2.3 3.9 15.0
Far East 18.3 27.9 18.1 30.4 -1.1
Latin America and Caribbean 2.2 3.4 1.6 2.7 -27.3
Total all countries 65.5 100.0 59.6 100.0 -9.0
* Note: No adjustment has been made for the 2004 EU enlargement
Source: Business & Trade Statistics and OEF calculations

The volume of exports transported by air has risen by almost 50% over the last decade
(Table 4.2). Heathrow continues to account for more than half of air freight handled by
UK airports, even though it handles no dedicated freight-only flights – all the freight that
passes through Heathrow is carried in the holds of passenger flights. This use of
bellyhold for carrying freight is vital for the efficiency of general air freight operations,
underlining the interdependence of passenger and freight services.

15
Because the statistics stopped being collected when the customs-free Single Market was completed in the
EU, we have made the assumption that the proportion of EU exports transported by air in the year 2005 was
the same (14.5%) as in 2000 (the last year for which data were collected).
16
Again we assumed an unchanged proportion (6.8%) of EU imports air freighted from 2000.


34
At the same time there has been a near-doubling in the share of Stansted in freight
handling over the past ten years and a near-trebling in the share of East Midlands airport.
These airports have not only developed significant general freight capabilities, but are
also the two UK airports used as major hubs by the express freight industry, which
depends on dedicated flights to provide door-to-door next day or time-dependent
shipments.

Table 4.2: Air Freight Handled by UK Airports


1994 2004 % change
mn tonnes % UK total mn tonnes % UK total 1994-2004
Heathrow 962.7 60.6 1,325.2 55.9 37.6
Gatwick 222.3 14.0 218.2 9.2 -1.8
Stansted 83.4 5.2 225.8 9.5 170.7
Total London airports 79.8 74.6

East Midlands 55.1 3.5 253.1 10.7 359.0
Manchester 91.1 5.7 149.2 6.3 63.8

Total UK airports 1588.8 100 2371.0 100 49.2
Source: CAA Statistics: 2004 Annual, Table 13.2

4.3 The importance of aviation for exports
The importance of air services for trade is much wider than just for freighting the relevant
goods, of course. Nearly two-thirds of companies (65%) in our survey, for example,
report that passenger services are either vital or very important for sales and marketing
(Chart 4.1), and a very similar proportion (64%) report that passenger services are either
vital or very important for servicing or meeting customers. Looking at it another way,
more than half of companies confirm that the availability of frequent air services to/from
the UK means that they serve a wider market (Chart 4.2). Interestingly, it is not just for
more distant markets outside the EU that this applies – as many companies report an
impact on serving wider markets within the UK and the rest of the Europe as report an
impact on serving wider markets outside Europe.


35
Chart 4.1: Importance of air services for sales and marketing
Source: OEF survey of UK companies (2006), Q7

Chart 4.2: Availability of frequent air services to/from UK on
ability to serve a bigger market
Source: OEF survey of UK companies (2006), Q11

Our survey suggests that on average companies consider that around 13% of their total
sales (domestic and export) depend on air services. Air services are not considered
significant for sales for around half of respondents. But there are a wide range of
0
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Passenger
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Delivery
Total
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Vital Very important Sometimes important
% %
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In UK & Europe Outside Europe
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Substantially To Some extent
% %


36
companies who are very dependent on air services, with 5% reporting that 60% or more
of their sales depend on air services and a further 10% reporting that 40% or more of
their sales do so (Chart 4.3).

Chart 4.3: What proportion of your company's sales do you
think depend on air services?
Source: OEF survey of UK companies (2006), Q8

Overall, the impact of air services on exports is substantial. But even these aggregate
figures may understate the importance of aviation for supporting the future export
performance the UK economy needs in an increasingly competitive global economy:
• Aviation is especially important for transporting UK exports to the fast-growing
markets of the Far East, including China and India. These markets accounted for
18.5% of all air freighted exports in 2005, much the same as in 2000 (Table 4.2). But
69% of UK exports to India, for example, went by air in 2005, 45% of exports to the
US were carried by air and 35% of exports to China (Table 4.3). While it might be
expected that exporters to more distant markets would be more likely to use air, these
proportions underline the importance of air freight if the UK is to retain and even grow
its market share of exports to the fastest-growing economies in the world.

Table 4.3: UK Exports by Air to Selected Countries
(2005, £ billion)
By Air Total by all modes % by air
China 1.0 2.8 34.8
India 1.9 2.8 69.0
USA 13.9 30.7 45.4
Sources: Business and Trade Statistics; UK Trade Info

0
10
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40
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60
70
0% 1-5% 6-20% 21-40% 41-60% 61-80% 81-100%
0
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% %


37
• Not surprisingly, air transport is disproportionately used for high value/low weight
traded goods such as gemstones, pharmaceuticals, precision engineering products
and technology-intensive products, as well as for perishable goods, such as fresh
fruit, bulbs and flowers. Table 4.10 shows the ten most important sectors (out of the
21 ‘sections’ in the Harmonised System) in UK exports to the non-EU transported by
air in 2005 - these ‘top ten’ sectors account for over 80% of all air freighted exports to
the non-EU. Machinery, mechanical appliances and electrical equipment accounted
for 40% of all exports by air to non-EU countries. Despite the relatively high weight of
some of these products, their high value and the need for rapid delivery (eg when
production lines are waiting for a spare part) meant that 60% of exports of these
products to non-EU countries went by air. For precious stones and metals, over 90%
of exports were carried by air. Within some of the categories shown in the table,
there will, of course, be sub-sectors which rely more than the average on air freight.
Within the chemicals sector, for example, 71.3% of exports of pharmaceuticals to
non-EU markets are transported by air, and it is high value-added, low-weight sectors
like this that are disproportionately important for the future of UK manufacturing. (See
Chapter 6 for a more detailed discussion of the importance of air services for growth
sectors.)
Table 4.4: The Ten Most Important Sectors in UK Air Freighted Exports to
Non-EU countries, 2005

As % of As % of
all air freighted all sector's
exports to exports to
£ billion non-EU non-EU
Machinery, mechanical
appliances and electrical
equipment 18.3 40.0% 60.4%
Chemicals 5.9 13.0% 49.3%
Precious stones and metals 5.7 12.5% 92.7%
Optical, photographic, surgical
instruments 3.7 8.2% 81.9%
Art, antiques 2.1 4.7% 74.8%
Base metals 0.7 1.5% 13.6%
Textiles 0.6 1.4% 31.4%
Pulp and paper 0.6 1.2% 27.3%
Vehicles, aircraft 0.5 1.1% 4.4%
Plastics, rubber 0.4 0.8% 15.4%

Total UK exports to non-EU
transported by air 45.7 100.0%

An increasing proportion of UK companies are reliant on very rapid delivery of goods to
their customers or to production facilities abroad and so depend on deliveries using the
air services offered by express delivery companies. The express industry is able to offer
delivery from UK to countries representing 90% of the world’s GDP in 24-48 hours, and
research by OEF
17
estimates that it now carries around 5% of overall UK exports of
goods by value, equivalent to about £10 billion of goods in 2004. As well as valuing the
speed and guaranteed delivery times offered by the express industry, users also value

17
The Economic Impact of Express Carriers for UK plc, Oxford Economic Forecasting, 2006


38
the ability to track the location of products en-route. Moreover, express services allow
exporters to adopt international best practice in production, which increase companies’
flexibility and ability to adapt to changes in demand. For example, many companies use
express services to permit ‘build-to-order’, since time savings on delivery can be used to
allow customisation to match particular client requirements. Similarly, express services
allow the fast handling of returned goods, either saving on inventory time if they can be
resold or protecting firms’ reputations by allowing repairs to be made quickly to faulty
products.
Although manufacturing companies will be the main users of air freight services, it is by
no means just manufacturing companies that depend on air services for sales and
exports – over 40% of companies in the service sectors report that air passenger
services are vital or very important for sales and marketing (Chart 4.5).

Chart 4.4: Importance of air services for
sales and marketing
– manufacturers
Chart 4.5: Importance of air services for
sales and marketing
- service companies
Source: OEF survey of UK companies (2006), Q7 Source: OEF survey of UK companies (2006), Q9

4.4 The importance of aviation for imports
Imports are just as vital a component of UK trade as exports. While exports support jobs,
imports provide goods and services that consumers wish to buy, capital equipment for
investment, and raw materials and sub-components needed by UK manufacturers. The
economic benefits of trade arise from selling to others products that the UK is relatively
efficient at producing in exchange for buying products that others can produce relatively
more efficiently than the UK, not from one side or other of the process in isolation.
It is not just consumers who benefit from the importing of cheaper products from
elsewhere or the availability of a wider range of goods and services. The same applies
to producers, who are able to operate more effectively if they can source inputs from a
variety of places around the world according to where they are produced most efficiently
– nearly 60% of companies in our survey report that air services are either vital or very
important for the efficiency of their production and supplier relationships (Chart 4.6).

0
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Passenger
Services
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Total
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Vital Very important Sometimes important
% %
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% %


39
Chart 4.6: Importance of air services for efficiency of
production & supplier relationships
Source: OEF survey of UK companies (2006), Q7

Table 4.5 shows the most important products imported into the UK by air from the outside
the EU (corresponding to Table 4.4 for exports). As on the exports side, machinery,
mechanical appliances and electrical equipment make up the largest proportion of air
freighted imports, highlighting the importance of air freight for production and investment
as well as consumption.
Table 4.5: The Ten Most Important Sectors in UK Air Freighted Imports from
Non-EU Countries, 2005


£bn
As % of all
airfreighted imports
from non-EU
As % of all
imports of sector
from non-EU
Machinery, mechanical appliances and
electrical equipment 19.5 39.2% 61.6%
Precious stones and metals 7.3 14.8% 95.7%
Chemicals 4.9 9.9% 52.6%
Optical, photographic, surgical instruments 3.8 7.5% 73.6%
Textiles 2.3 4.6% 22.4%
Art, antiques 1.4 2.8% 77.4%
Base metals 0.6 1.3% 11.6%
Miscellaneous manufactured goods 0.6 1.2% 13.0%
Live Animals, Animal Products 0.4 0.8% 22.5%
Vegetable Products 0.4 0.7% 14.0%

Total imports to UK from non-EU
transported by air 49.8

Source: Business and Trade Statistics
0
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Passenger
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Vital Very important Sometimes important
% %


40
4.5 The future of UK trade
While the EU is currently the destination for the majority of UK exports of goods, this is
set to change. Within twenty years we expect the share of emerging markets within UK
goods exports to increase by a half, and the EU’s share to fall below 50% (Chart 4.7).
Given the much greater use of air services for trade outside Europe, this means that
aviation is set to become ever more important for UK trade. If the proportion of exports
carried by air from the UK to the main trading blocs around the world remains
unchanged, the shifting importance of different markets for UK goods over time would on
its own lead us to expect the current 30% of UK goods exports by value carried by air to
rise to around 35% by 2025. In fact, the nature of goods traded is likely to change over
time too, with a growing proportion of high-tech goods of relatively low weight to value-
added which are more likely to be carried by air. So the actual proportion of UK exports
by value carried by air could easily grow more rapidly than this. Similarly, air services are
likely to become increasingly important for UK trade in services, especially as demand for
financial & business services from China expands.

Chart 4.7: UK trade in goods by destination



0
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60
70
1988 1992 1996 2000 2004 2008 2012 2016 2020 2024
0
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% of total
Source: OEF
North America
EU
Forecast
% of total
Other OECD
Emerging Markets
(including oil producers)


41
5 Aviation supports investment

5.1 Factors affecting where companies invest
Companies’ decisions on where to locate investment depend on a wide range of factors.
Although air services are only one component in the assessment firms make in choosing
where to be based or to locate new investment, a wide range of studies confirm that they
are one of the most important considerations.
Table 5.1, for example, summarises the evidence from the well-known Healey & Baker
European Cities Monitor
18
. This consistently shows that the most important factors
companies consider when deciding where to locate their business are easy access to
markets and customers, followed closely by the availability of qualified staff. However,
transport links with other cities and internationally are next in importance (closely
followed by the quality of telecommunications), with 52% of companies reporting in 2005
that these transport links are an absolutely essential factor to consider when deciding
where to locate their business.


18
European Cities Monitor 2005, published by Cushman and Wakefield Healey and Baker, and based on
surveying 501 companies from nine European countries.
Key points
• Better air transport services encourage more businesses to locate in an area as
well as affecting investment decisions by existing companies.
• A quarter of companies report that access to air services is an important factor
in influencing where they locate their operations within the UK.
• Nearly one in ten companies report that the absence of good air transport links
has affected their organisation’s decisions to invest in the UK. Of these, 30%
chose not to make the investment in the UK.
• In addition, 10% of companies say they would relocate some operations from
the UK if next day international express delivery services – which rely on night
flights from selected UK airports – ceased to be available.


42

Table 5.1: Essential Factors for Locating a Business


% of respondents reporting factor
as “ absolutely essential”
2002 2003 2004 2005
Easy access to markets, customers or clients 57 58 61 60
Availability of qualified staff 59 57 56 57
Transport links with other cities and
internationally
51 56 50 52
Quality of telecommunications 46 49 47 50
Cost of staff 32 35 39 35
Climate governments create for business through
tax and the availability of financial incentives
34 33 36 32
Value for money of office space 30 31 29 31
Availability of office space 27 26 27 30
Ease of travelling around within the city 21 24 25 22
Languages spoken 20 24 28 24
Quality of life for employees 18 15 18 16
Freedom from pollution 12 14 16 13
Source: Healey and Baker European Cities Monitors

Given the importance attached to these factors, it is no surprise that, with London ranked
first out of 29 European cities for its “transport links with other cities and internationally”
as well as for “easy access to markets, customers and clients”, it continues to be rated
the best city in which to locate a business today - ahead of Paris, with an ever wider
margin relative to Frankfurt, Brussels and Barcelona which together make the top 5 cities
in Europe in this survey.
OEF’s survey of UK companies shows similar patterns. Companies rate the size of the
local market and the availability of skilled labour as the most important factors in
determining the country in which they choose to invest (Chart 5.1). But the air transport
network is still rated as vital or very important by more than 40% of companies,
marginally ahead of the cost of labour and business taxes.



43
Chart 5.1: Importance of factors in determining the country in
which organisation chooses to Invest
Source: OEF survey of UK companies (2006), Q14

The Healey & Baker survey reveals the importance of transport links in general in firms’
location decisions, rather than air transport services in particular - although the specific
emphasis on international links suggests that air services will often be the key component
in companies’ minds when responding to the survey. Our own survey reveals more
companies regarding the air transport network as vital or very important than either the
road or rail networks, although the road transport network is rated more highly if only
factors regarded as vital are counted.
Other studies have looked more specifically at what characteristics of transport are
important in affecting location decisions. A recent study by a team from Napier
University
19
explores how firm characteristics affect the relative importance of transport in
their location decisions. Perhaps not surprisingly, they find that the most important factor
governing whether a company needs to be near an airport appears to be “the degree to
which the company is involved in multinational trading or contacts”, and suggest that “air
is the most influential transport factor in the location decisions of most overseas-based
business investing in the UK”. They argue that rather than air transport in itself, related
factors such as the “availability and efficiency of routes” and “perceived and actually
interchange efficiencies” are more relevant.
5.2 How much difference do good air transport services make?
Air transport is not just a factor that companies think is important in principle for location
decisions. OEF’s surveys of business suggest that it has also had a very important
impact on actual investment decisions:

19
Prof. McQuaid, Prof. Smyth and Cooper (2004) “The Importance of Transport in Business' Location
Decisions”
0 10 20 30 40 50 60 70 80 90 100
Rail transport network
Property costs/rent
Road transport network
Business taxes
Cost of labour
Air transport network
Extent of govt regs on business
Availability of skilled labour
Size of local market
Vital Very important Somewhat important
%


44

• In the UK, one in 12 companies (8%) report that the absence of good air transport
links had affected their own organisation’s investment here in the past (Chart 5.2). Of
those affected, 30% chose not to make the investment at all, although the majority
(65%) went ahead with the investment anyway but faced higher costs (Chart 5.3).

