15Network EconomiesKelly (1998) states that in a network economy, value is created and shared by all members of a network rather than by individual companies and that economies of scale stem from the size of the network - not the enterprise.Source: Kelly, Kevin New Rules for the Wired Economy.
16Network EconomiesA hub is a term used to refer to an airport that airlines use frequently for connecting passengers, and cargo. Cargo and travellers moving between airports not served by direct flights use a hub to change planes to get to their destination.Source:
17Network Economies Hong Kong International Airport – International Hub “HKIA is connected to about 160 destinations, including around 40 in the Mainland, through about 900 daily flights by over 100 airlines.”Source: HKIA
19Price DiscriminationPrice discrimination can exist when three conditions are met: consumers differ in their demands for a given good or service, a firm has market power, and the firm canprevent or limit arbitrage.
20Price DiscriminationAirline industry is ideal for price discrimination: The seller has some control on the price, buyers have different price elasticities of demand, and resale of the ticket by the buyer is not possible.
21Price DiscriminationYield Management: Software can constantly calculate the empty seats remaining and price them while maximizing returns.
22Price DiscriminationAirline price discrimination represents an attempt to charge the business traveler more than the leisure traveler, because business travelers typically have less elastic demand.
23Price DiscriminationBy offering different tickets (Saturday night stay-over restrictions, advance purchase discounts, and roundtrip discounts), airlines are attempting to have consumers sort themselves between business and leisure travelers.
24Price DiscriminationCathay Pacific: First Class, Business Class Business Standard, Business Flex), Premium Economy Class, Economy Class (Economy Core, Economy Standard, Economy Flex)
25Vertical IntegrationVertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need.Source: Wikipedia
26Vertical Integration 100% owned by Cathay Pacific: Cathay Pacific Catering Services (HK) Limited – Airline CateringAsia Miles Limited – Loyalty ProgrammeCathay Pacific Service Limited – Cargo TerminalHong Kong Airport Services Limited – Aircraft Ramp HandlingVogue Laundry and Cleaning Limited – Laundry and Dry CleaningCathay Holiday Limited – Travel Tour OperatorSource: Cathay Pacific Annual Report 2011
27Horizontal Integration Horizontal integration occurs when a firm is being taken over by, or merged with, another firm which is in the same industry and in the same stage of production as the merged firm.
28Horizontal Integration 100% owned by Cathay Pacific:Hong Kong Dragon Airlines LimitedNetwork Economies
29Entry Barrier Capital Requirement? Regulatory Requirement: Air Transport License – Bilateral Air Service Agreement, Capital RequirementIncumbent Advantage: Brand Loyalty, Time Slots
30Macroeconomics in Aviation Part IIMacroeconomics in Aviation
32Additional Reference Materials Airport Authority Hong Kong (2012). Press release at March 20, Retrieved from(with PowerPoint presentations downloadable)馮嘉耀 2010。「香港機場需要『第三跑道?』」《信報財經新聞 》，2010年4月15日。馮嘉耀、袁志樂、陳家欣 2011。「本港機場擴建借鑑德國成功經驗」《信報財經新聞》，2011年8月13日。馮嘉耀、袁志樂、陳家欣 2011。「興建第三跑道─如何達至社會共識﹖」 《信報財經新聞》，2011年9月1日。馮嘉耀、林艷虹 2012。「香港航空業的經濟貢獻」《信報財經新聞》2012年3月1日。
33Facts about HKIA 1998 2010 Passengers 28.6m 50.9m Cargos 1.6m tonnes Air Traffic Movements (ATMs)/Day450850Number of Destinations120160% of transfer/Transit passengers25%35.1%*m = millionSource: HKIA MP 2030 Summary; Annual Reports of HKIA
34Facts about HKIA (cont’d) EmploymentCurrent employment on the airport island: ~65,000 peopleValue AddedThe economic contribution by aviation industry in 2008: HK$ 78 billion1 in value added, or 4.6% of HK GDPImportance4 economic pillars2 rely heavily on efficient flow of people and goods1: Directly cited from the HKIA Master Plan 2030 Summary2: financial services, trading and logistics, tourism, and producer and professional services
35Competition Airport Nos of Runways Planned number of runways Beijing Capital3Planning to build a 2nd airportGuangzhou Baiyun25Shanghai PudongSingapore ChangiSeoul Incheon5 by 2020Tokyo NaritaShenzhen Bao’anSource: HKIA MP2030 Summary; various airports’ websites
36Reasons for Third Runway Source: HKIA MP2030 Executive Summary
