Mark Wardman

EUROCONTROL Abigail Bristow

Experimental Centre Jeremy Toner
Geoff Tweddle

Review of Research Relevant to

Rail Competition for Short Haul
Air Routes

EEC/ENV/2002/003

EUROCONTROL
 Review of Research Relevant to Rail Competition for Short Haul Air Routes

Mark Wardman, Abigail Bristow, Jeremy Toner, Geoff Tweddle

Institute of Transport Studues, University of Leeds, UK

EEC/ENV/2002/003

ii

© European Organisation for the Safety of Air Navigation EUROCONTROL May 2002

This document is published by EUROCONTROL in the interest of the exchange of information. It may be copied in
whole or in part providing that the copyright notice and disclaimer are included.
The information contained in this document may not be modified without prior written permission from
EUROCONTROL.
 REPORT DOCUMENTATION PAGE

Reference: Security Classification:

EEC Note No. EEC/ENV/2002/003 Unclassified
Originator: Originator (Corporate Author) Name/Location:
Ted Elliff EUROCONTROL Experimental Centre
Environmental Studies Business Area Centre de Bois des Bordes
B.P.15
91222 BRETIGNY SUR ORGE CEDEX
France
Telephone: +33 1 69 88 75 00
Sponsor: Sponsor (Contract Authority) Name/Location:
EUROCONTROL EUROCONTROL Agency
Rue de la Fusée, 96
B –1130 BRUXELLES
Telephone: +32 2 729 90 11
TITLE: Review of Research Relevant to Rail Competition for Short Haul Air Routes

Authors : Date Pages Figures Tables Appendix References

Mark Wardman
Abigail Bristow May 197 5
Jeremy Toner 2002
Geoff Tweddle
EATMP Task Specification Project Task No. Sponsor Period
- - 2002

Distribution Statement:
(a) Controlled by: EUROCONTROL Project Manager
(b) Special Limitations: None
(c) Copy to NTIS: YES / NO
Descriptors (keywords):
Demand modelling; Environmental Valuation; Air/Rail competition; Freight; Low Cost Carriers; Hubbing

Abstract: This report addresses several loosely related subjects associated with an envisaged sustainable
growth of the aviation sector. As well as examining the issue of replacing some air routes with high-speed rail, this
study informs on the state of research for valuing the environmental effects of transport. It also looks at how certain
aspects of the air market have stimulated demand on some routes, in particular the impact of low cost carriers and
the practice of hubbing by the major operators.
.
 Table of Contents

REPORT DOCUMENTATION PAGE .................................................................................... III

TABLE OF CONTENTS...........................................................................................................V

1. INTRODUCTION............................................................................................................... 1
1.1. Objectives of the Review................................................................................................ 1

2. OVERVIEW OF THE PRINCIPLES OF TRANSPORT DEMAND MODELLING.......... 3

2.1. Introduction...................................................................................................................... 3
2.2. Observation...................................................................................................................... 4
2.2.1. Aggregate Data ............................................................................................... 4
2.2.2. Disaggregate Data .......................................................................................... 5
2.3. Explanation ...................................................................................................................... 8
2.3.1. Aggregate Models ........................................................................................... 9
2.3.2. Disaggregate Models .................................................................................... 15
2.4. Application ..................................................................................................................... 20
2.4.1. Inter-Attribute Valuation................................................................................. 21 v
2.4.2. Demand Forecasting ..................................................................................... 22
2.5. Comparison of Data Sets and Techniques................................................................ 25
2.5.1. Aggregate versus Disaggregate Methods ..................................................... 25
2.5.2. Revealed versus Stated Preference Methods............................................... 26
2.5.3. Stated Preference versus Contingent Valuation ........................................... 28

3. REVIEW OF DEMAND MODELLING ........................................................................... 31

3.1. Introduction and Objectives ........................................................................................ 31
3.2. Scope .............................................................................................................................. 32
3.3. Aggregate Models ......................................................................................................... 34
3.3.1. Air Demand Forecasting................................................................................ 34
3.3.2. Rail Demand Forecasting.............................................................................. 37
3.3.3. Competition between Rail and Air ................................................................. 38
3.4. Behavioural Choice Models: Modelling Rail and Air Competition ......................... 42
3.4.1. Data Used ..................................................................................................... 43
3.4.2. Journey Purposes Covered........................................................................... 44
3.4.3. Modes Covered ............................................................................................. 44
3.4.4. Attributes Covered......................................................................................... 46
3.4.5. Perceived and Engineered Values and Misperceptions................................ 47
3.4.6. Functional Form ............................................................................................ 48
3.4.7. Other Choice Contexts .................................................................................. 50
3.4.8. Model Outputs ............................................................................................... 51
 3.4.9. Summary....................................................................................................... 57
3.5. Behavioural Choice Models: Valuation Studies........................................................57
3.6. Monitoring Studies ........................................................................................................59
3.7. Rail’s Position as a Competitor to Air ........................................................................63
3.7.1. Observed Competition .................................................................................. 64
3.7.2. Forecast Competition .................................................................................... 67
3.7.3. Summary....................................................................................................... 70
3.8. Rail as a Complement to Air ........................................................................................70
3.9. Data Sources..................................................................................................................74
3.9.1. Data for Aggregate Models ........................................................................... 74
3.9.2. Data for Disaggregate Models ...................................................................... 75
3.9.3. Data for Application....................................................................................... 75
3.10. Conclusions ...........................................................................................................76

