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

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

114 Aeronautical Revenue: Revenues that an airport derives from activities associated with flight operations (e.g., aero- nautical fees, ground handling). Airport City/Aerotropolis: Airport cities involve the devel- opment of multiple, and often complimentary, commercial and industrial activities on airport land that may benefit from the transportation linkages that the airport offers, including logistics centers, free trade zones, manufacturing, offices, retail, hotels, and recreational facilities. Airport Master Plan: Documented concept for the long- term development of an airport, providing the strategy for future airport development capable of meeting forecasted future aviation demand. Air Service Development (ASD): ASD describes a variety of activities focusing on retaining the existing air service or improving air access and capacity. It also involves all activi- ties directly related to enhancing commercial passenger ser- vice at an airport. Air Traffic Control: Service provided by ground-based con- trollers who direct aircraft on the ground and in the air. Availability Heuristics: Availability heuristics guide indi- viduals toward choices that are easily available from a cog- nitive perspective: if it is easy to remember, it must make sense. Benchmarking: Benchmarking is a management tool that compares performance and processes of a sector, an industry, or a firm to other similar sectors, industries, or firms. Beta Distribution: The beta distribution allows for a skew to the data, either upward or downward, and therefore can be used to represent risks where, for example, the upper extreme is further from the median than the lower extreme. Bilateral Agreement: Air service agreement normally between two nation states. Black Swans: High-impact events that are impossible to pre- dict or anticipate. Brainstorming: A technique used to find a solution for a specific problem by spontaneously allowing solutions to come to mind, either individually or in a group setting. Call Options: An investment term meaning that investors have the right (but not the obligation) to buy a stock, gener- ally to take advantage of a good situation. Capital Cost: Capital costs define costs that occur when pur- chasing land, as well as building, construction, and equipment costs. Common-Use Self Service (CUSS): CUSS kiosks can be installed around the airport as well as off-site (e.g., transit stations, parking lots). CUSS kiosks cut down space require- ments and allow for greater flexibility. Common-Use Terminal Equipment (CUTE): CUTE allows the airport to reassign gates and check-in counters without having to address individual airlines’ computer systems. Correlation: Correlation is a statistical measure analyzing the relationship of two variables. Usually, possible correla- tions range from +1 to -1, where a zero correlation indicates that there is no relationship, a correlation of +1 indicates a perfect positive correlation, and a correlation of -1 indicates a perfect negative correlation. Cost–Benefit Analysis: Cost–benefit analysis is used to ana- lyze large infrastructure projects (e.g. airport developments). Cost–benefit analysis determines a ranking of different options by calculating the ratio of benefits and costs. Decision Tree: Decision trees illustrate cumulative impacts of events and decisions. They contain chance nodes, decision nodes, and end nodes to represent a set of competing alterna- tives and help assess their implications. Decision trees model the relationships between states of nature, the decisions for- A p p e n d i x B Glossary

