Assessing tourism impact of aviation:
Exercises:
In no more than 400 words, briefly answer the following questions:
Describe how one might consider using the IO approach to estimate the tourism impact of an ‘open -sky’ between two nations. What are the limitations of the IO approach in assessing the economic impact? Discuss the use of CGE and its advantages in this context. Is the application of the CGE approach warranted in all circumstances?
The following reference may assist with this exercise. The first article looks at the economic impact of air transport liberalisation in Hamburg, while the second article looks at Australia. Don’t forget to the consult Readings 1 – 3 of this Unit.
Gillen, D. and Hinsch, H. (2001) Measuring the econo mic impact of liberalisation of international aviation on Hamburg airport, Journal of Air Transport Management 7, p.25 -34
Forsyth, P. (2006) Martin Kunz Memorial Lecture. Tourism benefits and aviation policy, Journal of Air Transport Management 12, p.3 -13
Unit Structure:
This unit considers the economic impact of aviation and tourism (Unit 9 focuses on the valuation of the environmental impact of aviation and tourism). In particular, to urism is considered as a key channel through which air transport contributes to the economy, as well as the general well -being of our society . Specifically, by end of this Unit, students should be:
• Familiar with the key channels through which air transport contributes to the economy
• Understand direct, indirect, induced, catalytic and multiplier effects of air transport
• Appreciate the different approaches in modeling these effects, and the approaches’ advantages and limitations
• Appreciate the releva nce of the choice of methodologies in the understanding of aviation’s economic impact, in particular with respect to tourism
This Unit introduces advanced concepts such as Computable General Equilibrium (CGE) models. While you are not expected to fully gr asp the technical details of this approach, it is important to be informed of the various modeling approaches used in tourism and transport policy arena. Also, it is important to be able to know where to find more information about these methods (and thence the interpretations of the results) when called upon. This Unit can be an important starting point.
Air transport and the economy:
One of the key ways through which transport influences the economy is trade. Reduction in transport cost paves way for specialisation in the production of services and goods with comparative advantage. Tourism is a form of trade. Unlike other traded products, however, tourism involves consumers traveling to the place of ‘production’. In systems of national accounts, for instance, inbound tourism is considered as an export sector. Low air travel costs stimulates tourism trade, which is a significant generator of income and employment in many economies.
The effect of transport can be compounding over time. The effects of transport improvements such as through infrastructure investments can be both temporary and permanent.
– Temporary effects: during the construction phase
– Permanent effects: maintenance and operations, effects on productivity, effects on location of activities, trade
Moreover, o ver time, “improvement of transport infrastructure not only leads to larger trade flows … also to a more transport intensive way of organization of production and distribution having distinct effects on the spatial distribution of pr oduction and distribution of activities” (Rietveld and Bruinsma 1998: 62).
In international air transport and aeropolitical context, Raguraman (1997) aptly summarised the (economic) benefit of air transport, stating, implementation of new or additional services may have an effect, in the presence of other complementary factors, of stimulating new investment in the city where the carrier is flying to. Such new services also contribute to an increase in consumer welfare in the sense that greater choice is afforded to travelers in that country and net savings in waiting time result from additional flights. There is also scope for increased trade in the sense that opportunities for export are presented for local companies using airfreight services (Raguraman 1995) … The most significant benefits, however, are apparent in the impacts of air services on the air transport and tourism sector (Raguraman 1997:660).
Defining the net expenditure can be challenging, and it is impor tant for the appropriate appraisal of economic benefits and costs of air services. As argued by Raguraman, In bilateral negotiations, it is often observed that the most keenly contested issue relates to capacity provisions on passenger traffic (O’Connor 1971). Given that the primary concern in bilateral agreements is the volume of passenger traffic, it is argued here that a correct appraisal of the net economic benefits of air service should weigh the injection of expenditures by visitors and the foreign carrier into the local economy against the leakages of expenditures of local travelers out of the country on that foreign carrier’s services. Such an exercise may in fact show that even if the local carriers are unable to mount reciprocal services, it actually may be beneficial to allow foreign carriers to do so if the demand for such services exists on the negotiated routes. (Raguraman 1997: 660 – 661)
At this point it is important to make a distinction between injection of expenditures and economic impact . Consider the following story from Australian Broadcasting Corporation (ABC) (n ote: in the coming weeks we will be using multimedia, including videos):
Multimedia 1. This is available from the RMIT TV database (via UNSW Library).
