Presentation on theme: "The Third Runway Expansion at Hong Kong International Airport- Issues and Economic Analysis M Fung and CK Law Aviation Policy and Research Centre CUHK."— Presentation transcript:
The Third Runway Expansion at Hong Kong International Airport- Issues and Economic Analysis M Fung and CK Law Aviation Policy and Research Centre CUHK
Global Aviation Market Air Transport Industry in Hong Kong Third Runway Expansion Issues and Economic Applications Teaching and Learning Materials
Global Aviation Market
Global flows in a digital age: How trade, finance, people and data connect the world economy, McKinsey Global Institute, 2014.
IATA Traffic Flows Between Regions in 2011 Percentage of Total Scheduled Revenue Passenger-Kilometres Source: IATA Watts (published in 2012), IATA Financial Forecast March 2013
Year 2012 Air Traffic Distribution Matrix RPKsAsia PacificNorth AmericaEuropeMiddle EastLatin AmericaAfrica Asia Pacific59%15%16%37%1%6% North America14%50%23%9%34%4% Europe16%22%36%31%30%51% Middle East10%3%9%14%-18% Latin America-10%9%-35%- Africa1% 7%9%0%20% Total traffic to and from region 100% Source: Boeing 2013
Regional Distribution of Airport Passenger Traffic by World Regions in 2006 vs Source: ACI Worldwide Airport Traffic Report 2007 & 2012
Top 12 Airports by Passengers (Millions) in 2006 and 2012 Source: ACI Worldwide Airport Traffic Report
Top 12 Airports by Cargo (Tonnes) Handled in 2006 vs Source: ACI Worldwide Airport Traffic Reports
Global Growth in Passenger Traffic and GDP Source: ICAO for traffic growth, IMF for GDP (PPP)
Airbus Air Traffic Forecasts – Largest Origin & Destination Flows in 2032 Source: Airbus (2013)
Net Profit/Loss and Revenues for World Commercial Airlines ( ) Source: ICAO, IATA
Historical Prices for Crude Oil and Jet Fuel Source: Boeing (2013) and EIA
Energy Intensity of New Aircraft Models Source: IATA (2013)
Passenger Numbers by Airline Business Models 2003 – 2012 Note: Share by top 200 passenger airlines Source: Airline Business, August 2013
Financial Returns of Different Airline Business Models (2010) Source: Airline Business, August 2011
Accumulated Net Losses and Gains of Legacy and Low-Cost Airlines in US Source: The US DOT (2012)
Alliance Membership as of July 2012 Source: Websites of Star, SkyTeam and Oneworld
Top 20 Airlines by Passenger Traffic (RPKs) in 2012 Source: Airline Business, August 2013
Aircraft Movements of Local and Foreign Airlines ( ) Source: HKAA (2013)
Aircraft Movements of HK’s Local Airlines ( ) Source: HKAA (2013)
Air Passenger Throughput of HKIA and for Local and Foreign Airlines ( ) Source: HKAA (2013)
Air Passenger Throughput of HK’s Local Airlines ( ) Source: HKAA (2013)
Connecting Traffic for Local and Foreign Airlines ( ) Source: HKAA (2013)
Connecting Traffic Handled by HK’s Local Airlines ( ) Source: HKAA (2013)
Key Air Passenger Markets of HK ( ) Source: HKAA (2013)
Air Cargo Throughput of Local and Foreign Airlines ( ) Source: HKAA (2013)
Air Cargo Throughput of HK’s Local Airlines ( ) Source: HKAA (2013)
Key Air Cargo Markets of HK ( ) Source: HKAA (2013)
Cathay Pacific Frequencies Per Week (Summer Schedule 2014) Destination Frequency per week Destination Frequency per week Destination Frequency per week Destination Frequency per week Adelaide 4 Denpasar 9 Manila 42 Sapporo4 Amsterdam 7 Dubai 14 Melbourne 21 Seoul42 Auckland 14 Frankfurt 7 Milan 7 Shanghai21 Bahrain 7 Fukuoka 7 Moscow 3 Singapore63 Bangkok 59 Ho Chi Minh city 16 Mumbai 10 Surabaya7 Beijing 14 Hyderabad 4 Nagoya 21 Sydney28 Brisbane 11 Jakarta 21 New York 35 Taipei106 Cairns 4 Johannesburg 7 Osaka 35 Tokyo42 Cebu 7 Karachi 4 Paris 14 Toronto10 Chennai 7 Kuala Lumpur 28 Perth 10 Vancouver14 Chicago 10 London 35 Riyadh5 Colombo 7 Los Angeles 28 Rome7 Delhi 14 Maldives 4 San Francisco14 Source: Cathay Pacific System Timetable for Summer Schedule 2014, Cathay Pacific Press Release (2014) Note: The data was as on 2 September 2014.
