MANAGEMENT SCIENCE Vol 27. No. 2.

February 1981

Fnnled m U SA.

BENEFIT-COST ANALYSIS OF A PROPOSED RUNWAY EXTENSION*

CARY SWOVELANDt
This paper describes a benefit-cost analysis of a proposed $1.4 million runway extension at Kelowna Airport, in Kelowna, British Columbia (Canada's westernmost province). Lengthening the runway as proposed would allow Pacific Western Airlines to operate their Boeing 737 aircraft out of Kelowna with heavier paytoads. thereby reducing the occurance of situations where the combined passenger and cargo demand exceeds the available weight capacity of the aircraft. The problem is complicated by the fact that the maximum payload weight permitted on take-off varies considerably with the air temperature and wind speed and direction at the time of departure. On hot summer days, when the problem is most severe, it is sometimes necessary to remove all of the cargo from the aircraft, and. at times, to limit the number of passengers taking the flight to less than the number of seats. An alternative means of achieving the objectives of the runway extension was also considered: lowering the average demand per flight by simply increasing the number of flights out of Kelowna. The "Runway Extension" and "Additional Flights" options were evaluated in terms of their net economic benefits, as compared with the "Do Nothing" option. Net economic benefit is the present value of economic benefits less the present value of economic costs. The economic benefits depend upon the extent to which unsatisfied passenger and cargo demand would be reduced, and on the unit economic costs of unsatisfied passenger and cargo demand. Estimates of the reductions in unsatisfied demand were obtained by means of a probability model that is similar to ones used to solve single-penod, stochastic inventory planning problems. The unit economic costs were not estimated; rather, the economic benefits were expressed as linear functions of the unit economic costs of unsatisfied passenger and cargo demand. The economic cost of the "Runway Extension" option was the cost of constructing and maintaining the runway extension; the cost of the "Additional Flights" option was the cost to Pacific Western Airlines of providing the additional flights out of Kelowna. The numbers of such additional flights were ch(en to produce the same amount of unsatisfied passenger demand as that which had been estimated for the "Runway Extension" option. Those responsible for deciding whether the runway should be extended were asked to judge the values of the unit economic costs of unsatisfied passenger and cargo demand, thus determining which of the three options was preferred on economic grounds. Prior to the study. Transport Canada had formally recommended the proposed runway extension to the Treasury Board (the Cabinet Committee of the Canadian Government that controls govemment expenditures). The Treasury Board requested the Department to reconsider the project, and as a result, a benefit-cost analysis was undertaken. Because of the conclusions of the study. Transport Canada decided to postpone indefinitely the lengthening of the runway. The runway may still be lengthened sometime in the future to accommodate aircraft that require a longer runway thai; does the Boeing 737, but only if a subsequent analysis shows that the resulting benefits would exceed the costs. Having been successfully applied at Kelowna Airport, the methodology developed in this study has now been adopted by Transport Canada for evaluating proposed runway extensions at other Canadian airports. (COST-BENEFIT ANALYSIS; AIR TRANSPORTATION; PLANNING)

1.

Iatro^KitioB

In fiscal 1971/li.^ the Govemment of Canada spent approximately $200 million (Can.) on capital improvements to the national airport and airspace system, and an
Paul Gray; recravai E>ecember 12, 1979. This paper has been with the author 2 months for 1 rev^on. ^ Inc., Vaaeoava, Canada. *^^ 0025-1909/81/2702/OI55$01.25
. T%e institute of Maiumcment ScieiMxs

156

CARY SWOVELAND

additional $460 million on the system's operation and maintenance (gross of revenues). The responsible federal department. Transport Canada, owns and operates 110 airports, including all of Canada's international airports. In addition. Transport Canada subsidizes the construction and operation of certain municipally-operated airports and maintains an extensive air traffic control network. Transport Canada consists of three administrationsair, marine, and surfaceand several corporate-level planning, financial and administrative units. The largest of the three administrations is the Canadian Air Transportation Administration (CATA), with approximately 13,000 employees, CATA's major responsibilities are to plan, operate, maintain and improve the national airport and airspace system, promulgate and enforce safety regulations and develop domestic and international air transport policies, CATA is a decentralized organization, having six regional offices between Moncton, New Brunswick (the Atlantic Regional Office) and Vancouver, British Columbia (the Pacific Regional Office), Most proposed air transport investment projects are initiated within one of CATA's Regional Offices, After having been approved for future funding by the Regional Office and by CATA Headquarters, each proposal must compete annually with all other approved projects for a limited capital budget. Decisions concerning which projects should be approved for future funding and what should be the relative priorities of approved projects are primarily based on judgement, because there is no single criterion used in ranking projects and because the value of proposed projects often cannot be estimated with sufficient accuracy to provide meaningful quantitive comparisons. To assist departmental management in making these decisions, CATA has encouraged the greater use of benefit-cost analysis for evaluating the economic merit of proposed investment projects. While it has been recognized that benefit-cost analysis has definite limitations (mainly related to the difficulty of estimating certain types of benefits), the economic effects of some projects can be estimated with reasonable accuracy. Although factors other than economic efficiency may also influence funding decisions, the results of benefit-cost analyses are clearly taken into account by those responsible for making the decisions. This paper describes the methodology developed by the author for estimating the economic effects of proposed runway extensions and the application of the methodology to a proposed runway extension at Kelowna Airport, in Kelowna, British Columbia. In the last fifteen years, Canada's five Regional Air Carriers have converted their fleets of mostiy 40-60 seat turboprop aircraft to 90-110 seat jet aircraftmostly Boeing 737's. During this same period, Canada's two flag carriersAir Canada and CP Airhave converted to all-jet fleets. To accommodate the increased use of jet aircraft, runway extensions and other airport improvements were required at many Canadian airports. At some airports, however, the existing runways could accommodate the new aircraft, though at times the aircraft operated under take-off weight limitations. In these cases, there was often controversy over whether the runway should be extended. The runway was long enough to permit safe flight operations, but the take-off weight limitations sometimes resulted in passen^rs being unable to take their preferred flights or in air cargo shipments being delayed. TTie problems caused by the weight limitations are complicated by the fact that maximum allowable take-off weight

