For release: May 2, 2003

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St. Louis Fed Analysis Looks at Possible Solutions to Overcrowding and Delays at Airports

ST. LOUIS, Mo. The most common response to congestion at airports is to construct new runways and terminals, but such expansions are inevitably costly, complex and controversial, according to an analysis from the Federal Reserve Bank of St. Louis.

The analysis was done by Jeffrey P. Cohen, an assistant professor of economics at the University of Hartford's Barney School of Business, and Cletus C. Coughlin, deputy director of research at the Federal Reserve Bank of St. Louis. Their comments appear in the May/June issue of Review, the St. Louis Fed's bi-monthly journal of economic and business topics.

In the first five months of 2001, more than 25 percent of flights arriving at the nation's 11 busiest airports were more than 15 minutes late. Despite a decline in air travelers and flights in 2001, which was associated with the terrorist attacks, congestion remains a concern for many airport administrators.

"Congestion imposes costs on passengers in terms of lengthening the time of their trips and airlines in terms of increased operating costs," they said. "Additional passenger trips translate into more flights, which is one source of congestion. In addition, more passengers cause more crowded airport terminals, creating delays at ticket counters and security checkpoints."

Cohen and Coughlin said the crucial issue regarding expansion is whether the benefits are greater than the costs. Using the proposed expansion of Lambert-St. Louis International Airport as an illustration, the authors went through the analysis that is routinely undertaken to assess whether an expansion is justified. "A benefit-cost analysis for any large project is very complicated," they said. "One source of complications is that numerous assumptions about future airport conditions are required and reasonable people can hold much different views about the future."

Assessing the responsiveness of the results to future conditions also requires that a "sensitivity analysis" be performed. "Forecasts of projected growth are difficult to make yet very important," said Cohen and Coughlin. "Incorrect forecasts, for example, will likely lead to a poor timing of airport investments, with overly optimistic forecasts causing underused facilities and overly pessimistic forecasts imposing costs in terms of delays and inconvenience. Without question, recent developments in the air transportation sector highlight both the difficulty as well as the importance of sensitivity analysis."

Regardless of the economic merits of a particular airport expansion, Cohen and Coughlin noted how controversial they are, because an airport expansion is especially disruptive to the communities located near the airport. "Lawsuits are filed in opposition to virtually every expansion of a major airport," they said. "Opponents generally challenge the right of airport officials to override local zoning rules or increase noise or air pollution. Almost without exception, the legal challenges are unsuccessful, so the projects, albeit delayed, do proceed."

The most notable controversies of airport expansions are the displacement of families and businesses, and the effects of noise. Not surprisingly, property owners and businesses are likely to resist their forced relocation. Moreover, many are likely to view the compensation as inadequate for the costs that they are forced to bear. For the property owners that are not forced to relocate, increased noise levels are a common problem. Since airport noise can affect housing prices, Cohen and Coughlin suggested that an airport expansion that leads to additional noise should be countered with a one-time compensation to property owners.

Finally, the economists analyzed some other possible solutions to congestion, one of which is "congestion-based pricing." At most airports, landing fees are structured according to aircraft size or weight. With congestion-based pricing, however, the owners of the aircraft would pay landing fees based on runway delays they cause. "These fees might vary at a particular airport, depending on the time of day," they said. "This way, when deciding when and where to land, an owner of an aircraft would be forced to consider the marginal social costs of landing at a particular airport at a particular time."

Review is also available on the St. Louis Fed's web site: http://www.stlouisfed.org.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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