The Economic Impact Of Civil Aviation On The U.S. Economy - Dec. 2009

Figure 1Real GDP and Demand for Air TravelSource: Bureau of Economic Analysis and Bureau of Transportation StatisticsIntroductionAviation has opened the worldto and for new faces, new places,innovation and business opportunities.Civil aviation has become a vital component oftoday’s lifestyle and of modern economic life.Just as Thomas Friedman4 asserts that cheapand ubiquitous telecommunications havelowered impediments to international competitionand innovation, the airline industry has shatteredbarriers of distance that once limited manyglobal economic transactions. More and morehouseholds and businesses have become relianton the advantages and cost effectiveness of airtransportation. Like the Internet and new laborsaving technologies, the growth and maturationof the aviation industry, and civil air transport inparticular, is truly a modern marvel.Even during these turbulent economic times, aviationremains a unique link for commerce that contributesto the revitalization of the economy. The 2007economic impact of U.S. civil aviation on the overallU.S. economy, 50 states and the District of Columbiais presented in this report along with current trendsin the civil aviation industry. The most current officialeconomic data available is for calendar year 2007.Next year’s report will update with 2008 data. Thefortunes of the civil aviation industry may be moreclosely related to the overall U.S. business cycle thanmany other industries. Even during the worst nationaleconomic challenge since the Great Depression, the4512aviation industry has shown responsiveness andflexibility by adopting innovative resource-savingtechniques and adjusting its business models to thechanging economic circumstances of businesses andconsumers from the U.S. and abroad. In the nextsection, we review some of these trends and emergingtechniques of the global and U.S. civil aviation industry.Current TrendsThe demand for aviation is a consequence of a vibrantand growing economy. Figure 1 illustrates the closerelationship between overall economic growth (inreal GDP) and the demand for air travel (in revenuepassenger miles). As the economy grows, so doesthe demand for air transportation, but economiccontractions and slowdowns have a pronouncedeffect on the level of activity and the financialperformance of the civil aviation industry. However,civil aviation’s industry growth, as measured by realair transportation GDP,5 is much more volatile thanthat of the overall economy, as shown in Figure 2.Between 1978 and 2007, on average, the civil aviationindustry has experienced a real growth rate of justover 7 percent with a standard deviation of 7.1 percent,while the U.S. economy has been growing around3 percent with a standard deviation of 1.8 percent.Figure 2Air Transportation Growth and the EconomySource: Bureau of Economic AnalysisSince the Airline Deregulation Act of 1978, theindustry has demonstrated both exuberant growthand precipitous drops. For example, in 1983, afterthe recession of 1981-1982, the industry expandedby nearly 22 percent, which was followed by threeyears of nearly zero growth in real terms (Figure 2).These highly volatile trends continue today, althoughthe magnitude of growth and decline has lessenedThomas L. Friedman. 2005. The World is Flat: A Brief History of the Twenty-First Century.U.S. Department of Commerce, Bureau of Economic Analysis, GDP by Industry.The Economic Impact of Civil Aviation on the U.S. Economy2007 Findings13

Figure 3U.S. Trade Balance by Industry, 2008 (Best Five vs. Worst Five)Source: U.S. International Trade Commissionin recent years. The dampening of volatility suggeststhat the industry has been somewhat successful in itsefforts to remain profitable by restructuring throughbankruptcy and contract renegotiations.6The air transportation industry has matured, and it andthe services it enables have become an integral part ofthe U.S. lifestyle. Similar to consumers’ expectationthat fresh vegetables and fruits will be available yearround in grocery stores, what had been luxury goodsare now considered commonplace consumptionopportunities by many Americans. Partly in responseto these qualitative shifts, the industry continues tomature. As the effects of industry deregulation playout, both households and businesses have been able totake advantage of lower prices and, in some cases, moreservice options. This trend continues, despite a smallincrease in airfares between 2007 and 20087 due to largeincreases in the price of jet fuel.In 2008, the demand for system-wide scheduledpassenger service in the U.S., as measured by revenuepassenger miles (RPM), for U.S. commercial aircarriers was roughly 823 billion, a decrease of nearly2.3 percent from 2007. System-wide supply by U.S.commercial air carriers decreased from 1,060 billionavailable seat miles (ASM) in 2007 to 1,040 billionASM in 2008, a 1.9 percent decline. The average airfareincreased somewhat, however, from 171.87 in 2007 to 181.64 in 2008.8Along with the growth in commercial passengerservice, air cargo has also experienced considerablegrowth since 2002. Air cargo carriers have respondedto a large surge in the demand for the air transportationof freight between 2002 and 2007. Because of theweakening economy in 2008, U.S. carriers moved 37.1billion ton-miles of freight, a decrease of 7 percent oftotal RTM compared with39.9 billion in 2007.9For years, U.S.