BENEFIT-COST ANALYSIS OF A PROPOSED RUNWAY EXTENSION

157

depends on certain environmental conditions at the time of take-off. In particular, maximum take-off weight varies with air temperature and "effective wind speed." (Effective wind speed is that component of wind velocity which is parallel to the runway, in the direction opposite that chosen for take-off.) This situation has existed at Kelowna Airport for several years. Pacific Western Airlines (PWA) operates Boeing 737 (B737) jet aircraft between Kelowna and several other cities in British Columbia and Alberta. For flights from Kelowna to Edmonton, Calgary and Vancouver, PWA sometimes must limit the number of seats that can be filled or the amount of cargo that can be carried, depending on the air temperature and effective wind speed at time of take-off. Whenever passenger demand for a particular flight exceeds the number of seats available, some passengers wanting to take the flight are tumed away. Some of these passengers have confirmed reservations and are told shortly before their flight is to depart that they must wait for a later flight. Other passengers affected are simply unable to reserve a seat on the flight, and must therefore arrange to take another flight, which may be less convenient. Whenever cargo demand for a particular flight exceeds the available cargo weight capacity (which depends in part on the passenger demand for the flight), some of the cargo must be held at Kelowna for a later flight. At times, it is necessary to remove cargo from the aircraft that is being shipped through Kelowna, which may slightly delay the departure of the aircraft. This problem is most severe in the hot summer months, because maximum take-off weight is inversely related to air temperature at time of take-off. (Maximum landing weights for PWA flights into Kelowna do not limit passenger or cargo demand.) In light of these difficulties, a runway extension of 1150 feet was proposed, which would have increased the length of the runway to 6500 feet. The capital cost of the extension was estimated to be approximately $1.4 million (in 1978 dollars). In addition, airport operations and maintenance costs would have increased by an estimated $3300 annually (due to increased runway sweeping and snow removal costs, etc.). The proposed runway extension was approved by Transport Canada and formally recommended to the Treasury Board (the Cabinet Committee of the Canadian Govemment that controls govemment expenditures). The Treasury Board, uncertain that the benefits of the project justified the costs, requested the Department to reconsider the project. As a result, it was decided to carry out the benefit-cost analysis described in this papier. 2. Benefit-Cost Andysis Benefits and Costs The benefit-cost analysis estimates, over the twenty year life of the runway extension, the magnitudes of the economic costs and benefits associated with the project. The economic costs include the capital costs of the mnway extension and the increased operations and maintenance cost that would be inctirred in each year of the planning period. The economic benefits result from increased maximum take-off weights for Pacific Westem Airlines' 737 flights. It is the judgement of Departmental experts that the safety of flight operations at Kelowna would not be enhanced significantly by lengthening the runway as proposed.

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CARY SWOVELAND

Therefore, no safety benefits were ascribed to the proposed project. Also, extending the runway as proposed would not necessarily result in the use at Kelowna of commercial aircraft larger than the B737. Consequently, the project was not credited with any benefits associated with the introduction of any new scheduled or chartered air services or with the future replacement of PWA's B737 aircraft on flights to and from Kelowna with larger, more economical aircraft Options The study also considered an altemative means of reducing unsatisfied passenger and cargo demand: increasing the frequency of PWA flights departing from Kelowna and not extending the runway. With this option, the economic benefits again are reduced unsatisfied passenger and cargo demand, whereas the economic costs are increased operating costs for PWA. Thus, three options were considered: the Do Nothing Option, the Runway Extension Option and the Additional Flights Option. For both altematives to the Do Nothing Option, the study estimated the extent to which unsatisfied passenger and cargo demand would be reduced, and calculated the associated economic benefits as functions of the unit costs of unsatisfied passenger and cargo demand (whose values were not estimated). Estimates of the economic costs of each altemative were then subtracted from the estimated benefits to give estimates of the net present values of each of the two altematives (relative to the Do Nothing Option), expressed as functions of the unit costs of unsatisfied passenger and cargo demand. It was left to the decision-maker to judge the values of these unit costs, thus determining which of the three options is preferred on economic grounds. Calculation of Net Benefits A public investment project is generally considered worthwhile, on economic grounds, if its net economic benefit is positive. The net economic benefit of a project, N, equals the present value of the economic benefits that would result from the project, B. less the present value of the economic costs of the project, V. Thus, if the physical life of the project is L, the benefits and costy years in the future are Bj and Vj, respectively, and / and a = 1/(1 + ) are the social discount rate and discount factor, = respectively.