Dragonair Frequencies per Week (Summer Schedule 2014) DestinationFrequencyDestinationFrequencyDestinationFrequency Beijing56Haikou7Phuket14 Bengalore7Hangzhou28Qingdao14 Pusan7Hanoi10Sanya5 Changsha7Jeju4SHA7 Chengdu14Kaohsiung38PVG91 Chiang Mai7Kathmandu6Siem Reap4 Chongqing7Kolkata5Taichung14 Clark3Kota Kinabalu7Taipei12 Da Nang7Kunming7Wenzhou7 Denpasar Bali2Manila5Wuhan10 Dhaka6Nanjing14Xiamen28 Fukuoka7Ningbo14Xian7 Fuzhou14Okinawa4Yangon4 Guangzhou14Penang8Zhengzhou7 Guilin7Phnom Penh10 Source: Dragonair System Timetable for Summer Schedule 2014Note: The data was as on 5 September 2014.
Hong Kong Airlines Frequencies Per Week (Summer Schedule 2014) Source: Hong Kong Airlines Timetable for Summer Schedule 2014 Destination Frequency per week Destination Frequency per week Destination Frequency per week Beijing28Guiyang7 Shanghai – Pudong 21 Bangkok35Haikou7 Shanhai - Hongqiao 7 Chengdu7Hangzhou21Taipei28 Chongqing7Hanoi7Taiyuan2 Denpasar14Nanjing14Tianjin5 Fuzhou14Nanning7Xiamen6 Guilin7Sanya7Xuzhou2 Note: The data was as on 5 September 2014.
Hong Kong Express Frequencies Per Week (Summer Schedule 2014) Source: Hong Kong Express Timetable for Summer Schedule 2014 Destination Frequency per week Destination Frequency per week Busan6Osaka14 Chiang Mai3Penang7 Fukuoka7Phuket4 Incheon17Quanzhou*4 Kota Kinabalu4Taichung14 Kunming3Tokyo-Haneda7 Nagoya6Zhengzhou^5 Ningbo7 Note: The data was as on 5 September 2014.
