Insights
August means airports, and now that air travel has rebounded from the lows during the Covid-19 pandemic to reach levels where globally there are more flights than ever, airports face bigger and bigger tests on their capacity to cope with rising demand.
This inevitably leads to calls for airport expansion – increasing capacity and infrastructure to handle more aircraft, passengers, and cargo. This could involve including building new runways, terminals or other facilities, or upgrading existing infrastructure.
The government announced at the start of the year that they support the idea of expanding Heathrow Airport, and other airports including London City, Luton, Bristol, and Farnborough have either had plans accepted or are in the process of developing expansion plans.
Airport expansion is often justified by arguing it will lead to economic growth, either at the national or local level. This blog outlines some concepts that can help policymakers think through the potential impacts on local growth.
Expanding to meet or spur demand?
First, it is important to think about the rationale for expansion. Most local transport investments can be grouped into two categories: alleviating capacity constraints in areas facing high demand, enabling further economic growth; or using new transport capacity to spur demand and generate growth in areas with lower levels of economic activity.
Projects at major national or regional airport hubs usually focus on the former. In part, this is because there will always be voices calling for expansion where there are big capacity constraints. For smaller airports in low growth economies, expansion is unlikely to be a cost-effective way of improving the local economy relative to other transport or infrastructure investments, unless there is a clear capacity demand from a growing or emerging sector. Expanding airport infrastructure is relatively expensive compared to other local transport investments which could be used for stimulus purposes.
Business agglomeration and displacement
One approach to local growth policy is to support agglomeration – encouraging concentration of businesses, investment and workers, as this leads to higher productivity, and can attract further businesses, investment and workers.
Airport expansion may support agglomeration if increasing passenger or freight capacity makes it easier for businesses to operate in a local economy or region – for example, giving them easier access to customers and clients, business partners, or workers. This
might make it more appealing to set up or expand near the airport or might make investments more viable (for example, investing in more productive manufacturing equipment knowing that there will be expanded cargo capacity nearby for exporting goods).
Whilst airport expansion that enables agglomeration to continue (where air capacity was acting as a break) may be successful, expansion that is trying to kickstart agglomeration by attracting new businesses to the area is less likely to work as, outside of a few niche industries, other costs and factors are likely to be more important in determining location choices. It may even make relocation less likely, if the airport expansion leads to increases in other costs.
There is some empirical evidence to support the idea better air transport capacity can have agglomeration effects. Sheard (2021) looks at the effects of airport infrastructure on employment in US metropolitan areas between 1991 and 2018, finding that a 10 percent increase in air traffic leads to an average increase in the population of a metropolitan area of 1 percent, an increase in the local labour force of 1.2 percent, an increase in employment of 3.6 percent, and an increase in Gross Domestic Product (GDP) of 2.6 percent.
But care is needed in extrapolating evidence from the US to the UK. For the UK, a small country with a relatively extensive passenger airport network, there are often multiple airport options open to travellers, in contrast to larger countries with greater distances between airports. This may mean expansion to meet general air capacity demand has relatively smaller agglomeration effects on local economies around the expanded airport, since there will be an extant network of air travel which passengers and businesses are using, meaning less incentive to relocate. On the other hand, expanding to meet a specific air capacity demand – say a need for more air freight linked to a specific industry, or to allow more tourism in a buoyant destination sector – may be effective in supporting agglomeration to continue.
Another key issue to consider is displacement – where economic activity moves from one location to another. For airports, this might mean businesses relocating between areas to be closer to an expanded airport: positive for the recipient area, but negative for the area losing the business. There is empirical evidence for this. Lenaerts, Allroggen, and Malina (2022) study 679 airports in 29 European countries between 2001 and 2012 and show that increased air connectivity has a strong, positive impact on wider service sector employment (i.e. excluding the aviation industry) for the regions around the airport. But they also find that for the regions just beyond, there is a reduction in employment, suggesting this indicates an ‘agglomeration shadow’ where businesses are moving to be closer to the airport.
Employment and multipliers
Expanding an airport will involve direct job creation: first, in any construction or infrastructure upgrading required, and second, in the airport itself. For example, London City Airport estimated in 2016 that an expansion would create 500 construction jobs and 1,600 airport staff jobs.
Employment in construction will only be temporary and often might not mean employment for people living in the local area if contractors bring staff with them. Jobs created directly in the operation of the expanded airport might include work in airport operations (e.g. baggage handling, passenger service agents, or maintenance technicians) or in the services and shops inside the airport.
A part of the wider local employment effect of expansion will depend on the employment multipliers from these directly created jobs. But most will depend on employment that comes from additional business activity supported by the expansion, which is why it is important to understand the types of business activity it might be able to generate. For example, expansion of major airports around London is usually framed in terms of being able to allow additional business activity in places like the City of London.
Different types of jobs produce different sized multipliers: our evidence suggests that for each tradeable sector job, there are 0.9 jobs created indirectly in the non-tradeable sector of the local economy. For each high-skilled tradeable sector job there are 2.5 non-tradeable jobs created. New non-tradeable jobs in the tourism sector might have smaller multiplier effects compared to new jobs in high-skilled tradeables like advanced manufacturing or business services. Part of understanding what is likely to materialise means going back to the rationale for expansion – what does the local economy already look like and which sectors are arguing for expansion because of pent-up demand?
Don’t wing it when thinking through growth
To gauge potential local economic impacts, think first about whether expanding an airport is loosening a pressure valve on pent-up demand for growth, and then about what that growth might look like in terms of the types of businesses and jobs that it could attract. For more on local transport investment and growth, our evidence topic page on transport provides a range of resources summarising evidence from impact evaluations.