For the proposed Kelowna mnway extension, it was estimated that L = 20 (i.e., the physical life would be 20 years), FQ = 1,398,200 (die capital cost in 1978 dollars) and = V = 3,3(X) fory = 1 , . . . , 20 (incremental annual operations and maintenance c<Mts in 1978 dollars). Thus, (discounting to 1978)
2Q

20

2 a>(3,300)

1,398,200 + (3,300Xl/i)[ 1 - {l/lf}

0)

BENEFIT-COST ANALYSIS OF A PROPOSED RUNWAY EXTENSION

159

Suppose that as a result of lengthening the runway, unsatisfied passenger and cargo demand were reduced by Pj (passengers) and C, (pounds), respectively, in each year;. Letting b^ (dollars per passenger) and b^ (dollars per pound of cargo) denote the economic benefits per unit reduction in unsatisfied passenger and cargo demand respectively,
20

where Kp = ^f^^aJPj and K^^f^^aJq. Then, N'=B-V>Q if and only if K^b^ + K,K > V. The extent to which the frequency of flights departing from Kelowna would be increased under Additional Flights Option is, of course, arbitrary. A small increase would result in the benefit of reduced unsatisfied passenger and cargo demand being small, but it would not increase PWA's operating costs by much; a larger increase would result in greater benefits, but also in a larger increase in PWA's operating costs. It was decided to choose for comparison a level which would result in expected unsatisfied passenger demand being the same for the Additional Flights Option as for the Runway Extension Option (for each route segment, month, and year). This choice facilitated a comparison of these two options, since they would differ only in economic cost (the capital and operating cost of the runway extension versus increased operating costs for PWA) and in expected unsatisfied cargo demand. Suppose that in year j the_ cost of providing the additional flights under the Additional Flights Option was V^, and the reduction in unsatisfied cargo demand was Cy Then the net economic benefit of this option (as compared with the Do Nothing Option) would be
_

20

where
20 20

and Kp is as defined previotisly. Thus, the Additional Flights Option would be preferred to the Do Nothing Option if N >0, or if Kpb^ + KA > V, and would be preferred to the Runway Extension Option if N > N, or if

Once Pj, Cj, Cj and Vj have been estimated, the determination of the preferred option depends only upon the values of the unit economic costs 6^ and b^, which, as mentioned previously, were judged by the decision-maker rather than estimated by the analyst. The nature of unsatisfied passenger and cargo demand, which influences judgments about their unit econ(nic a>sts, is dilKu^ed in the final section ^f this r. The following action describes the approu:h taken to estimating Pj, Cj, Cj, and

160

CARY SWOVELAND

3.

Estimation of Unsatisfied Passenger and C a i ^ Demand

The extent to which passenger and cargo demand for PWA's flights departing from Kelowna is satisfied depends on the maximum weight of passengers, baggage and cargo permitted on take-off; the number of seats in the aircraft; and the distributions of passenger and cargo demand per flight. Maximum Payload Weight The maximum weight of passengers, baggage and cargo permitted on take-off is called the "maximum payload weight." This equals the maximum take-off weight less the empty operational weight of the aircraft (which includes the weight of the crew and supplies), less the weight of the fuel carried. The minimum amount of fuel required equals the amount of fuel necessary to fly to the destination, plus an amount necessary to fly from the destination to'an "alternate" (in case the aircraft is not able to land at the planned destination), plus a safety reserve. The maximum take-off weight (MTO) for a particular aircraft primarily depends upon: (a) the physical characteristics of the airport (e.g., length, slope, elevation, and surface of the runway, and its orientation vis-a-vis mountains, buildings and other obstructions in the area); (b) the air temperature and effective wind speed at time of take-off; and (c), the operational procedures used by the pilot in taking off (e.g., the flap setting). Thus, for a particular aircraft, flight segment and runway direction designated for take-off, the maximum payload depends primarily on two "random" factorsair temperature and effective wind speed at time of take-off. The higher the temperature, the lower the MTO; the greater the effective wind speed, the greater the MTO, (Normally, the direction chosen for take-offand for landing as wellis such that the effective wind speed is positive,) To simplify the analysis, a constant wind speed of zero was assumed. This assumption caused the estimates of reductions in unsatisfied passenger and cargo demand to be somewhat on the high side, which resulted in a slight over-estimate of the benefits of both of the alternatives to the Do Nothing Option. The relationship between B737 (specifically, the B737-2(X) Advanced) maximum payload weight and temperature is illustrated in Figure 1 for the Kelowna-Edmonton flight segment, for an effective wind speed of zero. Maximum payload weights differ by runway direction because the runway has a slight slope and because of variations in terrain in the vicinity of the airport, (Runway 33 is the runway direction 330 from North; Runway 15 is in the opposite direction, 150 from North.) In this figure, the maximum payload has been expressed both in pounds and in equivalent numbers of passengers, including baggage. (The average weight per passenger, including baggage was estimated to be 200 lbs.; the aircraft has a seating capacity of 118.) If, for example, the temperature at time of take-off from the present Runway 33 were 90 F, the maximum payload would be about 19,(X)0 lbs., meaning that with no cargo on board at most 19,000/200 = 95 seaU could be filled. If the passenger demand for that flight were 100, there would be five units of unsatisfied passenger demand and all cargo demand for the flight would be unsatisfied. (In this case, all of the cargo aboard the aircraft during the previous flight segment would have to be removed at Kelowna and loaded onto a later flight.) If, instead, the passenger demand for this flight were only 77 (weighing 15,400 lbs.), all of it could be satisfied and at most 19,000 - 15,400 3,600 lbs. of cargo demand could be satisfied. With the lengthened Runway 33, the maximum payload at this temperature (90F) would be about 24,800

BENEFIT-COST ANALYSIS OF A PROPOSED RUNWAY EXTENSION

161

35-

o a
t)

.c a

I
m o
(D 0.