37Details of the 3rd Runway The forecasted flight movements at 2030 = 602,000Current capacity (as at 2010) = 360,000HKIA under 3-runway systemLength of the 3rd runway3.8 kmDesign capacity620,000 ATMs per yearConstruction timeAbout 10 yearsConstruction costsHK$86.2 billion (in 2010 dollars)Source: HKIA MP2030 Summary
38Schedule of the Third Runway Project PlanningEnvironmental Impact Assessment studiesAssociated design detailsFunding options~2 yearsProject ApprovalStatutory & Govt approvalsEnvironmental permitForeshore & seabed gazettalFinancial~1 yearProject ImplementationLand reclamationDetailed designsConstruction of related facilitiesCommissioning of a 3rd runway~8 yearsSource: HKIA’s press release at March 20, 2012
39Funding Borrowing User pays Dividends IPO Significant borrowing may adversely affect the credit ratings of AAHKUser paysSignificant levy on user fees may adversely affect the air traffic in the future, thus the forecasted traffic volumes and projected revenue become unreliableDividendsThe withheld dividends still need to pay back the stockholdersIPOThe goal for HKIA would become profit-maximizationHinder investment on infrastructure which lead to short-term loss in accounts
40Costs & BenefitsEconomic net present value : HK$912 billion (in 2009 dollars)Direct employment: 141,000 jobs by 2030Indirect + Induced employment: 199,000 by 2030Construction costs: HK$86.2 billion (in 2010 dollars) / HK$ billion (at MOD prices)Source: HKIA Master Plan 2030
41Costs & Benefits Analysis (i) Enright, Scott & Associates, Ltd (ESA) Airport Master Plan 2030 Economic Impact Study for the Hong Kong International AirportAvailable at:(ii) Aviation Policy and Research Center (APRC), Chinese University of Hong Kong Economic Contribution of Aviation Industry
42Economic Impact Study by ESA DirectAviation-related businessNon-aviation-related business at HKIAIndirectsupplies of goods and services to the activities at the airportE.g. utilities, fuel suppliers, constructionInducedSpending of incomes by the direct & indirect employees on local goods & servicesCatalytic DirectDirect contribution of aviation-related tourism & tradeCatalytic Indirect + InducedInduced contribution of aviation-related tourism & trade
43Tourism Aviation-facilitated tourism impacts Tourism exports When calculating the economic impact, consider only outbound tourismNet tourism*Net tourism equals tourism exports minus tourism imports minus tourism spending on the airport island“The net tourism impacts on Hong Kong’s economy were estimated by subtracting the tourism import impact estimates from the tourism export impact estimates.”*This part’s information is quote directly from ESA’s Economic Impact Study for HKIA.
44Indirect and Induced Impacts Economic multipliers are usedprovided by Economic Analysis and Business Facilitations Unit, Hong Kong Financial Secretary’s Office
45Economic MultipliersSource: ESA’s Economic Impact Study for HKIA
46Economic Multipliers 2006-2008 – used for projections 2009-2030 IndustryMultiplierDirect Revenue to Direct + Indirect Value Added MultiplierAir Transport0.311Tourism0.563Trade (re-exports)0.128Trade (retained imports)0.111Induced Value Added to Induced Revenue Multiplier0.605Source: ESA’s Economic Impact Study for HKIA
47Economic Multipliers - Assumptions Perfect elasticity of supply of inputsNo capacity constraintsNo rising salaries and input costs due to the large investmentNo technological change from
48Total Economic Impact with 3rd Runway – Value Added Value Added ( HK$ Millions)20082030Direct BenefitsValue added29,44693,764Share of GDP1.75%2.57%Indirect Benefits32,04042,2111.91%1.16%Induced Benefits16,10131,4970.96%0.86%Catalytic BenefitsTourism10,272(-12,644)18,273(-26,269)0.61%(-0.75%)0.50%(-0.72%)Trade61,588146,5553.67%4.02%Catalytic Indirect +107,012257,8436.37%7.07%Overall256,459590,14315.27%16.18%GDP1,679,0003,647,000Note: (i) Year 2008 dollar values are in 2008 dollars, the following years are in 2009 dollars.(ii) The figures in brackets are from net tourism.Source: ESA’s Economic Impact Study for HKIA
49Total Economic Impact with 3rd Runway – Employment Employment (Persons)20082030Direct BenefitsEmployment61,604141,141% of labor force1.69%3.66%Indirect Benefits66,45595,4161.83%2.48%Induced Benefits57,399104,0751.58%2.70%Catalytic BenefitsTourism32,116(-39,532)62,917(-90,450)0.88%(-1.09%)1.63%(-2.35%)Trade78,402218,5742.16%5.68%Catalytic Indirect + Induced Benefits263,506645,4807.24%16.76%Overall559,4821,267,60315.38%32.91%3,637,2003,851,300Note: (i) Employment in 2030 are obtained from the forecasted 2009 employment in “Hong Kong Labor ForceProjections for 2010 to 2029” issued by the Hong Kong Census and Statistics Department.(ii) The figures in brackets are from net tourism.Source: ESA’s Economic Impact Study for HKIA
