Transport economics Why is transport important?
Long-haul airline alliances
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- Benefits and costs
- Market share 29.3% 14.9% 20.8%
Long-haul airline alliancesAn airline alliance is an agreement between two or more airlines to co-operate for the foreseeable future on a substantial level. The degree of cooperation differs between alliances. The three largest alliances are the Star Alliance, SkyTeam and oneworld. A more recent development is the formation of alliances between cargo airlines, such as that of WOW Alliance between Lufthansa Cargo, Singapore Airlines Cargo, SAS Cargo Group and Japan Airlines Cargo. Benefits and costsBenefits can consist of: An extended and optimised network: This is often realised through code-sharing agreements. Many alliances started as only a code-sharing network. Cost reduction: This can include sharing of Sales offices Maintenance facilities Operational facilities, e.g. catering or computer systems. Operational staff, e.g. ground handling personnel, at check-in and boarding desks. Investments and purchases, e.g. in order to negotiate extra volume discounts.
More departure times to choose from on a given route. More destinations within easy reach. Shorter travel times as a result of optimised transfers. Faster mileage rewards by earning miles for a single account on several different carriers. Round-the-world tickets, enabling travelers to fly over the world for a relatively low price. Airline alliances may also create disadvantages for the traveler, such as: Higher prices when all competition is erased on a certain route. Less frequent flights, for instance when two airlines fly each three times a day on a given route, the alliance might fly only four times on the same route. The abilities for airlines to form an alliance are often restricted by laws and regulations or subject to approval by authorities. Antitrust laws play a large role. Sometimes political quid pro quo between governments is at hand.
Passengers per year 499.9 million 320 million 428 million Number of Destinations 912 692 841
Adria Airways (JP) Aeroflot (SU) Air Canada (AC) American Airlines (AA) Aeroméxico (AM) Air New Zealand (NZ) British Airways (BA) Air France-KLM Air China (CA) (AF/KL) ANA (NH) Cathay Pacific (CX) Alitalia (AZ) Asiana Airlines (OZ) Finnair (AY) Continental (CO)* Austrian Airlines (OS) Iberia (IB) Czech Airlines (OK) Blue1 (KF) LAN (LA) Delta (DL) bmi (BD) Qantas (QF) Korean Air (KE) Croatia Airlines (OU) Japan Airlines (JL) Northwest (NW) LOT Polish Airlines (LO) Malév (MA) Air Europa (UX) Lufthansa (LH) Royal Jordanian (RJ) Copa Airlines (CM) SAS (SK) To Join China Southern (CZ) Singapore Airlines (SQ) Mexicana 2009 Kenya Airways (KE) South African Airways (SA) S7 Airlines 2010 NEW SINCE Jan Spanair (JK) 2008 Swiss International Air Lines (LX) Air Europa (UX) TAP Portugal (TP) Vietnam Airlines Thai Airways International (TG) (VN) To join 2010 United (UA) *Contiental switching US Airways (US) to Star Alliance NEW SINCE Jan 2008 Eygpt Air (MS) Shanghai Airlines (FM) Turkish Airlines (TK) Membership correct as of 31/12/08 The Star Alliance is going to increase its dominance (during 2008 Star’s market share rose from 23% to 29%) with the addition of Continental from Sky, Air India, Brussels Airlines and TAM Airlines (the Brazilian national carrier). Note some major airlines are not present – particularly middle eastern airlines, but they do operate code shares. The economics of traffic congestion Congestion Congestion occurs whenever a journey has taken longer than the transport user expected (based on reasonable assumptions). As a consequence the transport system is inefficient and costly to users. In 1989 the CBI estimated the costs of congestion to industry at £15 billion a year (1989 prices). London and the south east accounted for 2/3 of this cost. This represented an average of £10 per week per household on the average budget as the higher costs of transport are passed on in the form of higher prices. Since this estimate was made costs have risen, but the figure you get depends upon how you estimate costs.20 Congestion applies to all forms of transport and is increasing as the demand for transport use grows faster than supply. The average speed of traffic in cities is falling, the chart shows average speeds in London. 
The costs of traffic congestion Traffic congestion is a market failure. External costs are imposed on society by transport users. This implies that the marginal social benefit of using cars, for example, is less than the marginal private benefit. 