E a E
H IS

S
40 70

75

80

85

90

95

Temperature (F) FIGURE 1. Maximum Payload Weight for PWA B737 Aircraft vs. Temperature for Kelowna-Edmonton Flight Segment (for wind speed of zero).

lbs. In this case, all 118 seats could be filled and 24,800 - (118 x 200) = 1,200 lbs. of cargo demand could be carried. Passenger and Cargo Demand Per Flight The amounts of unsatisfied passenger and cargo demand depend in part on the distributions of passenger and cargo demand per flight, as mentioned earlier. According to studies done by Boeing [1,2], passenger demand per flight can be reasonably approximated by a normal distribution, whose standard deviation to mean ratio falls between .2 and .4. In the absence of reliable data, Boeing's findings were tentatively assumed to apply to both passenger and cargo demand for flights departing Kelowna. Moreover, it was assumed that all passenger and cargo demands are independently distributed. (Clearly, certain pairs of random variables are correlated: whenever passenger or cargo demand for a particular flight exceeds the available aircraft capacity, the excess demand forms a part of the demand for some earlier and later flights. The independence assumption was judged, however, to introduce very little error into the analysis.) In the case of the Do Nothing and Runway Extension Options, the analysis assumes that average passenger demand would be constant for all PWA flights departing from Kelowna throughout the planning period. Though, in fact, average demand varies by month, year, and next stop, the assumption of a constant average demand was judged

162

CARY SWOVELAND

to be satisfactory, because the relationship between the reduction in unsatisfied passenger demand and the average passenger demand per flight was found to be nearly linear over the range of interest of the latter, as will be shown (see Figure 2 in the following section). This was fortunate, as it would not have been possible to reliably predict average passenger demand per flight by month, year and next stop. The "most likely" average passenger demand per flight used in the analysis was 76.7, which is 65% of the maximum seating capacity of 118. This estimate was based upon actual load factors for PWA flights departing from Kelowna in the summer of 1977. Sensitivity analyses were done for "low" and "high" average passenger demands per flight of 64.9 and 88.5 (55% and 75% load factors). The results of the sensitivity analyses are described in the next section. For all three options, the "most likely" ratio of the standard deviation to the mean passenger demand per flight was taken to be 0.3, the mid-point of the range found by Boeing as applying to most distributions. Sensitivity analyses were done for ratios of 0.2 and 0.4. Cargo demand per flight was also assumed to follow a normal distribution. The average cargo demand per flight, for each month, year and next stop, was estimated by dividing the estimated total cargo demand for that next stop (in that month and year) by the estimated number of flights. The latter quantity equaled the estimated total passenger demand (for the next stop, month and year) divided by the average passenger demand per flight Estimates of the standard deviation of cargo demand per flight were obtained by multiplying the average demand per flight by the same standard deviation to mean ratios as were adopted for passenger demand. Expected Unsatisfied Passenger Demand For each runway (i.e., present or proposed), runway direction, next stop, and temperature at time of take-off, the expected unsatisfied passenger demand per flight equals | > (2)

where s is the maximum number of seats that can be occupied for the given runway, next stop and temperature and fp(x) is the normal probability density of passenger demand (with mean n and standard derivation a) for PWA flights departing from Kelowna. (Observe that this equation depends on the previously-stated assumption that passenger and cargo demands are independent.) After some manipulation, equation (2) reduces to

lL
where F is the standard normal distribution function and

The fdlowing s t q s were then carried out t(x each qpticm. First, for eadi next staip aad mcmdi, average unsatisfied pa^enger demand per flight vm obtainl 1^ ccfflxputrag a wei^ted a v e n ^ (rf the />'s tor each runway directicm, period of day aad teflEtperature [where the wdghls w a d ^ fraction of time mxk rvanmy directicm is used, tite im^Kjrtkms of flighte depattiag ia eac^ <rf two iKdods erf tfa day (!^X) 1900 hrs. and K) - 1200/1900 - 22O hrs.) and, lot ewch <rf die tw) pwiods <rf the

BENEFIT-COST ANALYSIS OF A PROPOSED RUNWAY EXTENSION

163

day, the probabilities of the given temperatures occurring]. The resulting quantity was then multiplied by the forecast number of flights departing from Kelowna for the given next stop and month, for each year of the pianning period. (The latter quantity equalled the forecast number of passengers departing Kelowna for the given next stop, month and year, divided by fi, the average demand per flight.) Summing these products over next stops and months provided estimates of the total unsatisfied passenger demand for each year of the planning horizon. Expected Unsatisfied Cargo Demand Unsatisfied cargo demand was estimated for each of the three options in a similar, though slightly more complicated, way. The complexity of this calculation is related to the fact that passengers have priority over cargo. For each runway (existing or proposed), mnway direction, next stop, month, year and temperature at time of take-off, the expected unsatisfied cargo demand per flight is (4) where g(x) is the expected unsatisfied cargo demand when the passenger demand equals x. (Recall that f^(x) is the probability density of passenger demand per flight and s is the maximum number of seats that can be occupied on take-off). For x < s, Uc)dc, (5)

where w is the maximum take-off weight (for the given next stop and temperature at time of take-off), w^ is the average weight per passenger, including baggage, and/.(c) is the normal probability density for cargo demand with mean y and standard deviation T. For x > s.