Accessing this video clip can be done in three steps (these files are ~ 40mb):
(1) Go to UNSW Library Catalogue, then search for “ TVnews”.
(2) Access online link.
(3) Once in the database search engine, search for the following video “ Flying High: The Far North Queensland economy is improving with the resumption of direct flights between Japan and Cairns next year ”
The story tells of the potential tourism benefits from the new air services by Jetstar International between Cairns and Japan. It is expected that ea ch Japanese visitor will inject $2,000 per trip. The figure can be calculated based on surveys, such as through the type of data introduced in Unit 1. While a measure of monetary value, expenditure does not provide a complete account of the economic impact. Economic impact can be substantially less or more than that suggested by expenditure figures alone.
To economic impact we now turn.
Reading 1 is International Civil Aviation Organisation (2005) The Economic Contribution of Civil Aviation, Volume 1, Circular 292 -AT/124. Although the entire document is very informative (albeit slightly out -of -date), if you are pressing for time, the key pages are 2-1 to 2-9. The best way to find this document is to search for “ The Economic Contribution of Civil Aviation , Volume 1, Circular 292-AT/124” in a searchengine.
The e conomic impact of aviation is decomposed into four effects.
• Direct economic co ntributions (or direct effect) are expenditures made by aviation industries for the provision of air trav el and freight services.
• Indirect effects are transactions between direct suppliers and other suppliers in the supply-chain
• Induced effects occur when the profits and extra income earned by households and producers from the direct and indirect effects are re -spent, and thence re -injected into the economy, as consumers.
• Catalytic effect is generated by the off-airport expenditures of air transport users such as by tourists in destinations.
From Reading 1, consider the following questions:
• What is a multiplier?
• How are the direct, indirect and induced effects different from tourist expenditures?
• Provide examples of direct, indirect, induced and catalytic effects of Jetstar International services to Cairns
Tourist expenditures will have successive rounds of direct, indirect and induced effects. As mentioned earlier, tourism benefits are probably the most significant source of benefit arising from air services. The following section looks at the economic impact of tourism.
• What is the purpose of economic impact analysis?
• Why are saving, taxes and imports regarded as leakages?
• What are the relations between tourism multipliers and leakages?
• Describe type 1 and type 2 multipliers.
Traditionally, economic impact was estimated using an i nput -output table. These are discussed in p.288-298 of Chapter 8. In addition to Dwyer et. al. (2011), below is a simplified illustration of how input -output matrix is used to compute the economic impact of an initial injection of expenditure (say, by a to urist). The illustration is largely drawn from Bull, A. (1991).
Essential Readings:
Reading 1 is International Civil Aviation Organisation (2005) The Economic Contribution of Civil Aviation, Volume 1, Circular 292 -AT/124. Relevant pages are 2-1 to 2-9. The document can be found:
https://legacy.icao.int/atworkshop/C292_Vol1.pdf
Reading 2 is Chapter 8 of Dwyer, L., Forsyth, P., Dwyer, W. (2011) Tourism Economics and Policy , Channel View Publications (this is available online via the library website) .
Reading 3 is Chapter 9 in Dwyer et. al. (2011) Tourism Economics and Policy, Channel view publications (this is available online via the library website).
References:
Additional references (journal articles are available online via UNSW library website)
Bull, A. (1991) The Economics of Travel and Tourism, Longman
Forsyth, P. (2006) Martin Kunz Memorial Lecture. Tourism benefits and aviation policy, Journal of Air Transport Management 12, p.3 -13
Gillen, D. and Hinsch, H. (2001) Measuring the economic impact of liberalisation of international aviation on Hamburg airport, Journal of Air Transport Management 7, p.25 -34
Raguraman, K. (1997) Estimating the net economic impact of air services, Annals of Tourism Research 24(3): 658-674.