The demand curve represents the marginal private benefit of using cars. 0Q1 miles are driven when price is 0P. At price 0P the social optimum is where price equals MSB or 0Q* miles. The cost of using a road has three elements: The users own costs of using the uncongested road. Congestion costs faced by the marginal road user. Congestion costs imposed by the marginal user on everyone else. The first two costs are internal the third external. The problem of congestion is that joining the traffic on a congested road costs the marginal user far less than it costs society. Take the Severn Bridge as an example. The exodus from Wales means that the bridge is very busy and the average speed out of Wales is 5 mph. Suppose 10,000 cars are trying to use the bridge and with the toll the average cost of each journey is £4. Another car joins the traffic causing all cars to move slightly more slowly and this raises the cost per journey to £4.05. The marginal private cost of this extra journey is £4.05, but the marginal social cost is 10,000 x 5p, £500, as all the other cars already on making the journey are slowed down. The market is unable to adequately pass this extra cost on to the marginal user and so congestion becomes common. (Oddly the traffic moves freely on the road into Wales.)21 In reality the costs of congestion are difficult to compute, but they include: The additional cost of journey times - these are costed more highly for worktime. Increased fuel and other running costs. Reduced vehicle productivity. Additional costs to users and operators of public transport. Higher stock levels due to less frequent and efficient delivery. The negative externalities caused by congestion, e.g. more pollution. The problem of higher distribution costs are seen as particularly serious. Slow journey times means that more delivery vehicles and staff are required to distribute goods to retail and wholesale outlets. In the case of London the CBI estimates that around twice as many delivery vehicles operate than are necessary due to congestion. These extra costs are inevitably passed on to the consumer. Policy solutions? Any policy must address a central problem as identified by Pearce et al., in Blueprint 522 . “To relieve traffic congestion it must become possible to exclude certain sorts of road users from the road network - specifically those for whom the value of the journey is less than the value of the delays they would inflict on other road users.” This is a very market oriented view, but one that draws great support. Basically Pearce is saying that consumers that only use the roads at low prices (who join the market at the bottom of the demand curve) are the ones who should be excluded. A policy that rations road use by a means other than price will not do this. Some people find this notion unacceptable. ‘Equality’ often confuses the issue. Those who can afford the highest price can pay more because they earn more. But they earn more because their value added is greatest. In other words they contribute most to the economy. Possible solutions have been proposed (not all of which meet Pearce’s criteria); Make better use of existing roads - the engineers solution. Reduce parking on busy roads, use bus lanes, park and ride schemes, etc. Build more roads - the option taken often in the past. The problem is how to fund the new infrastructure And to build it without further serious loss of other resources. Improve public transport - used extensively in some areas of Europe where they have tried to integrate their public transport network and supported this with greater public subsidy. Increase the cost of urban travel to private motorists - there are various methods of charging for road use that are possible. These can be either direct (i.e. placed directly on the road user), or indirect (i.e. paid within another charge like VAT). Indirect methods On vehicle ownership On vehicle usage Licence fee Fuel tax Tyre tax
Area licence Distance licence Shadow tolls
Automatic scanning It is very difficult to discriminate among different road users with respect to the value of their trips. Goods whose delivery is urgent or people whose time is valuable are delayed by drivers on relatively unimportant trips. A real challenge is to find a method that prioritises the important users. Road pricing The principle of road pricing is that external costs should be internalized. That is users should pay the costs they impose on others. It is effectively a tax on road users, but can be varied according to the time of day and the level of congestion. The advantage of road pricing is that it is possible to set the tax to the socially efficient level of road use. The most obvious problem is deciding on the appropriate level of charges on each mode of road transport so that the most efficient mix is achieved. An important point to make is that road pricing is not a measure to be used in isolation, but as part of an overall strategy that allows everybody to use the transport infrastructure, but reduces the large costs of congestion. 
The diagram shows how the imposition of a tax on road use will move the market to the social optimum. This does depend on the right level of tax being imposed. The ideal level of tax is where the marginal user is charged the cost of the additional congestion caused. In this case society gains the shaded area in avoided dead weight loss. In addition the government gains a tax revenue of P*ABC which is transferred to other members of society (although road users could benefit if the money is used to improve public transport for example). The optimal tax is, however, not always the same on a particular route. The demand curve at peak times moves to the right, implying a higher level of tax is optimal than at low demand periods. Sometimes the MSC curve is shows as not diverging from the MPC curve at low levels of road use. As it is difficult to imagine a situation where there are no externalities from road use this is certainly a simplification. In rural areas, however, the additional costs imposed by one more road user are very small. This diagram also shows how congestion on a road such as the M25 affects users. At certain times there are no problems, but as traffic levels rise the external costs rise and become more and more significant. 