[c - (w - WoS)]Uc)dc.
S

(6)

After some algebraic manipulation, (5) and (6) reduce to

]l
- L e x p ( - l / 2 z | ) - z , [ l - F(z,)]\,
v2w where F is the standard normal distribution function,
2, = (w - Wgx - y)/T

(7)
(8)

and

Zj = (w - Woi - y ) / T .

Substituting (7) and (8) into (4) rraults in

[-^(^o)],

(9)

where 20 -= (* ^ M)/*- Numerical integration was used to evaluate the first term on the ri^t side of (9). For e^::h of the diree options, and for each next stop, month and year, wei^ted average of the g's were calculated, corrraponding to each combination of runway

164

CARY SWOVELAND

direction, period of day, and temperature. Each of the resulting quantities was then multiplied by the forecast number of flights departing Kelowna for the given next stop, month and year. The products were then summed for each year to obtain estimates of the total annual unsatisfied cargo demand. Note that if, for a given month and next stop, the ratio of average cargo demand to average passenger demand remains constant from year to year, y and Tand therefore Qalso remain constant from year to year (thus resulting in a considerable savings in computer time required). Numbers of Additional Flights Under Additional Flights Option By applying Equation (3) to the case where the runway is lengthened, it was estimated tiiat for flights to a given next stop in a given month and year, the expected unsatisfied passenger demand (for the entire month) would be some number U (for an average passenger demand per flight of /i). Subsequently, an estimate was made of the average demand per flight which, if the runway were not lengthened, would yield the same estimate of U for unsatisfied passenger demand for the given next stop, month and year. Call this derived average passenger demand per flight ji and the associated average cargo demand per flight y. The expected unsatisfied cargo demand per flight for the Additional Flights Option was then estimated by the use of Equation (9) with ju replaced by jl in the calculation of ZQ, y replaced by y and T replaced by f = y(j/y) in the calculation of z, and Z2, and 5' being the maximum number of seats that can be occupied on take-off, for the existing runway. If D passengers were to travel to the given next stop in the given month and year, the number of additional flights required to that next stop in that month and year with the Additional Flights Option would be

The /?'s for each next stop, month and year were calculated and summed over months to obtain estimates of the total numbers of additional flights required for each next stop, in each year. These calculations will be explained in greater detail in the next section. 4. Data Requirements The calculation of unsatisfied passenger and cargo demand required estimates of the following quantities: temperature distributions at Kelowna, by period of day and by month; maximum payload weight limitations for PWA B737 aircraft, as a function of temperature at time of take-off, for each next stop and runway direction; forecast passenger and cargo demand for B737 flights departing from Kelowna, by next stop, month and year; proportions of PWA B737 flights expected to depart in each runway direction; and values for the four parameters listed in Table 1. The derivation of the parameter values in Table 1 is explained in [2]. Though the estimates of these parameters were only tentative, it was decided to carry out three sets of analyses, using their "low," "most likely," and "high" valu^, before deciding whether more accurate estimates were required. Estinmted Reductions in Umaitisfied Passenger and Cargo Demami For the "most likely" values of these four parameters, it was ^timated that the Runway Extension and Additiomtl Flight Optima would reduce unsatisifed passenger R^ults

BENEFIT-COST ANALYSIS OF A PROPOSED RUNWAY EXTENSION TABLE 1 Values of Parameters Used in Analysis _ Parameter Average passenger demand per flight for the "Do Nothing" and "Runway Extension'" Options Shape of distribution of passenger demand per flightratio of standard deviation to mean Shape of distribution of cargo demand per flightratio of standard deviation to mean Fraction of departures between 1200 and 1900 hours Low Value Most Likel> High

165

64.9

76.7

88.5

0.2

0.3

0.4

0.2

0.3

0.4

0.4

0.5

0.6

and cargo demands by the amounts shown in Table 2. By way of comparison, in 1979, PWA flights from Kelowna to Edmonton, Calgary and Vancouver were forecast to cany a total of 160,000 passengers and 1,200,000 pounds of cargo. Table 3 illustrates the breakdown of the estimated reduction of 148 in unsatisfied passenger demand in 1979, by next stop and month.
TABLE 2 Estimated Annual Reductions in Unsatisfied Passenger and Cargo Demand* Estimated Reductions in Unsatisfied Passenger Demand. Runway Extension and Additional Flights Options 148 158 168 179 191 204 217 233 240 250 260 275 285 290 300 310 320 329 339 350 Estimated Reductions in Unsatisfied Cargo Demand (lbs.) Runway Extension Additional Flights Option Option 22.519 24.067 25.615 27.304 29,134 31,104 33,075 35,467 36,453 38,001 39,549 41,801 43,349 44,053 45.601 47,149 48,697 50,105 51,653 53,:MI 9.145 9.774 10.402 11,088 11,831 12,631 13.432 14.403 14.804 15.432 16,061 16,975 17,604 17.890 18.579 19,147 19.776 20,348 20.976 21,605

Year 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

' For "nwst likdy" parameter values.