Air Transport Industry in HK Economic Contribution
Total Value Added by HK’s Aviation Sector ( ) Source: HK Census and Statistics Department (2013)
Proportion of the Workforce Engaged in HK’s Aviation Industry ( ) Source: HK Census and Statistics Department (2013)
Air Transport Industry in HK A5 in the PRD Region
Five Major GPRD Airports Source: HKAA (2011)
Selected International Destinations Connected to Airports in the PRD Region—Hong Kong RegionDestinationsFrequency per week (Passenger) Frequency per week (Cargo) AsiaBangkok* Seoul Singapore Taipei AustraliaSydney 353 EuropeLondon 562 North America Los Angeles 2822 New York 287 Vancouver 210 Number of destinations for scheduled flights at March 2014: 180 Newly added in 2014 for passenger flights: Dallas, Seattle and Kagoshima Source: HKAA Annual Report ( ), webpage of HK Airport (2014) Data from 4-10 October for passengers, 6-12 October for cargo *Bangkok includes 2 airports: Bangkok and DMK
Selected International Destinations Connected to Airports in the PRD Region—Guangzhou RegionDestinationsFrequency per week (Passenger and Cargo) AsiaBangkok*101 Seoul73 Singapore76 Taipei40 AustraliaSydney54 EuropeLondon7 North AmericaLos Angeles15 New York5 Vancouver7 Number of destinations for scheduled flights in 2013: more than 160 cities (Domestic and international) Source: Webpage of Guangzhou Baiyun Airport (2014) Data from October *Bangkok includes 2 airports: Bangkok and DMK
Selected International Destinations Connected to Airports in the PRD Region—Shenzhen Source: Webpage of Shenzhen Baoan Airport (2014) Data from 4 – 10 October *Bangkok includes 2 airports: Bangkok and DMK DestinationFrequency per week (Passenger and cargo) Bangkok*26 Seoul30 Singapore25 Taipei22 Number of destinations for scheduled flights: 107 (Domestic: 92, HK- Macau-Taiwan:4, international: 11)
Daily Frequency of Destinations in the Mainland by Two Airports Destination Airport Beijing Shanghai (Pudong and Hongqiao) Hangzhou Hong Kong (HKG)22439 Shenzhen (SZX) Source: Webpages of HK International Airport and Shenzhen Baoan Airport (2014) Sample day: 24 October 2014 Figures include passenger and cargo direct flights only.
Selected International Destinations Connected to Airports in the PRD Region—Macau Webpage of Macau Airport (2014) *Bangkok includes 2 airports: Bangkok and DMK Data on 4 October provided by Macau Airport DestinationFrequency per week (Passenger) Bangkok*49 Seoul21 Singapore14 Taipei77 Number of destinations for scheduled flights: 37 (Mainland and Taiwan: 23, international: 14)
Key International Destinations Connected to Airports in the PRD Region—Zhuhai No international routes Number of domestic destinations: 41 Webpage of Zhuhai Airport (2014)
Planned Developments of Airports in the Region Source: HKAA (2011)
Handover Points Between the HK and Guangzhou Flight Information Regions Source: HK Government
The Third Runway Expansion
Global Air Traffic versus Economic Growth Source: HKAA (2011)
A Structured Air Traffic Demand Forecast Process Source: HKAA (2011)
Great Pearl River Delta Airports Passenger and Cargo Traffic Forecast Source: HKAA (2011)
HKIA Air Traffic Movement Projection (Up to 2030) Source: HKAA (2011)
Traffic Forecasts from Boeing and Airbus Source: HKAA (2011)
Two-runway System: Airport Layout Plan in 2030 Source: HKAA (2011)
Base Case Constrained Air Traffic Movement Forecast Source: HKAA (2011)
Base Case Constrained Passenger Traffic Movement Forecast Source: HKAA (2011)
Base Case Constrained Cargo Traffic Movement Forecast Source: HKAA (2011)
Three-runway System: Airport Layout Plan in 2030 Source: HKAA (2011)
Cost and Benefit Flows of Option 1 Source: HKAA (2011)
Cost and Benefit Flows of Option 2 Source: HKAA (2011)
Summary of the Economic Impact Analysis Source: HKAA (2011)
HKIA—Financing of 3 rd Runway and Slot Allocation Dr CK Law, Director of Policy Aviation Policy and Research Center CUHK (31/10/2014) 68
Content (a) Financing Options for the 3 rd Runway --Original Financing Plan --HKAA Proposal for 3 rd Runway --User-pay Principle—China --User-pay Principle—US --Passenger Surcharge for HK 69
Content (b) Slot Allocation --IATA Principle of Slot Allocation --London Airports—Slot Trading --US—Slot Trading and Proposed Slot Auctions --Current Cases of Slot Auctions --Lessons for HK 70
Original Financing Plan for HKIA 71 (a)In the 1991 financing arrangement of HKIA: --direct equity injection by HK Government: HK$36 billion; --maximum debt from borrowing (for first phase development works): HK$11.6 billion. (b)So this was a financing package of about 75% equity and 25% debt (user-pay principle was not implemented).
