Cost-Benefit Analysis of Investments in Airport Infrastructure

ARTICLE IN PRESS
Journal of Air Transport Management 10 (2004) 311326
Costbenet analysis of investments in airport infrastructure:

a practical approach
Jose-Doramas Jorgea, Gines de Rusb,*
b
a
European Investment Bank, Luxembourg
!
Departamento de Analisis Economico
Aplicado, University of Las Palmas de Gran Canaria, Spain
Abstract
This paper presents a costbenet analysis approach devised to conduct project evaluation in conditions of limited analyst time,
research budget and data availability. The emphasis is on discarding economically viable from unviable projects rather than on
arriving at a precise estimate of project return. The paper starts by setting out the theoretical background for identifying and
measuring project benets. It then presents a practical approach to measure such benets in projects involving the expansion of
passenger capacity and, subsequently, those aimed at expanding aircraft capacity. Projects in the freight market and the estimation
of airport costs are treated in turn. A practical application is included as an appendix.
r 2004 Elsevier Ltd. All rights reserved.
Keywords: Airports; Costbenet analysis; Infrastructure; Investment appraisal
1. Introduction
The economic evaluation of airport projects raises
issues common to every costbenet analysis of a major
investment in transport infrastructure. The basic comparison of social benets and costs and the criteria and
procedures to avoid errors and biases are not signicantly different: denition of the base case; identication
and measurement of relevant effects; use of appropriate
parameter values; and prevention of double or triple
counting (e.g. Adler, 1987; Mackie and Preston, 1998;
Boardman et al., 1996; Layard and Glaister, 1994; Nash,
1993; Gramlich, 1990).
Airport investments are centres of thriving retailing
activity. This raises the possibility that projects with a
sound nancial performance might be less appealing
from a broader economic perspective. This paper is
concerned with the costbenet analysis of airport
infrastructure. The principle underlying the paper is
that airport investments are to be assessed as transport
infrastructure improvements aimed at addressing a
demand for transportation. Therefore, the analysis
focuses on both the impact of the investment on the
*Corresponding author. Tel.: +34-928451808; fax: +34-928458183.
E-mail address: gderus@daea.ulpgc.es (G. de Rus).
0969-6997/$ - see front matter r 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jairtraman.2004.05.001
generalised cost of travel for users and on the costs of

supplying the transportation service, including both
airport and airline costs.
The methodology proposed in this paper is aimed at
helping in the practical application of costbenet
analysis for a project analyst facing limited availability
of data and a short period of time for issuing an
opinion, a situation faced by many analysts in government and international agencies. It can also be viewed as
an approach to help quick screening of projects, which
may be appraised in more detail subsequently. Also, the
political context within which project appraisal is
carried out in practice and the uncertainties it is subject
! 1999) can make a quick, low-cost assessment
to (Turro,
valuable. The emphasis is placed in the consistency
across projects in deciding whether a given project is a
good or bad investment, rather than on the accuracy of
project return estimates.
The approach must be workable, meaning that it must
be both pragmatic about data availability and consistent
with the limited resources available for project appraisal. When the full appraisal option (i.e. a full cost
benet analysis with surveys of local conditions) is not
possible the approach to be followed has to rely on data
readily available from the majority of airport operators.
Since there are signicant differences in data availability
ARTICLE IN PRESS
312
J.-D. Jorge, G. de Rus / Journal of Air Transport Management 10 (2004) 311326
across promoters of airport projects, in order to ensure

consistency in decision-making the methodology should
be sufciently exible in terms of data requirements.
Also, the approach must equally be applicable to all
types of airports, whether large or small, aimed at
intercontinental or short-distance trafc, and for business, leisure or cargo trafc.
This paper does not deal with safety, security or
environmental impacts, and it is conceived for incremental projects.1 Strategic projects with broader objectives like social and economic cohesion or national
competitiveness with controversial indirect effects are
not suitable for conventional costbenet analysis and
are prone to overestimating net social benets (see, for
example, Phang, 2003; van Exel et al., 2002).
The paper does not intend to measure strategic
investments based on the presumed impact of the
investment on the regional economy. Evaluating airport
investments in terms of maximising regional development would require a comparison of the regional impact
of airport investments with investment in other sectors,
such as manufacturing, education or health. In any case,
it should be noted that the economic return of the
project provides, in most cases, a good indication of the
projects impact on the regional economy. This is
because the willingness to pay for travel reects the
gross economic benet generated by the trip.2
Because the approach focuses on airports as transport
infrastructure, revenues from non-aviation activities
mainly retailing, but also land rental for other industrial
activitiesare not to be counted as economic benets
resulting from the airport investment.3 Whereas taking
such benets into account would give a more comprehensive view of project benets, there is also the risk that
projects that are bad from the transport point of view
may appear as good once we add, say, shopping
facilities. This could direct transport investment towards
both non-transport activities and sub-optimal transport
1
In a full costbenet analysis, these issues should also be explicitly

quantied. They are not done here as they are not necessary to
illustrate the concept of a simplied CBA. In addition, in the case of
the environment, there is much uncertainty regarding the parameters
to be used for quantication. In practice, CBAs simply make sure that
the project complies with the relevant environmental legislation. In the
case of Europe, the key reference is the Council Directive 85/337/EEC
on the assessment of the effects of certain public and private projects
on the environment, amended by Council Directive 97/11/EC, both
published on the Ofcial Journal of the European Communities.
2
Such gross benets include indirect effects. The only exception
would be where there exists a signicant distortion in a market in
which the project has a large impact. This could then be evaluated
using standard costbenet analysis methods.
3
This implies that construction and operating costs corresponding
to non-aeronautical activities should be excluded from the economic
evaluation. In many cases non-aeronautical revenues are transfers, but
even when they add value, it is advisable to calculate the project NPV
without the secondary activities. A positive global NPV could hide a
bad transport project.
infrastructure. However, when doing a full costbenet

analysis, it is necessary to estimate such revenues in
order to estimate the nancial return of the project
and to gauge any necessary adjustments to aeronautical airport charges resulting from project
implementation.
Sections 2 and 3 provide the theoretical basis for the
appraisal framework set out subsequently. Section 2 is
concerned with the theory of economic evaluation of
airport projects, and Section 3 with the theory of benet
measurement. Sections 47 are concerned with the
practical application of the framework. Sections 4 and
5 address appraisal of landside and airside investments,
respectively. Section 6 deals with the special case of
freight transport. Section 7 addresses the estimation of
airport operating costs. Finally, Section 8 draws some
concluding remarks about the approach presented.
2. The economic evaluation of airport projects

The economic rationale of public investment decisions
concerning whether a project should be implemented, or
which projects should be selected subject to a given
budget constraint, requires identifying and measuring
the benets and costs during the life of the project and
calculating the net present value (NPV) of this ow of
net benets.
An essential element in evaluating the economic
benets of a project is the denition of the alternative
to the project, the without project scenario. There are
two elements in this respect. Firstly, what would happen
to existing infrastructure. In the case of repair projects,
which involve bringing existing infrastructure back into
normal operative conditions, the without project scenario would be that no further investments are made
and that the airport will progressively degrade into
inoperability. If the project consists of a capacity
expansion, then the without project scenario should
include all minor investments to maintain operative the
existing level of capacity.
The second element is the institutional constraints
present in the market. These may involve government,
airport or airline policies which would place additional
conditions on the denition of the with project and
without project scenarios. For example, faced with
runway constraints, an airline dominating an airport
may not want to increase aircraft size and may prefer to
let yields rise instead. There may also be environmental
constraints, as when there is a cap on aircraft movements below full runway capacity. These constraints are
very much project-specic, and the project analyst must
incorporate them into the evaluation exercise accordingly, by making ad hoc adjustments to the denition of
the scenarios.
ARTICLE IN PRESS
2.1. Economic benefits of airport infrastructure