166

CARY SWOVELAND TABLE 3 Estimated Annual Unsatisfied Passenger Demand in 1979, With and Without Pr(^>osed Runway Extension*
Vancouver Calgary Reduction 0 0 0 0 0 2 10 8 0 0 0 0 20 Edmonton Reduction 0 0 0 0 2 5 14 11 Do Nothing 6 6 8 10 15 25 40 36 23 II Runway Extension 6 6 8 8 8 9 12 II 11 9 8 10 105 Reduction

ToUl Do Runway ReducNothing Extennon tion 38 35

51 53 53 81 131 119 91 62 54 70 843

Do
Month January February March Apnl May June July August September October November December Total Nothii Ig 22 21 31 31 29 37 58 53 45 36 33 42 437

Runway Extension 22 21 31 31 29 35 47

r>o
Nothing 10

Runway Extension 10 9 13 13 12 15 19 19 19 15 13 17 172

9
13 13 13 19 33 30 22 15 13 17 208

0 0
0

38 35
51 51 51 59 79 75 75 60 54 70 694

2
8 16 28 25 12 2 0 0 93

<t5
45 36 33 42 417

3
0 0 0 35

8
10 198

0 0 0 2 2 22 53 44 16 2 0 0 148

* Entries have been rounded to the nearest integer.

The relationship between the estimate of the rwluction in unsatisfied passenger demand in 1979, due to the lengthening of the runway, and the average demand per flight M for different "shapes" of the distribution of passenger demand per flight o/f., ? is illustrated in Figure 2. The dashed lines around the thrw curves labelled (i/\i = 0.2, 0.3, and 0.4 illustrate the degree of variation associated with the proportion of flights departing between 1200 and 1900 hours (i.e., the hottest part of the day). Tie dashed lines below the solid lines correspond to this proportion being 0.4, the solid lines correspond to it being 0.5 (the "most likely" value) and the dashed lines above the solid lines correspond to it being 0.6. It can be seen that the estimated reduction in the unsatisfied passenger demand is sensitive to both the average demand per flight M and , the shape of distribution of passenger demand per flight (O/M), but does not vary greatly with the aircraft departure times. The relationship betw^n the ^eduction in unsatisfied cargo demand and these parameters has a similar appearance (spe [3]).
Additional Flights Option

The calculation of the numbers of additional flights requir^i in 1979 under the Additional Flights Option is illustrated in Table 4 for the Kdowna to Edmonton route segment. The estimation of the "Required Average Etemand/Flight," by month, can best be explained by demonstrating how the calculation was made for a particular month, say July (1979). First it was estimated diat for the existing runway, total unsatisfied passenger demand for all flights to Edmonton in July would equal 5 if die average demand per flight were 64.9 (55% of 118) and would equal 40 if die average demand per flight were 76.7 (65% of 118). This was done by calculating, for p 64.9 and for ft - 76.7, rrapectively, weight^ a v e r a ^ of the /"s from equation (3), with the other parameters from Table I )uatling their "mtst likely" valu^ and with valu^ of s corresponding to the existing runway. Using linear interpcdatkm, unsati^^i passenger demand (for the month) was dien timatl to equal /=s-187.75-I-2.97jt, where ft is the avamge demmd per fU^t (Note that US lot fi64.9

BENEFIT-COST ANALYSIS OF A PROPOSED RUNWAY EXTENSION

167

64.9 (55%of118)

76.7 (65% Of l i e )

S8.S (75% Of 118)

Avsrage Oftmand Pr Flight CM)

FIGURE 2. Reduction in Unsatisfied Passenger Demand in 1979, as a Function of Parameter Values.

for n = 76.7.) Hence, U + 187.75 2.97 (10)

Next, it was estimat&l that for the proposed lengthened runway, ej^^cted total unsatirfied p a ^ e n ^ demand for fli^te to Edmonton in July of 1979 would be 12. This was done by calculating a wei^ted avera^ of the P's from equation (3) with frcMi Table I equ^ing their "most likely" values, and with values of 5 ing to the pr<^K)sed lengthened runway. Thus, to achieve an unsatisfied ^ m a o d (tf 12 without length^ng die runway, average demand per flight

168

CARY SWOVELAND TABLE 4

Calculation of Additional FWA Flights from Kelowna to Edmonton Required in 1979 Under the Additional Flights Option Forecast Passenger Demand 1280 1280 1760 1760 1760 2080 2720 2560 2560 2080 1920 2400 Additional Flights Option Req'd Average Number of Flights* Demand/Flight 76.7 76.7 76.7 74.0 68.4 66.1 67.3 67.5 69.9 74.6 76.7 76.7 16.7 16.7 23.0 23.8 25.7 31.5 40.4 37.9 36.6 27.9 25.0 31.3 336.5 Do Nothing Option-Number of Flights'* 16.7 16.7 23.0 22.9 22.9 27.1 35.5 33.4 33.4 27.1 25,0 31.3 315.0 Increased Number of Flights 0 0 0 0.9 2.8 4,4 4.9 4.5 3.2 0.8 0 0 21.5

Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. TOTALS

'Equals "Forecast Passenger Demand" divided by "Req'd Average Demand/Flight." ** Equals "Forecast Passenger Demand" divided by 76,7 (65% of 118).

(from Equation (10)) would have to be approximately _ 12+ 187,75 _ ^7 o as shown in Table 4, This procedure was repeated for each next stop and each month of 1979, Thus, for 1979, the number of additional PWA flights from Kelowna to Edmonton (under the Additional Flights Option) was estimates to be 21,5. By similar calculations, the numbers of additional flights in 1979 to Calgary and Vancouver were estimated to be 12.1 and 8.0, respectively. (If, for each month and route, the ratio of cargo demand to passenger demand remains constant from year to year, the estimated numbers of additional flights increase over time at the same rate as does passenger demand; otherwise, the calculations described above must be repeated for each year of the planning horizon.) For the Additional Flights Option, estimates of the expected reduction in unsatisfied cargo demand (shown earlier in Table 2) were calculated by the methods described in the previous section, using the estimates of average demand per flight contained in Table 4 and "most likely" values from Table 1 for the other parameters. Estimation of Net Benefits Net economic benefits were calculated for three social discount rates: 5% 10%, and 15%. Canada's Treasury Board r^ommends the use of a 10% social discount rate (to be applied to future benefits and costs expressed in constant dollars), but further suggests that calculations also be done for rates of 5% and 15%. All costs and benefits were measured in 1978 dollars and discounted J o 1978. Estimates for the coefficients / ^ , K^, and K^ (the present valu^ of reductions in unsatisfied passen^r and cargo demand) are containl in Tables 5 and 6. (Estimates of K^ initially were made only for "most likely" parameter values, due to the lai^e amount of time required to cany out the calculations. Subs^uentiy, it was concluded