-made aircraft have been in high demandboth domestically and internationally. Aircraft,aircraft engines and parts transactions add value tothe economy. And due to the high quality of U.S.aerospace products, demand from outside the U.S.economy further adds to overall economic growth andjob creation within U.S. borders. One way to measurehow the U.S. aircraft manufacturing industry is faringin today’s global economy is to estimate the net value ofgoods being exchanged between the U.S. and therest of the world.10 The trade balance provides sucha measure — the difference between the value of U.S.exports and imports. The trade balance measure issignificant, not only as a statement of the volume andcomposition of trade, but because these flows set thepace of demand for the transport of cargo by air andother means.For the U.S., the value of the top five importedcommodities greatly exceeds the value of the top fiveexports. The U.S. appetite for oil and motor vehicleimports far exceeds domestic production for domesticand export use (Figure 3). However, the net impactof exports of U.S. aerospace and aviation productsremains positive and lowers the U.S. trade deficit.Aerospace products and parts have made huge positivecontributions for the civil aviation industry in recentyears. Even in the slowing global economy of 2008,aerospace products and parts continued to have apositive influence on the U.S. trade balance.The air transportation sector has grown not only inthe U.S., but also the world over. The InternationalAir Transport Association (IATA) estimates thatscheduled carriers’ worldwide revenues were 528billion in 2008, compared with 508 billion in 2007.11The International Civil Aviation Organization (ICAO)reports that in 2008, 2.3 billion passengers and 41million tons of cargo were transported worldwide,which is virtually unchanged from 2007.12714The Economic Impact of Civil Aviation on the U.S. EconomyFuel PricesSource: Energy Information AdministrationSince 2003, the price of fuel has both risen and fallenbeyond expectations. Today, the volatility of the priceof jet fuel is a concern of all aircraft operators. Bymid-2008, jet fuel prices had reached record levels,followed by an abrupt drop in the second half of theyear (Figure 4). As the price of fuel rose to new highsduring the summer months, airlines and other operatorsfaced higher operating costs, and they found innovativeways to become more fuel efficient and to respond tochanges in passenger and shipper demand. This costcutting benefited the industry when fuel prices droppedin September 2008, leading to a leaner industry. Whilemany analysts believe that the oil market will returnto more familiar patterns, the price of fuel will likelycontinue to rise at a somewhat slower pace.Peter S. Morrell. 2007. Airline Finance.Department of Transportation, Office of the Assistant Secretary for Aviation and International Affairs. “Domestic Airline Fares Consumer Report,” FourthQuarter 2008.6Figure 4Department of Transportation, Office of the Assistant Secretary for Aviation and International Affairs. “Domestic Airline Fares Consumer Report,” FourthQuarter 2008. The average fare price is calculated using data for the top 1,000 city-pair markets.9Ibid.10United States International Trade Commission (USITC) www.usitc.gov11IATA Financial Forecast, June 2009.12ICAO Annual Report 2008, Document 9916.2007 Findings815

Figure 5Fuel Efficiencyaircraft have not been re-introduced into service afterfuel prices decreased. In addition to retiring aircraft,carriers have been deferring and canceling orders fornew aircraft.16Source: Bureau of Transportation StatisticsWorkforce Reduction and Labor Negotiations:The U.S. airline industry reduced its workforce by7 percent from the end of 2007 to the end of 2008.17A large number of labor contracts are in renegotiationin the U.S. airline industry, with a significant numberin mediation. In the current economic climate, theparties may have a difficult time achieving theirrespective objectives.18Alliance Restructuring: Many of the carrier alliancesare streamlining and cutting costs. Previously unaffiliatedcarriers are also joining alliances to benefit from costsavings (for example, in engineering and maintenance)and increased revenue.19The data in Figure 5 reflect the fact that more passengersand freight are being transported per gallon of fuelburned as airlines continue to improve fuel efficiency.The traditional fuel-efficiency measure of RTM pergallon is shown, alongside another metric, RPM pergallon. RPM per gallon is a measure of fuel efficiencyspecifically for passenger traffic, and it has increasedsubstantially over the last several years, most notablyafter 2001. This is partly due to improved fuel efficiencyand partly due to higher load factors (more passengersand cargo on each flight).The economic downturn in 2008 has forced the airlineindustry to take drastic steps to address weakeningdemand for air travel. Some of these actions are acontinuation of efforts to mitigate the effects of extremelyhigh fuel prices of early- to mid-2008.These actions include:Capacity Reduction: The U.S. airline