Chart 5.2: Has the absence of good air transport links ever
affected your organisations's decisions to invest in the UK?
Source: OEF survey of UK companies (2006), Q15

Chart 5.3: Effect of absence of good air transport links in
the UK by those affected
Source: OEF survey of UK companies (2006), Q15

0
10
20
30
40
50
60
70
80
90
100
Yes No
0
10
20
30
40
50
60
70
80
90
100
% %
0
10
20
30
40
50
60
70
Went ahead with
the investment
anyway but costs
were higher
Made the
investment
somewhere else
in the UK which
had good air
links
Made the
investment in
another country
which had good
air links
Chose not to
make the
investment at all
0
10
20
30
40
50
60
70
% %


45
• This finding is confirmed by evidence from other countries - a survey OEF conducted
in 2005 on behalf of IATA of businesses in Chile, China, the Czech Republic, France
and the US
20
found an average of 18% of companies reporting that the absence of
good air transport links had affected their own organisation’s investment in the past
(Chart 5.4).
Chart 5.4: Has the absence of good air transport links ever
affected your organisation’s investment?
Source: OEF survey of companies (2005)

• In some cases there are specific aspects of air services that are vital to companies -
in our 2005 survey covering express services
21
, 10% of companies reported they
would relocate some operations from the UK if next day international express delivery
services – which rely on night flights from selected UK airports – ceased to be
available.
We have also found econometric evidence that air transport usage has an effect on the
level of business investment. Research carried out last year for EUROCONTROL
22
was
based on cross-country panel data covering 24 European countries (all except
Luxembourg) for 10 years up to 2003, essentially involved looking for correlations
between air transport usage and business investment, once we have controlled for the
effects on business investment from its other key drivers. As in most models of business
investment, our results showed that business investment is driven in large part by the
relationship between the cost of capital and the return on capital. But the innovation in
our research was to include air transport usage among the long-run drivers of business
investment. The results imply that if air transport usage increases by 10% then business
investment will tend to increase by 1.6% in the long run. For Europe as a whole, air
transport usage increased by 5.1% a year over the last decade, compared with an
increase of around 2% a year in GDP over the same period. Translating the relatively
fast growth of air transport usage via our equation, we found that air transport usage

20
OEF (2005), “Measuring Airline Network Benefits”
21
The Economic Impact of Express Carriers for UK plc, Oxford Economic Forecasting, 2006.
22
‘The Economic Catalytic Effects of Air Transport in Europe’, Oxford Economic Forecasting, 2005
0
10
20
30
Chile China Czech Rep France US Total
0
10
20
30
% Yes % Yes


46
contributed just under one-third of the growth in European business investment over the
last decade. Average annual growth in business investment was 0.6% points higher over
the last decade than it would have been had air transport usage grown no faster than
GDP.
A recently completed study by OEF for IATA
23
takes the analysis a step further by
considering not just air transport usage but the contribution of aviation to the connectivity
of companies. As explained in Chapter 7, this was done by constructing a measure of
‘connectivity’ for major airports across the EU based on the number of flights from a
given airport weighted by the importance of each of the destinations served. The results
of this research imply that a 10% increase in connectivity (relative to GDP) is associated
with a 3.5% increase in the level of fixed investment in the long run.
5.3 The impact of air services on location within the UK
It is not just international location and investment decisions that are influenced by air
transport. Access to air services also influences companies’ decisions on where to invest
within the UK. Indeed, this effect appears to be of even greater importance than the
impact on the country in which firms choose to locate: more than one in four companies
(26%) report that access to air services is an important factor in influencing where the
company locates operations within the UK (Chart 5.5).

Chart 5.5: Is access to air services an important factor in influencing
where your company locates its operations in the UK?
Source: OEF survey of UK companies (2006), Q16

Even more strikingly, for companies in London and counties close to Heathrow
24
almost
half (45%) of companies report that access to air services is an important factor in
influencing where their UK operations are located in the UK (Chart 5.6).


23
‘Airline Network Benefits: measuring the additional benefits generated by airline networks for economic
development’, IATA J an 2006
24
We have included Berkshire, Buckinghamshire, Middlesex and Surrey in this category.
0
10
20
30
40
50
60
70
80
90
100
Yes No
0
10
20
30
40
50
60
70
80
90
100
% %


47
Chart 5.6: Is access to air services an important factor in influencing
where your company locates its operations in the UK?
Source: OEF survey of UK companies (2006), Q16
0
10
20
30
40
50
60
70
80
90
100
Yes No
0
10
20
30
40
50
60
70
80
90
100
% %
Companies in London and
counties close to Heathrow


48


Case studies

It is clear from a number of the interviews we carried out with companies and RDAs
that the availability of air services or the lack of them can have a significant effect on
what economic activity takes place in the UK and where it is located.

A medical equipment supplier based mainly at Inverness believes passenger
services from the local airport are vital. They are very worried that Inverness could see
a further deterioration in London air links, which could leave the site vulnerable.

The defence and electronics firm Thales regards air services as critical to the UK
marketing effort in winning both defence and civil orders. If UK air services could not
meet their needs then the business would be transferred from the UK back to France
or other subsidiaries.

Foster Wheeler Energy Ltd is the UK arm of a US company which is now their prime
business. Heathrow is a major factor in this development. Over 90% of the business is
done overseas with the bulk outside of Europe. If UK air services were to deteriorate
then much of this business could be lost.

The Reading office of Ernst & Young finds that many staff travel overseas for their
work and over 50% of turnover involves overseas clients or work overseas for UK
clients. This work could not be done without the varied services available from London
airports, especially Heathrow.

In the East Midlands, there is evidence that the express freight role of NEMA does
help attract key businesses - for example, two of the world’s largest freight integrators
have large facilities/investments based at the airport. For foreign-owned, and
internationally competitive companies, EMDA would expect air access to rank fairly
highly in influencing their investment location decisions, although they suspect that it is
less important than labour supply/skills issues, and potentially the ease of route to
market within the UK (surface transport access). The OEF Express Freight survey*,
although based on a small sample, shows that around 10% of firms would relocate
from the East Midlands region, and potentially from the UK, if international next day
delivery services were no longer available. EMDA expects this figure to grow as the
region's economy moves increasingly towards higher-value, higher-skill manufacturing
and service sectors.
* The Importance of the Express Delivery Industry for the East Midlands Economy’, OEF J anuary 2006.


49
6 How aviation supports growth sectors

6.1 Growth sectors
A key theme of government industrial policy is that growth depends on building the so-
called ‘knowledge economy’. The 1998 DTI White Paper on Competitiveness defined
this as sectors in which “the generation and exploitation of knowledge has come to play
the dominant role in wealth creation”. “Creating Wealth from Knowledge”, the DTI’s 5
year programme launched in November 2005, reiterated the theme: “We know from
experience that the best way – indeed the only effective way – to respond to globalisation
is to build a strong, modern knowledge economy.”
The UK economy grew on average by 2.8% a year between 1995 and 2005. Within this
strong performance, sectors which grew especially rapidly include pharmaceuticals
(average growth 4.9% over the last decade); banking and finance (5.1% a year);
communication services (8.3% a year); computer services (10.9%); and other business
activities such as consultancy (5.9%). If the DTI’s stress on the ‘knowledge economy’ is
correct, these sectors – possibly among others – will be the main drivers of UK economic
growth over the next ten years, and this is indeed what is implied by OEF’s international
industry forecasts. It will be crucial that the economic infrastructure is in place to allow
these sectors to flourish.
Within manufacturing, ‘knowledge-intensive’ industries produce high value/low weight
products where air freight is important. In addition ‘just-in-time’ inventory management
has become the rule in these industries and this cannot be managed without air freight
services to ensure rapid and reliable deliveries of components.
However, four of the five fastest-growing sectors in the last decade have been in the
services sector. For these sectors, it is business travel rather than freight which is the
critical element of the air transport infrastructure. And, of course, business travel also
plays a key role in the success of manufacturing sectors (for example, enabling their staff
to attend meetings with clients) and for R&D-intensive growth sectors such as
pharmaceuticals where employees, for example, need to keep in touch with latest
research internationally by attending professional research seminars.
Key points
• The government recognises that building a strong, modern knowledge economy
is the key to meeting the challenges of globalisation.
• Many of the growth sectors on which the future of the UK economy depends
are particularly dependent on air services for competing effectively in the global
economy.
• London’s successful cluster of international financial services is a key example
of a knowledge-based sector that is heavily reliant on aviation. But high-tech
sectors within manufacturing also report a much higher proportion of sales are
dependent on air services than other manufacturers.
• The UK economy is therefore set to become increasingly dependent on aviation
as the structure of the economy evolves.


50
6.2 Growth sectors and aviation
The importance of air services to growth sectors is reflected in the substantial amounts
they spend on passenger, freight and express services. As in our 1999 report, we have
ranked sectors of the UK economy both by their growth over the past ten years and by
how much they spend on aviation (see Annex B for detailed tables):
• Looking at how much sectors spend on air transport services as a share of their total
spending on transport services reveals that several fast-growing services sectors -
communication; banking; computer activities; R&D; other business activities - are
intensive users of aviation within their transport budgets. The correlation between the
rankings for growth and for aviation use is 0.36, which is significant at the 5% level,
and is very similar to the equivalent result in our previous study.
• As in our previous study, we have also looked at air transport usage in terms of each
sector’s spending on air transport services per employee. In this case, however, the
relationship with sectors that have seen the most rapid growth over the past ten years
is rather less clear than before, with a correlation coefficient of 0.17 compared with
0.35 in 1999.
The importance of air services to companies in sectors of the economy that are likely to
be critical for the future growth on the UK economy is also highlighted by results from our
latest survey of UK companies. Not surprisingly, a significant proportion of companies do
not regard any of their sales as depending on air services - for example, because they
serve only domestic markets. But for some sectors air services are vital:
• 23% of financial & business services companies regard more than 20% of sales as
depending on air services, compared with 11% of other private services companies
(Chart 6.1).
Chart 6.1: What proportion of your company's sales do you
think depend on air services?
Source: OEF survey of UK companies (2006), Q8

0 10 20 30 40 50 60 70 80 90 100
High-tech
Manufacturing
Traditional
Manufacturing
Other services
Financial &
business services
61-100% 21-60%
%


51
• 22% of high-tech manufacturing companies report that 60% or more of their sales
depend on air services, compared with 12% for other manufacturers.
It has been suggested that, while air services may have been an important factor in the
success of growth sectors in the past, new technologies mean that air services will be
less important to future growth. Firms are expected, for example, to make increasingly
sophisticated use of electronic communication, video-conferencing, and other advanced
technologies to reduce the need for staff to fly for meetings. Indeed, over 40% of
companies in our survey reported that electronic communication could substitute for air
services to a large extent, and 90% thought this to at least some extent (Chart 6.2). In
addition, one of the companies we interviewed in more detail reported that it strongly
encourages the use of electronic communication and video conferencing, and that this
saves a large amount of European travel, especially for inter-functional meetings.
Among the physical means of transport, as many companies thought there was scope for
substituting road transport for air services if necessary as thought rail transport could be
used instead.
However, it would be a mistake to conclude from these survey responses that air
services will become less important to economic growth in the future. Electronic
communication and video-conferencing have been around for several years now and
business use of aviation is still generally rising not falling. Most companies find that for
some purposes there is still no substitute for face-to-face contact, and in an increasingly
integrated world economy the need for international contact continues to rise. It is no
surprise therefore that very few companies reported in our survey that they expected
their dependency on air transport services to be less over the next 10 years than it is
now, with two-thirds of companies still expecting their dependency on air passenger
services to be somewhat or substantially more (Chart 6.3). Indeed, it is possible that
electronic communication actually increases the need for air travel - for example, when
initial contacts are made by e-mail but face-to-face contact is still needed to clinch a deal.



52
Chart 6.2: Extent to which other modes of transport or
communication can be substituted for air services
Source: OEF survey of UK companies (2006), Q13

Chart 6.3: Dependency on air transport services over the next
10 years
Source: OEF survey of UK companies (2006), Q25
0
10
20
30
40
50
60
70
80
90
100
Passenger
Services
Freight
Services
Express
Delivery
0
10
20
30
40
50
60
70
80
90
100
Substantially more Somewhat more Unchanged Somewhat less
% %
0
10
20
30
40
50
60
70
80
90
100
Electronic
communication
Road Rail Sea
0
10
20
30
40
50
60
70
80
90
100
To a large extent Somewhat
% %


53
6.3 The City of London
London’s successful cluster of international financial services, together with City-related
business services, is a key example of a knowledge-based sector that is heavily reliant
on aviation. Financial and business services have accounted for more than half of the
overall net increase in employment in the UK in the past twenty years, during which time
this area of the economy has changed from employing 40% fewer people than
manufacturing to providing 80% more jobs than the whole of UK manufacturing. And this
remains a key area for future growth – on our projections, financial and business services
will employ more than three times as many people as manufacturing by 2015 as they
continue to expand while manufacturers continue to shed labour. Within this key growth
sector, the City of London occupies a unique position as a core wealth-generating
component of the UK economy, generating high value-added jobs and competing
successfully in the global economy.
A survey we conducted for an earlier study highlight the critical importance of air services
to companies in the City and Central London Business District (CLBD)
25
:
• Almost 70% of firms considered air services to be critical for business travel by their
staff.
• 50% of respondents considered air services to be critical for travel by their clients to
meet with them.
• While new technology, such as video-conferencing, can be useful, companies
considered flying for face-to-face meetings still to be vital to winning new business
and developing client relationships.
Good air services appeared even more important for companies in the City and CLBD
than in the rest of the UK, for two reasons:
• Business in London, and particularly in the City, is much more concentrated in the
financial services sector than for the UK as a whole. Average spending per
employee on air services by the financial services sector is six times the average for
UK business as a whole.
• London-based organisations in the financial and business services sectors are
typically much more international than their counterparts in the rest of the UK. This is
especially true in investment banking, but also applies, for example, to the legal and
accountancy professions. Moreover, some of the companies we interviewed
emphasised that the international aspects of their business are becoming
increasingly important.
This survey supported the widely held view that London’s air service network currently
provides a competitive advantage over the continent. For example, 48% of firms replying
to the survey considered London to be the best served European hub and only 7%
considered it worse than continental airports. London firms were generally very well
satisfied both with the number of destinations and the frequency of service offered by
London’s airports.
Nevertheless, this survey of London businesses suggested that the government should
make improvements to the air services network in the South East one of its priorities. In
particular, London businesses want additional runway capacity to be developed in the
South East more quickly than the government’s current plans imply. For example, 60%
of firms reported that additional runways will be needed within the next 10 years for the
success for their business.

25
‘Aviation Services for the City of London’, Corporation of London 2002


54
Our survey suggested that there is some scope for improved rail travel to substitute for
business travel by air. However, this was generally limited to journeys to Paris, Brussels
and other parts of the UK. Strikingly, 22% of firms thought the train is hardly a good
substitute at all for air travel within the UK, let alone to other continental destinations.


Case study: City Investment Bank
As part of our 2002 study of air services for the City of London, we interviewed the
European Travel Manager from a leading investment bank with a large office employing
a few thousand staff in the City of London. In 2001 the bank spent around £10 million
on business travel by air, with the London staff making about 20,000 round trips, mainly
to the US and continental Europe. Key points arising from that interview included:
• Good air services are vital to the bank: it is (as it has been for many years) a global
firm, with offices and clients throughout the world. The recent improvements in
audio-visual teleconferencing technology mean that – if anything – the need for good
air services is slightly reduced, but it is still vital. That is because audio-visual
technology can never replace meeting clients face-to-face, so it is really a
complement rather than a substitute for air travel. Face-to-face meetings (and
therefore air travel) are indispensable, especially in the early stages of a relationship
with a client.
• If there are no improvements in the provision of air services into and out of London
over the next several years, there is a significant risk that the bank (and/or other
large City-based firms) will relocate their business abroad. In the case of the bank,
the likely location would be Frankfurt, where it considered the provision of air
services to be a lot better than London.


