MAKING THE RIGHT CONNECTIONS

ASM’s Nigel Mayes and York Aviation’s James Brass tell us more about the economic and social benefits of route development.

Route development is the most important activity an airport can undertake, for without air services, an airport is just a strip of concrete.

The key asset of all airports, air services define gateways and bring economic and social benefits to the serving city and region, whether as a catalyst for direct new foreign investment, tourism growth or enabling migration flows.

This article identifies where the traffic growth in Asia is expected to occur in 2018 and what type of economic and social benefits might be generated.

Finally, as the stakes have become higher, we look at how airports are investing in the route development function to ensure that they maximise the economic and social benefits from their networks.

Booming Asia-Pacific

According to IATA, the Asia-Pacific region is forecast to be the largest travel market on the planet by 2036, by which time it is expected to account for around 40% of the world’s passenger traffic.

This should be no surprise though, as Asia-Pacific’s GDP is expected to grow by 3.9% annually over the next 20 years, as the share of the world’s GDP is projected to rise from 33% to 40% by 2036.

These top line statistics demonstrate the link between economic growth and passenger growth and a relationship, which is two-way. Other drivers for growth have been liberalisation, new aircraft technologies and the successful evolution of new airline business models.

Annual capacity growth provided by the low-cost carriers continues to outstrip the total regional growth of 10% per year, with a 22% annual increase on average.   

Looking at seat capacity growth for 2018 v 2017, the three countries with the largest rise in seat capacity are: India, China and Indonesia, with nearly 4.6 million extra seats between the three country markets, providing growth of 13%, 2% and 6% respectively (see table below).

For all three markets, additional domestic seats account for a significant proportion of this growth. In China, domestic seats account for around 44% of the total, compared to around 90% in India and 80% in Indonesia.

If we look at China alone, of the 13 million additional seats, six million are domestic, and the next largest growth is to Thailand with 2.4 million seats. Thereafter, it is Cambodia with 550,000 and the US with 400,000. For Thailand, the increase in Chinese visitors will prove a major boost to tourism revenues.

It is interesting to see the US as the third largest country market where there has been an increase in seats from China. Many Chinese cities outside of the main hubs are now being connected to the US direct, and three of the largest increases in capacity from Chinese carriers for 2018 are connecting so called secondary cities: Qingdao – LAX (Xiamen Airlines), Chengdu – New York (Hainan Airlines) and Shenzhen – LAX (Air China).

Similarly, some US cities are achieving direct services to China for the first time. Atlanta, for example, is to be connected to Shanghai from July 2018.

The economic benefit of connecting two cities from two economic giants such as China and the US is huge, Chicago O’Hare estimated that the launch of Hainan Airlines between O’Hare and Beijing would generate $85 million in economic impact.

Economic and social benefits of route development

This wave of connectivity growth in three of Asia-Pacific’s fastest growing and most significant economies will bring with it far reaching economic and social benefits.

Growth in capacity will fuel pure passenger demand growth at airports, creating jobs in a wide variety of different companies, ranging from the airport operators themselves to airlines, retailers, ground handlers, maintenance and engineering firms and others.

These jobs will provide wages and salaries to individuals and the chance to increase profits for companies, ultimately growing the direct contribution of air services to GDP.

These initial direct impacts will ripple out into the wider economy through supply chain effects and income expenditure effects, supporting growth across a wide range of economic sectors, again increasing employment and GDP, and enabling increased productivity and standards of living.

However, this economic boost from increased activity in the aviation sector itself is very much only part of the story. As economies grow and move up the development curve, there is a shift in why airports and growing air services are economically important.

In countries with significant excess labour or where the skills-base is relatively low, the provision of jobs at airports, and in their supply chains, can be vitally important.  Nevertheless, as productivity rises, this shifts and the economic importance of airports becomes much more about what they can do for passengers in terms of connecting them to new markets, new destinations and new opportunities.

In other words, economic effects become more driven by the connectivity an airport offers, which is clearly strongly linked to its route network. This is increasingly what we see in the Asia-Pacific region.

As airports and their supporting economies develop and the connectivity they offer grows and becomes more refined, they become powerful facilitators of trade in all of its forms, both domestically within geographically large countries, such as China, India and Indonesia, and internationally.

Air services enable people to travel to make deals; compete in new markets; service customers; invest or to manage their investments; access new suppliers and new partners; acquire knowledge; meet colleagues from across the world; or simply to visit a new place (tourism is ultimately a form of trade).

Trade is at the heart of growth in the modern world economy. It enables comparative advantage and leads to specialisation and, ultimately, helps to facilitate a more efficient allocation of resources globally that builds prosperity.

Route development and, increasing connectivity in the Asia-Pacific region, needs to be viewed in this context. China, India and Indonesia are already significant forces in international markets and further connectivity growth will enable them to reap further benefits, even where domestic connectivity is a primary focus.

Growth in domestic connections will ultimately improve the functioning of their domestic economies, increasing efficiency and productivity through internal trade.

The scale of these types of effects is often difficult to assess, but research by a range of organisations in recent years has suggested that a 10% increase in connectivity relative to GDP could result in around 0.5% increase in total GDP.

This suggests that route development in 2018 could support $16 billion in GDP growth in India, $11 billion in China and $3 billion in Indonesia.

The scale of these impacts helps to explain why route development is so important for airports and the regions they serve.

Connectivity matters in the modern world because trade matters in an increasingly globalised economy, and the economic benefits that can be secured are truly significant.

Route development function

The scale of benefits has meant that attracting new air services is the single most important function an airport can undertake, and over the last 30 years they have begun to realise this and the route development function has become more sophisticated in many ways.

Gone are the days that an airport marketing team was responsible for creating a paper timetable and finding out what new business they have received from the slot submissions for the next season.

Route development teams now require specialist skills in data mining, research, traffic forecasting, accountant management, marketing B2B and B2C (digital, social, content, traditional), PR, procurement (and legal), sales and negotiation.

The market leaders in route development, the airports winning the Routes Awards, have account management structures and plans, sophisticated traffic forecast models, developed brand identities and built consumer databases.

And they use them effectively, employ social media and content marketing to communicate key messages and drive engagement.

These airports will have sales teams that are tenacious, skilled negotiators, with an ability to build relationships and execute the right deal for all parties.

To ensure an airport maximises its route development potential and in turn the economic and social benefits, it needs to make route development its number one priority.

ASM

ASM provides data, consulting and training to airports, governments and airlines across the globe. It was the original business that developed the Routes events, now the world’s largest commercial gathering of airports, airlines, tourism authorities and governments, where the world’s future route networks are decided.

Nigel Mayes is ASM’s SVP for consulting and product development.

York Consulting

UK based York Aviation has developed into one of the leading consultancies in Europe specialising in assessing, understanding, capturing and communicating the economic impact of air services and air service connectivity. James Brass is a partner based at the company’s Leeds HQ.