BENEFIT-COST ANALYSIS OF A PROPOSED RUNWAY EXTENSION TABLE 5 Present Values of Reductions in Unsatisfied Passenger and Cargo Demand. Runway Extension Option Social Discount Rate 5% Passenger Demand (K^) Parameter Values "Low" "Most Likely" "High" Cargo Demand in Lbs. (K^) Parameter Values "Low" "Most Likely" "High" 10% 15%

169

25 2.936 8.651

16 1.877 5.529

11 1.301 3.834

6,000 447,000 1.637,000

4,000 286,000 1,046,000

3.000 198.000 725.000

TABLE 6 Present Values of Reductions in Unsatisfied Passenger and Cargo Demand, Additional Flights Option* Social Discount Rate 5% Passenger Demand (K^) Cargo Demand (K^) 2,936 182,000 10% 1.877 116,000 15% 1.301 80.000

For "most likely" parameter estimates.

that there was no need to carry out a sensitivity analysis for the Additional Flights Option. For the "most likely" parameter estimates, the values in these tables correspond to present values of the three columns of figures in Table 2.) Estimates of the present values of economic costs of the Runway Extension and Additional Flights Options are contained in Table 7. The estimates for V were obtained by evaluating Equation (1) for each of the three social discount rates. Estimates for V were obtained by computing first the cost of providing the additional flights required under the Additional Flights Option, for each year between 1979 and 1998, and then calculating the present values of those cost streams. The marginal cost of PWA's B737 flights was estimated to equal $1,282 per "block" hour. This includes aircraft depreciation or rent, the cost of the flight crew, in-flight crew, fuel and oil, direct maintenance burden and miscellaneous flying expenses. The calculation of the estimated cost of
TABLE 7 Present Values of Econotnic Cost of Runway Extension and Additional Flints Options
Social Discount Rate 5% Runway Extension 10% 15%

Option (F) Additional Flights Option (F)

$1,439,000

$1,426,000

$1,419,000

922,000

590,000

4(,000

170

CARY SWOVELAND TABLE 8 Cost of Providing Additional Flights in 1979 under Additional Flights Option Next Stop Additional Flights Required in 1979 Marginal Cost per Flight Increased Costs in 1979 $ 5.984 12.932 27.563 $46,270

Vancouver 8.0 $ 748 Calgary 12.1 1068 Edmonton 21.5 1282 Estimated Total Cost Increase in 1979 = $46,270

providing the additional flights required in 1979, for example, is shown in Table 8. (The marginal costs have been estimated for the additional departures only, though it is recognized that additional departures from Kelowna would necessitate aircraft flight schedule changes elsewhere in PWA's route network. In particular, one additional arrival at Kelowna would be required for each additional departure. If the costs and benefits of the flight schedule changes were known, the marginal costs in Table 8 would be changed accordingly. Estimates of these costs and benefits are not available, however.) The net benefit of each of the two altematives to the Do Nothing Option may now be calculated, in terms of the unit economic costs of unsatisfied passenger and cargo demand {b^ and b^). For a 10% social discount rate and "most likely" parameter estimates, the estimated net benefits are
A' = S - V

1,8776^ + 116,0006, - 1,426,000 for the Runway Extension Option and N^ B-V = 1,8776^ + 116,000fe, - 590,000 for the Additional Flights Option. Thus, the preferred option depends on the values given to the unit economic costs b^ and b^. This is illustrated in Figure 3. The line labelled A'^ > Ot is described by the equation N^ = 1,8776^ 286,0006, - 1,426,000 - 0. The net benefit for the Runway Extension Option., N^, is pt^itive for points (6^,6,) above this line and ne^tive for points below this Une. Similarly, die net benefit for the Additional Flights Cation, N^, is positive for points (bp,bj above the line labelled A ^ > Ot and is negative for points below this line. Since ^ b^ - 286,0006, - 1,426,000 - (1,8776^ + 116,0006, - 590,000) - 170,0006, - 836,000, > N^ if and only if 6, > 836,000/17aOOO2s 4.92. liiat is, the Rtmmiy Extensitm Optimt has a ^eato* ratimatd net l^ndfit duui the Adtimad Flights (^mt if and cmly if die eccmomic oasX pa- pmmd oi unsattsfod cargo demand exceeds $4.92.

BENEFIT-COST ANALYSIS OF A PROPOSED RUNWAY EXTENSION

for Optiom at a Function of CoMfiMr IMit of UnMtitad
^HMnQir flnd CWBO O M I W I O

171

$6.00

Rumvay Extamion Option Prafarrad $SJ

$100

$200

$300

$400

$S00

$600

$700

ttOO

Economie Cott per Unit of Unsatisfiad Panengar Damand (p)

N^: Nat Prannt Vaiua, Runtway Extantion Option N^: Nat Prawnt Vaiua. Additional FHgim Option

FIGURE 3. Preference for Options as a Function of Costs per Unit of Unsatisfied Passenger and Cargo Demand.