115 absolute minimum and maximum are calculated as a func- tion of the distribution. Gross Domestic Product (GDP): A measure of the total national income and output of an economy. Heat Diagram: Also referred to as “qualitative risk assess- ment matrix.” Visual aid that assists in determining risk probabilities and impacts. Hedging: Hedging is taking a position to offset and balance against a particular or general risk. Airlines often use hedging strategies to reduce exposure to fuel price increases. Histogram: A histogram is a graphical representation con- sisting of rectangles whose area is proportional to the fre- quency of a variable. Hub airport/Hubbing: A hub airport is one that an airline (or many airlines) use as a transfer point to get passengers to their intended destination. It is part of a hub-and-spoke model, where travelers moving between airports not served by direct flights change planes en route to their destinations. Indirect Impact: An indirect impact is observed when the occurrence of an event indirectly affects the activity at the air- port (e.g., global economic recession, increase in jet fuel prices). Intermodal Facilities: An intermodal facility is defined as a place where interface occurs between transportation systems. Land Banking: Land banking involves reserving or pur- chasing land for future development to allow the option to expand the airport as traffic grows. Linearity Heuristics: Linearity heuristics make individuals seek simple cause-and-effect relationships in everything. Low-Cost Carrier (LCC): Also known as a no-frills or bud- get carrier, these are airlines that typically offer low fares for an air service with lower levels of service than traditional network or legacy carriers. Although there is considerable variation in the business models, LCCs typically operate a single aircraft type (to reduce training and maintenance costs), do not offer first- or business-class travel, do not provide in-flight services such as meals and entertain- ment (or offer them at additional charge), and emphasize point-to-point travel offering limited connecting options. Examples include Southwest Airlines, JetBlue Airways, and Allegiant Air in the United States and EasyJet and Ryanair in Europe. Market Share Analysis: A technique used to forecast local activity as a share of some larger, aggregated forecast. Mean: A mean is the mathematical average of a set of numbers. Monte Carlo Simulation: Monte Carlo simulation (or the Monte Carlo method) is a computerized simulation technique mulated depending upon each of the states, and the expected outcomes of the series of actions taken. Delphi Forecasting: Delphi forecasting is a qualitative fore- casting method based on an elicitation technique incorporat- ing the opinions of a group of experts. It is defined by four key features: anonymity, iteration, controlled feedback, and the statistical aggregation of group responses. Direct Impact: The occurrence of an event directly affecting the activity of the airport (e.g., destruction of airport infra- structure by a hurricane or the downsizing of an airline). Discrete Distribution: A distribution where each potential outcome is represented by a single value and a corresponding probability, where the sum of all probabilities is equal to 1. Downside Risk: When actual volumes are below forecasted volumes. Econometric Modeling: Statistical techniques that exam- ine the relationship between traffic and possible explanatory variables. Elicitation Process: A process that helps experts construct a set of carefully reasoned and considered judgments. Empirical Error: Observed errors from historical forecasts (i.e., the difference between actual values and prior forecasts of those values). Enplanements: The total number of passengers boarding aircraft at a given airport (or within a geographic area or country) over a specified period of time. Expected Value: The expected value of a random variable is the weighted average of all possible outcomes. Explanatory Variable: An explanatory variable (also inde- pendent variable) is used in a relationship to explain or to predict changes in the values of another variable (the depen- dent variable). Extrapolative Methods: Statistic methods that seek to iden- tify data patterns in the variable of interest. Financial Options: In a financial context, options allow inves- tors the right to acquire or to sell an asset (e.g., stock) at a speci- fied price during a specified time frame. General Aviation (GA): GA is civil aviation operations such as business aviation, private aircraft, specialized air chart, flight training, and air ambulance. Generalized Triangular Distribution: The generalized tri- angular distribution is often used for event risks and uses the median, lower percentile (such as 10%) and upper percentile (such as 90%) as input parameters. Based on these param- eters, a triangular distribution is fitted to the data, and the