Airport infrastructure devoted to meet transportation
demand can be divided into landside and airside.
Normally, airside involves infrastructure beyond security check points, where only passengers or authorised
personnel can access. Landside involves infrastructure
before that. For the purposes of this paper, airside is
taken to mean infrastructure to process aircraft; whereas
landside would involve infrastructure to process passengers or cargo. This latter division is more meaningful
in the current context, as it draws the line by type of
economic impact, as will be seen further down in the
paper.
Airside projects are geared to increase the capacity of
the airport to handle aircraft movements. Projects
involve new runways, the widening or lengthening of
existing runways; taxiways to increase runway capacity;
apron space to expand aircraft parking capacity; or
improvements in air trafc control in the airport or in
the airports vicinity. Landside projects aim at expanding the airports capacity to handle passenger and
freight. Projects can involve expanding capacity of cargo
or passenger terminals; improving access to terminals
through parking facilities or rail stations; and enhancing
product quality through increased use of jetways to
access aircraft.4 Projects can involve any combination of
these items or, ultimately, the construction of entirely
new airports.
The economic benets derived from investment in
airport infrastructure do not correspond to the revenues
obtained by the airport authority and retail rms with
commercial operations in the airport. The sources of
benets of investing in landside capacity are three-fold.
Firstly, the avoidance of trafc being diverted to
alternative travel arrangements that impose additional
generalised cost of transportation to the passenger or
freight customer. Secondly, by relieving congestion in
terminals, passenger or freight processing time is
reduced, hence contributing further to a decrease in
the generalised cost of travel. And thirdly, in the case of
investing on contact stands (i.e. those equipped with
jetways) in passenger terminals, comfort to passengers is
increased by avoiding bus trips or walks to and from
remote aircraft stands.
Investment on the airside will produce two potential
benets. First, enhanced airside capacity will enable an
increase in both the frequency of departure and the
range of routes available from the airport. This will yield
Jetways are the mobile tube-like corridors which connect an

aircraft with the passenger terminal and which enable indoor boarding
and disembarking to passengers. Aircraft parking positions equipped
with jetways are known as contact stands, and parking positions
requiring walking or transport by bus are known as remote stands.
313
the benet of reducing the frequency delay,5 as well as

potentially the trip duration, both of which contribute
to a reduction in the generalised cost of transport.
Second, airside investments may speed the processing
time for aircraft, reducing operating costs to airlines.
The benets derived from airside and landside
projects can be summarised into four categories: rst,
reductions in travel, access and waiting time; secondly,
improvements in service reliability and predictability;
thirdly, reduction in operating costs; and nally,
increases in trafc.
Regarding reduction in travel, access and waiting time,
infrastructure investments may lead to faster or more
frequent services, to alleviate congestion, or to generate
some network effects. The nal effects translate into
lower generalised cost of travel.
When capacity is not sufcient to match demand at a
given level of prices, investment in additional capacity
may not alleviate congestion, but rather accommodate
latent demand previously channelled through a less
convenient travel alternative. This is the concept of
scarcity (Starkie, 1988; Nash and Samson, 1999) useful
to account for the important fact of ex ante matching of
supply and demand through administrative procedures.
Scarcity applies to transport infrastructure with nonrandom entry and where the different operators have
access to the system through a coordinated scheme. In
theory, demand cannot exceed capacity. Unattended
demand at given prices is reected in scarcity. Nevertheless, with tight schedules, system overloads due to
ight delays generate congestion as the required
rescheduling to accommodate the delayed ights imposes changes in departing or arrival times for other
ights. Scarcity is possible without congestion when the
airport authority is not charging a market clearing price
for the slots available, and the number of slots give
enough slack to accommodate timing problems without
system overloads.
Investment in transport infrastructure can improve
service reliability and predictability and this is converted
into lower generalised costs for travellers or lower
operating costs for rms using air transport services.
Other projects allow the introduction of more efcient
technologies or facilitate a better use of technology in
use, resulting in a reduction in operating costs (lower cost
per seat associated with more efcient aircrafts, handling equipment, etc.)
Finally, the reduction in costs for passengers and
rms could lead to an increase in trafc. This is what it is
The frequency delay is the difference in the average passengers

preferred departure time and the closest ight departure feasible for
the passenger. Other things being equal, the greater the departure
frequency, the lower the frequency delay, and hence the time cost of
travel for the passenger.
ARTICLE IN PRESS
314
known as induced traffic, with two basic types: deviated

and generated.
The agents directly affected by these economic
benets are the following: airport users, airlines, rms
operating at the airport or providing services to the
airport, airport authority and taxpayers. Other agents
can be affected indirectly through substitutive and
complementary cross effects in secondary markets. The
importance of these effects in terms of the projects
economic evaluation depends heavily on the existence of
distortions in the economy and the magnitude of the
cross effects.6
2.2. Net present value of the investment
The NPV of an investment in transport infrastructure
can be simplied to expression (1), assuming that
investment costs are realised in year 0 (or in the case
of a larger period before year 0, converted into year 0
values) and changes in benets and costs of the
implemented project occur in year 1 onwards:
NPV I dt
T
X
DCSt DPSt ;
t1
where I is the investment costs, T is the project life, DCSt

is the change in consumer surplus in year t, DPSt is the
change in producer surplus in year t, dt is the discount
factor: 1 it ; and i is rate of discount.
The change in consumer surplus can be estimated
with the rule of a half:
DCSt 12 gt0 gt1 qt0 qt1 ;
gt pt t t ;
where gt0 is the generalised cost in year t without the

investment, gt1 is the generalised cost in year t with the
investment, qt0 is the airport users in year t without
the investment, qt1 is the airport users in year t with the
investment, pt is the price per trip inclusive of airport
charges, airline ticket, and access and egress money
costs, and tt is the value of total trip time (ying, access,
egress and waiting).
The change in producer surplus (for any of the
affected producers) is equal to
DPSt pt1 qt1 pt0 qt0 Ct0 qt0 Ct1 qt1 ;
where Ct0 qt0 and Ct1 qt1 denote total variable costs
without the project and with the project.
Changes in producer surplus require estimating
incremental revenues and costs for the airport authority,
airlines and other companies directly affected by the
project. The degree of market power in the airline
6
See the report by Venables and Gasoriek (1998) to the Department
of Transport (UK) and the revision of their estimations in Chapter 4 of
the Standing Advisory Committee on Trunk Road Assessment
(SACTRA).
industry and other economic activities directly affected

by the project will determine the nal beneciaries of
cost savings, increase in frequency and service reliability.
There are two ways of approaching the economic
appraisal exercise: the social surplus approach and the
resource use or resource cost approach. The social
surplus approach consists of the direct calculation of
changes in consumer and producer surpluses. This
requires identifying changes in prices, costs and revenues
with and without the new airport infrastructure. The
alternative approach to estimating the economic benet
of the project consists of looking at the changes in real
resources, ignoring transfers. Even in the case of positive
airport authority surplus, it is possible to concentrate in
resource costs as shown below.
So, instead of looking at the changes in social surplus,
we focus on measuring real resource costs changes
ignoring revenues from existing trafc. In this approach,
special care should be taken when changes in quality
occur, as well as with the treatment of both taxes and
incremental revenue in generated trafc.
When markets are competitive and incremental
revenues equal incremental costs for airlines and other
rms, it is possible to measure the benets of generated
trafc by measuring the savings in resource costs. In the
case of taxes, this shortcut is also feasible as long as
there is a general indirect taxation in the rest of the
economy. The net increase in tax paid to the government
could be too insignicant to justify further effort
(Abelson and Hensher, 2001).
The resource cost approach does not account for
quality changes (e.g. comfort) and additional measurement should be made to avoid the understatement of
user benets when the project includes signicant
quality changes.
The measurement of benets and costs requires
estimating airport demand for the entire life of the
project. Assuming that the base demand level is known
and equal to q0 ; that the annual growth rate is g, and
that no changes in generalised costs occur, the annual
airport demand is
Qt q0 1 gt :
It is worth noting that Qt is the number of passengers

willing to pay for the use of the airport at the existing
price in year t, and qt0 and qt1 in (2) and (3) are the
equilibrium quantities in year t without and with the
investment, respectively. We assume that the evaluating
agency knows the annual demand growth and needs to
work out the equilibrium quantities7 to estimate the
change in social surplus (or resource cost).
7
Instead of q0, a probabilistic distribution for q could be used with

standard software for Monte-Carlo simulations to obtain a probabilistic distribution of net present values.
ARTICLE IN PRESS
3. Identication of benets from airport infrastructure