HKAA’s Proposed Financing Sources for 3 rd Runway Proposed Financing Sources (a)Net income and retained earnings of HKAA (b)Reducing the ratio of dividend payment to the HK Government, using the extra cash for construction, plus other forms of direct government funding (c)Using user-pay-principle to collect a surcharge from users (d)Arranging traditional bank loans and issuing bonds Source: HKAA (2011) 72
Financing Options under the User-Pay Principle—China (a)In March 2012, Ministry of Finance in China issued a notice about Civil Aviation Development Fund ( 《民航發展基金 徵收使用管理暫行辦法》 ). (Domestic air passengers have to pay RMB 50 per movement, international air passengers have to pay RMB 90 per movement (including RMB 20 for Tourism Development Fund).) (b)Air carriers also have to pay for Civil Aviation Development Fund according to the maximum take-off weight of aircrafts, flying distances and routes. 73
Financing Options under the User-Pay Principle—the US (a)The PFC programme authorises the Federal Aviation Administration (FAA) to allow airports to impose fees on passengers to finance airport development projects and planning as defined in the law. (The PFC could be imposed at a level of US$1, US$2, US$3, US$4 and US$4.50 per passenger.) (b)For example: Chicago O’Hare International Airport: FAA permitted US$6.4b PFC to be collected up to 1/1/2038 (about 43% of estimated total cost for airport expansion, at US$15 billion). 74
User-pay Principle for 3 rd Runway --Additional Passenger Surcharge (1) (a)Can be levied similar to the existing framework of passenger departure tax (HK$120 per passenger, HK$2.2b tax revenue for 2013). (b)Air passenger departure tax is for the general revenue purpose, but not for the construction of HK airport. (c)Assuming 20 million passengers would pay this surcharge annually at HK$100 each, the total revenue would be HK$2 billion a year. (d)A 20-year programme, e.g. from 2016 to 2035, would easily yield HK$40 billion at 2013’s money. 75
User-pay Principle for 3 rd Runway --Additional Passenger Surcharge (2) (e)A charge can be levied under “Scheme of Airport Charges” in HK Law Chapter 483 by HK Airport Authority. (f)Currently, a terminal building charge is in effect (HK$23 per non-transit passenger), which is levied on air carriers. This charge would require the approval of the Chief Executive, but not LegCo. 76
Recommended Funding Sources for HKIA’s 3 rd Runway Funding sources HKAA internal capital Government direct funding User-pay Principle BorrowingTotal HK$ (billion) Percentage (%)
IATA’s Principles of Slot Allocation (a) According to the latest estimation by HKIA, the current capacity of 420,000 flights per year would be reached by 2016/17. We are running out of slots sooner than expected. (b) 4 major cornerstones in IATA Worldwide Slot Guidelines are : – certainty of access; – flexibility to mix and match slots to meet operational challenges and changing market needs; – sustainability of costs; and – transparency of allocation (c) 4 major principles: – Historic slots – Changes to historic slots – Slot pool – New entrants Source: IATA (2013) 78
MB PSPS Quantity of flights Price MC S MC P A B C D QSQS P QCQC QPQP Congestion as Negative Externality Source: Figure 1 adapted from Cohen et al. (2009)
London Airports— Slot Trading (1) (a)Heathrow Airport and Gatwick Airports are “Level 3” Airport (HKIA as well) under IATA classification. (b)For most of the time, the demand of runway movement exceeds the capacity of runway movement. (c)Airport Coordination Limited (ACL) as the independent airport coordinator, which is monitored by Civil Aviation Authority. (d)In Summer 2014, air transport movement cap for two runways was about 85 movements per day. Source: IATA (2013), ACL (2014) 80
