Addressing Uncertainty about Future Airport Activity Levels in Airport Decision Making (2012)

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A I R P O R T C O O P E R A T I V E R E S E A R C H P R O G R A M ACRP REPORT 76 TRANSPORTAT ION RESEARCH BOARD WASHINGTON, D.C. 2012 www.TRB.org Research sponsored by the Federal Aviation Administration Subscriber Categories Aviation  •  Economics   •  Planning and Forecasting Addressing Uncertainty about Future Airport Activity Levels in Airport Decision Making Ian Kincaid Michael Tretheway InterVISTAS ConsultIng llC Bethesda, MD Stéphane Gros David Lewis HDr InC. Silver Spring, MD

AIRPORT COOPERATIVE RESEARCH PROGRAM Airports are vital national resources. They serve a key role in trans­ portation of people and goods and in regional, national, and inter­ national commerce. They are where the nation’s aviation system connects with other modes of transportation and where federal respon­ sibility for managing and regulating air traffic operations intersects with the role of state and local governments that own and operate most airports. Research is necessary to solve common operating problems, to adapt appropriate new technologies from other industries, and to introduce innovations into the airport industry. The Airport Coopera­ tive Research Program (ACRP) serves as one of the principal means by which the airport industry can develop innovative near­term solutions to meet demands placed on it. The need for ACRP was identified in TRB Special Report 272: Airport Research Needs: Cooperative Solutions in 2003, based on a study spon­ sored by the Federal Aviation Administration (FAA). The ACRP carries out applied research on problems that are shared by airport operating agencies and are not being adequately addressed by existing federal research programs. It is modeled after the successful National Coopera­ tive Highway Research Program and Transit Cooperative Research Pro­ gram. The ACRP undertakes research and other technical activities in a variety of airport subject areas, including design, construction, mainte­ nance, operations, safety, security, policy, planning, human resources, and administration. The ACRP provides a forum where airport opera­ tors can cooperatively address common operational problems. The ACRP was authorized in December 2003 as part of the Vision 100­Century of Aviation Reauthorization Act. The primary participants in the ACRP are (1) an independent governing board, the ACRP Oversight Committee (AOC), appointed by the Secretary of the U.S. Department of Transportation with representation from airport operating agencies, other stakeholders, and relevant industry organizations such as the Airports Council International­North America (ACI­NA), the American Associa­ tion of Airport Executives (AAAE), the National Association of State Aviation Officials (NASAO), Airlines for America (A4A), and the Airport Consultants Council (ACC) as vital links to the airport community; (2) the TRB as program manager and secretariat for the governing board; and (3) the FAA as program sponsor. In October 2005, the FAA executed a contract with the National Academies formally initiating the program. The ACRP benefits from the cooperation and participation of airport professionals, air carriers, shippers, state and local government officials, equipment and service suppliers, other airport users, and research orga­ nizations. Each of these participants has different interests and respon­ sibilities, and each is an integral part of this cooperative research effort. Research problem statements for the ACRP are solicited periodically but may be submitted to the TRB by anyone at any time. It is the responsibility of the AOC to formulate the research program by iden­ tifying the highest priority projects and defining funding levels and expected products. Once selected, each ACRP project is assigned to an expert panel, appointed by the TRB. Panels include experienced practitioners and research specialists; heavy emphasis is placed on including airport pro­ fessionals, the intended users of the research products. The panels pre­ pare project statements (requests for proposals), select contractors, and provide technical guidance and counsel throughout the life of the project. The process for developing research problem statements and selecting research agencies has been used by TRB in managing cooper­ ative research programs since 1962. As in other TRB activities, ACRP project panels serve voluntarily without compensation. Primary emphasis is placed on disseminating ACRP results to the intended end­users of the research: airport operating agencies, service providers, and suppliers. The ACRP produces a series of research reports for use by airport operators, local agencies, the FAA, and other interested parties, and industry associations may arrange for work­ shops, training aids, field visits, and other activities to ensure that results are implemented by airport­industry practitioners. ACRP REPORT 76 Project 03­22 ISSN 1935­9802 ISBN 978­0­309­25857­9 Library of Congress Control Number 2012948248 © 2012 National Academy of Sciences. All rights reserved. COPYRIGHT INFORMATION Authors herein are responsible for the authenticity of their materials and for obtaining written permissions from publishers or persons who own the copyright to any previously published or copyrighted material used herein. Cooperative Research Programs (CRP) grants permission to reproduce material in this publication for classroom and not­for­profit purposes. Permission is given with the understanding that none of the material will be used to imply TRB or FAA endorsement of a particular product, method, or practice. It is expected that those reproducing the material in this document for educational and not­for­profit uses will give appropriate acknowledgment of the source of any reprinted or reproduced material. For other uses of the material, request permission from CRP. NOTICE The project that is the subject of this report was a part of the Airport Cooperative Research Program, conducted by the Transportation Research Board with the approval of the Governing Board of the National Research Council. The members of the technical panel selected to monitor this project and to review this report were chosen for their special competencies and with regard for appropriate balance. The report was reviewed by the technical panel and accepted for publication according to procedures established and overseen by the Transportation Research Board and approved by the Governing Board of the National Research Council. The opinions and conclusions expressed or implied in this report are those of the researchers who performed the research and are not necessarily those of the Transportation Research Board, the National Research Council, or the program sponsors. The Transportation Research Board of the National Academies, the National Research Council, and the sponsors of the Airport Cooperative Research Program do not endorse products or manufacturers. Trade or manufacturers’ names appear herein solely because they are considered essential to the object of the report. Published reports of the AIRPORT COOPERATIVE RESEARCH PROGRAM are available from: Transportation Research Board Business Office 500 Fifth Street, NW Washington, DC 20001 and can be ordered through the Internet at http://www.national­academies.org/trb/bookstore Printed in the United States of America