investment
3.1. Benefits without rationing
Assuming competitive markets for airlines and other
companies providing airport services, and leaving aside
the measurement of service reliability and predictability,
the economic benets of investing in airport infrastructure can be determined through the reduction in
resource costs. Let us consider an airport project that
brings about a reduction in total trip time (t1 t0 ), and
assume that prices do not change.
Fig. 1 represents the stylised case of such an
investment in landside infrastructure, which eventually
leads to higher capacity. Generalised costs and willingness to pay for airport services are measured in the
vertical axis and the number of passengers per unit of
time (e.g. hour, peak period, day or year) in the
horizontal axis. Initial capacity allows attending a
maximum of qa users per period of time at a constant
generalised cost equal to g0 : The average generalised
cost function C shows that once the critical level qa is
reached, an increase in trafc with the existing capacity
is only possible at a higher average cost.
Initially, demand in a particular period of time has an
imperfect substitute (another less convenient ight,
airport or mode of transport) available at a generalised
cost of g1 ; higher than g0 ) nevertheless, as demand is D0 ;
all the users willing to pay g0 will be served. Demand
growth is expected to be equal to g and according to (4)
the level of demand in the following period is Qt :
Depending on which cost (g0 or g1 ) applies, Qt would be
fully served if the project is implemented (Qt qd ), or
partially with the existing airport facilities (qb ). In this
latter case, there will be some deviated trafc to second
best alternatives (qc qb ) and some deterred trafc
(qd qc ).
Generalised cost
Willingness to pay
C
Dt
D0
g1
g0
qa
qb
qc
qd
Passengers
Fig. 1. Users benets.
315
The situation with the project is characterised in the

gure by the possibility of maintaining a generalised
cost of g0 as demand shifts to Dt ; Qt qd : Without the
project, at a level the demand equal to Dt ; the
equilibrium quantity in the airport would be qb oqd :
Once the equilibrium level of demand with and
without the project has been determined, we can proceed
to evaluate the economic benet of the investment
project.
Three categories of benets can be identied in Fig. 1:
(i) benets to existing users (qb ), (ii) benets from
avoided diversion costs qc qb and (iii) benets from
generated trafc (qd qc ).
Benets to current users are equal to g1 2g0 qb ;
because the maximum number of passengers (qb ) is now
determined by the alternative travel option. Benets
from avoided diversion costs are equal to
(g1 g0 )(qc qb ). Passengers in the segment qc qb will
deviate to less preferred alternatives. The diversion
could be in time, when passengers are forced to change
to less convenient departure times, or in mode when the
passenger has to use an alternative airport or mode of
transport.8
User benets from generated trafc are equal to
0.5(g1 g0 )(qd qc ). From the perspective of forecasted
future demand Qt ; this benet can equivalently be
interpreted as deterred trafc avoided thanks to the
investment. It is important to notice that additional
benets (taxes and revenues above incremental costs)
could be associated with deviated and generated
trafc.
The previous analysis ignores two important facts:
rstly, the existence of administrative rationing and
different generalised cost for existing and deviated
travellers; and secondly, the possibility of insufcient
capacity to meet demand during the project lifetime.
3.2. Benefits with rationing
In Fig. 1 it was assumed that the number of airport
users in equilibrium was determined by the intersection
of the average generalised cost function and the
generalised cost (g1 ) of an imperfect substitute (another
less convenient ight, airport or mode of transport) and
hence the generalised cost at the without project case
was identical for existing and deviated users. This is not
usually the case when there is rationing of capacity.
Fig. 2 shows the standard case of different generalised
costs for existing and diverted users. The situation with
the project is identical to Fig. 1, but the situation
without the project is quite different: qb is now
8
The rule of a half applies equally to diverted as well as generated
trafc. In Fig. 1 the benets of diverted trafc is represented by the
difference g1 g0 : This value should be interpreted as the average,
equal to a half of the interval of time savings.
ARTICLE IN PRESS
316
Dt
Generalised cost
Willingness to pay
Generalised cost
Willingness to pay
D0
g1
g
g0
Dt
D0
g1
g
g0
qb
qc
qd
Passengers
Fig. 2. User benets with administrative rationing of capacity.
qb
qc
qe
qd
Passengers
Fig. 3. User benets with administrative rationing and congestion.
determined through slots allocation and hence the

generalised cost of existing trafc has to be lower (g0 )
than the second best alternative.
This way, the generalised cost of deviated trafc is
higher (or equal in an extreme case) than the generalised
cost of existing trafc. Scarcity without the project
results in some deviated trafc to second best alternatives (qc qb ) and some deterred trafc (qd qc ).
The comparison with and without the project leads to
different benets than in the case where there is no
capacity rationing. Benets to current users are equal to
g0 g0 qb ; strictly lower than without rationing. Benets from avoided diversion costs are equal to (qc qb )
(g1 g0 ), which are strictly higher than those reected in
Fig. 1 as (qc qb ) is now strictly higher.9 User benets
from generated trafc are similar.
The comparison between the situations reected in
Figs. 1 and 2 is also useful to show that when congestion
is above the optimal level, by rationing capacity it is
possible to achieve welfare improvements, even without
implementing the project. Another insight is that the
benets of expanding capacity appear to be substantially
higher in Fig. 1 than in Fig. 2, highlighting the
importance of a clear denition of the without project
case.
3.3. Capacity constraint
During the lifetime of the project, it may well occur
that demand in some year t is above generalised cost g0
in Fig. 1. This is a quite realistic case during a typical
project life of 15 or 20 years.
Fig. 3 illustrates a situation during the project life, in
which demand Qt cannot be met at a constant cost g0
9
We ignore the trivial case where qb is equal in both cases.
but at a higher cost, due to the presence of congestion.

This could happen because of indivisibilities in airport
investment, under which it may be optimal not to invest
in additional capacity for some years. Note that this case
is compatible with the assumption of perfect information on demand.
During the years in which such congestion takes
place, benets from capacity expansion are lower
than those described in Fig. 1. The saving in the
generalised cost by using the airport is now lower
and so is generated trafc. The generalised cost for
existing trafc remains at g0 : Benets come from
diversion costs avoided, equal to (g1 g0 )(qe qb ).
No deterred trafc exists in this case. Project
benets are denitely lower when supply and demand
conditions are those represented in Fig. 3 as demand at
equilibrium is lower and there is a smaller reduction in
costs.
The graphical analysis shows the user benets to be
measured in order to work out whether the investment is
socially protable: time savings for existing passengers;
diversion costs avoided and the consumer surplus of
generated travel.
We have assumed so far that the economic effects of
the investment are limited to passenger time savings,
leaving the producer surpluses of airport authority,
airlines and other rms aside. However, investment in
airport infrastructure can change the operating costs
and revenues of the airport authority, the airlines
operating out of the airport and other rms. Hence,
we need to generalise the previous graphical analysis
based in the resource cost approach to the case of a
positive airport authority surplus. For simplicity, we
make the assumption that any cost reduction accruing
to airlines is passed on to consumers through lower
prices.
ARTICLE IN PRESS
Without rationing, from expressions (2) and (3), and

disaggregating existing and generated trafc, the change
in gross social surplus with the project in year t is
equal to
gt0 gt1 q0 pt1 pt0 q0 12 gt0 gt1 qt1 qt0
pt1 qt1 qt0 :
EUR
1 / AS
1 Runway
2 Runways
C
Given that g p t; expression (5) can be rearranged

as follows:
tt0 tt1 q0 12 tt0 tt1 pt1 pt0 Dq:
317
fd1
fd = c
c1
a
b
d
FD
Ca
In practice, analysts will only have limited evidence on

elasticity values. Hence, for small changes in generalised
costs, Eq. (6) can be converted to