55
7 The importance of connectivity

7.1 Introduction
The value of air transport to a business clearly depends on air services being available
that allow either passengers or freight to travel between the desired origin and
destination for a trip. The ease with which this can be done will depend both on the
range of destinations served by air services that can be accessed and on their frequency.
In other words, it depends on how well connected a location is with other parts of the
world by air services.
Research by OEF for IATA
26
has considered the impact of connectivity on the
productivity performance of a range of countries over the last decade. This analysis used
a connectivity indicator developed by IATA based on the number of flights from a given
airport weighted by the importance of each of the destinations served. It considered the
economic significance of aviation’s role as a connected network as analogous to that of
banking or telecoms networks. In broad terms, our econometric results (discussed in
Chapter 8) suggested that a 10% improvement in connectivity (relative to GDP)
increases both long-run productivity and GDP by 0.9%.
7.2 The importance of hub airports
Hub airports clearly play a key role in providing connectivity. Given its importance both
as a hub airport and as a provider of direct flights to a large catchment area within the
UK, it is no surprise therefore that our survey found that Heathrow is rated as of vital
importance by more companies than any other UK or European airport (Chart 7.1). 32%
of companies regard Heathrow as vital to their organisation and a further 22% consider it
to be very important.


26
‘Airline Network Benefits: measuring the additional benefits generated by airline networks for economic
development’, IATA J an 2006
Key points
• Aviation users depend on a network of services providing connectivity to a wide
range of destinations.
• Nine out of ten companies in London or counties close to Heathrow regard the
airport as either vital or very important to their organisations.
• Elsewhere in the UK, Heathrow is still considered vital or very important to more
than 40% of companies, although regional airports are the airport of choice for
many when feasible – they are used very frequently for direct short-haul flights
by half of all companies.
• Passengers transferring between flights at a hub airport increase the viability of
services that benefit direct passengers too, allowing greater a frequency and
range of services.


56
Chart 7.1: Importance of airports
– all UK companies
Chart 7.2: Importance of airports
- London & counties close to Heathrow
Source: OEF survey of UK companies (2006), Q9 Source: OEF survey of UK companies (2006), Q9

Chart 7.3: Importance of airports
- wider South East

Chart 7.4: Importance of airports
- other UK companies
Source: OEF survey of UK companies (2006), Q9 Source: OEF survey of UK companies (2006), Q9

It is also no surprise that the importance of Heathrow is most strongly valued by
companies based in London or counties close to Heathrow
27
(Chart 7.2). It is striking,
however, that as many as nine out of every ten companies in this area responding to our
survey regard Heathrow as either vital or very important to their organisations. In the
wider south east of England
28
, Heathrow is still regarded as vital or very important by
more than 40% of companies, and the same applies to companies elsewhere in the UK.

27
We have included Berkshire, Buckinghamshire, Middlesex and Surrey in this category.
28
We have included the rest of the South East Government Office Region, and the Eastern region, together
with neighbouring counties of Dorset, Wiltshire and Northamptonshire in this category.
0 10 20 30 40 50 60 70 80 90 100
European hub
airports
Other UK airports
Birmingham
Manchester
Stansted
Gatwick
Heathrow
Vital Very important Sometimes important
%
0 10 20 30 40 50 60 70 80 90 100
European hub
airports
Other UK airports
Birmingham
Manchester
Stansted
Gatwick
Heathrow
Vital Very important Sometimes important
%
0 10 20 30 40 50 60 70 80 90 100
European hub
airports
Other UK airports
Birmingham
Manchester
Stansted
Gatwick
Heathrow
Vital Very important Sometimes important
%
0 10 20 30 40 50 60 70 80 90 100
European hub
airports
Other UK airports
Birmingham
Manchester
Stansted
Gatwick
Heathrow
Vital Very important Sometimes important
%


57
7.3 The importance of regional airports
Although many trips require use of a hub airport, regional airports are more convenient
for the majority of businesses. Access from regional airports to a hub is therefore
important for providing companies throughout the UK effective connectivity. This point
was reinforced in a large-scale survey by the British Chamber of Commerce in 2004
29
in
which companies deemed access to a local/regional airport as of “prime importance”,
while accessing “Heathrow, Gatwick and the other London airports is not supported as
strongly as regional access”
30
(Chart 7.5).
Chart 7.5: Importance of access to airports

One way of interpreting this finding is simply that for most companies a local airport is a
lot more convenient than a London airport and will therefore be used whenever possible.
However, it is clear that the UK’s hub airport is used by companies from all over the
country. Airports outside the South East are used very frequently for direct short-haul
flights by half of all companies, and used sometimes by a further 20%. But half of all
companies also use regional airports for connections to international flights from
elsewhere in the UK, which will be predominantly from London (Chart 7.6).


29
Getting Business Moving (BCC, 2004) surveyed a total of 1,933 companies
30
Ibid, p9.
0 10 20 30 40 50 60 70 80 90 100
Other London
airports
Heathrow
Local Regional
Airport
Not stated Not at all important Not very important
Neither Important Very important
Essential
%
'Not important' 'Important'
'Neither'
Source: BCC, Getting Business Moving, 2004


58
Chart 7.6: Use of airports outside the South East of England
Source: OEF survey of UK companies (2006), Q10
7.4 The impact of interliners
Where connecting flights are required, businesses do not necessarily care whether they
interline via a UK or continental hub – more companies use regional airports for
connections to international flights from Europe than for connections to international
flights from the UK (Chart 7.6). And of companies who report that access to air services
is an important factor in affecting where they locate within the UK, 60% report that being
close to an airport with direct links to a European hub airport is vital or very important,
compared with 40% who consider being close to an airport with direct links specifically
with Heathrow is important (Chart 7.7). Nevertheless, connecting via a UK hub is clearly
preferred by respondents if that option is available – 30% of companies report that
transferring between fights at a UK hub is very acceptable, whereas only 20% consider
transferring between flights at a continental hub airport to be that acceptable (Chart 7.8).
Despite this preference, it is clear that for many companies transferring between flights at
a continental hub rather than Heathrow for long-haul connections is accepted when the
resulting service matches travellers’ needs more closely. Over 80% of companies report
that transfers at a continental hub are either very or sometimes acceptable, almost
exactly the same proportion as for transfers at Heathrow.

0 10 20 30 40 50 60 70 80 90 100
Very frequently Sometimes Occasionally
%
Direct short-haul
flights
Direct long-haul
flights
Connections to
international
flights from UK
Connections to
international
flights from
Europe


59
Chart 7.7: Importance of air services in influencing company
location
Source: OEF survey of UK companies (2006), Q16

Chart 7.8: Acceptability of connection options between flights
Source: OEF survey of UK companies (2006), Q20
0 10 20 30 40 50 60 70 80 90 100
Close to airport with direct links to
particular European cities
Close to airport with direct links to
European hub airport
Close to airport with direct links to
Heathrow
Within easy access of Heathrow
Vital Very important Somewhat important
%
0 10 20 30 40 50 60 70 80 90 100
Transfers between flights at a UK hub
airport
Transfers between flights at a continental
hub airport
Transfers involving changing between
two airports in the same region
Transfers between flights by same airline
or within an Alliance - one booking
Transfers between flights by airlines -
separate booking for each flight
Very acceptable Sometimes acceptable Not acceptable
%


60
Nevertheless, looking at this issue from a broader perspective than that of an individual
company, there are factors that suggest these two options will not necessarily be
equivalent. Most importantly, the existence of interlining passengers transferring onto a
particular route has a major effect on the frequency of service that can be offered on that
route. This higher frequency of service will be of benefit to direct passengers too, who
will have a greater choice than otherwise of when to fly. Similarly, the use of a UK hub
rather than a continental one can lead to a better hub connection itself since interlining
demand for this connection is likely to be supplemented by more demand for point-to-
point journeys on the same route. So there are spin-off benefits to other UK passengers
from the use of a UK hub by interliners.
In some cases the higher frequency will itself allow passengers from within the catchment
area of the hub to take advantage of direct flights rather than themselves transferring
between flights elsewhere. The ability to fly directly rather than having to change to a
connecting flight is seen as vital or very important by 40% of companies even for long-
haul flights, and by 70% for flights within Europe (Chart 7.9).
Chart 7.9: Importance of being able to fly directly rather than
having to change to a connecting flight
Source: OEF survey of UK companies (2006), Q19

From a UK-wide perspective, the level of connectivity provided by the hub will be
enhanced not only by the presence of interliners but also by the existence of a greater
number of services to regional airports around the country. Some of the more
geographically peripheral areas of the UK sometimes consider that access to a
continental hub is inferior to access to a UK hub because it affects the area’s
international ‘prestige’. They fear knock-on impacts on inward investment if the lack of a
link with Heathrow raises doubts in overseas investors’ minds over the government’s
view of the region and commitment to the success of the local economy.
0
10
20
30
40
50
60
70
80
90
100
Flights within Europe Long haul flights
0
10
20
30
40
50
60
70
80
90
100
Vital Very important Somewhat important
% %


61
8 Aviation supports business efficiency and economic growth


8.1 How aviation raises productivity
One of the key findings of our 1999 study was that improvements in the UK’s transport
infrastructure have an impact on the efficiency of business operations, boosting Total
Factor Productivity (TFP)
31
and hence the economy’s potential GDP. TFP is the key
ingredient of economic performance over-and-above the input of labour and capital and
is critical to achieving high and sustainable growth rates for the economy, and hence
more wealth and higher living standards.
Many of the ways in which aviation contributes to business efficiency and productivity
growth are clear from the discussion in previous chapters of this report. The role of
aviation in facilitating international trade (Chapter 4), for example, allows companies to
increase sales and to improve the efficiency of production and supplier relationships.
Similarly, the role of aviation in supporting investment (Chapter 5) enhances productivity -
inward investment has particular benefits as it can introduce new technologies or
management techniques into the economy. Air travel also enables organisations to be
managed more effectively - for example, by making it easier for senior executives to visit
subsidiaries or parent companies in another country. 70% of companies in our survey
report that passenger services are vital or very important for the management of their
organisation (Chart 8.1), and this role in itself is likely to reinforce the impact of aviation
on inward investment.


31
TFP measures the contribution to GDP of intangible factors such as technology, R&D, management and
efficiency to output, and is calculated by looking at how much output has increased after taking account of
any increases in capital and labour used in production.
Key points
• Air services help to improve the competitiveness of almost all aspects of
companies’ operations, including sales, logistics and inventory management,
production and customer support.
• By expanding the size of the market that can be served, aviation acts as a spur to
innovation, increases sales and profits, allows more scope to exploit economies of
scale and increases competition.
• Earlier econometric work by OEF on the impact of business use of air services on
productivity in the rest of the economy has been updated with new data and
refinements to the estimation methodology. Unlike the previous study, a distinct
effect on productivity from changes in air transport usage is now found rather than
just an effect from transport usage in aggregate.
• The results imply that if growth in business use of aviation services (both
passenger and freight) was held back by 1 percentage point a year over a thirty
year period there would be loss in potential GDP of 1.8% a year by the end of the
period.


62
Chart 8.1: Importance of air services for management of
organisation
Source: OEF survey of UK companies (2006), Q7

Perhaps the most direct advantage which air transport brings to businesses, though, is
that it allows them to serve a bigger market. Air transport means trade with distant
markets is easier and cheaper, and that goods and services can be marketed on a global
basis. The ability to serve a larger market has a number of consequences (Chart 8.2).
The biggest effect according to our survey is as a spur to innovation, presumably
because the costs of innovation can be spread across a greater number of potential
sales. 40% of business report that air transport services had a substantial impact on
incentives to be innovative, and 70% report that this is affected at least to some extent.
Companies also report that the access air services gives them to a bigger market leads
to increased sales and profits, more scope to exploit economies of scale and increased
competition. While not necessarily viewed as positive by individual companies,
increased competition is a significant benefit for consumers and economic performance
more generally. It drives down prices and encourages improvements in the quality of
goods as UK firms face increased pressure from foreign rivals.
Looking specifically at passenger services, companies report that they are of greatest
importance for meeting clients and potential clients, for management of foreign
subsidiaries and/or their management of foreign owners, and for networking with
potential collaborators and partners in other countries (Chart 8.3). All these factors have
the potential to improve the efficiency of companies’ operations.

0
10
20
30
40
50
60
70
80
90
100
Passenger
Services
Freight
Services
Express
Delivery
Total
0
10
20
30
40
50
60
70
80
90
100
Vital Very important Sometimes important
% %


63
Chart 8.2: Implications of being able to serve a bigger market
Source: OEF survey of UK companies (2006), Q11

Chart 8.3: Importance of passenger air services to organisation
Source: OEF survey of UK companies (2006), Q21

0 10 20 30 40 50 60 70 80 90 100
To attract & retain staff
Managers from abroad to oversee
organisation
To oversee foreign subsidiaries
Network with collaborators and
partners in other countries
To meet clients & potential clients
Vital Very important Sometimes important
%
0 10 20 30 40 50 60 70 80 90 100
Reduce costs by air import of
products
Greater incentive for R&D
Greater incentive to invest in other
countries
Greater incentive to invest in the UK
Face tougher competition from
foreign rivals in home market
Increased sales outside Europe
Greater ability to exploit economies
of scale
Increased sales in UK & Europe
Increased profits
More innovative as a company
Substantially To some extent
%


64
8.2 How firms would be affected by a deterioration of air services
The importance of aviation for the efficiency of companies across the wider economy is
also highlighted by their assessment of the impact that a deterioration in air services
would have on their organisations (Chart 8.4). Nearly one in five report that they would
be very badly affected; a further one in four would be quite badly affected; and most of
the rest would be inconvenienced. Only one in eight companies report that they would
not be significantly affected.
Chart 8.4: Effect of deterioration of air services on
organisations
Source: OEF survey of UK companies (2006), Q27

These adverse effects would be felt in a variety of ways. The most widespread concern
is the potential loss of customer contact, with 60% of companies reporting that they
would be very badly or quite badly affected in this way, and just over 40% reporting the
same with regard to lost orders (Chart 8.5). Particularly striking in the context of the
efficiency of UK plc is that nearly half of companies (46%) report that they would be very
badly or quite badly affected by increased costs, while 38% report that innovation would
suffer.
0
10
20
30
40
50
60
70
Very badly
affected
Quite badly
affected
Inconvenienced Not significantly
affected
0
10
20
30
40
50
60
70
% %


65
Chart 8.5: Effects of deterioration of air services
Source: OEF survey of UK companies (2006), Q27

8.3 Estimating the impact on productivity econometrically
Given these effects, it is natural to look for quantitative evidence that business use of
aviation has had an impact on productivity. The results presented here build on OEF’s
analysis of the contribution of the aviation industry made in 1999. That used
disaggregated data for UK industry and services to explain the growth rate of TFP. The
academic literature at the time found that a 10% increase in transport services would
increase aggregate TFP by 0.5-4.0% - a rather broad range. OEF’s study found a figure
- 1.3% - towards the lower end of that range.
There are several reasons to revisit this work again. First, data for several more years
are now available and might help refine our estimates. Second, one disappointment from
the first exercise was the finding that a significant relationship only existed between the
growth rates of the variables of interest. Finding a model where the level of output
explained the level of TFP would increase confidence in the results and be more
persuasive of the economic link. Finally, in the previous exercise, we were not able to
find a relationship between TFP and aviation output alone - the only statistically
significant relationship was given by using total transport output. Even though the
avenues through which transport affects productivity clearly apply to air transport just as
much, if not more, than other means of transport, the evidence would be clearer if we
could identify the effect of aviation separately.
In undertaking our new econometric research, data from across 31 different industrial
and service sectors have been pooled. This is more “efficient” in an econometric sense
than just using data on the economy as a whole, since it allows the estimated effects to
be based on a much richer sample of information, while common coefficients can still be
imposed where appropriate across sectors.
0 10 20 30 40 50 60 70 80 90 100
Less investment in R &
D
Some operations would
be moved abroad
Less investment in
foreign subsidiaries
Less investment in UK
operations
Less innovative -
networking is reduced
Lost orders/business
Increased costs
Loss of customer
contact
Very badly affected Quite badly affected Inconvenienced
%


66
The use of air transport services by companies can be measured in several different
ways. For example, we experimented with measures based on the Gross Value Added
(GVA) of the aviation industry. However, our final results use a measure of air transport
services that is more closely aligned to business use of aviation. This was constructed
by combining the number of business passengers at UK airports
32
(Chart 8.6) with the
volume of airfreight (Chart 8.7). The resulting indicator of business aviation use is shown
in Chart 8.8 (and the underlying data are shown in Annex B). The TFP measures used
for each sector were constructed by OEF from OECD data.