The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. On the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, on its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. The Transportation Research Board is one of six major divisions of the National Research Council. The mission of the Transporta- tion Research Board is to provide leadership in transportation innovation and progress through research and information exchange, conducted within a setting that is objective, interdisciplinary, and multimodal. The Board’s varied activities annually engage about 7,000 engineers, scientists, and other transportation researchers and practitioners from the public and private sectors and academia, all of whom contribute their expertise in the public interest. The program is supported by state transportation departments, federal agencies including the component administrations of the U.S. Department of Transportation, and other organizations and individu- als interested in the development of transportation. www.TRB.org www.national-academies.org

C O O P E R A T I V E R E S E A R C H P R O G R A M S AUTHOR ACKNOWLEDGMENTS The research reported herein was performed under ACRP Project 03­22 by InterVISTAS Consulting LLC (hereinafter referred to as “InterVISTAS”) in collaboration with subcontractor HDR Decision Eco­ nomics (hereinafter referred to as “HDR”). Dr. Michael Tretheway of InterVISTAS was Principal Investigator, and Ian Kincaid of InterVISTAS was Project Manager and primary author of the guidebook. Dr. David Lewis and Dr. Stéphane Gros were lead investigators for HDR. Dr. Richard Mudge of Delcan acted as Senior Advisor. Other project researchers involved were Nicole Geitebruegge, Steven Martin, Robert Andriulaitis, and Solomon Wong of InterVISTAS and Dr. Vijay Perincherry, Dr. Alejandro Solis, Kate Ko, and May Raad of HDR. Debbie Homonai of InterVISTAS served as Administrative Officer for the project. Amy Kvistad of Amy Kvistad Design provided graphical support, and Jane Norling of KMT Communications provided assistance with organizing, presenting, and editing the report. The authors are very grateful for the guidance and help provided by the project panel for ACRP Project 03­22. The project team would also like to sincerely thank the airports, academics, and other practitioners that contributed to the guidebook through interviews and review of the draft materials. CRP STAFF FOR ACRP REPORT 76 Christopher W. Jenks, Director, Cooperative Research Programs Crawford F. Jencks, Deputy Director, Cooperative Research Programs Michael R. Salamone, ACRP Manager Lawrence D. Goldstein, Senior Program Officer Anthony Avery, Senior Program Assistant Eileen P. Delaney, Director of Publications Doug English, Editor ACRP PROJECT 03-22 PANEL Field of Policy and Planning Frederick R. Busch, Denver International Airport, Denver, CO (Chair) Richard de Neufville, Massachusetts Institute of Technology, Cambridge, MA Naren Doshi, MMM Group, Thornhill, ON James H. Lambert, University of Virginia, Charlottesville, VA JoJo Quayson, Port Authority of New York & New Jersey, New York, NY Dipasis Bhadra, FAA Liaison Paul Devoti, FAA Liaison Kimberly Fisher, TRB Liaison