1
Dg
tt0 tt1 tt0 tt1 pt1 pt0 eqg
7
q0 ;
2
g
where eqg is the elasticity of demand with respect to
generalised cost.
Following (7) the gross social surplus of the project is
equal to total time cost savings for the existing users. In
the case of generated passengers, only half of that
amount should be accounted for, plus half of the
average of ex ante and ex post airport charge per
passenger. Time cost savings through diversion are
treated in (7) as existing trafc (conditions in Fig. 1) and
the full difference in trip time applies. Investment costs
and airport operating and maintenance costs must be
subtracted from the estimated benets to obtain the
projects net social surplus.
With rationing, condition (6) has to be modied to
account for possible differences in time savings between
existing and diverted trafc, as happens to be the
case in Figs. 2 and 3. The conditions prevailing in Fig. 2
require calculating the rst term of (6) twice: once for
existing trafc and a second time for deviated trafc.
With Fig. 3 the calculus is straightforward as the same
time savings apply to all trafc and as no deterred trafc
exists.
3.4. Additional considerations for airside investments
An increase in the aircraft movement capacity of an
airport has three effects. Firstly, it enables an increase in
the potential passenger and freight capacity. Secondly, it
makes it possible to increase ight frequency, beneting
all passengers travelling through the airport. These
benets result from the greater choice of departure time,
and consist of reductions in the frequency delay, which
is the difference between the passengers preferred
departure time and the nearest departure time available
(or a formal treatment of this concept see Douglas and
Miller, 1974). Thirdly, as departure frequency increases
the average size of aircrafts using the airport may
change. This has implications for airline operating costs
f1
f2
Frequency
Fig. 4. Benets from airside investment.
because larger aircraft are cheaper to operate on a

per seat basis than smaller aircraft.10
Indivisibilities in airport expansion imply that runway
capacity cannot increase linearly with trafc. As a
runway handles more passengers, it will eventually have
to handle larger aircrafts. When a new runway is built,
two effects may bring about reductions in average
aircraft size. Firstly, airlines would tend to compete for
time sensitive business travellers by increasing ight
frequency, which would call for the use of smaller
aircraft. Secondly, new airlines will enter the airport,
developing new routes, normally using smaller aircraft.
In the without project scenario, should the new
runway not be built, airlines will be forced to operate
larger aircraft in order to accommodate trafc growth.
Hence, the decision to invest in a new runway will have
to consider the possible trade-off between, on the one
hand, reduced frequency delay at a higher cost per seat if
the runway is built and, on the other hand, keeping
frequency delay constant at a lower cost per seat if the
runway is not built.
This trade-off is illustrated in Fig. 4. The left-hand
side vertical axis measures currency units and the righthand side vertical axis the inverse of average aircraft size
(AS). The horizontal axis measures departure frequency
(F). The marginal frequency delay schedule (FD)
denotes the inverse relationship between departure
frequency and generalised cost. An increase in the value
of time would shift the schedule upwards.
The marginal airport cost schedule (Ca ) denotes
constant returns to scale. The marginal total cost
schedule (C) includes both airport and aircraft costs.
With respect to the right-hand side vertical axis, C
reects the inverse relationship between departure
frequency and aircraft size and, with respect to the
10
For an empirical analysis of the cost economies of aircraft size see

Wei and Hasen (1993). The authors nd that when pilot costs are
treated as endogenous, the cost minimising aircraft size is smaller. Pilot
costs increase with aircraft size, and the optimal aircraft size is smaller
than that which would result from technical efciency criteria alone.
ARTICLE IN PRESS
left-hand side vertical axis, the direct relationship

between departure frequency and cost per seat. When
total trafc grows, for a given level of departure
frequency, aircraft size will have to increase, reducing
marginal cost per seat, rotating the C curve downwards,
clockwise.11
In the example illustrated in Fig. 4, runway 1 has a
capacity for aircraft movements of f1 : Building a second
runway would enable an increase in frequency to f2 . At
f1 the cost imposed on the passenger by the frequency
delay is fd1 ; higher than marginal operating costs of c1 .
Airlines hence have an incentive to increase frequency at
the expense of aircraft size, as passenger willingness to
pay for an extra frequency is higher than the marginal
cost associated with reducing aircraft size. Equilibrium
would be reached at point b, where frequency is f 0 and
where fd 0 is equal to c0 :
The benets of building a new runway, enabling an
increase in departure frequency, will be equal to the area
abd: Moreover, the passing of time will bring about two
effects: growth in trafc, shifting the C schedule
downwards; and increases in the value of time as
income grows, shifting the FD schedule upwards. These
two effects would expand the area abd from all of its
three corners, meaning that the benet of building a new
runway increases with time. The economic returns from
investing on a new runway are determined by the
present value (PV) of the future stream of benets as
determined by the area abd in each year during the
project life, and by the PV of the capital investment
required for the new runway. Until point b exceeds the
capacity of runway 2, there will be no benet from
building a third runway.
4. Applied measurement of benets from investment in

airport landside
4.1. Expansion of landside capacity
Airport infrastructure usage experiences marked
peaks and troughs, which follow time of day, day of
the week and month of the year patterns.12 Fig. 5
provides an indication of the degree of variability of
capacity requirements placed on airport infrastructure
throughout the year. It displays the ow distribution
curve (FDC) for a hypothetical typical airport. The
11
Note that trafc is not constant along the horizontal axis. An
increase in departure frequency itself generates trafc because it
constitutes an improvement in service quality and a decrease in
frequency delay. The cost curve C accounts for this effect. The shift in
the C curve would be accounted for only by exogenous changes in
trafc such as those caused by population or income growth.
12
For an assessment of airport scarcity and congestion in Europe,
see Reynolds-Feighan and Button (1999).
Hourly passenger flow
318
5% of throughput
C-level
2,000
4,000
6,000
8,000
Ranking of hours in the year

Fig. 5. FDC for a hypothetical airport.
FDC ranks all 8760 h of the year by passenger

throughput in descending order, starting from the left.
This pattern of demand means that the terminal is
underused for a signicant portion of time. In principle,
terminal capacity could be increasedand a more
economically efcient operation could be achievedby
attening the FDC, for instance through pricing policy.
Airport charges may differ between peak and off-peak
periods either through a differentiated pricing system or
by a market-driven slot allocation. In practice, almost
always a at charge is applied, increasing the peaks in
demand above efcient levels.13
When peak pricing is not followed because there is an
external constraint, costbenet analysis can be applied
anyway, though the investment will be sub-optimal in
the long run, as demand in the peak will be higher,
producing over-investment.
Terminals are designed to process a target hourly
throughput at a given minimum level of service quality.
The objective is to strike a balance between the need to
address trafc peaks and the need to minimise unused
capacity during throughput troughs. This implies that a
terminal needs to supply a level of service that is
acceptable most of the time.
There is not one single criterion to set the hourly
throughput target for terminal design. Some alternatives
include:
*
*
*
the Standard Busy Rate, taken to be the thirtieth

busiest hour;
the fortieth busiest hour;
the 5% Busy Hour Rate, dened as the minimum
throughput level which the 5% of passengers travelling during the busiest hours nd in the terminal (see
Fig. 5, where the area under the FDC and left of the
doted line corresponds to 5% of total trafc at a C
level of service qualitysee below); and
measures of the type busiest hour in the second
busiest month.
13
See, for example, Morrison (1987), Oum and Zhang (1990) and
Daniel (1995) for a discussion of efcient airport pricing and airport
capacity investment.
ARTICLE IN PRESS
Table 1
ACI/IATA level of service space standard (m2/pax)
Check-in queue area

Wait/circulate area
Hold room
Bag claim areaa
Gov. inspection services
Difference to C
1.8
2.7
1.4
2.0
1.4
35%
1.6
2.3
1.2
1.8
1.2
18%
1.4
1.9
1.0
1.6
1.0
0%
D
1.2
1.5
0.8
1.4
0.8
18%
E
1.0
1.0
0.6
1.2
0.6
36%
Source: ACI/IATA.
a
Conveyor belt excepted.
At the target level of throughput, a standard of service

is dened. The Airports Council International (ACI)
and the International Air Transport Association
(IATA) have dened a scale of service standards, in
terms of space available per occupant at various
locations in the terminal. These standards are shown
on Table 1. Service level A would correspond to a free
ow of passengers in the terminal and service level C to
the minimum space required for steady ow. Below C
level, passengers would start bumping on each other and
would have to make frequent stops as they move
through the terminal. Trespassing the minimum limits
imposed by level E would take the terminal to level F ;
where there would be substantial cross-ows and
congestion, leading to what is considered system/service
breakdown.
It is important to underline that the actual capacity of
the terminal in terms of passenger throughput per hour
is determined by the maximum capacity of the weakest
point along the passenger processing chain. So, an
otherwise A-level terminal with C-level hold room
standards, can only be expected to be able to handle
the amount of passenger throughput under C-level
terminal standards, with a minimum C-level service
quality standard.
Fig. 5 illustrates the case where a 5% busy hour rate is
chosen at a C level of quality. The area under the FDC
and left of the vertical dotted line comprises 5% of
annual throughput in the airport. The point where the
dotted lines intersect the FDC determine the hourly
throughput consistent with a C level of quality
(measured on the vertical axis) and the hour within the
annual ranking at which that level of throughput
actually takes place (measured on the horizontal axis).
The extent to which passenger diversion takes each of
its possible formsdiversion in time or in modevaries
from case to case, depending on the shape of the FDC at
the airport, passenger prole in terms of trip purpose,
alternative transport means available, and the scheduling practices of airlines operating at the airport.
Estimating diversion at an airport with precision can
potentially be a complex task. In many cases the analyst
does not have the required information readily avail-
319
able, and assembling it would require signicant analysis

