Recently I became aware of a proposal by Nieuport Aviation, owner and operator of the terminal at Billy Bishop Toronto City Airport (BBTCA), to spend $69 million upgrading it, including the construction of a US Customs and Border Protection pre-clearance hall.
I’ll unpack the wordy first sentence with some background. Nieuport Aviation opaquely describes itself as a group of institutional investors advised by J.P. Morgan Asset Management with ongoing access to capital including investments on behalf of millions of Ontario and Canadian families (pension funds, maybe?). In 2015 Nieuport bought the terminal from Porter Airlines (remember the raccoon and “flying refined”?) for $750 million. The relationship between Nieuport and Porter has turned adversarial, with Nieuport suing Porter for $49 million in unpaid terminal fees.
Pre-clearance helps travelers from Canada get through US Customs faster than on arrival at US airports and enables them to fly into smaller US airports without a Customs facility. The US Government pays the capital and operating cost of pre-clearance at eight other Canadian airports, but it has not yet agreed to do so at BBTCA.
Nieuport’s proposal was presented at a meeting of Toronto City Council’s Economic Development Committee on Dec. 1 (from 35 to 70 minutes on the YouTube video) and is supported by a report entitled “Quantifying the Economic Impact of a Managed Growth Strategy and US Pre-Clearance Facility at BBTCA” prepared by York Aviation, a British consultancy.
Why I’m Interested
I received my Ph.D. in Economics, and my dissertation was about the economics of airport planning. I used the federal government’s proposal in the Seventies to build a second Toronto International Airport in Pickering as my case study. Based on my research, I concluded that expanding the existing airport (then called Malton, later renamed Pearson) created more economic well-being than building the new airport. Public policy evolved in the direction I recommended, though I can claim no credit.
I’ve maintained a watching brief on airport planning decisions in the 45 years since my dissertation was accepted. A few years ago, I wrote an obituary about Howard Raiffa, one of my professors at Harvard, who undertook an analysis of airport planning for Mexico City, reaching a conclusion similar to mine about Toronto. I’ve also commented on plans by Porter Airlines to introduce jets at BBTCA. Generally, I’ve been skeptical about building new airports rather than making better use of existing ones. So, skepticism leads me to carefully examine Nieuport’s proposal.
Three Missing Words: “Zoom” and “Carbon Footprint”
The Nieuport proposal assumes that, after being closed from March 2020 to September 2021, BBTCA’s passenger traffic will bounce back to pre-pandemic levels of 2.8 million annually by mid-2022 and, with the pre-clearance facility open later that year, will increase to 4.5 million by 2023.
I am less concerned that this rosy forecast was ignoring the immediate impact of the Omicron variant than that it is ignoring the possibility of a major structural change, namely the replacement of a considerable portion of business travel with communications technologies such as Zoom calls. The York Aviation report (p. 13) describes BBTCA as “a city centre airport with fast transit times that will be particularly attractive to business users, whose time is at a premium, and to those making trips without overnight stays.” Au contraire, I think these travelers are the ones most likely to substitute Zoom meetings for daytrips.
A second factor the York Aviation report doesn’t mention is air travel’s wide carbon footprint, which becomes clear in carbon footprint calculators. While “flight shame” may lead some people to reduce their air travel, it is more likely that governmental carbon pricing policies will result in a substantial long-term increase in the price of jet fuel, and hence higher ticket prices and fewer trips.
The GDP Numbers Game
The York Aviation report attributes to BBTCA a “GDP impact” of $2.1 billion in 2019 and, if it is expanded, a “GDP impact” of $4.8 billion in 2025. This is calculated by taking an estimate of GDP per job at the airport (which is higher than salaries) and then doubling it to account for goods and services bought from others to produce that output (indirect impact). Then the total of direct and indirect impact is multiplied by another factor of approximately 4 to account for the “wider economic impact” of the airport. Wider economic impact is based on an econometric study done by the International Air Travel Association, an industry group, that found that a growth of one percent in national air connectivity relative to GDP increases labour productivity by one-twentieth of a percent (p. 20 of the York Aviation report).
I find these multipliers confusing, unconvincing, and rife with double-counting. For example, how does a relationship between air connectivity and labour productivity at the national level translate into increased GDP at BBTCA? A similar study of the economic impact of expanding London City Airport was criticized by CE Delft, a European research consultancy, in words I find entirely relevant to the York Aviation BBTCA study. “Adding direct, indirect, and induced effects together leads to double-counting and the overestimation of the economic impact of airport expansion. If all sectors would claim the direct, indirect, and induced effects as their own, the country’s GDP would be significantly overstated, seeing as most sectors are either a supplier or customer of another sector.”