Chart 8.6: Business Passengers at UK
airports
Chart 8.7: Freight moved through UK
airports

Chart 8.8: Proxy for business air
transport services
Chart 8.9: Measures of air transport
services



32
We have information on international air travel by purpose (business, leisure) from the International
Passenger Survey. For domestic business trips, we are grateful to DfT statisticians for estimating a time
series based on the incomplete results available from CAA airport surveys.
0
50
100
150
200
1980 1984 1988 1992 1996 2000 2004
0
50
100
150
200
International
Domestic
Total
Source: OEF
1990=100 1990=100
0
50
100
150
200
250
1980 1986 1992 1998 2004
0
50
100
150
200
250
Source: OEF
1990=100 1990=100
0
50
100
150
200
1980 1986 1992 1998 2004
0
50
100
150
200
Source: OEF
1990=100 1990=100
0
50
100
150
200
250
1980 1984 1988 1992 1996 2000 2004
0
50
100
150
200
250
Air transport
services
Business air
transport services
Total
transport
services
Non-air
transport
Source: OEF
1990=100 1990=100


67
8.4 Results
Annex C contains the detailed results of our econometric research. In summary:
• Our equation models the relationship between the use of air services and TFP (ie the
efficiency of producing output after taking account of labour and capital inputs).
• It is estimated on the basis of a ‘panel’ of data for 31 UK industries for 27 years.
• The equation allows the impact of air services on TFP to vary proportionately across
sectors according to how important air services are within the purchases made by
each industry.
• Air services are represented by a series combining business passenger numbers and
freight tonnage, since these are the services that are likely to affect the efficiency of
business operations. This business air usage is calculated relative to GDP to provide
an indicator of the aviation-intensity of the economy.
• The equation implies that, other things equal, a 10% increase in business air usage
would raise GDP by 0.6% (£9 billion) in the long run. Financial services account for
the biggest share of the increase in GDP (£3.0 billion), followed by business services,
and extraction (including oil) – the absolute size of the effects depending on both the
size of the sector and the importance of air services within its costs.
8.5 Other results
It is worth noting that this econometric evidence of the relationship between air services
and the wider economy is supported by work OEF has undertaken in two other studies
since our original 1999 UK report. (These studies have already been discussed in
Section 5.2 in the context of the impact of aviation on investment) The research for
EUROCONTROL
33
involved a cross-country panel of data from 24 EU countries over a
10 year period, looking at the relationship between air transport usage (defined as a
combination of both passenger numbers and freight tonnes) and TFP. Chart 8.10 shows
the positive relationship between TFP and air transport usage (scaled by GDP) across all
24 EU economies that was confirmed by this econometric research.


33
The Economic Catalytic Effects of Air Transport in Europe’, OEF 2005


68
Chart 8.10
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0 5 10 15 20 25
Relationship between air transport usage and
total factor productivity
Total factor productivity
Air transport usage / GDP (at PPPs)
Each point represents one
year's pair of TFP and air
transport data for one
country
Source: OEF



The long-run relationship identified in that modelling implies that a 10% increase in output
of air services would lift productivity and potential output by 0.56% in the long run – in line
with our estimates for the UK. In terms of historical performance, the results imply that
the rapid growth in air transport usage over the last decade has boosted long-run
underlying productivity (ie TFP) by 2.0% across the EU25.
The study for IATA
34
comes to similar conclusions, but takes the analysis a step further
by considering not just air transport usage but the contribution of aviation to the
connectivity of companies. As explained in Chapter 7, this was done by constructing a
measure of ‘connectivity’ for major airports across the EU based on the number of flights
from a given airport weighted by the importance of each of the destinations served. The
results of this research imply that a 10% increase in connectivity (relative to GDP)
increases both long-run productivity and GDP by 0.9%.
The impact of aviation on TFP boosts the economy’s potential output over-and-above
any impact that improved air services have on investment – that is, TFP measures the
impact on GDP for a given level of the capital stock (and labour). But OEF’s work for
both EUROCONTROL and IATA also identified a positive impact from air transport usage
or connectivity on the level of business investment that occurs in the EU (see Chapter 5).
The overall impact of increases in air transport usage on economic performance – ie on
GDP and hence on wealth and living standards – will therefore be larger than the impact
on productivity alone.

34
‘Airline Network Benefits: measuring the additional benefits generated by airline networks for economic
development’, IATA J an 2006


69
9 Quantifying the overall economic impact of airport development


9.1 Overall approach
Our 1999 report on the economic impact of the aviation industry provided a measure of
the overall contribution by modelling the implications of constraining the future growth of
aviation. This chapter follows a similar approach to modelling the impact of various
runway proposals in the 2003 Aviation White Paper. The steps involved are summarised
below.
(a) Re-estimation
The first stage involved re-estimating the econometric relationship between the
availability of air services and the productivity of the rest of the economy (see previous
chapter).
Key points
• Our UK Industry-Aviation model allows us to use the results of the relationship
we have estimated between business aviation use and the overall level of
productivity in the economy in order to estimate the wider economic benefits of
different scenarios for future airport development. We present results here for
three specific scenarios. Because of the inter-dependency of passenger flows
at different airports it is not generally possible simply to add the results of
different scenarios together to produce a combined scenario.
• Our results should be regarded primarily as illustrative of the possible wider
economic benefits, since there is inevitably considerable uncertainty over some
of the assumptions made – the model is particularly sensitive to assumptions
about the scale of business use of aviation in the different scenarios.
• We estimate that mixed-mode operation at Heathrow would generate wider
economic benefits of £2.5 billion a year of additional GDP in today’s prices by
2015 (0.2% of GDP). Over the period to 2030, the wider economic benefits
generated would have a total Net Present Value of £35 billion.
• A third runway at Heathrow would generate wider economic benefits estimated
at £7 billion a year of additional GDP in today’s prices by 2030 (0.3% of GDP),
with a Net Present Value of £27 billion. This is lower than the NPV calculated
for mixed mode operation, reflecting the later date at which a new runway could
come into operation and therefore the GDP benefits could start to accrue. By
2030, though, the annual GDP benefits are nearly twice those of mixed mode
operation – estimating NPVs over a longer period than to 2030 would therefore
alter the comparison.
• Full implementation of the White Paper runway proposals would generate wider
economic benefits of over £13 billion a year of additional GDP in today’s prices
by 2030 (0.6% of GDP).
• The net present value of the wider benefits from the full White Paper runway
proposals over the period to 2030 is estimated to be £81 billion – equivalent to
over £1,300 per person in the UK.


70
(b) Updating the model
Second, we have updated our UK Industry-Aviation model to reflect developments in the
structure of the UK economy since 1999 and OEF’s projections to 2030, as well as
incorporating the re-estimated relationship between aviation and productivity. (Annex
A(c) summarises the key routes through which aviation impacts on the rest of the
economy in the model. A more detailed description of the equations in the model can be
found in Annex G of the 1999 report.)
(c) Defining the scenarios
Third, the scenarios being modelled need to be defined by producing a set of
assumptions to characterise the potential impact of the runway proposals being modelled
in terms of usage of air services. The most obvious assumption needed is the impact on
overall passenger numbers. But the model also requires assumptions on different types
of passengers - the model splits the total into UK (terminating) business passengers, UK
(terminating) leisure passengers, foreign (terminating) business passengers, foreign
(terminating) leisure passengers, and transfer passengers. The model includes air
freight usage in tonnes as well, but for simplicity and in order to avoid presenting what
might otherwise be an overstatement of effects, all scenarios assume that there is no
appreciable impact on freight.
Since the impacts on business efficiency and productivity that we are modelling depend
on business use of aviation, the assumptions about additional business passengers are
the most important for the model results. It is not usually clear what impact alternative
runway developments will have on business use of aviation, however. Some estimates
are available from DfT modelling work using their Air Passenger Forecasting Model
35
,
and we have taken these into account in developing the assumptions used here.
However, the DfT model is designed to look at a rather different question. It is based on
fixed underlying demand, with actual passenger numbers being determined by a
proportion of underlying demand being suppressed to match available capacity. Since
business passengers on average place a higher value on being able to travel when they
want to, it is mainly other passengers who are displaced by the model. Since business
passengers therefore account for a relatively small proportion of suppressed demand, the
model tends to show a significantly smaller proportion of business passengers using
additional runway capacity than the average business usage of existing capacity. This is
logical in the context of fixed underlying demand, but does not always reflect airport or
airline expectations of the uses of additional capacity. For our purposes, the assumption
of fixed underlying demand seems unnecessarily restrictive. Creating additional capacity
where it is wanted is likely to do more than just attract a share of suppressed demand.
Underlying passenger demand is also likely to be higher - by encouraging business
investment and allowing businesses to operate more efficiently, appropriate additions to
air service capacity could, for example, enable the UK to get a larger share of overall
European business activity and associated use of air services. We have therefore
typically assumed for our scenario modelling that the business share of additional
passengers lies somewhere between that generated by a fixed demand model like DfT’s
and that which would result from assuming the same business share as for existing
capacity.
(d) Analysing the results
Finally, the estimated impact of each scenario is analysed by comparing the results of
model runs with and without the additional passengers associated with each runway
proposal to estimate the impact on broader economic aggregates, in particular GDP.

35
In particular, some of the proposals discussed in the 2003 Air Transport White Paper are analysed in
‘Passenger Forecasts: Additional Analysis’, DfT, December 2003


71
Results are presented both for the impact on annual GDP in today’s prices in 2015 and
2030, and also for the Net Present Value (NPV) of overall additional GDP over the period
to 2030 using a discount rate of 3.5% in real terms, in line with that set out in the ‘Green
Book’ – the Treasury guide to appraisal and evaluation in central government. (Note that
this is more conservative than much of the NPV analysis of transport options, which
includes benefits up to 2060.)
9.2 Impact of mixed-mode operation at Heathrow
(a) Passenger assumptions
The extent to which the introduction of mixed mode operation at Heathrow would allow
for greater passenger throughput clearly depends on the extent to which environmental
limits at the airport act as a constraint. As an illustration of the potential effect, however,
we have based our scenario on the understanding that if environmental constraints can
be met then operationally mixed mode might allow an increase from a baseline of
480,000 Air Transport Movements (ATMs) a year to 540,000. Very approximately, this
might allow an extra 12 million passengers a year at (in round numbers) 200 passengers
per ATM.
In terms of passenger types, DfT’s Air Passenger Forecasting Model suggests that on
the basis of fixed underlying demand this sort of addition to capacity might lead to around
0.5 million extra business passengers in 2015, rising to 1.5 million extra by 2030 as UK
aviation becomes more heavily constrained in the absence of additional capacity. On the
other hand, business traffic is expected to make up nearly half of Heathrow’s passenger
traffic in 2015 under the assumption of maximum use of existing capacity, and somewhat
more than half by 2030. If these proportions also applied to additional capacity, that
would suggest in the region of 5.5 million additional business passengers might be
serviced with mixed mode operation in 2015, rising to around 7 million additional
business passengers by 2030. BA have told us that as well as allowing some
improvements to frequency on existing routes, mixed mode operations would allow more
destinations to be served from Heathrow, including long haul destinations not currently
served from anywhere in the UK which might otherwise be operated from continental
hubs instead. These new routes would be expected to have a mixture of business and
non-business use, while additional frequency on existing routes is likely to make them
more attractive to business passengers by adding flexibility in scheduling. We have
therefore analysed the potential wider economic impact of mixed mode operation on the
assumption that it generates significant additional business traffic as well as non-
business use. In practice we have averaged the two approaches discussed above of
using fixed underlying demand results or using the business share of existing capacity
use, leading to an assumption of 3 million additional business passengers in 2015, rising
to 4.3 million by 2030.
Timing is another potential source of uncertainty, but the results we present for 2015 are
based on assuming that the full potential increase in passenger numbers is realised by
then.
(b) Results
Comparing a baseline version of the model with one in which passenger numbers are
able to increase by an additional 12 million by 2015 (and thereafter continue at 12 million
a year more than in the baseline case) suggests that the spillover effects on the
productivity of the rest of the economy could generate 0.2% higher GDP (£2.5 billion in
today’s prices) in 2015 than would otherwise be the case. By 2030 the estimated impact
rises to over £4 billion in today’s prices as the economy expands and the assumed


72
business share of the additional passengers rises. The total additional GDP generated
over the period to 2030 has an estimated NPV in today’s prices of £35 billion.

Table 9.1 Modelling the Impact of Runway Proposals
- Mixed Mode Operation at Heathrow
2015 2030
Assumed impact on passenger numbers (million) 12 12
Assumed impact on business passenger numbers (million) 3.0 4.3
Estimated impact on GDP (£bn, 2005 prices) 2.5 4.1
Estimated impact on GDP (%) 0.2 0.2
Estimated impact on GDP (NPV to 2030, £bn 2005 prices) 35
Source: OEF Industry-Aviation Model
9.3 Impact of a 3
rd
Runway at Heathrow
(a) Passenger assumptions
There are, of course, a number of possibilities both for the impact of a 3
rd
Heathrow
runway, if one is built, on capacity and for the timing of such an effect, and the DfT paper
on ‘Passenger Forecasts: Additional Analysis’ includes a variety of options. The purpose
here is simply to illustrate the potential impact of a 3rd runway, without making any
judgements about whether a specific option is in any way a likely or preferred outcome.
To do this, we have assumed an impact on passenger numbers on the same scale as the
largest impact shown in the DfT projections for the various scenarios they modelled, in
order to illustrate what the range of impacts might be. This means that we have
assumed that a 3
rd
runway at Heathrow would lead to 31 million extra passengers by
2030
36
. In terms of the breakdown of passengers by purpose, we have assumed just
under 10 million of these would be additional business passengers
37
.
(b) Results
The baseline scenario we have used here is one in which an extra runway is assumed to
be already operational at Stansted. Using the assumptions outlined above, comparing
with this an alternative scenario with 31 million extra passengers by 2030 suggests that
the spillover effects on the rest of the economy could lead to GDP in 2030 around +0.3%
a year higher than it would otherwise have been (around £7 billion in today’s prices). In
NPV terms, the 3
rd
runway generates increased GDP of £27 billion over the period to
2030. This is lower than the Net Present Value calculated for mixed mode operation, but
this simply reflects the later date at which a 3
rd
runway could become operational and the
GDP benefits could start to accrue – by 2030 the annual GDP benefits are nearly twice
those of mixed mode operation.

36
This assumption is derived by comparing DfT Scenario 7 (STN+1) with Scenario 12s3 (STN+1; LHR+1
2020,655/700).
37
This is equivalent to using the results of the DfT model as far as international passengers by purpose are
concerned (5.3 million additional international business passengers), while for domestic passengers
assuming that business usage accounts for around half the share of additional passengers that it makes up
in the baseline scenario.


73

Table 9.2 Modelling the Impact of Runway Proposals
- 3
rd
Runway at Heathrow
2015 2030
Assumed impact on passenger numbers (million) 0 31
Assumed impact on business passenger numbers (million) 0 9.7
Estimated impact on GDP (£bn, 2005 prices) 0 7.2
Estimated impact on GDP (%) 0 0.3
Estimated impact on GDP (NPV to 2030, £bn 2005 prices) 27
Source: OEF Industry-Aviation Model
9.4 Impact of Full Implementation of White Paper Runway Proposals
(a) Passenger assumptions
In looking at the potential economic spillover effects of all the runway proposals in the
White Paper, we have derived passenger assumptions by comparing projected
passenger numbers in a base case incorporating no new runway development with a
scenario
38
that incorporates one new runway at Stansted by 2015, and by 2030 also
incorporates a 3
rd
runway at Heathrow. Outside the South East, it also includes
additional runway capacity at Birmingham and Edinburgh by then. The net result is that
full implementation of the runway proposals in the White Paper is assumed to lead to
around 14 million extra passengers by 2015 and 58 million by 2030. Business
passengers are assumed to make up a bit less than a third of these
39
.
(b) Results
Comparing a model baseline assuming no new runway development with a scenario with
this increase in passenger numbers suggests that full implementation of the White Paper
runway proposals could lead to GDP in 2015 0.3% a year higher than it would otherwise
have been and in 2030 0.6% a year higher than it would otherwise have been (over £13
billion in today’s prices).
In NPV terms, we estimate that full implementation of the White Paper runway proposals
would generate additional GDP over the period to 2030 valued at £81 billion in today’s
prices, equivalent to over £1,300 per person in the UK.