industry reduceddomestic capacity by 9 percent from the end of 2007to the end of 2008.13 This was achieved by adjustingfleet size and fleet mix as well as frequency of service.Carriers have not reduced capacity uniformly acrossoperating regions. Domestic capacity was the first tobe reduced. Recently, international capacity has beenreduced as the number of premium and business-classpassengers declined as a result of the recession andreduced business travel.14Fleet Adjustment: The number of active aircraft inthe U.S. airline industry fleet decreased by 18 percentfrom the end of 2007 to the end of 2008.15 Many older,less fuel-efficient aircraft were taken out of serviceduring the fuel price increase of 2008. Most of theseRegional Carrier Industry Business ModelModifications: The economic downturn has resultedin major changes for the regional airline industry. Thenumber of regional carrier departures declined by 12percent from the end of 2007 to the end of 2008.20Mainline carriers have reduced flying by their regionalpartners and some are trying to renegotiate contractsto reduce payments to the regional partners. However,these changes will likely come slowly due to the longterm nature of most contracts. Some of the regional jetaircraft types (especially those with 50 or fewer seats)are unprofitable in an environment of weak demand.Some regional carriers are now flying larger regionaljets (70 or more seats) between large markets, ratherthan the traditional small market to large market routeof the hub-and-spoke system. Some regional carriershave provided capital to their mainline partnersbecause of the mainline partner’s inability to obtain itin the traditional capital market.21Expansion of Fees for Unbundled Services: Carriershave increased existing ancillary fees and implementednew ones to raise additional revenue. Ancillary feesinclude fees for baggage, priority seating, food andbeverages, and pillows. Checked-baggage fees alonegenerated 635 million in revenue for the first threequarters of 2008 for U.S. legacy and low-cost carriers.22Cash Position Protection: The cash position of manyU.S. carriers is weak, due to several factors, including: Decreased revenue because of weak demand Large losses in 2008 due to the high cost of fuel untilmid-2008 Fuel hedging contract losses due to the sharp fuelprice decease since mid-2008Healthy cash positions are extremely important toinsulate carriers from uncertain future demand andcosts, especially the price of fuel. The current weakcash positions of carriers are of particular concernbecause of the difficulty or inability to obtain financingfrom the credit markets due to the turmoil in thefinancial sector. In addition, carriers could experienceproblems when they need to roll over debt sooncoming to maturity.23 Carriers have thus taken actionto improve their cash positions, including:24 Drawing down existing credit lines Selling frequent-flier miles in advance tomileage partners Selling and leasing back aircraft Issuing debt and equityThese last two actions have been limited in somecases because of credit market constraints affecting allsectors of the economy.Aviation Week & Space Technology, June 15, 2009, p. 111.GAO, “Airline Industry Contraction Due to Volatile Fuel Prices and Falling DemandAffects Airports, Passengers, and Federal Government Revenues,” April 2009.18Ibid.19Aviation Week & Space Technology, June 15, 2009, p. 72.20Aviation Week & Space Technology, May 18, 2009, p. 46.21Aviation Week & Space Technology, May 18, 2009, p. 46.22GAO, “Airline Industry Contraction Due to Volatile Fuel Prices and Falling DemandAffects Airports, Passengers, and Federal Government Revenues,” April 2009.23Aviation Week & Space Technology, May 25, 2009, p 54.24Aviation Week & Space Technology, February 2, 2009, p 24.1617GAO, “Airline Industry Contraction Due to Volatile Fuel Prices and Falling Demand Affects Airports, Passengers, and Federal Government Revenues,”April 2009.14Aviation Week & Space Technology, June 15, 2009, p. 39.15GAO, “Airline Industry Contraction Due to Volatile Fuel Prices and Falling Demand Affects Airports, Passengers, and Federal Government Revenues,”April 2009.1316The Economic Impact of Civil Aviation on the U.S. Economy2007 Findings17

National Impact ofU.S. Civil AviationThis report estimates the economic impactof civil aviation on the U.S. economy. Civilaviation has far-reaching economic impacts.Some of these impacts cannot be measuredquantitatively, and this report attempts to use the bestdata available from government and private sources tocapture all of the economic activity generated by directand indirect air transport of passengers and cargo. Aspecial effort is also made to include the contributionsof general aviation (GA) to the economy. WhileGA operates in a large and remarkable range ofcommunities across the U.S., exact data on the vitaleconomic activity generated by this sector of theaviation community can be sparse. Numerous surveystudies were used and special attention was paid toGA’s operations to estimate its economic contribution.Methods and ResultsThe total economic impact of an industry is asummation of primary impacts (direct and indirect)and induced impacts of spending on that particularindustry. This definition is standard for economicimpact