It is important to consider the price elasticity of demand when setting road pricing levels. As most congestion occurs in urban areas or busy motorway sections during the ‘rush hour’ it is reasonable to assume that the journeys being made are important. PED is likely to be inelastic at these times and so a small rise in marginal private cost will have little effect. This means that: The toll level must be set very high to have a significant effect. The toll must be used in conjunction with other methods to make PED more elastic. Park and ride schemes, Raising parking charges, Reducing parking spaces and Improved public transport These are all possible strategies to implement at the same time. If the revenue form the road pricing scheme is hypothecated to other traffic reduction schemes then there is no cost to the general tax payer (non-road users). It has been suggested that tolls on the Severn Bridge should be varied according to the time of day according to demand. As the example above shows the optimal tax may be a significant amount at peak times. Advantages of road pricing It is a market based solution, as it takes account of consumer preferences (demand). As it is not possible to see which journeys are the most important by observation road pricing reveals this by the willingness of people to pay. Legislation would fail to achieve this. It will result in less traffic and higher speeds (unlike all the other policy options which lead to more traffic.) Revenue generated from road pricing can be used to fund improvements in public transport.
Estimating external costs of congestion is too difficult to allow accurate road pricing. The technology available to implement road pricing by electronic reading is unreliable and lanes and booths would create delays not reduce them. The level of charge must be fixed carefully to take account of the price elasticity of demand if congestion is to be reduced. Singapore - road pricing in practise Road pricing was introduced in 1974 in the central district of the city. The problem identified then was excess demand at peak times (the morning ‘rush hour’ and evening ‘rush hour’). The scheme tried to discourage use of the limited road space at peak times and also discourage use of private cars generally. A number of measures were taken. Introduction of bus lanes - this reduced the supply of road space available to private cars, but reduced bus journey times. Payment of a licence fee if a car was to be used in a certain area at peak times. The raising of car parking charges generally.
service vehicles. An import duty of 45% on new cars. A registration fee of $1000 for private cars and $5000 for company cars. An additional registration fee of 150% of the market value of the vehicle. An annual road tax based on engine capacity averaging $2000 for a private car and $4000 for a company car. Higher licence fees for company cars in the restricted area. The introduction of a Certificate of Entitlement Scheme (COE) to limit new car purchases (1990). There are a limited number of COE’s and they are auctioned, each successful bidder being able to buy at the lowest successful bid price. This further restricts the number of cars in Singapore. It has been argued that this is an inefficient way to reduce congestion as it is not ownership but when and where cars are used that is the issue. Recently the Land Transport Authority in Singapore have introduced variable tolls. Not only can tolls change according to the time of day, but they are also reviewed every three months and adjusted to account for traffic flow.23 The advent of ‘ERP’ ‘Electronic Road Pricing’ has allowed this. Electronic readers can charge cars as they pass through the barriers meaning there is no need to purchase an area licence in advance. This technology means that ERP will be easier to introduce elsewhere. The success of the Singapore scheme is impressive, but has failed to reduce the number of cars on the road. In 1982 there were 179,635 cars in Singapore, by 1992 this had risen to 285,500. Perhaps the encouraging news is that the number of buses rose from 7,585 to 9,658 in the same period. One of the lessons of Singapore is that a co-ordinated policy is required to solve the congestion problem. Practical problems in the UK The application of road pricing to Britain is not as simple as in Singapore. Singapore is a city state (and an island) which makes the scheme more like pricing in central London only. Individual cities can adopt the scheme, but it may not work on a national scale. There are essentially two different types of road pricing. Cordon schemes - appropriate for city centres. Mileage schemes - appropriate for trunk roads.