38
Scenario S15s1 in the DfT paper.
39
As with the scenario above looking at a 3
rd
runway at Heathrow, this is equivalent to using the results of
the DfT model as far as international passengers by purpose are concerned, while for domestic passengers
assuming that business usage accounts for around half the share of additional passengers that it makes up
in the baseline scenario.


74
Table 9.3 Modelling the Impact of Runway Proposals
- Full Implementation of White Paper Proposals
2015 2030
Assumed impact on passenger numbers (million) 14 58
Assumed impact on business passenger numbers (million) 4.4 17.5
Estimated impact on GDP (£bn, 2005 prices) 4.0 13.5
Estimated impact on GDP (%) 0.3 0.6
Estimated impact on GDP (NPV to 2030, £bn 2005 prices) 81
Source: OEF Industry-Aviation Model
9.5 Conclusions
These simulations of the wider GDP effects of different scenarios for the aviation industry
show substantial potential effects (which we also found in our previous study). In terms
of orders of magnitude, one way of looking at these results is in terms of the wider
economic benefit per additional business passenger. For the scenario looking at full
implementation of the White Paper runway proposals, an impact of 0.6% of GDP would
today be equivalent to around £7 billion.
40
For this scenario, £7 billion of wider economic
benefits imply an impact of around £120 per additional passenger, or £400 per additional
business passenger, since it is only business passengers that we expect to generate
these wider benefits. This compares
41
with DfT estimates of perhaps £30 of user
benefits per passenger derived by applying the ‘rule of a half’ to changes in shadow
costs
42
.
It is worth stressing that the DfT estimates are measuring something rather different.
They are looking at the increase in user benefits (‘consumer surplus’) that arise as a
result of travellers saving costs from things like being able to use their preferred airport if
the range of services it has available improves. Our estimates are based on increases in
GDP that are feasible if businesses are able to operate more efficiently and have the
incentive to invest more in the UK.
So is it likely that wider economic benefits could amount to perhaps £400 per additional
business passenger? A benefit of the order of magnitude of £400 per additional
passenger appears a lot in comparison with the likely average fare, even for business
passengers – while we do not have data on fares paid for business trips as such, we
know that the typical business trip is short-haul rather than long-haul, and that a
significant number of short-haul business trips are taken with no-frills carriers. It is worth
bearing in mind, though, that the cost to a business of an employee making a business
trip is much higher than just the price of the ticket itself, including most obviously the cost

40
The impact in 2030 is a lot higher, even in today’s prices, as a result of the real growth in the economy
expected over the next 25 years. But for the purpose of thinking about how the impact compares with other
per capita measures it is easier to look at the results in today’s terms since it is easier to think about orders of
magnitude in comparison with familiar values.
41
This is a simplification, since benefits arise to existing passengers too, so it is not strictly meaningful to
divide our estimated GDP effects just by the number of additional passengers, but that does not alter the
general comparison between the two approaches.
42
See Annex C of ‘Passenger Forecasts: additional Analysis’, DfT December 2003. The ‘rule of a half’ is
based on the average willingness to pay of additional passengers assuming the demand curve is
approximately linear over the relevant range.


75
of the time the trip takes. Compared with the generalised cost of travel rather than just
the ticket cost, the higher estimate of wider benefit set out above does not appear so
large.
It is not at all easy to estimate from the business perspective what the value of an
employee making a trip might be. If the traveller was the CEO of a large corporation who
was able to make a significant contribution to managing an overseas subsidiary by
visiting the site in person then presumably the value could be very large. Similarly, if a
key specialist was able to sort out a problem. On the other hand, if the trip was, for
example, to attend a conference then the payoff would be much more nebulous. But
presumably a company would not pay for an employee to make a trip - and pay his or her
salary while on the trip - if they did not expect it to generate sufficient value to the
company in some form or other.
Perhaps another way of thinking about the value to a company of a business trip is to
regard a typical business passenger as a consultant to the business, and the overall
value of what the passenger is doing as what a consultant would be paid to do it instead.
Of course, consultancy fees vary, from several thousand pounds a day for top lawyers,
management consultants, etc to perhaps a few hundred pounds a day for relatively junior
consultants - an average of £1,000 a day is perhaps not an unreasonable assumption,
which might equate to a reasonably senior consultant in a reasonably-rewarded field.
The majority of this fee goes towards the consulting company's overheads and profits
rather than the consultant's salary, and therefore might be regarded as the value-added
of the trip from the employer's point of view – which might therefore somewhat exceed
our estimate of £400, though the orders of magnitude are similar.
There is quite a tenuous link between this concept of value to the employer and the
concept of the wider benefit of the aviation service, of course. It would be better, for
instance, if we could measure the value to the employer over-and-above the contribution
to overheads/profits that the consultant would be able to generate in the next best use of
their time (ie on a project that did not involve air travel). This additional contribution could
be anywhere from close to zero to the bulk of the gross contribution generated (ie up to
£1,000 in our example) - perhaps in the absence of better information an assumption of a
half would give an order of magnitude of the possible additional benefit derived. In any
case, this sort of argument at least suggests that the wider economic benefit estimates
from our model simulations are consistent with plausible analysis from other perspectives
about the additional value of a business trip by air.


76
10 The costs of congestion in UK aviation


10.1 Congestion in UK aviation
Congestion imposes costs on both airlines, increasing the cost of providing planned
services, and users, whether through the extra time taken to pass through airports or the
time wasted when flights do not leave or arrive on time. With the rapid rise in air traffic in
recent years, congestion is a problem at a number of UK airports - both the average
length of delay and the percentage of more serious delays, of 30 minutes or more, has
risen substantially between 1995 and 2005 (Table 10.1). In the case of Heathrow, the
average delay in minutes has gone up by 63% and the number of flights more seriously
delayed has gone up from just under 11% to close to 14% of the total. However, the
problems are not just confined to Heathrow. Indeed, some indicators of congestion now
look almost as bad for some of the smaller airports.

Key points
• Congestion imposes costs on both airlines - increasing the cost of providing
planned services - and passengers, whether through the extra time taken to
pass through airports or the time wasted when flights do not leave or arrive on
time.
• Congestion costs have been rising over the past decade as passenger
numbers have grown more rapidly than the capacity of the air transport system
to handle them. Our estimates show congestion costs (to both airlines and
passengers) have more or less tripled from nearly £600 million in today’s prices
a decade ago to £1.7 billion today.
• If these trends continue, congestion costs could exceed £5 billion a year (in
today’s prices) by 2015, and approach £20 billion a year by 2030.
• There are a range of possible investments – eg introduction of mixed mode
operations, improvements in air traffic control, new runway and terminal
development – that would reduce congestion, with substantial potential benefits
to the economy.


77
Table 10.1: Delays at Major UK Airports (Scheduled Flights)

1995 2005
Passengers
(millions)
Average
delay
(minutes)
Delays
above 30
minutes (%
of total)
Passengers
(millions)
Average
delay
(minutes)
Delays
above 30
minutes
(% of
total)
Heathrow 45 10.3 10.9 67.9 16.9 13.5
Gatwick 16 11.8 11.2 23.2 17.7 11.6
Manchester 8 6.2 7.6 13 13.1 11.7
Stansted 3.9 8.2 9.6 21 11.8 10
Birmingham 3.3 5.9 6.7 13.5
Edinburgh 3.6 9.9 8.1 14.2
Glasgow 3.9 7.5 6.7 12.9
London City 0.7 12.6 2 11.5
Luton 1.8 6.6 8.4 14.5
Newcastle 1.3 5.9 3.6 13.4
Source: CAA
In some ways it is not surprising that congestion has increased. Between 1995 and
2005, the number of flights in or out of Heathrow has increased by around 13% (Chart
10.1), while the numbers of passengers has risen by over 50%. At the same time, there
has been no increase in runway capacity - Heathrow has to cope with all this traffic with
only two runways whereas most of its rivals have 3, 4 or even 5 runways (Table 10.2). In
terms of total passengers served, Heathrow still leads the way, but it is falling behind
these other major airports in terms of total movements in and out. Of the other major
airports listed here, only Munich has two runways and that is due to expand to three in
2010.
Table 10.2: European Airports Selected Statistics
Runways Growth in routes served
(% change 1996-2006)
Passengers
(2005,
millions)
Movements (2005,
thousands)
Amsterdam 5 8 44.2 421
Frankfurt 3 13 52.2 490
Heathrow 2 3 67.9 478
Munich 2 52 52.0 399
Paris CDG 4 25 53.8 523
Source: FT, CAA, Airports Council International



78
Chart 10.1: Annual air transport movements at Heathrow

Quantifying the costs of congestion in UK aviation is not straightforward. Estimates
based on the total number of minutes lost, for example, take no account of the extent to
which the costs of regular relatively limited delays are likely to differ from rarer substantial
delays even if the total number of minutes lost is the same. Neither do they take account
of any differences between delays that may be built into airline schedules as an expected
part of their planning, compared with one-off unexpected delays. We have nevertheless
produced partial estimates based on a number of strong simplifying assumptions, in
order to provide an indication of the orders of magnitude that may be involved.
10.2 Costs for airlines
Delays impose a range of direct costs on the airline industry. These include the extra
fuel used up as a result of extended flight times (eg circling while waiting for an
opportunity to land), extra aircraft required to operate the schedule, extra wages for
crews working longer hours, dealing with passengers who have missed connections etc.
We have based our estimates of the cost of these effects on internal analysis by British
Airways that puts the average direct cost to the airline of every minute that an aircraft
was delayed at £21.80 in 2002. Assuming that the cost per minute was similar from one
year to the next after allowing for inflation, this would imply costs per minute of £23.40 in
2005 prices. We have also assumed that other airlines face similar costs per minute to
those BA estimate. Table 10.3 sets out the resulting assumptions and inputs into our
estimates of the cost of delays to airlines at the four UK airports with the largest number
of passengers, along with assumptions based on more limited data that we have made
for the other airports.

400
410
420
430
440
450
460
470
480
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
400
410
420
430
440
450
460
470
480
('000s) ('000s)
Source: CAA


79

Table 10.3: Assumptions Used to Calculate the Cost of Delay for Airlines

Average Delay
(minutes)
No of flights
(‘000s)
Cost per minute
(£, 2005 prices)
1995
Heathrow 10.3 435 23.4
Gatwick 11.8 193 23.4
Manchester 6.2 140 23.4
Stansted 8.2 84 23.4
Other 6.9 542 23.4

2005
Heathrow 16.9 470 23.4
Gatwick 17.7 204 23.4
Manchester 13.1 175 23.4
Stansted 11.8 166 23.4
Other 12.6 1025 23.4

These assumptions imply that the total direct costs to all airlines of delays at Heathrow in
2005 was £185 million compared with £105 million in today’s prices in 1995 (Table 10.4).
The total direct cost for airlines from congestion at all airports is estimated to have been
£666 million in 2005 compared with £283 million in 1995.


Table 10.4: Estimated direct cost of delays for airlines (£ million, 2005 prices)

1995 2005
Heathrow 105 185
Gatwick 53 85
Manchester 20 53
Stansted
Other
16
89
46
297
Total 283 666
Source: CAA, BA and OEF calc
But there are also indirect costs of delays for airlines. For a single airline these will
include such things as the loss of future business that arises as a result of customer
frustration with delays. BA estimates that the additional indirect costs to it of delays were
almost as great as the direct costs. However, this is not necessarily the case for the
airline industry as a whole as some of the business lost by one airline is likely to have
been picked up by others. We have therefore not included indirect costs to airlines in our
aggregate calculations. As a result, they are likely, if anything, to underestimate the
costs of congestion at airports.
10.3 Costs for passengers
It is also possible to estimate the cost of delays for passengers, using the information
above on the scale of delays involved at UK airports. The estimates that follow cover
scheduled passengers only.


80
The calculation is heavily affected by the proportion of business passengers at an airport,
since (following the usual approach to valuing time) time lost through delay by a business
passenger is valued using average earnings, which is much higher than the opportunity
cost of lost time assumed for a leisure passenger. We have combined standard
assumptions for these with figures for the total number of passengers and the average
length of delay to produce figures for the total cost of delay.
The calculation that was made is -
Total cost = Average delay * number of passengers * cost per minute of delay

Table 10.5: Assumptions Used to Calculate Cost of Delay for Passengers

Average
delay on
scheduled
flights
(minutes)
No of
scheduled
passengers
(millions)
% of
business
passengers
% of
other
passengers
Cost per
min – bus.
passengers
(pence, 2005
prices)
Cost per
min – other
passengers
(pence, 2005
prices)
1995
Heathrow 10.3 53 40 60 64 13
Gatwick 11.8 16 24 76 64 13
Manchester 6.2 8 24 76 64 13
Stansted 8.2 3.9 24 76 64 13
Other 6.9 28.1 24 76 64 13

2005
Heathrow 16.9 67.9 40 60 89 18
Gatwick 17.7 23.2 18 82 89 18
Manchester 13.1 13.5 18 82 89 18
Stansted 11.8 21 18 82 89 18
Other 12.6 68.4 18 82 89 18

The assumptions used in the calculation are given in Table 10.5 and the results are
displayed in Table 10.6. The value of time is assumed to rise over time with earnings,
and all figures are presented in today’s prices. The total cost of congestion to
passengers at UK airports is estimated to have been about £1,050 million in 2005, up
from £297 million in 1995. Heathrow is by far the largest single contributor to this,
accounting for around 60% of the costs of congestion in 1995 and over 50% in 2005.
This is due not only to Heathrow’s dominance in terms of total number of passengers but
also because a higher percentage of Heathrow passengers are travelling on business.



81
Table 10.6: Estimated Costs of Delays to Scheduled Air Passengers
(£ million, 2005 prices)
1995 2005
Heathrow 181 530
Gatwick 47 126
Manchester 12 54
Stansted 8 76
Other 48 264
Total 297 1049
Source: OEF calc
10.4 Wider impacts of congestion
While this discussion has so far primarily been about the economic costs of congestion,
there are also likely to be social and environmental costs to congestion:
• The delays caused by congestion eat into travellers’ social time, delaying holidays
and leading to frustrated tourists finding themselves stuck at airports (costs of leisure
passengers on “charter” flights are not covered in the above estimates).
• Congestion also has negative environmental benefits as planes are forced to burn
fuel for longer as they are delayed on runways or circling around airports, leading
both to increased carbon emissions and also additional noise and lower air quality for
local residents.
• Surface congestion around airports as both passengers and staff travel to or from the
airport can have similar environmental impacts, as well as an economic cost
43
.
• Severe delays at airports can also have knock-on negative effects on the reputation
of the UK as a whole, which may leading to it being seen as a less attractive place to
visit as a tourist or in which to do business.
10.5 Congestion costs in the future
Congestion costs have been rising over the past decade as passenger numbers have
grown more rapidly than the capacity of the air transport system to handle them. Our
estimates are likely, if anything, to understate the cost of congestion since they make no
allowance for indirect costs to airlines, and no allowance for rising contingency costs for
passengers if the increased possibility of severe delay means that more slack has to be
built into travel schedules. Even so, they show congestion costs (to both airlines and
passengers) having risen from nearly £600 million in today’s prices a decade ago to three
times that much today. If average delays continue to increase at the same rate as over
the past decade then, after taking account of rising passenger numbers as well,

43
Though it is worth noting that the econometric work discussed in Chapter 8 does take account of any
negative impacts on business efficiency from growth in aviation adding to congestion around airports. Since
our analysis estimates the net effect of growth in business aviation usage on productivity, the productivity
data already reflect any disbenefits that adversely affect economic performance. This means that to the
extent that increases in congestion around airports affect business travellers and thereby reduce their
productivity, this is already allowed for in our modelling. So, even allowing for the fact that increases in air
travel can increase congestion around airports and harm productivity as a result, our estimation shows that
the overall effect is still to raise the average level of productivity in the economy as a whole.


