Analysis of the Interaction Between Air Transportation and Economic Activity: A Worldwide Perspective

Abstract

Air transportation usage and economic activity are interdependent. Air transportation provides employment and enables certain economic activities which are dependent on the availability of air transportation services. The economy, in turn, drives the demand for air transportation services resulting in the feedback relationship between the two. The objective of this work is to contribute to the understanding of the relationship between air transportation and economic activity. More specifically, this work seeks to (1) develop a feedback model to describe the relationship between air transportation and economic activity and (2) identify factors which stimulate or suppress air transportation development. To achieve these objectives this work uses an exploratory research method which combines literature review, aggregate data and case study analyses. First, this work uses data at the individual country level to identify different types of growth patterns between air transportation passengers and GDP for 139 countries. This analysis is then used to identify twenty-two representative countries which span a range of possible interaction behaviors, geographies and income categories. The case study analysis at the individual country level is performed to describe the air transportation impact for each individual economy. These findings help develop a feedback model which describes the relationship between air transportation and economic activity. Specifically, the analysis is used to describe (1) how air transportation flows of passengers and cargo enable the flows of goods, services, knowledge, tourism, investment, remittances and labor among economies and (2) how air transportation flows can affect the country’s factor, demand and business conditions. The feedback model is then extended to perform quantitative analysis of the evolution of the enabling impact of air transportation in a particular economy. Specifically, a quantitative system dynamics model is developed to describe the interaction between the demand for leisure travel and the resulting enabling impact of tourism on Jamaica’s economy. Case study analysis is also used to identify factors which may stimulate or suppress air transportation system development. The factors are identified both from the air transportation supply and demand sides. The following supply side change factors are identified: changes in the regulatory framework, infrastructure capability, vehicle capability and airline strategy. The air transportation demand is found to be directly affected by exogenous demand shocks, economic downturns, political and economic sanctions, and the development of other transportation modes. The analysis also identifies the following change factors which affect the demand indirectly by changing the country’s economic attributes: economic liberalization, institutional and political reforms, supporting infrastructure investment, exchange rate fluctuations, political and macroeconomic stability, growing consumer demand, and changes in management practices. This analysis of stimulating and suppressing factors helps to describe the role of government intervention in changing air transportation system development and its impact on economic activity. The results of this work can help guide further development efforts, investment and policy decisions pertaining to air transportation usage especially in developing economies.