TABLE 9 Line Intercepts in Figure 'ifor Various Social Discount Rales and Parameter Values Social Discoount Parameter Rate 5% Values Low Most Likely High Low MostUkety Line Ubelled N >0T Line Labelled N >0T Line Labelled

\ > Nf
N/A 5.09 N/A N/A 5.09 N/A N/A 5.09 N/A 1.95 N/A N/A 4.92 N/A N/A 8J7 N/A

J Cost/Pass. Cost/lb. Cargi Cost/Pass.. C<t/lb. Cargo C<wt/lb. Cargo $57,560 490 166 89,125 760 258 129,000 1,091 370 $240.00 3:23 .88 356.50 4.99 N/A 314 N/A N/A 314 N/A N/A 314 N/A

10%

15%

Low Most Likely

473.00 7.17

N/A

172

CARY SWOVELAND

The horizontal and vertical intercepts for the lines labelled N^>OX, N^ >(yf and N^ > N^I in Figure 3 are given in Table 9 for social discount rates of 5%, 10% and 15% and for various parameter values. 5. Interpretation of Results

To determine which of the three options is best on economic grounds, we must estimate the unit economic benefits b^ and b^. This, however, is not an easy task. Economic theory says that b^ should be that amount a passenger would be "willing to pay" to take his or her preferred flight, rather than another one. This amount clearly varies from passenger to passenger; and even for a particular passenger, is different from one time to another, depending on the passenger's reasons for wanting to take a particular flight, the alternatives available, the amount of notice given that the preferred flight is not available, and so on. Consider the example of a retired couple living in Kelowna who decide that in two days time they would like to fly to Vancouver to visit friends and relatives. They call PWA to make reservations for the 1:35 p,m. weekday flight and find that no seats are available, in part because of expected high temperatures in Kelowna on the day they want to travel. So they make reservations for either the 9:40 a.m. or 9:10 p.m. flight the same day, both of which still have seats available. Contrast this case with that of a busy executive who must get to an important meeting in Vancouver that starts at 3:00 p.m. Arriving at Kelowna Airport at 1:20 for the 1:35 p.m. flight (for which he had a confirmed reservation), he finds that because of unexpectedly high temperatures that day no more passengers can be taken aboard the aircraft. Although he is able to get on the following flight at 5:(X) p.m., he misses the meeting and must wait over three hours to depart. The economic cost of the inconvenience suffered by the retired couple is probably quite small. For the executive, however, the economic cost of missing an important meeting and having to wait over three hours for the next flight may be quite large. The average unit cost of unsatisfied passenger demand depends also on the rule used for deciding which passengers are able to take a particular flight. If some sort of "first come, first served" rule is used, the average economic cost clearly will be greater than it would be in the case where the selection rule gives preference to those passengers who would be willing to pay the most to take their preferred flight. The latter type of rule need not be inequitable. For example, the Civil Aeronautics Board in the U.S. requires that (under certain circumstances) when an air carrier has overbooked a flight, and demand exceeds the number of seats available, the carrier must ask if anyone aboard the aircraft is willing to deplane and take a later flight, in exchange for a partial or full refund of his or her air fare. This policy encourages those passengers who would be least inconvenienced by waiting for a later night to voluntarily give up their seats. The economic cost per pound of unsatisfied cargo demand (b^) consists of: (a) the additional cost to PWA of unloading, storing, and reloading cargo that must be removed from its aircraft at Kelowna; (b) the economic costs associated with delays in the delivery of air cargo shipments; and (c) the cost as^Kiated with any delay in the departure of aircraft from Kelowna because cargo m^Ist be removed. (This delay generally does not exceed five minute.) Unfortunately, no estimates are available for any of these costs. H i r o u ^ further investigation it would have been pmsible to estimate the magnitude of the first c4 the% ct^ts, if this had proven nssary.

BENEFIT-COST ANALYSIS OF A PROPOSED RUNWAY EXTENSION

173

Although there was no consensus within CATA about the magnitude of the unit economic costs of unsatisfied passenger and cargo demand, there was general agreement that they were not large enough to justify either of the altematives to the "Do Nothing Option." Consequently, it was decided to postpone indefinitely the lengthening of the runway. The runway may still be lengthened sometime in the future to accommodate aircraft that require a longer mnway than does the Boeing 737, but only if a subsequent analysis shows that the resulting benefits would exceed the costs. Having been successfully applied at Kelowna Airport, the methodology developed in this study has now been adopted by Transport Canada for evaluating proposed runway extensions at other Canadian airports. The methodology can also be used to determine optimum runway lengths and to assess the effects of different types and mixes of aircraft on unsatisfied passenger and cargo demand.'
'The author wishes to thank George Nishimura of Transport Canada and Jeffrey Sidney of the University of Ottawa for useful comments on an earlier version of this paper.

References
1. BOEING COMMERCIAL AIRPLANE COMPANY, "Surplus Seat Management." undated. (Also a personal communication from K. R. Fox. of Boeing, August. 1979.) 2. LANKFORD, R. AND PINA, E., "Management of Scheduled Airline Capacity." TIMS/ORSA Meeting. Atlanta. 1977. 3. TRANSPORT CANADA, "Cost-Benefit Analysis of a Proposed Runway Extension at Kelowna Airport." Report TP 1917, June, 1979.