82
congestion costs would be likely to exceed £5 billion a year (in today’s prices) by 2015,
and approach £20 billion by 2030.
Of course, there are likely to be several reasons why congestion costs do not grow at the
same rate over the next twenty-five years as they have over the past decade. It is
possible, indeed, that these could be a significant underestimate of the future costs of
congestion since once congestion reaches a certain point then costs tend to increase
exponentially as passenger numbers continue to rise. However, it is probably more likely
that operational decisions would limit delays before they reach this point, since otherwise
if congestion costs did reach these levels, this would probably choke off some of the
predicted increase in passengers. Some of the increase in delays over the past decade
is probably a result of a conscious decision by the industry to accept some increase in
delays in order to put on more services. An equivalent trade-off may not be possible over
the next decade where a runway reaches the upper limit on the number of services it can
accommodate, but even where it is available it is not necessarily the case that the same
decision would be taken to accept further increases in delays.
Whatever we might expect to happen to congestion costs in the next twenty-five years in
the absence of future increases in runway capacity, however, it is likely that there are
substantial potential benefits to the economy to be made by reducing the length of delays
caused by congestion.


83
11 Climate change costs


11.1 Introduction
This report primarily focuses on the economic impact of the aviation industry in the UK.
However, aviation also has social and environmental impacts. Some of these have
already been briefly discussed in previous chapters. For example, Chapter 2 discussed
some elements of the social impact of aviation, while Chapter 10 looked at the issue of
congestion, which has both social and environmental aspects.
In addition to congestion, there are three other significant environmental impacts arising
from aviation:
• noise;
• local air quality;
• the emission of greenhouse gases, affecting climate change.
Earlier work on this subject, including the DfT’s 2003
44
and 2004
45
papers, shows that
greenhouse gas emissions are by far the most important of these in quantifiable terms,
and these are therefore the main focus here. This is not to say that noise and air quality
are not important issues – they can have a major impact in the vicinity of airports, and a
lot of effort is being put into noise abatement and local mitigation measures. There are
also restrictions and regulations in place for noise and air quality that mean airport
development will not be allowed to lead to limits for these being breached. These are
primarily local issues, however, and the main focus of this report is on the impact of the
aviation industry on a national scale. The impact on climate change through greenhouse

44
“Aviation and the Environment – Using Economic Instruments” Department for Transport, 2003
45
“Aviation and Global Warming” Department for Transport, J anuary 2004
Key points
• In addition to congestion, there are three other main environmental impacts
arising from aviation: noise, local air quality and climate, of which the last is by
far the most important in quantifiable terms.
• The combined cost of CO
2
and the potential non-CO
2
climate impacts from UK
aviation is estimated to have amounted in aggregate to £1.4 billion in 2000, and
could reach £4.0 billion a year in today’s prices by 2030.
• The growth in air services in the alternative scenarios for runway development
analysed in Chapter 9 would have implications for emissions, with an estimated
cost ranging from an additional £100 million a year for mixed mode operation at
Heathrow to an additional £700 million a year in today’s prices by 2030 for full
implementation of the White Paper proposals.
• But the economic benefits of the White Paper runway proposals remain
substantial even after allowance is made for the climate change costs of
additional emissions.


84
gas emissions is potentially significant, and the industry has accepted that the costs it
imposes in this way need to be met.
11.2 Potential impact on climate change
Aircraft engines emit carbon dioxide (CO
2
), a greenhouse gas, and nitrogen oxide (NO
X
),
which is not in itself a greenhouse gas but which results in ozone which is. Both of these
are estimated to contribute to global warming and climate change.
It is worth pointing out that at present the UK aviation industry is a fairly minor contributor
to total UK CO
2
emissions. For instance, it is estimated that, in 2000, UK civil passenger
aviation produced 30 million tonnes of CO
2
, which was about 5% of total UK emissions.
The biggest contributors were residencies and businesses, while transport as a whole
accounted for about 24% of total emissions. Moreover, the UK’s entire total of CO
2

emissions only accounts for around 2% of total global production. Consequently, carbon
emissions by the UK aviation industry in 2000 amounted to less than 0.2% of total global
emissions. So, even the complete disappearance of the entire UK aviation industry
would have a negligible impact on total global CO
2
emissions.
However, the government is committed to reducing UK greenhouse gas emissions by
12.5% below 1990 levels by 2008-2012, and has goals of reducing CO
2
emissions by
20% below the 1990 figure by 2010 and 60% by 2050. Since current trends and policies
suggest that CO
2
emissions due to UK domestic air transport and all international air
transport departures from the UK could increase by 2.3 times between 2000 and 2030 to
a level of around 70 million tonnes, such goals imply that the aviation industry will be
under continued pressure to reduce its emissions. The industry, of course, recognises
this and has committed itself to a set of sustainable development goals
46
.
There are essentially three elements needed to assess the cost of greenhouse gas
emissions by the UK’s aviation industry
47
:
• An estimate of the amount of carbon or CO
2
emitted (1 tonne of carbon corresponds
to approximately 3.67 tonnes of CO
2
);
• An adjustment factor to reflect the potential additional climate change impacts of
aircraft associated with NOx emissions and cirrus cloud formation. We have used the
same factor of 2.5 used in the DfT work;
• An economic cost per tonne of carbon or CO
2
.
For 2000, DfT base their calculations on annual CO
2
emissions of 30 million tonnes (8.2
million tonnes of carbon). This figure is purely for civil passenger aviation, so it excludes
the contribution from air freight or from surface transport. UK emissions are defined as
all emissions from domestic flights plus half of all emissions from international flights.
The economic cost is illustrated using a cost of £70 per tonne of carbon. This
assumption is taken from a range of estimates of £35 to £140, and we continue to
present figures here based on this assumption for comparability. It is worth bearing in
mind, though, that this is somewhat higher than the current cost of reducing carbon
emissions elsewhere in the economy as implied by the price of permits under the
European Trading Scheme – permit prices in the range 15-20 euros per tonne of CO
2

equate in broad terms to around £40-50 per tonne of carbon. In total, these assumptions
imply that the cost of CO
2
emissions from UK aviation in 2000 amounted to £560 million.
When the potential non-CO
2
impacts are included using the Government’s adjustment

46
See www.sustainableaviation.co.uk.
47
This follows the approach used in the DfT 2003 and 2004 reports referred to earlier in the chapter.


85
factor, this implies that the total climate cost from UK aviation in 2002 amounted to up to
£1.4 billion.
Calculations of the cost of future emissions are obviously open to a great degree of
uncertainty, not least because of the assumptions that have to be made to produce
estimates of future CO
2
emissions. Various factors need to taken into account in making
the calculations. These include assumptions about demand for air travel, future airport
development including the provision of extra runways, trends in aircraft development that
could lead to increased fuel efficiency, other operational improvements and the possible
introduction of various policy changes such as taxes which could increase the cost of air
travel and so lower the demand. A DfT illustrative baseline calculation in 2004 showed
that the cost of emissions could reach £4.0 billion a year in today’s prices by 2030, based
on emissions rising to 15.9 million tonnes of carbon and per unit costs rising £1 a year in
real terms to £100 per tonne of carbon in 2030. Government policy, supported by the
industry, is that any such increases in emissions should be offset by lower emissions
elsewhere through emissions trading covering the aviation sector.
11.3 Impact on climate change of alternative development scenarios
Chapter 9 looked at the economic benefits that might flow from various alternative
proposals to increase future runway capacity over-and-above that currently assumed in
the base case. However, to get a full idea of the impact of such developments, it is worth
looking also at the environmental impact of these various scenarios.

Table 11.1 Modelling the Impact of Runway Proposals
Description of
scenario
Estimated cost of
additional
emissions
(£2005bn)
Estimated GDP
impact
(£2005bn)
Estimated GDP
impact less cost of
additional emissions
(£2005bn)
2015 2030 2015 2030 2015 2030
Mixed mode operation
at Heathrow
0.1 0.1 2.5 4.1 2.4 4.0
3
rd
runway at
Heathrow
0 0.4 0 7.2 0 6.8
Full implementation of
WP runway proposals
0.1 0.7 4.0 13.5 3.9 12.8
Source: OEF calculations

Estimates of the additional environmental costs of each alternative scenario have been
calculated using the methods outlined in the previous section. The results, which can be
seen in Table 11.1, are derived by multiplying Defra’s estimate of the environmental cost
of carbon (£70/tc in 2000, rising by £1 per annum thereafter) by the adjustment factor of
2.5 assumed by the government and by the quantity of carbon emitted by the additional
flights, assuming this is proportionate to the number of passengers. Everything else in
these scenarios, apart from the additional passengers, is the same as in the base
calculations. So, for example, no attempt has been made to take into account the impact


86
of any additional building work that might be required nor of the additional surface
transport that would be needed to deliver these extra passengers. The results are given
as changes from the base case figures. It is worth bearing in mind, though, that if the
White Paper proposals were not implemented there would be some displacement of
demand for air travel to airports in other, mostly EU, airports which, in turn, means that
the net additional climate costs of airport development in the UK would be below those
shown.
The biggest impact comes from the full implementation of the runway proposals in the
White Paper, which is estimated to raise environmental costs from emissions by around
£0.7 billion a year by 2030 in today’s prices (compared with the wider economic benefit
calculated of over £13 billion a year in today’s prices). The other scenarios cover
developments with rather smaller implications for the number of passengers, and
therefore have corresponding smaller estimated impacts on the environmental impact of
emissions from aviation: building a third runway at Heathrow is calculated to increase
environmental costs by £400 million a year by 2030, while the implementation of mixed
mode operation at Heathrow is calculated to have an impact of £100 million a year. In
each case, this is only a fraction of the estimated wider economic benefit.


87
Annex A: Our approach to the study
(a) Survey
Questionnaires were sent out by OEF to around 6,000 companies and 165 replies were
received (Table A.1). We are very grateful to those organisations who responded.

Table A.1 : Number of Replies to UK Aviation Survey

By Sector By number of employees
High Tech Manufacturing 17 <50 30
Traditional manufacturing 38 51-250 26
Financial & Business Services 29 251-500 37
Other Services 77 501-1000 26
Other 4 1001-5000 28
5001+ 18
Total 165 Total 165

Source: OEF Survey of UK companies, 2006

This represents a solid number of replies from which to draw conclusions - although the
response rate of a bit less than 3% looks relatively low, statisticians generally regard 50
responses as representing a reasonable sample on which to base analysis, more or less
regardless of the size of the population from which the sample is drawn. One danger
with a low response rate, though, might be response bias – a possible tendency for those
most affected by aviation to be most likely to reply to a survey on the impact of aviation.
This is a potential problem with any response rate below 100%, but we have no reason to
think it is a particular problem here. Respondents are widely spread across both sectors
and company sizes, and we also know by inspection that our responses include some
companies that have said they are little affected by air services but have still been kind
enough to compete the survey. We therefore believe a good cross-section of effects is
covered by the survey. Similarly, survey respondents cover a wide range of different
degrees of internationalisation both in terms of organisation and trading relationships
(Table A.2), so there is no reason to believe that responses are dominated by firms who
are more dependent on aviation than the typical UK company or vice versa.



88
Table A.2 : Background Information on Respondents
Is global headquarters in the
UK?
Subsidiaries in other countries?
Yes 127 60
No 37 -
% of turnover of UK
operations from overseas
% of procurement spend for UK
operations secured overseas
<5% 69 67
5-10% 16 21
11-20% 10 24
21-50% 27 21
>50% 34 24

Source: OEF Survey of UK companies, 2006

(b) Case studies
To gain a deeper appreciation of the importance of air services to other parts of the
economy than it was possible to cover in the survey, we held a total of 11 interviews with
a variety of companies across a range of different sectors to discuss in more detail the
uses they make of air services and how they were affected by different aspects of air
services. At the same time, we also discussed (including by telephone or in writing) with
a variety of English RDAs, together with corresponding bodies elsewhere in the UK, how
aviation affects companies in their region. In all cases, we are very grateful to those
organisations with whom we were able to discuss these issues.
(c) Model
The approach we have adopted here is based on the methodology developed in our
1999 study. The structure of our UK Industry-Aviation Model is described in more detail
in that report, and for the current study we have simply updated it with more recent data
and forecasts for UK industries, and with new equations that quantify the relationship
between aviation and productivity elsewhere in the economy based on our latest
econometric research. In summary, the Industry-Aviation Model is an expanded version
of Oxford Economic Forecasting’s well-established UK Industry Model. The main version
of the model is used as an analytical tool to examine the implications of changes in the
overall macroeconomic environment for different industrial sectors of the economy and
the linkages that exist between the different sectors. As such, it already incorporates an
input-output framework of links between different parts of the economy. The version of
the model for our aviation work has been expanded to include the aviation sector of the
economy explicitly rather than simply as part of the transport services sector, and to
incorporate detailed linkages between aviation and other sectors reflecting the
relationships identified in the studies.
Building the model then enables us to look at the potential impact of different scenarios
for runway development in the UK by running different versions of the model with
different projections for passenger numbers under the different scenarios, and looking at
the implied differences that are generated elsewhere in the economy.
The version of OEF’s UK Industry Model used here provides annual forecasts of output,
employment, investment, prices and so on for the UK economy, disaggregated into 31


89
sectors. It incorporates a series of dynamic relationships between different parts of the
model, which are solved simultaneously to generate the forecasts. The simultaneous
nature of the relationships means that any one part of the forecast typically depends on
all the other parts of it, but it is nevertheless possible to pinpoint certain key causalities
within the model.
Output for each sector is estimated using a production function, which relates the level of
output of the sector to the inputs used in the production process. This has three key
elements:
• Employment in the sector. This is determined partly by the level of real wages (the
higher the real wage an employer has to pay, the fewer people he will take on), and
partly by the level of demand for the sector’s output. Demand, in turn, depends partly
on the output of other industries which use the sector’s output as an input to their own
output, and partly on final demand from consumers, exports, etc.
• The amount of capital equipment available, which depends on the industry’s
investment record.
• The sector’s productivity after taking into account the amount of labour and capital
used – ie Total Factor Productivity (TFP).
In the long run the overall level of employment is not determined so much by the level of
demand from particular industries as by the supply of workers looking for a job. If an
expanding industry increases the demand for labour sufficiently, this will, over time, put
upward pressure on wages as firms compete for the available pool of workers. The
resulting inflationary pressure will lead to higher interest rates, which will eventually
choke off the extra demand for labour at a whole economy level. Conversely, if the
demand for labour is below the available supply, over time there will be downward
pressure on real wages and interest rates until the falling cost of employing people is
sufficient to attract additional demand for labour. So, in the long run, it is the labour
supply, investment and productivity that are the key to the economy’s output.
There are four routes through which aviation enters into these relationships and affects
other sectors in the economy, illustrated in Figure A.1:
a) Intermediate demand generates indirect effects on supply chain
Output and employment in aviation will automatically generate demand in sectors
supplying aviation companies. This will in turn affect the level of employment in those
industries, and the additional wages they pay will generate demand and jobs elsewhere
in the economy.
But while the numbers of jobs generated are useful in assessing the contribution of an
industry to a local area, or to the overall economy in the short run, in the long run the
level of overall employment is not determined so much by the level of demand from
particular industries as by the supply of workers looking for a job (as explained earlier).
So, in the long run, employment does not give a reliable indication of the contribution
aviation makes to the UK economy. Its significance lies more in the types of jobs and
industries that the UK will attract in the future and the living standards they can support,
rather than in the overall level of employment we are likely to see.
b) Changes in supply affect aviation prices which affect intermediate costs
The impact of changes in the supply of aviation services on their prices is discussed in
more detail below. The principle, however, is that restrictions in the supply of air services
put up costs for businesses, whether through directly higher fares, longer journey times
as a result of lower frequency of service, or the need to find alternative ways to travel or


90
transport freight. This in turn leads to a loss of competitiveness for those UK industries
which make significant use of aviation, reflected in lower demand for British goods and
services.
c) Aviation output facilitates productivity growth elsewhere
Chapter 8 discusses the relationship between aviation output and productivity growth
elsewhere in the economy. Our estimation work shows an identifiable impact of changes
in aviation output on productivity growth, which is incorporated into the model through the
level of output each industry produces for given inputs. This is critical for the estimates of
the long-run impact of aviation, given the way employment effects tend to be offset
elsewhere in the economy.
d) Productivity also affects returns to capital and hence the level of investment
Chapter 5 looks at the impact aviation can have on the attractions of the UK as a
destination for foreign direct investment. This is reflected in the model through the
impact of changes in productivity back onto investment and hence the amount of capital
equipment available for production.

