Networks and externalities Aviation Telecommunications
Financial services Energy transportation 2
Slide 3
Economy can function without network industries Economy cannot
function without network industries External economies and
productivity 3
Slide 4
IATA: Policy-makers must understand that a well-designed
aviation network creates huge benefits for users, and for growth
and investment in the wider economy. Indeed, an extensive air
transport network represents one of a countrys essential
infrastructure assets like banking or telecoms network. It is a
vital component for economic development and growth. 4
Slide 5
Transport Canada (2006): Air transportation is an essential
tool to connect Canadians with one another and the world: it
directly contribute to a dynamic economy moving people and goods,
supports tourism and economic development, produces significant
value by connecting all parts of Canada, creates and maintains
specialized, highly paid employment throughout Canada, and supports
Canadas trade agenda. 5
Slide 6
International gateway (Tier 1): Full range of scheduled
passenger, freight and maintenance services; inter-regional/inter-
continental connections with a preponderance of long-haul flights
National hub (Tier 2): National interlinking role; limited
inter-regional/inter-continental connections Regional hub (Tier 3):
Intra-regional networks; connected to Tier 1 and Tier 2 hubs 6
Slide 7
International gateway airports generate more value for their
respective regional and national economies than national hubs,
regional hubs, or stub airports (the end-points of spokes from
hubs) 7
Slide 8
John Bowen: Hub cities have important economic development
advantages for certain types of economic activity. These advantages
reflect two key distinctions that hub cities share: (1) the
concentration of large passenger and cargo flows and (2) the high
degree of connectivity with other points in domestic and
international airline networks. The way in which these advantages
intersect with economic development has been described as circular
and cumulative to the extent that additional air services
facilitate development which in turn stimulates demand for further
air services. This virtuous cycle tends to reinforce and perpetuate
the privileged position that hub cities enjoy. 8
Slide 9
Tier 1 hubs, with very few exceptions, have developed because
major carriers use them as the principal hubs for their networks
See Table 1 With the exception of Orlando, each of the largest
airports serves as a hub for at least one major airline Hub
carriers are important 9
Slide 10
Toronto barely makes the top 40, coming in at number 38
Montreal, with a population base comparable to Seattle,
Minneapolis, Phoenix, Denver, San Francisco and Rome, does not even
come close to making the top 40 Neither does Vancouver, although
its population base is much smaller than all the cities on this
list with the exceptions of Orlando, Charlotte, Frankfurt and
Munich 10
Slide 11
Large population base is important, but definitely not decisive
for an airport to become a Tier 1 hub Geographic location,
infrastructure/capacity, costs, and the competitive success of the
hub carrier seem to be more critical 11
Slide 12
Given geography, traffic densities, and the current sizes of
airports and hubs, it appears reasonable to surmise that most of
the Tier 1 hubs (25 at most) likely will be located in North
America (4-8), Europe (3-5), Asia (4-8), the Middle East (1-2),
Latin America (1) 12
Slide 13
Table 2 Neither YYZ nor YVR ranks high in terms of total number
of passengers or passengers per capita If either one could reach
the level of passengers per capita of some of the secondary hub
airports (Copenhagen, Vienna, Brussels), traffic levels would be
65% to 100% larger for YYZ, and 30% to 70% larger for YVR For Star
Alliance, some of the most likely candidates to become Tier 1 hubs
are: Bangkok, Beijing, Chicago, Frankfurt, Los Angeles, Munich, New
York, Sao Paulo, Singapore, Shanghai, Tokyo, Washington, and
perhaps Toronto and Vancouver 13
Slide 14
Hub system makes it possible, for each flight, to combine
connecting traffic and point-to-point traffic As traffic flows
increase, the hub carrier increases the number of flights to any
given destination As soon as a carrier offers a number of flights
that is greater than half of all flights offered by all the
airlines flying to this destination, it becomes more attractive
than its competitors, thus improving load factor and market share
14
Slide 15
If hub carrier and hub airport do not achieve the density
economies and the hub carrier is unable to gain a frequency
advantage, both begin to fall behind and both risk becoming
marginalized over time Neither YYZ nor YVR are likely to meet the
same fate as Pittsburgh or St. Louis Unless their hub carrier, Air
Canada, continues to expand the networks both in scope and in
depth, and hence the connectivity of both YYZ and YVR, both
airports might continue their slide in the global rankings of
airports 15
Slide 16
Matters to Canadians whether they connect through Toronto or
Vancouver or Montreal; or they have to make an additional stop and
change planes and airlines in order to travel through a foreign hub
If Air Canadas network becomes smaller, connectivity becomes more
difficult for Canadians The resulting economic losses over time
would dwarf the initial economic losses stemming from a
retrenchment in Air Canadas network and a decline in the
competitive positions of YYZ and YVR 16
Slide 17
Infrastructure costs Competition 17
Slide 18
Government Policies: airport rents, ATSC, fuel tax,
privatization of airports and Nav Canada Tables 3 and 4 Cumulative
effects of the taxes and fees range between 16% and 33% of the
total fares for AC, 21% and 41% for WJ Leakages to US border
airports Leakages to US, Middle East and Asian hubs more critical
18
Slide 19
UAE investing in excess of US$35 billion in airports Sheikh
Mohammed bin Rashid Al Maktoum, the Vice President and Prime
Minister of the UAE and the Ruler of Dubai: Aviation and transport
infrastructure is the fundamental catalyst for the creation of
global cities. 19
Slide 20
Trade agreements (GATT, NAFTA) include codes on subsidies,
dumping and safeguards NAFTA includes side agreements on
environment and labour ATAs do not, although capacity controls can
prevent capacity dumping Ineffective against subsidies and
excessive competition (Safeguards) No minimal standards to prevent
race to bottom 20
Slide 21
If Canada is to benefit from the continued growth of the
aviation sector, competition must be fair This begs the question:
how do we define fair or level playing field? A level playing field
in the aviation industry is critical, as this will impact the
future evolution of hub airports and route networks 21
Slide 22
Repercussions of success or failure in YYZ and YVR becoming
Tier 1 hubs 22
Slide 23
5% increase case results in an aggregate increase of 2.3
million passengers, which result in approximately: 24,000 more
jobs; $2.4 billion more in economic output ($930 million in GDP);
and $320 million more in taxes 23
Slide 24
3% decrease case results in an aggregate decrease of 1.4
million passengers, which result in approximately: 14,500 fewer
jobs; $1.4 billion reduction in economic output; and $190 million
less in taxes 24
Slide 25
Both cases ignore catalytic impacts on productivity Neither
considers impacts on passenger traffic at other Canadian airports
25
Slide 26
Re-examine all policies that impact the aviation industry
directly or indirectly and make the changes necessary to promote
Canadian airlines and airports The starting point for the new
policy direction is the termination of the ground rents, the ATSC,
and the excise tax on jet fuel Look at the funding of
infrastructure 26
Slide 27
Consider including in all ATAs countervail and dumping
provisions similar to the ones in the NAFTA and the GATT, and codes
on labour, etc. These provisions would level the playing field for
Canadian airlines and airports by eliminating the competitive
distortions in the market resulting from aggressive subsidization
policies by a small number of foreign governments 27