F O R E W O R D By Lawrence D. Goldstein Staff Officer Transportation Research Board ACRP Report 76 provides a guidebook on how to develop air traffic forecasts in the face of a broad range of uncertainties. It is targeted at airport operators, planners, designers, and other stakeholders involved in planning, managing, and financing of airports, and it provides a systems analysis methodology that augments standard master planning and strategic planning approaches. This methodology includes a set of tools for improving the understanding and application of risk and uncertainty in air traffic forecasts as well as for increasing overall effectiveness of airport planning and decision making. In developing the guidebook, the research team studied existing methods used in tradi­ tional master planning as well as methods that directly address risk and uncertainty, and based on that fundamental research, they created a straightforward and transparent systems analysis methodology for expanding and improving traditional planning practices, appli­ cable through a wide range of airport sizes. The methods presented were tested through a series of case study applications that also helped to identify additional opportunities for future research and long­term enhancements. Forecasting activity levels is an essential step in airport planning and financing, yet critical parameters essential for preparation of air traffic forecasts (e.g., economic growth, fuel costs, and airline yields) have recently become more volatile. For example, extreme fuel price rises experienced in 2008 led air carriers to cut air service. Price increases were followed by a sharp economic downturn, which, in turn, put additional pressure on airline yields, traffic levels, and air carrier viability. Subsequent variations in fuel prices, both up and down, have continued to result in uncertainty. In addition, continuing concerns around shock events (e.g., terrorism or health pandemics) have magnified the degree of uncertainty involved in producing reliable air traffic forecasts. The effects of changing economic conditions on air cargo demand, airline mergers and bankruptcies, and airline decisions concerning routes and hubbing activities have also affected the reliability of air traffic forecasts. The traditional approach to handling uncertainty has been to supplement base­case fore­ casts with high­ and low­case forecasts to account for a range of potential outcomes. This approach, however, provides only a cursory understanding of the risk profile and provides no detail on how unforeseen events and developments actually affect forecasts and result­ ing decisions. A critical lesson demonstrated by this research is that forecasting must con­ sider what can happen in addition to what seems most likely to happen. Thus, the research concludes that a forecasting process that is less prescriptive and more informative can be effective in addressing future risk and uncertainty while responding accordingly. Forecasts should provide more information on the type, range, and potential impacts of different future outcomes because all airports face significant risks that can have different outcomes

based on commercial decisions made by carriers. Another finding is that many of the plan­ ning options that can mitigate air traffic risk are already in use today but have never been developed into a systematic approach. Furthermore, these options can have benefits beyond just risk mitigation. For example, configuring terminal space to handle different traffic flows (such as domestic and international) can reduce the overall terminal space requirements. The guidebook concludes with recommendations for further expansion of the systems analysis framework, principally in relation to possible occurrence of rare, high­impact events and political risk. While the systems analysis methodology presented in this guide­ book reflects current approaches to deal with these two broad factors, additional research offers the potential for continuing to advance the state of the art.