Figure A.1: Impact of aviation industry on other sectors






Price of air Availability of Indirect/induced
transport air transport effects




Competitiveness Productivity Investment Intermediate/
final demand


The model identifies six separate components of air traffic which have potentially different
effects on the economy: leisure (terminating) passengers, split into UK resident and non-
UK resident; business (terminating) passengers, also split into UK resident and non-UK
resident; transfer passengers; and freight carried. It also identifies three separate
aviation prices: leisure fares; business fares; and freight charges. The traffic variables
are not determined within the model - they are given by the nature of the scenario being
studied.


91
But the price of different aviation services is allowed to vary within the model. The focus
of the analysis is on the impact of restrictions in the growth of aviation services below
baseline projections. The baseline is designed to represent the most plausible level of
demand if the supply capacity of the industry does not impose constraints. Conversely,
the alternative cases assume that restrictions on the capacity of the aviation industry to
meet projected demand mean that demand has to be reduced, either by price increases
or by rationing, or perhaps by increased congestion costs. This means that the price
equations in the model are based on demand relationships rather than supply
relationships. Prices for different types of aviation (business/leisure/freight) are therefore
assumed to be negatively related to the corresponding traffic variables - a rise in price
would mean that fewer passengers would want to travel and businesses would want to
move less freight by air. In principle, each price could be affected by all the different
traffic variables since the numbers of one type of passenger affect the amount of space
available on aircraft for other types of passengers, and some relatively minor effects from
the volume of one type of traffic on the price of another type are included in the model -
but these have only a modest impact on the results.



92
Annex B: Sectoral use of air services



Growth in value-added
% year Rank (%, 2003) Rank
Computer activities 12.4 1 23.8 4
Communication 9.2 2 24.4 3
Computers and office equipment 8.8 3 6.6 18
Other business activities 6.7 4 21.7 5
R & D 6.3 5 17.6 6
Pharmaceuticals 5.7 6 3.0 27
Banking and finance 5.0 7 37.2 1
Distribution 3.7 8 2.4 30
Transport 3.7 8 5.2 21
Hotels & catering 2.7 10 10.1 12
Motor vehicles, parts & accessories 2.6 11 7.0 17
Construction 2.4 12 5.6 20
Electronic equipment 2.3 13 7.8 16
Non- market services 2.3 13 8.4 15
Other means of transport 2.2 15 14.6 7
Electricity, gas and water 2.0 16 1.4 33
Real estate and renting 1.9 17 10.9 10
Electrical engineering 1.5 18 6.6 18
Insurance 0.9 19 27.4 2
Precision and optical instruments 0.7 20 10.8 11
Non-metallic mineral extraction 0.6 21 2.8 29
Agriculture, forestry and fishing 0.5 22 2.2 31
Food, beverages and tobacco 0.5 22 2.0 32
Metal products n.e.c 0.5 22 3.7 25
Rubber and plastics 0.5 22 2.9 28
Extraction 0.4 26 11.8 9
Other manufacturing 0.4 26 5.0 22
Paper, printing, publishing 0.3 28 9.3 14
Other chemicals 0.2 29 4.3 24
Mechanical engineering 0.1 30 4.4 23
Wood and wood products -0.2 31 0.0 34
Coke, petroleum & nuclear fuel -0.8 32 9.6 13
Basic metals -1.1 33 12.4 8
Textiles, leather and clothing -4.9 34 3.6 26
Rank correlation: 0.36
Share of air in sector's
Table B.1: Sectoral growth and use of Air Transport
total transport demand 1994-2004


93


Growth in value-added
1994-2004
% year Rank (£, 2003) Rank
Computer activities 12.4 1 193 14
Communication 9.2 2 895 5
Computers and office equipment 8.8 3 193 14
Other business activities 6.7 4 257 11
R & D 6.3 5 133 20
Pharmaceuticals 5.7 6 121 22
Banking and finance 5.0 7 1694 3
Distribution 3.7 8 132 21
Transport 3.7 8 1211 4
Hotels & catering 2.7 10 74 28
Motor vehicles, parts & accessories 2.6 11 272 9
Construction 2.4 12 44 31
Electronic equipment 2.3 13 161 18
Non- market services 2.3 13 63 30
Other means of transport 2.2 15 219 13
Electricity, gas and water 2.0 16 17 33
Real estate and renting 1.9 17 229 12
Electrical engineering 1.5 18 165 17
Insurance 0.9 19 2238 1
Precision and optical instruments 0.7 20 176 16
Non-metallic mineral extraction 0.6 21 267 10
Agriculture, forestry and fishing 0.5 22 22 32
Food, beverages and tobacco 0.5 22 101 24
Metal products n.e.c 0.5 22 69 29
Rubber and plastics 0.5 22 98 25
Extraction 0.4 26 1998 2
Other manufacturing 0.4 26 110 23
Paper, printing, publishing 0.3 28 374 7
Other chemicals 0.2 29 372 8
Mechanical engineering 0.1 30 93 26
Wood and wood products -0.2 31 0 34
Coke, petroleum & nuclear fuel -0.8 32 543 6
Basic metals -1.1 33 136 19
Textiles, leather and clothing -4.9 34 89 27
Rank correlation: 0.17
Spend per employee
Table B.2: Sectoral growth and use of Air Transport


94
Annex C: Econometric tests
As explained in Chapter 8, our econometric research into the impact of aviation on the
productivity of the UK economy uses a proxy for UK business use of air services derived
from data both on business passengers at UK airports and air freight tonnage. The
underlying data and constructed proxy are shown in Table C.1.

Table C.1: UK business use of air services


Before estimating the model we need to establish carefully that each of the time series
we use in the model has the appropriate statistical properties. The charts in Chapter 8
clearly show that the air services measures are trending over time and that implies that in
statistical terms the series are “integrated”. The levels of dependent and explanatory
variables should have the same order of integration for the results of any sort of “levels
Business passengers at UK airports: 1980 - 2005
Domesti c
2
(000s)
1980 8.3 3.9 12.2 0.7 2.0
1981 8.2 3.7 11.9 0.7 1.9
1982 8.1 3.9 12.0 0.7 1.9
1983 8.7 3.9 12.7 0.7 2.0
1984 9.9 4.4 14.2 0.9 2.3
1985 10.1 4.7 14.8 0.9 2.3
1986 10.7 4.8 15.5 0.9 2.4
1987 10.9 5.3 16.2 1.0 2.6
1988 13.4 5.9 19.3 1.1 3.0
1989 13.0 6.4 19.4 1.2 3.1
1990 15.1 6.8 21.9 1.2 3.4
1991 14.5 6.2 20.7 1.1 3.2
1992 14.7 6.1 20.7 1.2 3.3
1993 16.4 6.2 22.6 1.4 3.6
1994 17.4 6.4 23.8 1.6 4.0
1995 19.1 6.7 25.8 1.7 4.3
1996 20.0 7.1 27.1 1.8 4.5
1997 21.6 7.5 29.0 1.9 4.8
1998 23.3 8.0 31.2 2.1 5.2
1999 23.8 7.6 31.4 2.2 5.3
2000 25.4 8.3 33.7 2.3 5.7
2001 22.9 8.6 31.5 2.1 5.3
2002 23.2 9.1 32.2 2.2 5.4
2003 22.8 9.5 32.3 2.2 5.4
2004 24.3 9.5 33.8 2.4 5.8
2005 25.5 10.0 35.5 2.5 6.0
1. Data derived fromInternational Passenger Survey (IPS)
2. Data estimated using CAA survey data and UK airport statistics (adjusted for double counting).
Internati onal
1
Total Cargo frei ght l oaded
pl us unl oaded
(million tonnes)
Proxy for busi ness ai r
servi ces
(000s of workload units)


95
only” regression model to be valid. For single time series we report Augmented Dickey-
Fuller (ADF) and Phillips-Perron (PP) statistics (see Table C.2). Since we also estimate
models using panel data techniques we report the panel equivalents of the single time
series tests (see Table C.3). These tests conclude that the series for business air
services and sectoral TFP contain a single unit root.

Table C.2 Unit roots tests for business air services intensity


Table C.3 Panel Unit roots tests for TFP by sector


The models are estimated over the sample period 1979-2005. As the demand for air
services varies across industry, we attempt to control for this by weighting the ‘pooled’
coefficients using various schemes. For each of our industry groupings we considered
spending on air transport services, total transport (and transport excluding air services)
BUSAIR/GDP Stati sti c P-val ue Obs
Null Hypothesis: Unit root
ADF -0.09 0.94 26
PP -0.14 0.93 26
∆(BUSAIR/GDP)
Null Hypothesis: Unit root
ADF -3.89 0.00 25
PP -3.77 0.00 25
Stati sti c P-val ue
Panel
members Obs
l n(TPF
i
)
Null Hypothesis: Unit root (assumes common unit root process)
Levi n, Li n & Chu t* 1.45 0.93 31 796
Brei tung t-stat -1.51 0.07 31 765
Null Hypothesis: Unit root (assumes individual unit root process)
Im, Pesaran and Shi n W-stat 4.80 1.00 31 796
ADF - Fi sher Chi -square 34.83 1.00 31 796
PP - Fi sher Chi -square 37.37 0.99 31 806
Null hypothesis: No unit root (assumes common unit root process)
Hadri Z-stat 21.5 0.00 31.0 837
∆l n(TPF
i
)
Null Hypothesis: Unit root (assumes common unit root process)
Levi n, Li n & Chu t* -14.88 0.00 31 766
Brei tung t-stat -5.15 0.00 31 735
Null Hypothesis: Unit root (assumes individual unit root process)
Im, Pesaran and Shi n W-stat -16.209 0.00 31 766
ADF - Fi sher Chi -square 353.38 0.00 31 766
PP - Fi sher Chi -square 396.48 0.00 31 775
Null hypothesis: No unit root (assumes common unit root process)
Hadri Z-stat 0.96 0.17 31 806
** Probabilities for Fisher tests are computed using an asympotic Chi-square distribution. All other tests assume asymptotic normality.


96
as a percentage of Gross Valued Added and as percentage of employment. Having
explored the impact of using the various weighting schemes, the spending per head
weights (expressed relative to the all industry average) gave the most plausible results.
The outcome from estimating the preferred model is shown in Table C.4. The model
includes levels terms only and we conduct appropriate tests that increase our confidence
the models are not simply spurious regressions. Our initial model included more lagged
terms for the dependent and explanatory variables. Many of these terms were not
significant. Indeed, a (joint) test of whether they add anything to the explanatory power
of the model concluded that they could be dropped. We estimate separate intercepts (or
fixed effects) and time trends for each sector, and ‘pool’ the long-term coefficient
measuring the impact of business air services usage on sectoral productivity. The
important point to be made is that there does seem to be a long-term relationship
between productivity and air transport services across all the sectors. This conclusion is
obtained from the alpha coefficient in the model, which is highly statistically significant
and correctly signed. The long-run coefficient suggests that a 10% rise in business
usage of air services raises TFP and hence GDP by 0.6% in the long run.

Table C.4: The impact of air transport services on sectoral TFP

MODEL - A: LOG(TFP
i,t
) =a
i
+b
i
*TIME +alpha*( w
1b,i
*(BUSAIR
t
/GDP
t
) ) Sample: 1979 - 2005
United Kingdom ISIC Rev.3 a
i
b
i
alpha
Agriculture, hunting, forestry and fishing 01-05 -0.02 0.0091 17.39
Mining and quarrying 10-14 0.07 -0.0037 (2.9)
Food products, beverages and tobacco 15-16 0.10 0.0067
Fextiles, textile products, leather and footwear 17-19 -0.05 0.0119
Wood and products of wood and cork 20 0.21 0.0038
Pulp, paper, paper products, printing and publishing 21-22 0.05 0.0063
Coke, refined petroleum products and nuclear fuel 23 0.25 -0.0001
Chemicals and chemical products 24 -0.34 0.0196
Rubber and plastics products 25 -0.01 0.0111
Other non-metallic mineral products 26 0.04 0.0081
Basic metals, fabricated metal products, except machinery and equipment 27-28 -0.10 0.0124
Machinery and equipment, n.e.c. 29 0.09 0.0071
Office, accounting and computing machinery 30 -1.43 0.0557
Electrical machinery and apparatus, nec 31 0.06 0.0091
Radio, television and communication equipment 32 -0.33 0.0198
Medical, precision and optical instruments 33 0.01 0.0092
Motor vehicles, trailers and semi-trailers 34 -0.22 0.0159
Other transport equipment 35 -0.25 0.0196
Manufacturing nec; recycling 36-37 0.33 -0.0007
Electricity, gas and water supply 40-41 -0.15 0.0149
Construction 45 0.08 0.0079
Wholesale and retail trade; restaurants and hotels 50-52 0.11 0.0058
Hotels and restaurants 55 0.41 -0.0028
Post and telecommunications 64 -0.46 0.0193
Financial intermediation 65-67 0.20 -0.0050
Real estate, renting and business activities 70-74 0.57 -0.0092
Public admin. and defence; compulsory social security 75 0.25 0.0014
Education 80 0.34 -0.0002
Health and social work 85 0.20 0.0029
Other community, social and personal services 90-93 0.13 0.0050
w
1b,i
is sector
i
spend on air transport services per head relative to industry average


97
As a final test on the validity of the model, we checked that the model residuals are not
trended. As well as charting the residuals, we ran formal tests to look for co-integration
between sectoral productivity and business air services (relative to GDP). These are
reported in Table C.5. The tests do not find any evidence of unit roots in the panel model
residuals, and so we conclude that there is a co-integrating relationship present.
Importantly, this provides strong statistical evidence that the output of the air services
industries is an important factor driving economy-wide productivity growth in the long-
term.

Table C.5 Panel co-integration tests


Can we also find an extra significant impact from transport excluding air services? As
Table C.6 shows, this was possible, but the coefficient was not as significant as that for
business air services. The coefficient alpha measures the long-run impact of business
air services usage. In this case, this is coefficient is slightly smaller than that in the first
model (15.8). But since a 95% confidence interval contains the earlier figure, it is not
significantly different. The beta coefficient measures the long-run impact on productivity
of the usage of non-air transport services and this model implies a 1% increase in non-air
services intensity raises long-run productivity by 0.4%. (The impact of total transport
services was also found to have a to be positive, though not significant impact, on trend
productivity – a conclusion that remained across many variants of this equation.)
Stati sti c P-val ue
Panel
members Obs
Null Hypothesis: Unit root (assumes common unit root process)
Levi n, Li n & Chu t* -14.48 0.00 31 761
Brei tung t-stat -4.86 0.00 31 730
Null Hypothesis: Unit root (assumes individual unit root process)
Im, Pesaran and Shi n W-stat -15.61 0.00 31 761
ADF - Fi sher Chi -square 352.60 0.00 31 761
PP - Fi sher Chi -square 402.84 0.00 31 775
Null hypothesis: No unit root (assumes common unit root process)
Hadri Z-stat 1.03 0.15 31 806
** Probabilities for Fisher tests are computed using an asympotic Chi-square distribution. All other tests assume asymptotic normality.