4. VALUING THE ENVIRONMENTAL EFFECTS OF TRANSPORT..............................85

vi 4.1. Environmental Impacts of Transport..........................................................................86
4.1.1. Why value environmental impacts? .............................................................. 86
4.2. Valuation Methods.........................................................................................................88
4.2.1. Revealed Preference Approaches ................................................................ 89
4.2.2. Hypothetical Market Choices ........................................................................ 91
4.2.3. Alternative Cost Approaches......................................................................... 96
4.3. Valuation Studies...........................................................................................................98
4.3.1. Hedonic Studies of Noise.............................................................................. 98
4.3.2. Hedonic Studies of Air Pollution.................................................................. 100
4.3.3. Conclusions on the Hedonic Pricing Approach ........................................... 101
4.3.4. Contingent Valuation Studies of Noise........................................................ 102
4.3.5. Contingent Valuation Studies of Air Pollution.............................................. 103
4.3.6. Contingent Valuation of Climate Change .................................................... 103
4.3.7. Conclusions on CVM................................................................................... 104
4.3.8. Stated Preference Studies of Noise and Air Pollution................................. 104
4.3.9. Conclusions on Stated Preference.............................................................. 108
4.3.10. Consequential Cost Studies of Air Pollution ................................................ 109
4.3.11. Shadow Pricing of Noise ............................................................................. 109
4.3.12. Conclusions................................................................................................. 110
4.4. Application Studies .....................................................................................................110
4.4.1. Optimal Charges for Noise at Airports ........................................................ 110
4.4.2. Charges for Air Pollution from Aircraft......................................................... 111
4.4.3. Charges for All Externalities........................................................................ 114
4.4.4. Assessing the Costs and Benefits of Policy ................................................ 116
 4.4.5. Modal Comparisons .................................................................................... 117
4.4.6. Corridor Studies .......................................................................................... 118
4.5. Conclusions ................................................................................................................. 120

5. THE AIR TRANSPORT MARKET ............................................................................... 129

5.1. Overview ....................................................................................................................... 129
5.2. Low Cost Carriers ....................................................................................................... 132
5.2.1. Introduction.................................................................................................. 132
5.2.2. Characteristics of the LCCs......................................................................... 133
5.2.3. Analysis of the European LCCs .................................................................. 135
LCC Market Positioning ............................................................................................. 137
5.2.5. Impacts of the LCCs.................................................................................... 141
5.2.6. Conclusions................................................................................................. 142
5.3. Hubbing, network structure and airport development........................................... 143
5.3.1. The Structure of the European Aviation Network ........................................ 143
5.3.2. Capacity, Congestion and Traffic Growth.................................................... 146
5.3.3. Summary ..................................................................................................... 148
vii
5.4. Possible future scenarios .......................................................................................... 149
5.4.1. Environmental charges................................................................................ 149
5.4.2. Concentration in the airline industry ............................................................ 150
5.5. Conspectus .................................................................................................................. 151