The York Aviation report even undercuts its own claims of indirect and wider economic impacts by admitting that some of the growth in passenger traffic at BBTCA will be traffic that is displaced from Pearson and should therefore not be counted. The York Aviation report concedes that “it is difficult to say ‘a priori’ how much displacement will occur in any case and the analysis of these effects is potentially complex.” So, it reduces the estimates of indirect and wider effects by 25 percent to account for displacement (p. 23). If someone did the complex analysis and found out that much more traffic was displaced from Pearson to BBTCA, the multipliers would shrink accordingly. The only situation in which displacement would not occur is if Pearson were at full capacity in those domestic and transborder markets that BBTCA serves. With air travel emerging from the pandemic into an uncertain environment, it is very unlikely that this is the case.
The York Aviation report undercuts its claims in a second way. It estimates a monetary value of passenger time savings of approximately $30 million, starting in 2023 (p. 24). The business case for BBTCA rests on time savings, but their monetary value is minuscule in comparison to the GDP impact of $4.8 billion the report claims. It is hard to believe that expanded aviation operations at BBTCA that save $30 million in travelers’ time would result in an impact on GDP of 160 times that value.
A Welfare Economics Approach
The airport planning approach used by both the York Aviation report on BBTCA and the London City Airport study led me to look back at the approach I used in my doctoral dissertation. I used a criterion based on welfare economics, which states that the benefits of any private good, in this case trips by air, are measured by what users are willing to pay for it (technically the area under the demand curve) minus the social cost of producing it (which includes passengers’ time, pollution, and congestion). This is standard economic analysis. The shape and location of demand curves for air travel (say business and leisure to any given destination) are determined by all the economic impacts that York Aviation tries heroically to measure. If air travel has all the impacts the consultants say it does, it will show up in robust demand.
In my analysis, capacity would be expanded when the benefits of additional capacity are large enough to pay for it. If there is a choice between expanding capacity at alternative airports, the one with the higher net present value of benefits minus social costs would be chosen. (The York Aviation study examined only expanding capacity at BBTCA, rather than at Pearson as an alternative.) Readers interested in this analysis regarding Toronto’s Pearson and Pickering airports can consult my article entitled Pricing and Investment in a Transportation Network: the Case of Toronto Airport, published in the Canadian Journal of Economics (Vol. 11, Number 4, November 1978, pp. 680-700).
Ignoring the Environment
The York Aviation report says nothing about the local environmental impacts of expanding operations at BBTCA in comparison to Pearson. These would include noise and air pollution. One could make the case that additional noise and air pollution at Pearson, a large airport in an industrial part of Toronto, is less obtrusive than it would be close to the waterfront residential area and the parkland on Toronto Island.
The York Aviation report claims that expanding BBTCA reduces carbon costs relative to Pearson because of shorter journeys to and from the airport and, potentially “reduced contrail-related carbon emissions associated with the aircraft operating at BBTCA compared to Pearson. These, effects are not, however, estimated here” (p. 5). This, of course, is pure speculation on Nieuport Aviation’s part. If it is proposing to expand operations at BBTCA, Nieuport has an obligation to assess the environmental impact. It totally failed to meet that obligation, and that alone should be reason to reject the proposal.
What is to be Done?
Nieuport Aviation does not appear to be putting up its own money to expand BBTCA, despite the access it claims to the capital markets. It is looking for public funding. Nieuport Aviation’s lease for an essential portion of the airport lands expires on June 30, 2033, a fact that is not mentioned in the York Aviation Report. Nieuport Aviation is hoping that building more facilities with public money will make renewal of the lease a political “no brainer” twelve years from now.
There is, of course, an alternative to continuing airport operations at BBTCA, which is to convert the airport to parkland, the current use for most of Toronto Island. That argument is made by the local advocacy group Parks Not Planes, which was represented at the City of Toronto Economic Development Committee on December 1 by its spokesperson Brian Iler. Iler was permitted to speak for three minutes, and his remarks start at one hour and 11 minutes on the YouTube video of the meeting.
In my view, our major public policy challenges are ending the pandemic and fighting climate change. The York Aviation report and Nieuport Aviation’s summary of it at the Economic Development Committee meeting have made a weak and unconvincing case for diverting $69 million from those challenges to subsidizing expanded passenger traffic at BBTCA.