costs.
A workable alternative would be for the analyst to use
a set of generic rules that can be adjusted to each
particular project. A general rule of thumb followed in
the industry is that a C-level terminal will start
experiencing signicant traveller diversion when trafc
exceeds design annual throughput capacity by about a
third. As shown in Table 1, this roughly coincides with
the average difference in space requirements between
service level C and the lower limit of service level E: In
view of this, it would be possible to take ACI/IATA
service standard criterion as a proxy index of spare
capacity before diversion takes place. It could be
assumed that all potential throughput exceeding such a
33% threshold would experience diversion. The percentage assumed for A-level terminals would be higher
(some 5060%) and for E-level designs lower (say, some
5%).
Diversion can be measured in equivalent time terms,
and its cost calculated using published values of time.
One approach would be to take an average diversion
time for all diverted passengers. It can be further
assumed that all diversion would be equally resource
consuming, and hence should be treated equally. The
average time could be set at 2 h for both diversion in
time and in mode. Regarding diversion in time, peak
periods in airport activity extend for 12 h. It is
reasonable to assume that in cases of scarcity, where
rationing is necessary, ight schedules would have to be
displaced by 13 h, the average being around 2 h. As for
diversion in mode, 2 h drive is deemed a reasonable
additional access or egress time to an alternative airport,
or longer travelling time if the trip is carried out on an
alternative transport mode. If, for a particular project,
circumstances dictate that such assumptions are not
reasonable, the analyst can adjust them accordingly.
Diverted trafc is equal to qc qb in Fig. 2. The 2 h
worth of passenger time corresponds to g1 g0 in the
vertical axis. This corresponds to the difference in
generalised cost of using the airport under consideration
and the best alternative available to passengers. Such
alternative can be either an alternative transport mode
or airport (in which case diversion would take the form
of diversion in mode) or to an alternative, less preferred
departure time from the same airport (diversion in time).
Only when for a specic project circumstances suggest
that the overall cost of diversion would be signicantly
different for time or mode diversion, and when a
reasonably accurate estimate could be formulated as to
what proportions would each diversion take, would
there be a case for treating them differently. The typical
case would be when the alternative mode of transport
poses a very large time penalty on the passenger, as is
likely to be the case in islands. There, the 2 h rule
must be substituted by the estimated additional time
ARTICLE IN PRESS
320
passengers must invest when travelling by the alternative

mode.
In estimating future trafc, the analyst will start with
existing trafc levelsthe only hard evidence on
demand conditions available to the analystand, as
mentioned in Section 3.2, it is very important to dene
very clearly what the situation of this existing trafc is
regarding generalised cost. Throughput projections will
normally have to be made for 2025 years, and to do
this the analyst must follow long-term air trafc
projections, normally supplied in the form of average
yearly growth rates. The critical issue when applying
such growth rates to existing trafc is determining any
possible changes in the generalised cost of travel to
existing airport users after the project is implemented. If
there are signicant changes, then generated trafc
might be signicant and particular attention must be
placed to its estimation.
Normally, new capacity will be opened before scarcity
or congestion becomes serious, so that existing trafc at
the time of project appraisal will be experiencing a
generalised cost of, or close to, g0 in Fig. 2. In this case,
throughput on each subsequent year after project
implementation can be estimated using long-term air
trafc projections. These projections can be taken to
include trafc that in the absence of the project would
have been deviated or deterred. For ease of calculation,
when estimating the welfare loss resulting from the
without project scenario, both types of trafc can be
treated equivalently and estimated jointly, as the
resulting error will be small compared to the uncertainties regarding long-term trafc levels, anyway. It should
be noted that this does not mean that the estimation
excludes generated trafc, but only that both deviated
and generated trafc are taken to be included in the
long-term trafc growth estimate.
However, if at the time of the appraisal the airport is
operating with rationing, then existing trafc would be
experiencing a generalised cost akin to g0 in Fig. 2. If so,
applying the long-term trafc growth to the years
immediately following the opening of the additional
capacity could result in a substantial underestimate, as
the sudden decline in generalised cost of users will bring
about signicant generated trafc. The same applies to a
situation without rationing but where the project still
produces a lower generalised cost relative to that of
existing trafc. An example is when the project attracts
new services by no-frill airlines.
In these cases, generated and deviated trafc should
not be estimated jointly. The proposed method to
calculate generated trafc would be to, rstly, estimate
the difference in generalised cost between existing trafc
and future trafc at the margin (that is, g1 g0 or g0
g0 in Fig. 2, depending on conditions at the airport), and
then applying an elasticity of about 1, common in
! 1997).
aviation (e.g. Jorge-Calderon,
4.2. Improvement of landside quality

There are two key variables in determining the
quality experienced by the passenger on a terminal:
congestion in the terminal; and the quality of access
facilities to aircraft, as dened primarily through the
availability of jetways. Congested terminals experience
longer queues and more disruption to the ow of
passengers within the building. Hence, whereas terminals can handle more throughput than they are
designed for, time delays would be experienced. This
corresponds to g0 g0 in Fig. 3, which is the additional
passenger throughput time resulting from congestion,
multiplied by the value of time. In the absence of
detailed congestion data, one approach for ensuring
comparability across projects in project appraisal would
be to set a single cost per passenger for all projects. A
reasonable approximation to actual time penalty would
be a cost per passenger of, say, 1015 min worth of
passenger time.
Some passenger terminal projects include improvements to the quality of service offered to passengers via
increasing the proportion of contact stands relative to
remote stands. Such investments involve signicant
costs and do not increase terminal capacity. Benets of
the investment consist entirely of increased comfort to
passengers.
There is no readily available evidence on the academic
literature on passenger willingness to pay for contact
stands. In the absence of studies, the analyst can make a
judgmental estimate and apply it consistently across
projects. A suggested approach is to take a value of
EUR 510 for tourist trafc, and double that for
business trafc.
Remote and contact stands also differ on the type of
operating costs involved. Remote stands require bus
shuttling, while contact stands normally require aircraft
towing vehicles, as well as maintenance, lighting and
heating of jetways. These costs are similar in magnitude
and any difference should have only a marginal impact
on estimated project returns. Hence, for simplicity
during appraisal, it could be assumed that the difference
in costs between remote and contact stands consist only
of infrastructure construction costs.
In order to keep the project appraisal as simple as
possible, it is suggested that the comfort benet
provided by contact stands is only included explicitly
on the appraisal exercise when the project at hand is
highly geared towards increasing comfort. When projects involving new terminals do not signicantly alter
the proportion of contact to remote stands in the
airport, the project can be considered as a capacity
expansion using the same production technology. If
such proportion increases signicantly, then there would
also be an element of quality enhancement in the
project.
ARTICLE IN PRESS
5. Applied measurement of benets from investment in

airport airside
Some projects may yield a disproportionate increase
in airside (i.e. aircraft movement) capacity relative to the
increase in landside (i.e. passenger or freight throughput) capacity. Airside capacity is determined by runways, taxiways and apron space. As with terminals, the
actual hourly capacity of an airports airside infrastructure is determined by the capacity of the weakest of
these three levels. The exception being a possible partial
substitutability between taxiways and apron space, in
that the latter can handle virtual queues until taxiways
are decongested. Investment aimed at alleviating an
airside bottleneck could trigger large increases in the
ability of the airport to handle aircraft movements.
Improvements in departure frequency can be valued
in terms of changes in frequency delay.14 Whereas
studies explicitly using frequency delay are rare, the
most widely quoted estimates of a delay function is that
by Douglas and Miller (1974)
Fd 92F 0:456 ;
where Fd is the frequency delay and F is the departure