98
Table C.6: The impact of non-air transport services on sectoral TFP


MODEL - B: LOG(TFP
i,t
) =a
i
+b
i
*TIME +alpha*( w
1b,i
*(BUSAIR
t
/GDP
t
) ) +beta*( w
2b,i
*(TRANSX
t
/GDP
t
) ) Sample: 1979 -
2005
United Kingdom ISIC Rev.3 a
i
b
i
alpha beta
Agriculture, hunting, forestry and fishing 01-05 0.02 0.0091 15.78 12.09
Mining and quarrying 10-14 -0.07 -0.0027 (2.7) (1.7)
Food products, beverages and tobacco 15-16 0.08 0.0069
Fextiles, textile products, leather and footwear 17-19 -0.03 0.0120
Wood and products of wood and cork 20 0.21 0.0038
Pulp, paper, paper products, printing and publishing 21-22 0.05 0.0066
Coke, refined petroleum products and nuclear fuel 23 0.24 0.0002
Chemicals and chemical products 24 -0.39 0.0199
Rubber and plastics products 25 -0.01 0.0112
Other non-metallic mineral products 26 -0.03 0.0084
Basic metals, fabricated metal products, except machinery and equipment 27-28 -0.14 0.0126
Machinery and equipment, n.e.c. 29 0.12 0.0071
Office, accounting and computing machinery 30 -1.41 0.0559
Electrical machinery and apparatus, nec 31 0.07 0.0092
Radio, television and communication equipment 32 -0.31 0.0199
Medical, precision and optical instruments 33 0.04 0.0093
Motor vehicles, trailers and semi-trailers 34 -0.19 0.0160
Other transport equipment 35 -0.25 0.0198
Manufacturing nec; recycling 36-37 0.37 -0.0007
Electricity, gas and water supply 40-41 -0.13 0.0149
Construction 45 - 0.0079
Wholesale and retail trade; restaurants and hotels 50-52 - 0.0059
Hotels and restaurants 55 - -0.0027
Post and telecommunications 64 3.50 0.0202
Financial intermediation 65-67 4.52 -0.0044
Real estate, renting and business activities 70-74 4.81 -0.0090
Public admin. and defence; compulsory social security 75 4.53 0.0015
Education 80 4.61 -0.0002
Health and social work 85 4.48 0.0030
Other community, social and personal services 90-93 4.42 0.0051
w
1b,i
is sector
i
spend on air transport services per head relative to industry average
w
2b,i
is sector
i
spend on non-air transport services per head relative to industry average








SURVEY ON THE IMPORTANCE OF AIR SERVICES
TO YOUR COMPANY

March 2006

Oxford Economic Forecasting is conducting this survey on behalf of the CBI, the Department
for Transport, a consortium of airlines and airports, and VisitBritain in order to assess the
contribution of air services to the UK economy and the competitiveness of UK business. The
results of the survey will be presented to the Government to inform the 2006 progress report
on its White Paper on airports policy.

Completing this survey should take no more than 20 minutes. Section A covers a few
company details; Section B asks about your use of different types of air services and their
importance to your business and investment decisions; Sections C and D ask more specific
questions about your use of air passenger and freight/express delivery services respectively;
and Section E asks for your views on changes to air services. Please tick only one box
per row in the questionnaire. If you do not know the answer to a particular question,
please leave all boxes on that row unticked.

Analysis of this survey will be undertaken by Oxford Economic Forecasting. The information
supplied will be treated in strictest confidence and remain anonymous. Please send your
completed questionnaires by 14 March to Aviation Survey Team, Oxford Economic
Forecasting, Freepost, SCE15649, Oxford, OX1 1BR; or fax back on 01865 268906.

Thank you for taking the time to complete the questionnaire. If you have any questions
about the survey, please contact: Adrian Cooper, Managing Director, Oxford Economic
Forecasting - email [email protected]; tel. 01865 268902.

All values weighted by employment unless otherwise stated


A
ABOUT YOU AND YOUR ORGANISATION


1 Company name…………………………………………….………….……………………….

Company address………………………………………….………….……………………….

………………………………………….………….……………………………………………..

………………………………………….………….……………………………………………..

…………………………………………..…Postcode…………………………………………..

Your name……………………………..…J ob title…………………………………………….

Email address………………………….…Telephone number……………………………….

Oxford
Economic
Forecasting

2a What is the principal activity of your business?


Manufacturing Financial & Business
Services
Other Services Other



2b Is this a high tech business?


Yes No






3 How many staff does your company employ in the UK? (unweighted numbers)

Less than 50 51-250 251-500 501-1,000 1,000-5,000 5,001+



4 Does your company have its global headquarters in the UK? (unweighted numbers)

Yes No






If yes, does your company have subsidiaries in other countries? (unweighted numbers)

Yes No








5
What proportion of your company’s turnover from UK operations comes from overseas?
(unweighted numbers)

Less than 5% 5-10% 11-20% 21-50% Over 50%




6
What proportion of your company’s procurement spend for UK operations is sourced from
overseas? (unweighted numbers)

Less than 5% 5-10% 11-20% 21-50% Over 50%


77% 22%
47% 52%
42% 10% 6% 16% 21%
41% 13% 15% 13% 15%
18% 16% 22% 16% 17% 11%
26% 16% 57% 2%
15% 85%

B ABOUT YOUR ORGANISATION’S USE OF AIR SERVICES

7 How important are the different types of air transport services to your organisation?


(a) For your marketing and sales?
Vital
Very
important
Sometimes
important
Not
important

Passenger Services


Freight Services


Express Delivery
(as provided by DHL, FedEx, TNT , UPS etc)


(b) For servicing / meeting with customers?
Vital
Very
important
Sometimes
important
Not
important

Passenger Services


Freight Services


Express Delivery



(c) For efficient organisation of your production and supplier relationships across
different geographic locations?

Vital
Very
important
Sometimes
important
Not
important

Passenger Services


Freight Services


Express Delivery


(d) For management of your organisation and your subsidiaries?
Vital
Very
important
Sometimes
important
Not
important

Passenger Services


Freight Services


Express Delivery


31%
16%
19%
34%
13%
19%
18%
26%
30%
17%
42%
31%
37% 27% 20% 16%
14% 12% 18% 51%
18% 18% 21% 40%
25% 33% 21% 20%
13% 15% 25% 42%
10% 25% 24% 37%
36% 35% 17% 12%
10% 13% 21% 51%
14% 19% 23% 39%
8 What proportion of your company’s sales do you think depend on air services?

Please state approximate figure………………………13%



9 How important are the following airports to your organisation?

Vital
Very
important
Sometimes
important
Not
important

a) Heathrow



b) Gatwick



c) Stansted



d) Manchester



e) Birmingham



f) Other UK airports



Which ones? (please specify)

………………………………………………………………

g) European hub airports




Which ones? (please specify) ………………………………………………………………



10 In what ways does your organisation use airports outside the South East of England?

Very
frequently
Sometimes Occasionally Never

a) For direct flights to other UK
and European destinations




b) For direct long-haul flights
(eg to US, Asia)


c) For connections to international flights:
i) Connecting in the UK





ii) Connecting elsewhere in Europe
(eg Amsterdam, Frankfurt, Paris)





32% 22% 25% 18%
47% 24% 19% 8%
4% 26% 41% 21%
7% 18% 35% 29%
5% 15% 39% 31%
4% 21% 35% 32%
21% 22% 35% 12%
23% 21% 13% 27%
22% 25% 14% 32%
27% 28% 18% 21%
19% 20% 34% 25%


11
Does the availability of frequent air services to/from the UK mean that your
organisation serves a bigger market than it could otherwise?

Substantially
To some
extent
Not
significantly
a) In the UK and Europe




b) Outside Europe





What implications does this have for your business?
Substantially
To some
extent
Not
significantly
c) Increased sales in the UK and Europe






d) Increased sales outside Europe




e) Increased profits







f) Greater ability to exploit economies of
scale








g) Greater incentive to invest in the UK







h) Greater incentive to invest in other
countries







i) Greater incentive to undertake R&D





j) We are more innovative as a company
as a result of being involved in
international networks of contacts





k) We face tougher competition from
foreign rivals in our home market






l) We can reduce our costs by importing
products by air






m) Other effects (please specify) ……………………………………………………………





23% 32% 42%
19% 32% 42%
9% 33% 52%
12% 23% 57%
3% 27% 63%
22% 30% 45%
26% 23% 48%
32% 25% 43%
32% 22% 45%
38%
27% 30%
13% 32% 47%
3% 16% 73%
12 How well does the UK air transport network meet your organisation’s requirements?

Very well Quite well Poorly
Very
poorly

a) Ease of travelling to other
locations in the UK



b) Ease of travelling to destinations
in continental Europe



c) Ease of travelling to long-haul
destinations (eg US, Asia)



d) Range of destinations available



e) Frequency of flights



f) Cost



g) Reliability



h) Punctuality



i) Road access to airports



j) Public transport to/from airports




13
To what extent can other modes of transport or communication substitute for your
organisation’s use of air services?

To a large extent Somewhat Not at all
a) Road

b) Rail

c) Sea


d) Electronic
communication



33% 50% 11% 3%
35% 49% 4% 0%
41% 36% 17% 1%
35% 51% 8% 1%
12% 61% 18% 2%
23% 60% 11% 0%
18% 67% 10% 0%
38% 41% 5% 1%
15% 58% 22% 1%
11% 35% 33% 12%
30%
49% 19%
25%
52% 21%
7%
20% 64%
44%
47% 4%
14
How important are the following factors in determining the country in which your organisation
chooses to invest?
Vital
Very
important
Somewhat
important
Not
important

a) Availability of skilled labour


b) Cost of labour


c) Property costs/rent


d) Business taxes


e) Extent of government regulations
on business


f) Size of local market


g) Road transport network


h) Rail transport network


i) Air transport network



j) Other (please specify)

……………………………………………………………..

15
Has the absence of good air transport links ever affected your organisation’s decisions to
invest in the UK?

Yes

No
If yes, in what way?


We went ahead
with the
investment
anyway but costs
were higher to
overcome
problems with air
transport
We chose to make
the investment
somewhere else in
the UK which had
good air links
We chose to make
the investment in
another country
which had good air
links
We chose not to make
the investment at all










Other (please specify) ……………………………………………………………..
24% 30% 11% 18%
14% 26% 26% 18%
7% 27% 33% 16%
8% 30% 25% 20%
14% 37% 16% 17%
31% 29% 11% 14%
9% 27% 32% 17%
2% 14% 36% 34%
3% 38% 22% 19%
8% 88%
65% 30% 3% 2%
16
Is access to air services an important factor in influencing where your company locates its
operations within the UK?


Yes



No



If yes, how important are the following considerations?

Vital
Very
important
Somewhat
important
Not important

a) We need to be within
easy access of Heathrow



b) We need to be close
to an airport with direct
links to Heathrow



c) We need to be close
to an airport with direct
links to a European hub
airport




d) We need to be close
to an airport with direct
links to particular
European cities







24% 25% 17% 34%
8% 32% 14% 46%
16% 45% 24% 15%
26% 69%
12% 34% 35% 20%
C ABOUT YOUR ORGANISATION’S USE OF PASSENGER AIR TRAVEL

17
How important to your organisation’s business are the different destinations for which it uses
passenger air services?
Vital
Very
important
Sometimes
important
Not important
a) Elsewhere in UK


b) Other European countries



c) North America




d) Asia Pacific




e) Other destinations
(eg Latin America, Middle
East, Africa)





18
To what extent do you expect your organisation to increase its use of passenger air services
to the following destinations over the next 10 years?

Substantially Somewhat
No change
expected
Use likely to
decline
a) Elsewhere in UK


b) Other European countries



c) North America




d) Asia Pacific




e) Other destinations
(eg Latin America, Middle
East, Africa)





19
How important is it to your organisation to be able to fly directly rather than having
to change to a connecting flight?

Vital
Very
important
Somewhat
important
Not important
a) For flights within Europe





b) For long haul flights
(eg US, Asia)





18% 42% 20% 15%
9% 30% 48% 11%
19% 23% 24% 29%
21% 23% 23% 28%
9% 21% 25% 38%
9% 33% 51% 4%
13% 41% 37% 4%
14% 28% 48% 4%
25% 22% 43% 4%
14% 24% 50% 4%
26% 43% 14% 12%
17% 25% 33% 18%

20
When making a journey that might require a connection from one flight to another, how
acceptable are the following options to your organisation?

Very
acceptable
Sometimes
acceptable
Not
acceptable

a) Transfers between flights at a UK hub
airport (eg Heathrow)


b) Transfers between flights at a continental
hub airport (eg Amsterdam, Frankfurt, Paris)


c) Transfers involving changing between two
airports in the same region (eg Heathrow
and Gatwick)


d) Transfers between flights by the same
airline or within an Alliance arranged on one
booking


e) Transfers between flights by airlines that
are not part of an Alliance requiring separate
booking for each flight



21 Why are passenger air services important to your organisation?

Vital
Very
important
Sometimes
important
Not
important

a) To meet clients and potential
clients



b) To enable our management to
oversee foreign subsidiaries



c) Managers from abroad need to
travel to oversee our organisation



d) To network with collaborators and
partners in other countries



e) To attract and retain staff




f) Other (please specify) ........................................................................................

……………………………………………………………….

38% 29% 10% 15%
31% 49% 5%
22% 58% 3%
1% 15% 69%
30% 51% 1%
11% 49% 24%
30% 20% 14% 28%
21% 26% 15% 30%
21% 34% 18% 20%
6% 7% 41% 39%
22
Do you think that the quality of passenger air services available through UK airports is better
or worse than in our European competitors?


Better Worse About the same

Do you think this affects your organisation’s ability to compete in international markets?

Yes If so, in what way? (please specify)………………………......................
……………………………………….
No


D

ABOUT YOUR ORGANISATION’S USE OF AIR FREIGHT AND EXPRESS SERVICES


If you organisation does not use air frieght and/or express delivery services, please go to question 25


23
What are the advantages to your organisation of using air freight and/or express delivery
services?
Vital
Very
important
Sometimes
important
Not
important


a) Ability to serve distant markets




b) Speed of delivery




c) Ability to source inputs from
cheapest / best quality suppliers




d) Allows production to be
organised in most cost-effective,
efficient way across organisation’s
different operations



e) Other (please specify) ……………………………………………………………………….


24
Do you think that the quality of air freight and express delivery services available through UK
airports is better or worse than in our European competitors?


Better Worse About the same

Do you think this affects your organisation’s ability to compete in international markets?

Yes If so, in what way? (please specify)………………………......................
……………………………………….
No

14% 15% 13% 19%
19% 19% 10% 14%
7% 10% 22% 22%
4% 13% 19% 27%
33% 10% 47%
13%
73%
5% 2% 52%
3%
45%



E

ABOUT YOUR ORGANISATION’ S VIEWS ON CHANGES TO AIR SERVICES

25
Do you expect your organisation to become more or less dependent on air transport services
over the next 10 years?


Substantially
more
Somewhat
more
Unchanged
Somewhat
less
Substantially
less

a) Passenger
Services


b) Freight
Services


c) Express
Delivery


26
To what extent do you think that new technologies (eg video conferencing, internet) will affect
your organisation’s use of air services over the next 10 years?

Encourage more air travel No effect
Reduce it
somewhat
Reduce it
significantly





27
If the air services available to you today deteriorated, how would your organisation be
affected?

Very badly affected Quite badly affected Inconvenienced
Not significantly
affected





If affected, in what ways?

Very badly
affected
Quite badly
affected
Inconvenienced
Not
significantly
affected


a) Increased costs




b) Loss of customer contact




c) Lost orders / business




d) Less investment in UK
operations


18% 25% 37% 13%
10% 36% 25% 14%
25% 36% 21% 2%
13% 29% 25% 17%
8% 17% 24% 36%
3% 37% 51% 4%
23% 58% 4% 2%
7%
18% 66% 2% 0%
6%
49% 27% 4% 0%
17%

Very badly
affected
Quite badly
affected
Inconvenienced
Not
significantly
affected


e) Less investment in foreign
subsidiaries




f) Less investment in R&D





g) Less innovative as networking
is reduced


h) Some operations would be
moved abroad


28

To what extent would these effects damage your organisation’s ability to compete
internationally?


Very badly

Moderately

Slightly

No effect












29
Do you have any other comments you wish to make on the importance of air services to your
organisation and changes you would like to see to the air transport network?

……………………………………………………………………………………………………………..

……………………………………………………………………………………………………………..

………………………………………………………………………………………………………………

30
Would you be willing to be interviewed in more detail about the importance of air services to
your organisation?

Yes No




Thank you for your assistance

Please return by 14 March to:

Aviation Survey Team, Oxford Economic Forecasting, Freepost, SCE15649, Oxford,
OX1 1BR

or fax back on 01865 268906
6% 15% 27% 30%
3% 7% 21% 45%
14% 26% 16% 35%
6% 12% 15% 45%
12% 26% 19% 22%
20% 76%

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