6. OVERVIEW OF POTENTIAL FOR RAIL MOVEMENT OF AIR FREIGHT .............. 157

6.1. Overview of the Research on the Subject ............................................................... 158
6.1.1. Review of Previous Related Work............................................................... 158
6.1.2. Defining High-Speed Rail Freight and Networks......................................... 161
6.1.3. Premium Freight Traffic Currently on Rail ................................................... 162
6.2. Potential Rail Use by Air Freight Market Sectors ................................................... 166
6.2.1. General Air Freight Characteristics ............................................................. 166
6.2.2. Road Feeder Service Characteristics.......................................................... 168
6.2.3. Prospects for Shifting General Air Freight to Movement by Rail ................. 168
6.2.4. Problems for Air Freight Using Rail ............................................................. 170
6.3. Potential Transfer of Air Mail Traffic to Rail ............................................................ 171
6.3.1. Characteristics of European Mail ................................................................ 171
6.3.2. Characteristics of Domestic Postal Services Within European Countries ... 172
6.3.3. Prospects for Shifting Postal Traffic to Rail ................................................. 173
6.3.4. Problems for Postal Traffic Using Rail......................................................... 174
6.4. Couriers and Integrators ............................................................................................ 174
6.4.1. Characteristics of Courier and Integrator Operations.................................. 174
 6.4.2. Prospects for Transferring Courier and Integrator Traffic to Rail ................ 177
6.4.3. Problems for Courier and Integrator Traffic Using Rail ............................... 178
6.5. Express Road Freight .................................................................................................178
6.5.1. Characteristics of Express Road Freight Operations .................................. 179
6.6. Data Sources and Methodology Available for Future Studies..............................180
6.6.1. Data Sources .............................................................................................. 180
6.6.2. Methodology Available for Future Studies .................................................. 181
6.7. Direction of future research .......................................................................................182
6.8. Conclusions .................................................................................................................184

viii
 1. Introduction

1.1. Objectives of the Review

The objectives of this research are to provide Eurocontrol with a thorough understanding
of the state of the practice in transport research relating to the possibilities for replacing
short haul air services with rail services.

The review will provide an authoritative statement which informs Eurocontrol of the
methodologies, data sources, previous studies and market characteristics, and research
opportunities in areas in which it wishes to develop its interests. This will enable
Eurocontrol to determine research needs and directions relevant to its strategic interests.

This is a piece of desk research, concentrating on previous studies, existing

methodologies and available data sources, and does not involve the conduct of fresh
empirical research.

The background to the review is that there is increasing recognition within the aviation
industry that the air route network is becoming saturated, and that further significant
growth in the numbers of aircraft movements may be increasingly resisted due to the
environmental consequences. In addition, congestion at airports will become an
increasing problem. Thus attention turns to the possibilities of meeting the demand for
travel over short haul routes by high speed rail services.

This review covers a number of different topics relevant to the broad area of rail
competition for the short haul air market. 1
Chapter 2 provides an overview of the principles of demand modelling, covering the
techniques that can be used to examine competition between rail and air as well as those
used to forecast growth in the relevant markets.

Chapter 3 reviews demand modelling practice, with particular emphasis on the modelling
of air demand, rail demand and competition between them. Developments in high speed
rail are of particular interest in transferring traffic from air to rail. The chapter covers the
available evidence in the different areas of aggregate modelling and behavioural choice
modelling, as well as examining studies which have monitored actual competition
between rail and air. It also considers rail as a complement as well as a competitor to air.

Chapter 4 provides a thorough overview of the state of the art in the valuation of the
environmental impacts of transport, with particular emphasis on rail and air travel. The
focus of the discussion is on noise, local and regional air pollutants and CO2 emissions.
We distinguish between what we term valuation studies, which have estimated values of
environmental attributes, and application studies, which have used values to conduct
appraisals of actual environmental situations.

Chapter 5 deals with the air market and reviews developments in this market. It provides
advice in three areas of the scheduled air passenger market. These are: the evolution and
impact of low cost airlines; the possible impact of likely future regulation scenarios; and
developments in hubbing, network structure and airport development.

Chapter 6 provides an overview of the potential for rail movement of air freight. Previous
work in this area has demonstrated that the air freight market is not homogeneous and the
potential for transfer of traffic to rail varies between the various market sectors. This
chapter reviews the potential for transfer in general air freight, road feeder services, mail
and postal traffic, and the courier and integrator markets.
2
 2. Overview Of The Principles Of Transport Demand Modelling

This chapter sets out the principles of transport demand modelling. We build upon this in
the next section by reviewing practical demand studies relevant to rail competition for
short haul air routes.

The structure of this chapter is as follows. After the discussion of some background issues
in section 2.1, we describe various types of data upon which demand models can be
estimated in section 2.2. Sections 2.3 and 2.4 respectively discuss the issues of model
estimation and model application whilst section 2.5 considers the relative merits of
different forms of data and modelling approach.

2.1. Introduction

Although the principles are essentially the same, we make a distinction between what are
termed aggregate and disaggregate models. Aggregate models are based on the
aggregated behaviour of individual decision makers, an example being the total number
of air trips between, say, London and Paris which is made up of the behaviour of all those
individuals in London who decided to make a journey to Paris and who chose to travel by
air. Disaggregate models make the individual decision maker the unit of observation. An
example is the analysis of different individual’s choice between taking a short break in
Paris, Brussels or Amsterdam and whether to travel by air, rail or car.

We also make a distinction between the type of data upon which the model is estimated.
Data may represent changes in behaviour over time, differences across individuals or 3
locations at a given point in time, or indeed a combination of the two. In addition, it can
represent what individuals actually do in the market place or their stated responses to
hypothetical situations.