frequency.
Douglas and Miller acknowledge that the actual delay
is affected by scheduling practices, not picked in the
formula. However, they underline that the value of the
formula does not reside in estimating absolute values of
delay, but rather in estimating changes in delay, and that
for this latter purpose chances of estimation bias are
lower. Changes in delay are governed by the estimated
elasticity of 0.456.
Changes in average frequency delay can be computed
by referring to the average departure frequency per
route in the airport, a gure that should be readily
available for most airport operators, including those
with poor data resources. The extent to which frequency
delay changes over time will depend on how fast
departure frequency increases. As a rule for a simplied
type of project appraisal, it can be assumed that if
aircraft movement capacity increases in line with
passenger capacity, average aircraft size should remain
the same. Departure frequency should then increase in
line with trafc. In practice, there could be more than
proportionate increases in departure frequency during
the rst few years following project implementation, as
airlines rush to secure runway slots. The rule reects a
long-run equilibrium.
14
Note that the additional runway capacity could also be used to
open a new route. However, this can also be considered an increase in
frequency starting from zero departures. The effect for the passenger
could be considered the same as an increase in the frequency of an
existing route: should the passenger wish to depart at the time of the
new ight it saves him/her from either altering the departure time or
from spending waiting time in an intermediate connecting airport.
321
If the increase in aircraft movement capacity were to

be lesser than the increase in passenger capacity, then
aircraft size would increase in the long run. Changes in
aircraft size would bring about changes in operating
costs, as larger aircraft are cheaper to operate on a
per seat basis than smaller aircraft. The average cost
per seat per trip for a mid-size aircraft, such as the
Airbus A-320 is &51.15 Aircraft cost per seat is related to
aircraft size by an elasticity in the region of 0.5.16 The
impact of a change in average aircraft size on operating
costs could be made by applying the 0.5 elasticity to
cost per seat values based on the &51 benchmark gure.
An additional element to take into account is the
impact that changes in aircraft operating procedures in
the airport have on costs. To the extent that there is a
signicant change in airline operating costs as a result of
the project, these should be accounted for as a welfare
change. Changes in aircraft operating costs could result
from various sources, including changes in approach
trafc patterns, ground taxiing requirements and turnaround times allowed by the new facilities. Each project
will have different impacts on these factors. A common
denominator for these factors can be to convert them
into time savings and then translate them into a total
cost gure through data on costs per aircraft blockhour. A workable way of including these factors into the
project appraisal exercise would then be:
(i) considering only situations where the project will
produce signicant changes in aircraft operating
costs; and
(ii) using an average gure for cost per block-hour that
can be easily adjusted in situations where aircraft
types differ signicantly from the average, as in
regional airports.
The suggested approach is to use the A-320 benchmark mentioned above. The aircrafts cost per blockhour is estimated at &2,530. Adjustments for airports
with a signicantly different aircraft prolesuch as in
projects on regional airportswould be made following
the 0.5 elasticity of operating costs with respect to
aircraft size already mentioned.
As in all other aspects of the practical framework here
proposed, the analyst should be aware of institutional
constraints facing the airport and its users which may
15
The actual average cost per block-hour in an airport will depend
on the aircraft mix serving the airport, the average route length own
by such aircraft, as well as on the non-aircraft operating costs of an
airline, which can differ signicantly by the airlines country of origin.
The calculation can potentially become tedious and inefcient. The
gure quoted was calculated from 1999 US data from The Airline
Monitor.
16
A constant elasticity is to be used as an approximation, in the
absence of more detailed data. The actual elasticity will vary somewhat
with aircraft size itself, as well as with route length. New empirical
evidence of this relationship can be found in Wei and Hansen (1993).
ARTICLE IN PRESS
322
affect the assumptions made when constructing the with

project and without project scenarios. In the case of
airside investments, one key concern is the extent to
which it is realistic to expect an increase in aircraft size.
In highly competitive markets, particularly where there
is competition between hubs, airlines may demand more
runways to enable them to compete through departure
frequency. When one airline faces inferior runway
capacity on its hub than competitors on their hubs,
negating new runways to that one airline alone, hence
forcing it to expand capacity only by increasing aircraft
size and at the expense of departure frequency, would
distort competition in the airline market. Moreover, the
airline may go on to develop a second hub in another
alternative airport instead of increasing aircraft size. So,
in the case of a project consisting of building a new
runway, the analyst may have to adjust its without
project scenario by capping the assumed increase in
aircraft size below what would be technically feasible.
6. The treatment of airfreight

The European air freight market is very competitive.
Operators compete on price and quality, normally with
very narrow operating margins. Freight is less speed
demanding and more exible regarding travelling times
than passengers. Also, aviation carries goods with a
relatively high value to weight ratio, where transport
costs are a relatively low proportion of the nal price of
the good. These characteristics encourage competition
in two ways: First, it widens the catchment area of the
various freight terminals relative to passenger catchment
areas. Second, it enables more inter-modal competition
than in the passenger sector.
Hence, demand is little dependent on a single project,
as capacity constraints in one network node can be
overcome relatively easily by channelling freight ows
through other nodes. Under these circumstances, the
benets of the project would stem from the lower
operating costs resulting from it. Given that an
independent operator can take the price as given, such
benets would be the gain in producer surplus resulting
from the project, that is, the nancial internal rate of
return (IRR).
In cases where demand is largely dependent on the
project, as in a remote island, then the project could
bring about signicant savings in diversion costs. An
estimate of such costs should then be made, and treated
in an analogous manner to diversion costs for passengers. This would require estimates for the value of time
for freight.
These considerations apply to both landside and
airside projects. In the case of landside projects, the
relevant issues are the same as for the passenger sector:
terminal capacity determines potential throughput.
However, regarding airside projects, the trade-off

between aircraft size and departure frequency does not
normally apply. Normally, cargo ights can operate
during off-peak periods. Hence, runway slot availability
is normally a non-issue, and here are no benets from
increasing the number of runways. Instead, the critical
issue is the technical characteristics of the runway, as it
determines whether large freighter aircraft can operate
from the airport at all. When there is no sufcient belly
hold space on passenger aircraft and alternative means
of transport are very expensive, large freighter aircraft
reduces signicantly the costs of carrying freight relative
to smaller freighter aircraft. In such cases, investments
to upgrade a runway to accommodate such aircraft
could be economically justied.
7. Airport operating costs

Airport costs can be grouped into landside costs and
airside costs. Landside costs are those incurred by
processing passengers and cargo through terminals.
Airside costs are those attributable to processing aircraft
through aprons, taxiways and runways. Both airside and
landside operations are infrastructure-intensive, creating
signicant xed costs that give rise to cost economies.
Conceptually, the relationship between throughput
and unit cost could be disaggregated into three potential
sources of cost economies:
*
Economies of density: arising from increasing

throughput through the existing infrastructure.
Economies of scale: arising from increasing throughput by increasing infrastructure capacity, while
keeping throughput density constant.
Economies of scope: arising from combining different
types of output through the existing infrastructure,
while keeping density constant. As in airlines,
output segmentation could consist of passenger and
freight.
A priori, economies of density should be expected in

airports, both on the airside and on the landside, due to
large xed cost components on both infrastructure
types. However, the case for economies of scale is not
so clear. On the one hand, there could be economies
through more intensive use of centralised functions such
as administration. On the other hand, airports will tend
to expand capacity by exploiting the next best available
location, so that the cost of each successive piece of
infrastructure is higher than the preceding one.
Unilateral expansion of either landside or airside
capacity could produce different impacts on unit costs.
A landside expansion while keeping airside constant can
create cost economies by increasing density on the
airside. Such a project might have to be accompanied by
an increase in the average size of the aircraft operating
ARTICLE IN PRESS
from the airport. However, a unilateral expansion on