C O N T E N T S 1  Summary 8 Chapter 1  Introduction 8 1.1 Purpose of This Guidebook 8 1.2 How to Use This Guidebook 9 1.3 How the Research Was Conducted 9 1.4 Related Materials P A R T I Primer on Risk and Uncertainty in Future Airport Activity 13 Chapter 2  Uncertainty in Airport Activity 13 2.1 Defining Risk and Uncertainty 14 2.2 Sources and Types of Uncertainty Facing Airports 15 2.3 Forecast Accuracy and Traditional Airport Planning 17 Chapter 3  Implications of Unforeseen Events and Conditions 17 3.1 Lambert­St. Louis International Airport 18 3.2 Baltimore/Washington International Thurgood Marshall Airport 19 3.3 Louis Armstrong New Orleans International Airport 20 3.4 Bellingham International Airport 22 3.5 Zurich Airport and Brussels Airport 23 3.6 Washington Dulles International Airport 25 Chapter 4   Approaches for Incorporating Uncertainty  into Demand Forecasting 25 4.1 Standard Procedures to Account for Uncertainty in Aviation Demand Forecasting 27 4.2 More Advanced Procedures for Incorporating Uncertainty into Forecasting 31 4.3 Is It Possible to Predict and Forecast the Impact of Rare or High­Impact Events? 33 Chapter 5   Addressing Risk and Uncertainty  in Airport Decision Making 33 5.1 Flexible Approaches to Airport Planning 35 5.2 Real­World Applications of Flexible Airport Planning 37 5.3 Diversification and Hedging Strategies 39 5.4 Assessment of the Reviewed Approaches

P A R T I I A Framework and Methodology for Addressing Uncertainty about Future Airport Activity Levels in Airport Decision Making 43 Chapter 6  Introduction 43 6.1 Overview of the Framework 43 6.2 Tailoring the Framework 46 Chapter 7  Step 1: Identify and Quantify Risk and Uncertainty 46 7.1 Categories of Airport Activity Risk and Uncertainty 46 7.2 Approach and Tools for Identifying and Quantifying Risk and Uncertainty 51 7.3 Advanced Approaches to Quantifying Probabilities and Impacts 53 7.4 Developing a Risk Register 56 Chapter 8  Step 2: Assess Cumulative Impacts 56 8.1 Developing a Model 57 8.2 Analyzing the Cumulative Impact of Risks 61 8.3 Examining Extreme Outcomes 64 Chapter 9  Step 3: Identify Risk Response Strategies 64 9.1 Overview of Risk Response Strategies 64 9.2 Specific Risk Response Strategies in Airport Planning 64 9.3 Developing Ideas for Risk Response Strategies 69 Chapter 10  Step 4: Evaluate Risk Response Strategies 69 10.1 Overview of the Assessment Approach 70 10.2 Largely Qualitative Approaches to Evaluation 71 10.3 Principally Quantitative Approaches to Evaluation 74 Chapter 11  Step 5: Risk Tracking and Evaluation 74 11.1 Tools to Assist Tracking and Evaluation 76 11.2 Updating the Risk Register P A R T I I I Applying the Methodology Using Real Life Case Studies 79 Chapter 12  Bellingham International Airport 79 12.1 Background 79 12.2 Application of the Methodology 90 Chapter 13   Baltimore/Washington International  Thurgood Marshall Airport 90 13.1 Background 91 13.2 Application of the Methodology

P A R T I V Conclusions and Recommendations for Further Research 109 Chapter 14   Conclusions and Recommendations  for Further Research 109 14.1 Conclusions 109 14.2 Recommendations for Further Research 111 Appendix A  References 114 Appendix B  Glossary 118 Appendix C  Acronyms, Abbreviations, and Airport Codes 120 Appendix D   Further Information on Approaches  for Incorporating Uncertainty  into Demand Forecasting 128 Appendix E   Flexible Approaches to Airport Planning  and Real Options 136 Appendix F   Modeling Techniques to Assess  Cumulative Risk Impacts