studies and is used to accommodate aviation’sunique economic contribution to the nationaleconomy. The data used to measure the primaryeconomic impacts of civil aviation are collected fromreliable government and private sources. This studyestimates those impacts by looking at industry output,earnings and jobs. These data are entered into theBureau of Economic Analysis Regional Input-OutputModeling System (RIMS-II) to derive the secondaryimpacts. Primary and secondary impacts are summedto produce a measure of civil aviation’s total impact onthe U.S. economy.18The Economic Impact of Civil Aviation on the U.S. EconomyTypes of Economic ImpactsPrimary Impacts:The primary impacts of aviation are a summation ofdirect and indirect impacts of civil aviation on the U.S.economy and include:1. Air transportation and supporting services2. Aircraft, aircraft engines and parts manufacturing3. Travel and other trip-related expenditures bytravelers using air transportationDirect: Direct impacts of civil aviation are createdthrough manufacturing and air transportation activitiesas measured by the employment, payroll and sales/output associated with the following industries/entities: Scheduled and non-scheduled commercial airlines(passenger and cargo) and air couriers Airport and aircraft service providers (includingFAA and other government services) Air cargo service providers GA (non-commercial) aircraft operators (includingflight schools) Aircraft and components manufacturingIndirect: Indirect impacts result from the expendituresof air passengers other than airfares and associatedcharges paid directly to airlines or travel arrangers.Visitor expenditures translate into sales, payroll andemployment for the following industries: Traveler accommodations (hotels, motels, etc.) Food and beverage providers (restaurants, bars,fast-food outlets and stores) Arts, entertainment, and recreation (museums,theatres and amusement parks) Visitor travel services (sightseeing, other touristservices and travel agencies) Ground transportation (to and from airports) Other on-and-off airport purchases of goods andservices (souvenirs)2007 Findings19

Induced or Secondary Impacts:Induced impacts result from expenditures made byindustries identified in the measurement of primaryimpacts to supporting businesses and entities, as wellas the spending of direct and indirect employees.Induced impacts capture the secondary impacts to theeconomy as direct/indirect sales, and payroll impactsare circulated to supporting industries throughmultiplier effects.Measures of Economic ImpactsThe RIMS-II model uses direct and indirectexpenditures to estimate the induced effects of thoseexpenditures on the U.S. economy. Using thoseidentified expenditures, the RIMS-II model calculatesthe induced or secondary expenditures and both thedirect and induced earnings and jobs creation.Output: The total value of goods and services produced.25Earnings: Wages and salaries, other labor income andproprietors’ income paid to all employed persons whodeliver final demand output and services.Jobs: The number of people who provide civil aviationservices, manufacture aircraft and aircraft engines orwork in other industries that are indirectly affected byactivity in the civil air transportation sector.ResultsTable 2 summarizes the total impact of U.S. civilaviation on output, earnings and jobs. The totaleconomic activity attributed to civil-aviation-relatedgoods and services was approximately 1,315.3 billionin 2007, which generated well over 11 million jobs and 396 billion in earnings.Economic Activity ImpactsTo fully represent the effects of commercial and GAservices on the U.S. economy, this study provides bothan overview and a detailed look at civil aviation byimpact type. Using national data sources and studies,the primary direct and indirect impacts as well asinduced impacts from the RIMS-II model are shownin Tables 3a and 3b.Some observations on the relationships in these dataand results are: Commercial aviation accounts for the bulk of theimpact of civil aviation. Commercial aviationgenerated 115.0 billion in direct impact, almost 50percent of the total direct expenditures. (Table 3a). Commercial passengers spent 214.5 billion once theyreached their final destination by air, just over 95percent of the total indirect expenditures (Table 3a). General aviation also made a sizable impact, asshown in Tables 3a and 3b. While smaller than theimpact from commercial aviation, it reflects generalaviation’s unique role in the nation’s transportationsystem. GA contributed 14 billion in direct impactsand 5 billion in indirect impacts. GA contributed atotal of 90.5 billion, a significant amount for nonscheduled service that includes all aircraft activityexcept for major airlines and the military. In theUnited States, GA accounted for more than 5 percentof aviation related services. GA has access to morethan 5,200 public-use airports and a significantnumber of pr

- Types of Economic Impacts - measures of Economic Impacts - results - Economic Activity Impacts - Aviation's Contribution to Gross Domestic Product - Changes over Previous Years - manufacturing - Impact on Other Industries - Supply Chain management - Impact on International Tourism state Economic impact conclusion List of tables and Figures .