the airside can create cost diseconomies by reducing
airside throughput density.17 The rationale for such a
project would be to enable an increase in the ight
frequency. The main source for scope economies would
be an increase in airside throughput density by expanding freight landside capacity.
Airport cost studies have so far centred on producing
benchmarks for cost efciency. There is no parallel to
the research effort found in the airline literature,
modelling production functions and identifying sources
of cost economies. Airport benchmarking studies
normally relate unit cost to throughput via an allembracing concept of economies of scale, sufcient for
comparing efciency across airports. Their denition of
scale does not correspond to the denition adopted in
this paper, and says little about airport production
functions.
However, a number of studies produce some evidence
as to the shape of the production function. Doganis et al.
(1995) nd strong economies of scale until about 3
million work-load unit (WLU),18 constant or slightly
declining thereafter. Salazar (1999) sheds further light
for larger airports, nding constant average costs in the
range 3.512.5 million passengers/year, but increasing
thereafter. Findings by Murillo-Melchor (1999) are
compatible the preceding two studies. It nds decreasing
average costs for small airports, constant or increasing
average costs for larger airports.
The project analyst will have information on capital
investment costs and operating costs. When calculating
project returns these costs must be accounted at the time
they are incurred. Normally, data on current and
projected operating costs are available from the project
promoter. However, sometimes future operating cost
estimates may not be available or may be unreliable, and
the analyst must make his or her own estimates.
One way of proceeding is to use data on similar
projects and to estimate a relationship between unit
operating costs, that is operating cost per unit of
throughput (i.e. per WLU), and airport capacity
utilisation. Costs can then be calculated as a function
of throughput.
When estimating such a relationship, it must be borne
in mind that density economies dictate that unit costs
will increase when a new piece of infrastructure is
opened, and then decrease progressively towards longterm unit operating costs as the infrastructure becomes
fully utilised. As a rule of thumb, it is proposed that,
after a new terminal is opened, unit costs increase in
relative terms by half the relative increase in capacity.
17
See Gillen and Lall (1997).

WLU is a standard measure of airport throughput and
corresponds to one passenger or 100 kg of freight.
18
323
So, for example, a new terminal that expands airport

throughput capacity by 50% would result in an initial
increase in unit costs of some 25%. Subsequently, as
throughput increases, unit costs would tend towards
broadly the same level as before the expansion.
Such a rule will imply constant long-run returns to
scale. In practice, future operating costs will depend on
the following two additional factors, both of which are
airport-specic:
*
the degree of spare capacity with which the airport

operator tends to operate on average; and
the extent to which physical, institutional or trafc
circumstances in the airport make each additional
piece of infrastructure increasingly expensive.
The analyst can adjust the assumption of constant

returns to scale to project circumstances. Should
additional infrastructure capacity come at a signicantly
higher cost, an appropriate cost surcharge could be
included in the appraisal exercise.
8. Conclusions
Conducting a thorough costbenet analysis of
airport investment projects can be a very resource
consuming exercise. An accurate estimation of the
returns from an investment can require carrying out
surveys of local demand conditions and the formulation
of detailed hypotheses about the future evolution of
trafc and airline operations. And still, even a full
appraisal exercise will render the evaluation subject to
signicant uncertainties.
Sometimes, project analysts do not need to have
precise estimates of the expected returns of a project and
instead need to nd out simply whether the project is
good or bad, whether it should go ahead or not, or
indeed whether it is a borderline case that merits a closer
look. The analyst may also want to quickly screen a
large number of projects, to select a shortlist to be
examined in more detail. To arrive at these types of
conclusions, conducting a full economic evaluation
might itself be not economically justied. Instead,
consistency in decision-making would require the
emphasis to be placed on comparability of results across
projects. When data availability varies widely across
projects, consistency would call for simplication of the
appraisal process.
We have proposed one possible way in which such a
back of an envelope answer can be provided. This is
done by drawing on rules of thumb generally accepted in
the aviation industry, and applying them to the standard
costbenet analysis framework. The approach can be
used for all types and sizes of airports, not only small
airports requiring small investments.
ARTICLE IN PRESS
324
The approach is itself exible and requires judgment

by the analyst, as assumptions can be altered for a
specic project when there is a case for doing so. We
believe that, whereas the approach makes a large degree
of generalisations and would not substitute a full cost
benet analysis where necessary and feasible; it still has
a role to play among applied economists. It is useful in
conditions of very limited analyst time, research budget,
available information, and where quick decisions must
be made for a large number of projects, a condition
which many professionals face in practice.
Acknowledgements
The authors gratefully acknowledge comments by
! P. Boeuf and A. Lynch, and by
M. Hansen, M. Turro,
participants at the EIB internal seminar on costbenet
analysis of airport infrastructure investment, and the
Fifth European Conference on Evaluation of the
Structural Funds (European Commission, Budapest,
2003). Comments by two anonymous referees have also
been very helpful in the nal revision. This paper was
written when the second author was a visiting scholar at
the Institute of Transportation Studies (U.C. Berkeley).
Financial support from the Secretar!a de Estado de
! y Universidades is gratefully acknowledged.
Educacion
The views presented in this paper are those of the
authors and do not necessarily reect those of any
institution.
Appendix A. CBA of airport investment: an application

Suppose an airport that in 2001 had a throughput of 9
million passengers. The design capacity at a C level of
quality (see Table 1) is 10 million passengers per year.
Throughput is expected to grow at 4% per year over the
next 2030 years. This growth rate constitutes g in
formula (4). Airport management would cap passenger
throughput once system breakdown occurs for a
signicant proportion of hours which, according to the
rule of thumb introduced in Section 4.1, is an annual
throughput a third higher than design capacity, that is,
13.3 million passengers. At the expected average annual
growth rate of 4%, such throughput would be reached
by 2011.
Airport management wants to expand terminal
capacity to accommodate future trafc growth. Because
management is conscious also about the level of quality
offered to the passenger, they would like the new
capacity to enter operations well before 2011. So, they
propose a project consisting of expanding capacity by
building a new 10 million passengers terminal at a C
level of quality. This implies that the new terminal
would be able to handle an additional 13.3 million
passenger before system breakdown, bringing total

airport capacity to 26.6 million at F level of quality.
The regime of economic regulation applied by the
government to the airport ensures that the airport will
be able to increase airport charges sufciently to cover
the investment and to attain a normal rate of return on
capital. However, airport management would also like
to know the economic protability of the project in
order to decide whether to pursue government grants
and other assistance. A full costbenet analysis would
cost &300,000 and take at least ve months to conduct.
Airport management needs an answer sooner and at a
lower cost, so it asks the in-house economist to give
them a quick estimate of the likely economic returns of
the project.
Table 2 summarises the main calculations made by
the in-house economist, offering snapshots of different
years for both the with project and without project
scenarios. The table also offers the PV for each project
benet and cost item, discounted at 6%, taking 2001 as
year 1 (that is, all values are discounted to the rst of
January 2001). All monetary gures are expressed in
2000-year-end prices, so the discount rate constitutes the
real discount rate.
Terminal construction works would start during 2001,
and would be completed by 2005, when the terminal
would be ready for operation. The investment cost
identied as I in formula (1) in Section 2.2is budgeted
at &350 million. They are spread over 5 years, beginning
in 2001 with some minor conditioning and surveying
works, and ending in 2005 with nishing works,
amounting to &25 million in each of 2001 and 2005,
and &100 million in each of the 3 years in-between.
Investments to ret the existing terminal would be
incurred equally whether the project is carried out or
not, so they cancel each other out as far as the
calculation of the economic return is concerned.
Following its opening in 2005, the new terminal
would have an economic life of an additional 20 years,
until 2025. By that time, trafc would have reached 23
million passengers, 3 million above the design capacity
of the airport with the project.
Airport operating costs currently stand at &10 per
passenger.19 Without the project, operating costs per
passenger would be expected to remain at this level
indenitely. This corresponds to Ct0 qt0 in formula (3),
divided by throughput. Airport design studies normally
give estimates of future operating costs. In the absence
of these estimates, the in-house economist, relying on
past experience, and knowing that the airport is likely to
have constant long-run returns to scale, follows the rules
19
Operating costs must be understood in the economic sense, i.e.

excluding depreciation. In normal nancial reporting operating costs
would include depreciation.
ARTICLE IN PRESS
325
Table 2
Steps in the derivation of project benets
Units
With project
(1)
(2)
(3)
(4)
(5)=(2) (4)
(6)=(2) V (2)
(7)=(2) V (1/6) if (2)>(1)
Design passenger capacity

Passengers
Diverted passengers
Operating costs per passenger
Operating costs
Cost of diversion
Cost of congestion
(Thousand)
(Thousand)
(Thousand)
(EUR)
(EUR m)
(EUR m)
(EUR m)
(8)
Investment cost
(EUR m)
Without project
(9)
(10)
(11)
(12)
(13)=(10) (12)
(14)=(10) V 2
(15)=(10) V (1/6) if (10)>(9)
Design passenger capacity