Toll booths. Electronic tags. Camera schemes If toll booths are used they will cause tail backs at peak times. Also on a road like the M25 some 30 booths would be needed in each direction, requiring a great deal of land. Electronic tags have implications for personal privacy. A tag is activated by a roadside beacon which charges according to the time of day. Such information could be regarded as an invasion of privacy as it implies that the location of individuals at certain times could be revealed to others. A system where a road user remains anonymous unless a vehicle has contravened the rules (i.e. the number plate is photographed) gets around this. This was the system adopted in London. It avoids queues on the boundaries and allows drivers to remain anonymous unless they don’t pay. Unfortunately it is susceptible to false number plates and refusal to pay. A further problem is the diversion to traffic. If ERP was introduced on motorways traffic would move to A roads. This may cause local problems and greater danger to pedestrians. When the London congestion charge was introduced there was also great concern that roads just outside the charging zone would become overloaded as people ‘skirted around’ the zone. This did not happen. Central London Congestion Charge The Mayor of London has authority over the city’s transport network. According to Transport for London 
Politically this is very difficult and runs the risk of unpopularity, Livingstone’s re-election may encourage others. London introduced a scheme to charge £5 a day to enter central London, later raising this to £8 in July 2005. This seems to have general support, but with many specific objections (such as the exact boundaries). The area is very small and it was feared that it would encourage congestion immediately outside the chosen area. However so far this has proved an unfounded fear. Initially many found it difficult to see how in an area where parking costs £6 and hour £5 a day extra will deter entry. The initial impact was a fall of between 20 and 25%. At the end of the first year this had settled down to a 18% fall in traffic during charging hours and a 15% fall in traffic overall.24 Average traffic speeds rose from 8.5mph before the charge was imposed to 10mph in 2006. The improvement of public transport is crucial for the scheme to work and at present there is controversy over the future of the tube. Other methods, such as trams and improved buses are being considered.25 What follows is considerable detail of the scheme which some of you may find useful. Why a charging scheme was needed * Every weekday morning in Central London too many vehicles were trying to use too few roads * There is no possibility of building more roads in the centre of London * Drivers spent up to 50% of their time crawling in jammed traffic * Congestion in London was costing business about £2 million a week * Static and slow traffic generates more air pollution and produces more carbon dioxide, the greenhouse gas. This has resulted in a general loss of amenity for Londoners in terms of quality of life on the streets * No one would deny that congestion in London was causing frustration and raising stress levels Aims of the charging scheme * Reduce traffic where it is most congested by between 10-15% year-round, ie to school summer-holiday levels * Reduce delays by 20-30% * Make delivery times more reliable * Save 2-3 million hours of journey time annually inside the zone and a further 4-7 million hours in the area between the zone and the North and South Circular roads * Raise £1.3 billion over the first 10 years for re-investment in all forms of transport in London, including roads, buses, local streets and railways * Increase public transport use in the central area by 1-2% * Pay for itself within 18 months of starting Charging times Charges were initially made between 7am and 6.30pm, Monday to Friday - excluding Public Holidays. This was changed to 6pm with the extension of the scheme. Charging costs The charge is £8 a day for which vehicles can enter and leave the zone any number times on the same day. Exemptions A discount of 90% is available to residents living in the zone. There is complete exemption for: * Disabled persons with a Blue Badge * Vehicles used by certain NHS staff and patients. * Emergency service vehicles * Motorbikes and mopeds * Hackney carriages (black cabs) and London licensed mini-cabs * Buses and coaches with nine or more seats * The cleanest alternative fuel vehicles (band 4 as defined by the Powershift Register, www.powershift.org.uk) and electrically propelled vehicles * Breakdown vehicles in use to provide roadside assistance or recovery services operated by independently accredited organisations (eg AA, RAC, Green Flag) An assessment of the impact of the London Congestion Charge Despite concerns beforehand the scheme has been a success. Some people oppose it, but this is confined to those who simply do not want to pay the charge and those who must work either side of the boundary. After one year the following can be concluded: Traffic patterns are now settled. Traffic delays within the zone average 30% lower than before the charge was introduced. During the charging period traffic entering the zone are 18% down. Nitrogen Oxide emissions from traffic down 12%, carbon dioxide by 19%. Traffic diverting outside the zone has not caused problems. Public transport is coping well with ex-car drivers (principally the extra bus capacity) Buses have benefited from less congestion within the zone with up to a 60% reduction in disruption caused by traffic delays. 60% of businesses surveyed supported the continuation of congestion charging (given continued investment in public transport) only 20% opposed it. There is only minimal impact on retailers. An average of 165,000 penalty charge notices are issued each month! Of the 65,000 to 70,000 fewer car trips made each day between 50% and 60% have transferred to public transport, 20 to 30% divert around the zone and 15 to 25% have made other arrangements such as changing the time of trips. Bus passengers arriving in the zone is up 37%. The Institute for Public Policy Research published ‘In the fast lane’26 in July 2004. This basically covers similar ground to the CfiT view on a national charging scheme. It did include a CBA of the London Congestion Charge which is reproduced below. Preliminary estimates of costs and benefits of central London congestion charging £m per year
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