London Airports— Slot Trading (2) (e)Currently, slots are traded in the secondary market (Online Platform: slottrade.aero), monitored by CAA. The objective is to improve the efficiency of slot utilization. (f)ACL is responsible for facilitation of trading slots by providing the online platform. (g)Airlines are the main participants for bilateral negotiations in the trading. Source: slottrade.aero (2014), ACL (2014) 81
London Airports— Slot Trading (3) (h)Usually, the price for slot trading is confidential. (ACL asks airlines to disclose the price on a voluntary basis). (i)In 2013, two deals valuing Heathrow slots about GBP 15 million per daily pair according to news. (j)In the Summer 2012 season, there were 23 transactions, involving 122 slots-per-week traded (just above 1%, total slots-per-week allocated was 9,524, about 1,360 flights per day). Many valuable slots were traded in earlier years already. Source: slottrade.aero (2014), ACL (2014), CAPA (2013) 82
Trading Volume of London Heathrow and Gatwick Airport from S08 to S12 AirportLHR (Heathrow)LGW (Gatwick) Season/ Year Number of transactions Slots-per- week traded Total slots- per-week allocated Percentage of slots-per- week traded Number of transactions Slots-per- week traded Total slots- per-week allocated Percentage of slots-per- week traded S , %281946, % W , %81134, % S , %112645, % W , %52674, % S , %92465, % W , %3434, % S , %4775, % W , %004, % S , %3335, % 83 Source: slottrade.aero (2014), table complied by APRC (2014)
Slot Secondary Trading and Proposed Slot Auctions in the US (1) (a)In 1960s, Reagan National and 3 New York City area airports were congested so FAA implemented High Density Rule (HDR) to limit the number of flights operated for all or part of the day. (b)FAA adopted a buy/sell rule on slots in 1986, as it believed that a secondary market in slots would address concerns by new entrant airlines and smaller carriers about access and competition at High Density Rule-controlled airports. (c)FAA proposed congestion management rules (including slot auctions) for LaGuardia, Newark and John F. Kennedy Airport in 2008 for easing the congestion. Source: Colangelo (2012), US GAO (2012), Williams (2009) 84
Slot Secondary Trading and Proposed Slot Auctions in the US (2) (d)Based on this proposal, most of the existing slots at all three airports would be "grandfathered" to their current owners. This would allow incumbent carriers to retain the vast majority of the slots they already operate. (e)Carriers would hold these slots (called "common slots") as lease agreements for 10 years. At JFK and EWR, each carrier would retain 100% of its current slots up to 20, plus 90% of all of its slots over 20 (meaning 10% of these would be taken out immediately for auctions). Once the proposed rule expired, all interests of “common” slots would revert to FAA. (f)The FAA would then auction those slots withdrawn from eligible carriers (initially called "limited slots") to successful bidders over a staggered 5-year period. Those slots awarded through the withdrawal-and-auction process would have shorter leases. (g)Once the limited slots are auctioned and leased to the highest bidder, they then would become "unrestricted" slots. The unrestricted slots, unlike common and limited slots, would not be subject to withdrawal by the FAA, but would instead expire at the end of the specified lease term. “Unrestricted” slots would expire when the rule sunsets (i.e. 10 years). (h)But this auction scheme has never been implemented. 85 Source: The mechanism was sumamrised by Williams (2009). 73 Federal Register (2008) Remarks: The one at LaGuardia was quite similar to this one at JFK and Newark.