Passengers
Diverted passengers
Operating costs per passenger
Operating costs
Cost of diversion
Cost of congestion
Project benefits
(16)=(13)+(14)+(15)
(17)=(5)+(6)+(7)+(8)
(18)=(16)(17)
Benets
Costs
Net present value (NPV)
PV
2001
2005
2015
2025
2,050
0
164
10,000
9,000
0.0
10
90
0
0
20,000
10,529
0.0
15
158
0
0
20,000
15,585
0.0
12
191
0
0
20,000
23,070
0.0
10
231
0
137
294
25
25
(Thousand)
(Thousand)
(Thousand)
(EUR)
(EUR m)
(EUR m)
(EUR m)
1,502
1,333
623
10,000
9,000
0
10
90
0
0
10,000
10,529
0
10
105
0
47
10,000
13,300
2,285
10
133
139
68
20,000
13,300
9,770
10
133
688
79
(EUR m)
(EUR m)
(EUR m)
3,458
2,510
949
90
115
25
152
183
31
340
191
149
900
368
532
Notes: Vt : VoT(1.015)t, VoT: value of time per hour.

PV: Present value, discounted at 6%.
of thumb introduced in Section 7.20 So, given that with

the project capacity would grow by 100%, operating
costs would grow by 50% following the opening of the
new terminal in 2005. Thereafter, they will decrease
progressively to reach &10 by 2022, once the new
capacity is fully utilised. For a given year t, these costs
would correspond to Ct1 qt1 in formula (3), divided by
throughput.
As mentioned above, at the expected yearly trafc
growth rate of 4%, the airport would reach the system
breakdown annual throughput of 13.3 million passengers by 2011. Additional potential passengers will then
either have to travel at inconvenient off-peak times, take
alternative modes of transport, or not travel at all. Rows
(3) and (11) in Table 2 determine the passengers affected
by diversion with project and without project,
respectively. Without the project, by 2015 some 2.3
million passengers would have been affected, and by
2025, some 9.8 million passengers. Avoiding such trafc
diversion constitutes the main justication for the
project. Should the project be carried out, once
the new terminal reaches its economic life by 2025, the
20
The rule of thumb is that at the time at which the airport opens,
operating costs per passengers would increase by half the relative
increase in capacity. Thereafter costs per passenger decline progressively until, by the time the new capacity is fully utilised, they reach the
same level as before the terminal opened.
airport would be handling 23 million passengers, below

the 26.6 million maximum capacity. Hence, no trafc
diversion would take place in the with project scenario.
The next step consists of placing a monetary value on
the time cost of trafc diversion. The in-house economist gauges from government guidelines that the current
value of time for air passengers is &25 per hour. Because
of rising incomes in the wider economy, the value of
time is expected to increase by an annual factor,
expected to range between 1% and 2% per year,
depending on future rates of economic growth. The inhouse economist takes the mid-point assumption of
1.5% per year.
The cost of diverted trafc is then estimated by
multiplying the number of diverted passengers by 2 h
worth of time. Two hours is the rule of thumb adopted
as the average diversion time per passenger, as described
in Section 4.1. Following these assumptions, the cost of
time diversion without project is &139 million by 2015,
reaching &688 million by 2025.
An additional economic benet is the lower levels of
congestion at the terminal as capacity is expanded. This
benet arises during the early life of the project. As the
new terminal becomes itself congested, not only does
this benet disappear, but running the new infrastructure turns more costly, raising costs. This effect can be
seen in the result of the benet estimates. The in-house
economist values congestion costs at 10 min of passenger
ARTICLE IN PRESS
326
time for all passengers once throughput exceeds design

capacity.
Congestion costs in the with project and without
project scenarios are included in Table 2 in rows (7) and
(15), respectively. In the without project case, such
costs would start being incurred as early as 2004. By
2010 they would amount to &68 million, and by 2025 to
&79 million. The small difference between 2010 and 2025
is due to the fact that after 2011 the airport would not be
able to handle any additional passengers, so that any
further increase in congestion costs would be through
increases in the real value of timethe 1.5% growth
factor discussed in the preceding paragraph.
By 2025 the with project scenario will itself display
congestion costs. This is the type of situation discussed
in Section 3.3. Congestion costs would start being
incurred by 2022, when throughput would have
exceeded terminal design capacity. As depicted in line
(11) in Table 2, these costs represent a cost of the
project. That is, they have to be subtracted from project
benets.
For simplicity, airport charges are assumed to remain
constant. Hence, the summation of the diversion and
congestion costs corresponds to the change in consumer
surplus depicted in formula (2), in Section 2.2. The
airports producer surplus is assumed to be equal to the
cost of capital so no further consideration is given.
The benet and costs of the project are calculated on
rows (16) and (17), respectively. Benets include the
diversion costs without project, the congestion costs
without project and the operating costs without
project. The cost of the project would include the
diversion costs with project, the congestion costs with
project, the capital investment costs, and the total
operating costs with project.
The projects NPV is the difference between rows (16)
and (17), and stands at &949 million, shown in row (18).
This corresponds to formula (1) in Section 2.2. The
projects NPV indicates that, subject to no budget
constraints, it is worth undertaking. Other measures of
project return are the benetcost (B2C) ratio and the
IRR. The projects IRR is the discount rate at which the
NPV equals 0, which is 15.9%.
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ARTICLE IN PRESS

Journal of Air Transport Management 10 (2004) 311326

Costbenet analysis of investments in airport infrastructure:

generalised cost of travel for users and on the costs of

J.-D. Jorge, G. de Rus / Journal of Air Transport Management 10 (2004) 311326

across promoters of airport projects, in order to ensure

In a full costbenet analysis, these issues should also be explicitly

infrastructure. However, when doing a full costbenet

2. The economic evaluation of airport projects

2.1. Economic benefits of airport infrastructure

Jetways are the mobile tube-like corridors which connect an

the benet of reducing the frequency delay,5 as well as

The frequency delay is the difference in the average passengers

known as induced traffic, with two basic types: deviated

where I is the investment costs, T is the project life, DCSt

where gt0 is the generalised cost in year t without the

industry and other economic activities directly affected

It is worth noting that Qt is the number of passengers

Instead of q0, a probabilistic distribution for q could be used with

3. Identication of benets from airport infrastructure

The situation with the project is characterised in the

determined through slots allocation and hence the

We ignore the trivial case where qb is equal in both cases.

but at a higher cost, due to the presence of congestion.

Without rationing, from expressions (2) and (3), and

Given that g p t; expression (5) can be rearranged

In practice, analysts will only have limited evidence on

because larger aircraft are cheaper to operate on a

For an empirical analysis of the cost economies of aircraft size see

left-hand side vertical axis, the direct relationship

4. Applied measurement of benets from investment in

Hourly passenger flow

Ranking of hours in the year

FDC ranks all 8760 h of the year by passenger

the Standard Busy Rate, taken to be the thirtieth

Check-in queue area

At the target level of throughput, a standard of service

able, and assembling it would require signicant analysis

J.-D. Jorge, G. de Rus / Journal of Air Transport Management 10 (2004) 311326

passengers must invest when travelling by the alternative

4.2. Improvement of landside quality

5. Applied measurement of benets from investment in

where Fd is the frequency delay and F is the departure

If the increase in aircraft movement capacity were to

J.-D. Jorge, G. de Rus / Journal of Air Transport Management 10 (2004) 311326

affect the assumptions made when constructing the with

6. The treatment of airfreight

However, regarding airside projects, the trade-off

7. Airport operating costs

Economies of density: arising from increasing

A priori, economies of density should be expected in

from the airport. However, a unilateral expansion on

See Gillen and Lall (1997).

So, for example, a new terminal that expands airport

the degree of spare capacity with which the airport

The analyst can adjust the assumption of constant

J.-D. Jorge, G. de Rus / Journal of Air Transport Management 10 (2004) 311326

The approach is itself exible and requires judgment

Appendix A. CBA of airport investment: an application

passenger before system breakdown, bringing total

Operating costs must be understood in the economic sense, i.e.

Design passenger capacity

Design passenger capacity