116 Regression Analysis: Explanatory variable method that introduces causal variables to explain and forecast the vari- able of interest. Reference Class Forecasting: Reference class forecasting involves evaluating (or even developing) a forecast for a par- ticular project by referencing it against actual outcomes from a group of similar projects. Revenue Diversification: Revenue diversification involves an airport modifying and diversifying its products to reduce its dependence on aeronautical revenues and thus potentially reduce overall volatility. R-Squared Statistic: The R-squared statistic is a measure between 0 and 1 of how well a regression line approximates real data. The closer the R-squared value of a model is to 1, the greater is the ability of that model to predict a trend. Scenario Analysis: Scenario analysis is a process of analyzing the impact of future events by considering alternative possible outcomes. Sensitivity Analysis: In a sensitivity analysis, the forecasting assumptions are varied one at a time and the resulting changes in projected outcomes (e.g., passenger demand forecast) are reported accordingly. Shock Event: A shock event is an unpredictable, infrequent event with potentially significant impacts (such as wars, terrorist attacks, or geopolitical instability). Simulation: A technique involving the use of complex mod- els that evaluate different snapshots of a travel network. Stakeholder: An individual or business that has an interest in an airport. Key stakeholders may include airport manage- ment, airlines, resident companies, tourism industry, and neighboring communities. Standard Error: The standard error measures the accuracy with which a sample represents the whole. Statistical Groups: Statistical groups are used to perform one-time surveys of experts’ opinions, without any interac- tions among the experts. Structure and Logic (S&L) Diagram: S&L diagrams are graphical representations of models reflecting cause-and-effect relationships among economic, financial, demographic, policy, and political factors. Swing gate: A swing gate is a gate that can be converted from domestic to international traffic (or between types of inter- national traffic) on a daily basis. System Analysis: The goal of a system analysis is to deter- mine the most efficient method for a specific procedure. that makes use of randomization and probability statistics to investigate problems involving uncertainty. Net Present Value (NPV): NPV is a means of producing a single monetary value for an option based on the future cash flow stream (both incoming and outgoing—hence “net”). Nominal Group: Refinement of experts’ opinions by a series of survey-based sessions; experts are allowed to interact. Non-Aeronautical Revenue: Revenues that an airport derives from activities not associated with flight operations (e.g., car rental, parking fees, concessions). Normal Distribution: A normal (also Gaussian) distribution describes random variables that tend to cluster symmetrically around a single mean. O/D Traffic: Origin/destination traffic. In aviation, this refers to the traffic between two cities or countries where the origin is the starting point of the air journey and the destination is the final destination of the air traveler. As such, it does not include connecting traffic at the origin or destination. For example, O/D traffic between the United States and the UK would cap- ture the total traffic that started in the United States and ended in the UK (and vice versa in the other direction). It would not include passengers starting in the United States and connecting in the UK en route to other destinations (e.g., Germany). Open Skies: An Open Skies air service agreement creates a very liberal market between the two signatory nations. It allows any number of airlines from either nation unlimited rights to fly between any city-pair involving the two countries, without sig- nificant restrictions on capacity, frequency, or price. Percentile: A percentile is the value of a variable below which a certain percent of observations fall (e.g., the 10th percentile determines the value below which 10% of the observations fall). PERT Distribution: A PERT distribution is a special form of the beta distribution. The PERT distribution uses the medi- an, minimum (or lower percentile, such as 10%), and maxi- mum (or upper percentile, such as 90%) as input parameters. Probability Distribution: A probability distribution repre- sents a range of possible values along with an estimate of how likely these different outcomes may be. Put Option: An investment term meaning that investors have the right (but not the obligation) to sell a stock, generally to get out of a bad situation. Real Options: The concept of real options is based on and developed from financial options. A real option is the right, but not the obligation, to take a certain course of action. Qualitative Risk Assessment Matrix: See “Heat Diagram.”

117 Unknown Unknowns: Unknown unknowns are conditions or events that no one knows the existence of before the con- ditions or events actually materialize or are discovered. The term was popularized following its use by former Secretary of Defense Donald Rumsfeld (in a press briefing on February 12, 2002). See also Black Swans. Upside Risk: When actual volumes exceed forecasted volumes. Variance: Variance is a measure of how far a set of numbers is spread out. What-If Analysis: Also known as impact analysis. An estimate of the impact of a single event (such as an economic downturn, a rapid increase in fuel prices, or a health pandemic) on the variable of interest (e.g., air passenger traffic). Time-Series Method: Trend extrapolation using statistical techniques that rely on lagged and contemporaneous traffic data to infer future values. Tornado Diagram: Tornado diagrams are designed to help identify critical factors by ranking risk variables (threats and opportunities) by their expected impact. t-Statistic: The t-statistic is the regression coefficient (of an explanatory variable) in ratio to its standard error. If the t-statistic is greater than 2, it can be concluded that the vari- able in question has a significant impact on the dependent variable (i.e., the variable is significant). Uniform Distribution: A uniform distribution describes random variables where all values within a range of potential outcomes have the same probability.