Current Cases of Slot Auction: New York LaGuardia Airport (2011) (a)A joint waiver request from Delta Air Lines and US Airways was granted—to remove the prohibition on purchasing slots at LaGuardia Airport (LGA). (b)Auction of 32 slots at LGA and 16 slots at Washington Reagan Airport (DCA), by a blind, cash-only sale through an FAA-managed website. (c)JetBlue Airways bid US$72 million for 8 roundtrips a day at both LGA and DCA in the auction. WestJet, a Canadian carrier, will pay $17.6 million for eight slot pairs at LaGuardia. Source: 76 Federal Register in 2011, US DOT (2011), WSJ (2011) 86
Current Cases of Slot Auction: Washington Reagan Airport (2014) (a)US Department of Justice ordered to have auctions for slots owned by America Airlines, as an approval of merger of America Airlines and US Airways. (b)According to the settlement for the merger with DOJ, American and US Airways agreed to give up 52 slot pairs at Reagan airport. (c) Results on 30 January 2014: – 5 slot pairs remained unaccounted from the 52 DCA slot pairs. – Of those 52, Southwest now has 27 and JetBlue 20. Source: USAToday (2014), Southwest Airlines (2014) 87
Slot Trading/Auction Lessons for Hong Kong Hong Kong is running out of slots soon. In order to enhance the efficiency of slot utilization, HK government should consider: (a)Allowing secondary slot trading. (b)Auctioning remaining slots in the next few years. (c)Encouraging existing airlines to surrender under-utilized slots. (UK ACL could impose financial sanctions, up to GBP 20,000 for each instance of misuse of slots, on air carriers which misuse the slots. In Summer 2013, British Airways was fined for GBP 2,000 as it operated off slots in Gatwick Airport.) 88
Environmental Issues Carbon Emission
Social Costs Airport expansion -Infrastructure cost -Damages to ecology, like marine Increasing flights due to expansion -Noise -Air pollution (SOx) -Carbon
Example Social costs of London Heathrow Airport Expansion Source: A New Approach to Evaluating Runway 3, New Economics Foundation, 2010
Carbon Emission: Evaluation from HKAA HKAA evaluated the carbon emission in August 2014 In the coming 50 years (from 2012 to 2061), the amount of carbon emission brought by the operation of third runway would be 266 million tonnes. The social costs involved will be HKD 54.7 billion. (For the whole journey of flights, including carbon emission in HK and destinations) The amount of carbon emission brought by the operation of third runway in the coming 50 years, will only be 32 million tonnes and the social costs will be HKD 7.3 billion only, excluding the emission in overseas destinations. Source: 明報財經網 (2014)
Results from Social Return on Investment by HK Friends of Earth, HK Dolphin Conservation Society and The Professional Commons Source: 獨立媒體 (2014)
Divergence between private and social costs Social optimum: Marginal Social Cost (MSC) = Marginal Social Benefit (MSB) Result of negative externality: MSC > MSB => Overproduction
Methods to handle the problem Major economic principle: Internalize all the negative externalities in decision making How to do it in practice? Quota Tax Other methods and regulations
Quota Fix the pollution quota at social optimum (Q2)
Example - Quota European Emission Trading System (EU ETS) The European Union committed to reducing its GHG emissions by 8% under the Kyoto Protocol. The EU ETS was set up to help the 27 Member States achieve their targets by capping CO2 emissions from the main emissions producing industries. Three phases launch period : Expansion to cover three new States (Liechtenstein, Norway and Iceland); In 2012, expansion to cover the aviation sector : to reduce emissions by 20% by 2020 compared with 1990; Expansion to cover more gases (nitrous oxide and PFCs) and new sectors (petrochemicals, ammonia and aluminum, etc.)
Policy Analysis and Opportunity Costs Uwe Reinhardt, an economist at Princeton University, wrote the following in a column in the New York Times: Cost-effectiveness analysis seeks to establish which of several alternative strategies capable of achieving a given therapeutic goal is the least-cost strategy. It seems a sensible form of inquiry in a nation that is dismayed over the rising cost of health care …. Opponents of cost- effectiveness analysis include individuals who sincerely believe that health and life are “priceless”.
Policy Analysis and Opportunity Costs Are health and life priceless? Are there any decisions you make during your everyday life that indicate whether you consider health and life to be priceless?
Life is priceless??
Policy Analysis and Opportunity Costs Lawrence Summers served as secretary of the treasury in the Clinton administration from 1999 to 2001 and as director of the National Economic Council in the Obama administration from 2009 to He has been quoted as giving the following moral defense of the economic approach: there is nothing morally unattractive about saying: We need to analyze which way spending money on health care will produce more benefit and which less, and using our money as efficiently as we can. I don’t think there is anything immoral about seeking to achieve environmental benefits at the lowest possible costs.
Policy Analysis and Opportunity Costs Would it be more ethical to reduce pollution without worrying about the cost or by taking the cost into account? Briefly explain.