AviAtion investment To my father Aviation Investment Economic Appraisal for Airports, Air Traffic Management, Airlines and Aeronautics DorAMAs Jorge-CAlDerón European Investment Bank © Doramas Jorge-Calderón 2014 All rights reserved. no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. Doramas Jorge-Calderón has asserted his right under the Copyright, Designs and Patents Act, 1988, to be identified as the author of this work. Published by Ashgate Publishing limited Ashgate Publishing Company Wey Court east 110 Cherry street Union road suite 3-1 Farnham Burlington, VT 05401-3818 surrey, gU9 7PT UsA england www.ashgate.com British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. The Library of Congress has cataloged the printed edition as follows: library of Congress data has been applied for. ISBN 9781472421302 (hbk) ISBN 9781472421319 (ebk – PDF) ISBN 9781472421326 (ebk – ePUB) III Contents List of Figures   vii List of Tables   ix Preface   xi List of Abbreviations   xix 1 Introduction   1 1 Reasons to Invest in Aviation   1 2 Financial and Economic Returns   4 3 Discount Rate, Risk and Uncertainty   10 4 Additional Considerations   12 2 Identifying Benefits   15 1 Air Transport as an Intermediate Service   15 2 Travel Time   16 3 The Money Cost of Travel   19 4 Accident Risk   22 5 Externalities   23 6 The Generalised Cost of Transport   26 7 Wider Economic Benefits   29 3 The Basic Framework   41 Introduction   41 1 Landside Investments   41 2 Airside Investments   47 3 Scenario-building   50 4 Airports   69 Introduction   69 1 A Greenfield Airport   70 2 Involving the Private Sector (1): No Room for   Capital Investment   84 3 Terminal Capacity Expansion   92 4 Involving the Private Sector (2): Room for   Capital Investment   100 5 The Incentive to Overinvest   101 6 Enlarging a Runway   115 vi Aviation Investment 7 Adding a Runway   126 8 Involving the Private Sector (3): Regulatory versus   Competitive Outcome   138 5 Air Traffic Management   141 Introduction   141 1 Greater Movement Capacity   141 2 Involving the Private Sector (4): Pricing Policy   149 3 Flight Efficiency   154 6 Airlines   159 Introduction   159 1 Fleet Replacement   162 2 Fleet Expansion   167 3 The Value of Air Transport   177 7 Aeronautics   191 Introduction   191 1 Low Uncertainty   194 2 High Uncertainty   209 8 Concluding Remarks   223 References   229 Index   233 List of Figures 2.1 Effect of a tax on the money cost and economic cost of an input   21 2.2 Effects of a project on secondary markets   34 3.1 Demand and supply in landside capacity provision   42 3.2 Costs in airside capacity provision   49 3.3 Alternative counterfactual capacity conditions in the presence of market power   61 4.1 Effects of increasing airport aeronautical charges on user and airport surpluses   90 4.2 Effect of an increase in income on the investment case for a new runway   138 6.1 Option price and value at expiration and investment returns   172 7.1 Effect of introducing competition in a monopolised aircraft market   200 7.2 Treatment of environmental costs in the economic appraisal of investments in competitive aircraft manufacturing markets   208 7.3 Binomial tree for the financial real option value of an aircraft engine project   214 7.4 Binomial tree for the economic real option value of an aircraft engine project   222 List of Tables 1.1 Financial and economic calculations of return on investment: differences and linkages   9 2.1 Components of generalised cost of transport as used in this book   29 3.1 Competitive conditions and scenario-building in investment appraisal   55 4.1 Estimating traffic-generating potential of town A   70 4.2 Estimating deterred (or generated) traffic in town A   72 4.3 Financial and economic returns of a greenfield airport project   76 4.4 Financial and economic returns of the greenfield airport project with higher aeronautical charges   86 4.5 Financial and economic returns of the terminal capacity expansion project   94 4.6 Financial and economic returns of terminal expansion with larger capacity but with no price increase   104 4.7 Financial and economic returns of terminal expansion with larger capacity and with price increase   111 4.8 Financial and economic returns of a runway enlargement project with no change in aeronautical charges   118 4.9 Returns on a runway enlargement project with change in aeronautical charges and limited airline competition   123 4.10 Returns on a runway enlargement project with change in aeronautical charges and competitive airline market   124 4.11 Economic returns of adding a new runway   134 4.12 Economic returns of adding a new runway with faster growth in aircraft size without the project   136 5.1 Economic returns on an ATM project aimed at increasing aircraft movement capacity   144 5.2 Financial returns for an ANSP of investing in greater aircraft movement capacity   151 5.3 Economic returns on an ATM investment project aimed at improving flight efficiency   156 6.1 Financial and economic returns on a fleet replacement project with external emissions costs   165 6.2 Financial and economic returns on a fleet replacement project with emissions costs internalised   166 x Aviation Investment 6.3 Traffic and investment return scenarios for an airline considering an expansion of its fleet   169 6.4 Contribution to GDP and generalised cost of a hypothetical passenger trip across various route lengths   182 6.5 Returns on investing in an air service   186 7.1 Returns on investment in the aeronautical sector under alternative scenarios regarding competition and external costs   198