50Economic Impact Breakdown 2008 Value added breakdown(% of GDP)2030 Value added breakdown(% of GDP)
51Economic Contribution by APRC Miscellaneous ServicesLand Transport
52Value Added of the Aviation Industry at Current Prices Unit: HK$ million (unless otherwise specified)20052006200720082009Direct benefitsAir transport and incidental servicesValue added44,66143,78646,48932,07542,422Share of GDP3.29%3.01%2.94%2.01%2.74%(b.p. and curr. p.)Indirect benefitsTrade services59,15160,96266,53064,07059,5494.35%4.20%4.21%4.02%3.84%Tourism7,9529,3339,9049,9498,0260.59%0.64%0.63%0.62%0.52%Logistics6,3636,3306,5996,0476,2860.47%0.43%0.42%0.38%0.41%Overall118,127120,411129,523112,141116,2838.69%8.29%8.20%7.04%7.50%GDP (b.p. and curr. p.)1,359,2001,452,8001,580,1001,592,9001,550,900
53Environmental Economics in Aviation Part IIIEnvironmental Economics in Aviation
54Social Costs – Pollution Water QualityMarine EcologyFisheriesAir QualityNoise
55Air Pollution Aircraft engine emissions approximately consists of 70% carbon dioxide (CO2)< 30% water vapor (H2O)< 1% each ofnitrogen oxides (NOx)carbon monoxide (CO)oxides of sulfur (SOx)volatile organic compounds (VOCs)particulatesSource: Federal Aviation Administration
56Air Pollution% of emissionsCO2, H2O, NOx, SOx, ParticulatesVOCs , COairport ground level operations and Landing & Take-Offs10%30%higher altitudes90%70%Emissions at ground level affect health: lung diseases, respiratory diseases,…Emissions at higher altitudes may cause global warming and climate changeSource: Federal Aviation Administration
57Quantification of Air Pollution Carbon TaxAustralia charges carbon tax at a fixed price of AUD23/tonne of CO2 for ~500 companies from July, 2012New Zealand charges NZD25 for 2 tonnes of emission until 31 Dec Carbon credits can be exchanged in open market afterwardsEU Emission Trading Scheme (ETS): Governments issue permits which are tradable privately, OTC or over EU’s climate exchanges. Permit price ~ € 10 per tonne on March 2012
58Quantification of Air Pollution EU Allowance (EUA): permit to emit one metric tonne of CO2 under EU ETS throughout the period of the contractNational Allocation Plans determine the total quantity of EUAs that Member States grant to their companies, which can then be sold or bought by the companies themselves.Source: Bloomberg
59EU ETS – Aviation Q&A 1How are the aviation emissions allowances determined?The European Commission (EC) calculates the number of aviation allowances from 2012 based on the average annual aviation emissions by aircraft operators to and from European airportsaverage emission219,476,343 tonnes of CO2No of allowances in 201297% of average:212,892,052 tonnes of CO2No of allowances from 2013 onwards95% of average: 208,502,525 tonnes of CO2Target: Cut 50% carbon by 20301 allowance can emit 1 tonne of CO2Source: European Commission
60EU ETS – Aviation Q&A 2 How are the allowances allocated? 82%: given for free to aircraft operators and15%: allocated by auctioning3%: allocated to a special reserve for later distribution to fast growing airlines and new entrants into the market.Source: European Commission
61EU ETS – Aviation Q&A 3 How can the allowances be traded? Private transactionsMarketCurrently through the national registry by EU member statesMigrating to the Union Registry which will be fully activated after June 2012Note: More information about the national registry of each member state,Please check:
62Noise PollutionCauses regional annoyance and interferes with communications, children’s learning, and enjoyment of the outside world.Health impact: depression, sleep disturbances and hypertension.Property prices of areas affected by the aircraft noise may decrease in value
63Quantification of Noise Pollution To quantify the effects of noise pollution, hedonic pricing is developedHedonic pricingA technique that derives values for non-market goods such as environmental quality using information on the value of market goods such as residential property.By analyzing a large set of properties that are exposed to varying levels of noise annoyance, while controlling for other relevant characteristics, one can obtain an implicit price for the characteristic peace and quiet.Reference:Schipper, Nijkamp, Rietveld Why do Aircraft Noise Value Estimates Differ?