Travel behaviour involves choices along a number of different dimensions. The most
commonly examined dimension is that of mode choice, but travel behaviour is the
outcome of choices between a whole range of other alternatives, including destination,
day and time of departure along with time away, ticket type and class of travel, route,
operator and indeed whether to make the journey or not. Where public transport is
concerned, there are additional choices involved in accessing and egressing the main
mode. Decision making and hence modelling can be complex where a large number of
alternatives need to be accounted for.

Another important distinction to make is according to the use to which the demand model
is put. The most obvious purpose for developing travel demand models is to forecast
demand in future time periods, but they can also be used to determine the relative
importance of different service quality and cost attributes. The latter enables the product
being offered to be tailored to the needs of particular market segments and to support the
economic appraisal of transport investments and policies.

The principles of demand analysis can be separated into the three component parts of:

z Observation
z Explanation
z Application
The first stage of demand modelling is that of data collection, where we observe some
form of travel behaviour and the factors that influence it. We then need to explain the
observed travel behaviour. This involves the estimation of a quantitative relationship using
 an appropriate statistical technique which identifies the separate effects of the various
explanatory variables (stimuli) on travel demand (response). Once this relationship has
been estimated, the model can be applied to evaluate the impact upon demand or the
consequences for economic well-being of changes in any of the explanatory variables
contained in the model.

This discussion of the principles of demand modelling will follow the above categorisation
into observation (section 2.2), explanation (section 2.3) and application (section 2.4),
although we shall see that these various aspects are inter-related. In so doing, we will
distinguish between:

z Aggregate and disaggregate models

z Type of data
z Number of choice dimensions examined

2.2. Observation

Our measure of travel behaviour and associated explanatory variables may be purposely
collected to support demand analysis, which is termed primary data, or it may have been
collected for some other purpose, which is termed secondary data. Aggregate data tends
4 to be secondary whilst disaggregate data tends to be primary.

2.2.1. Aggregate Data

Aggregate data represents collective behaviour such as the total number of air travellers
between two points or the market share of air or an airline on a particular route. It may be
time series, such as the number of quarterly departures from an airport over a number of
years, or cross-sectional, such as the market share of air on a number of different
corridors.

There are different levels of aggregation which, as we shall see, support analysis in
different degrees of detail. The aggregate data may represent the volume of trips, the
amount of expenditure or market shares. Examples of aggregate data relevant to air travel
include:

z Official statistics on the number of international departures by mode. These might be

survey based or determined from returns supplied by operators or airports.
z Official statistics, purpose collected origin-destination data or commercially available
and survey based information on the number of trips at an inter-regional, corridor or
route level, with a breakdown according to mode used.
z Airport figures of passenger throughput along with information on the number of
flights.
z Operators’ records of the volume of traffic on each of its routes along with the service
quality offered and range of fares charged. This information might also be available by
ticket type, class of travel and departure flight.
2.2.2. Disaggregate Data

Disaggregate data is based around the choices made by decision makers, which can be
individuals, households, groups or organisations. Although in principle it can involve the
observation of how decision-making varies over time, the vast majority of studies are
based on cross-sectional comparisons of what different decision makers do.

Disaggregate data often take the form of choices amongst discrete alternatives, but it can
also represent the number of trips or the amount of expenditure at the individual level.
Examples of disaggregate data are:

z Data specifically collected in surveys of travellers concerning the travel choices they
make, the number of trips they undertake or the amount of money spent, along with
information on the factors which influence behaviour.
z Records of individuals’ choices, such as the holiday destination chosen from those
offered by an operator or the operator, ticket and departure time chosen from all those
available.
z Data collected for other purposes, such as information obtained by government
agencies for planning purposes. The census is an example, and in the British context
there is the national travel survey, family expenditure survey and British household
survey, although the relevance to air travel is limited.
When we operate at this disaggregate level of individual or household decision making, 5
we have the additional opportunity of collecting information on behaviour from
hypothetical but experimentally controlled conditions.

The traditional approach to demand analysis has been to observe travel behaviour in an
actual market place. This is termed revealed preference (RP) since individuals reveal
through their actions the importance they attach to the attributes such as time and cost
which characterise each alternative. If there are two flights, the only difference between
them being that one is 2 hours quicker but is £50 more expensive, then an individual who
chooses the faster (slower) service reveals that they value travel time more (less) than
£25 per hour.

We could obtain the same information if respondents were offered a hypothetical situation
with two flights differing by 2 hours and £50 and they stated which flight they would prefer.
This approach is termed stated preference (SP) in transport research but it is widely
referred to as conjoint analysis.

Stated Preference

Stated Preference (SP) refers to a family of data collection techniques where a decision
maker is offered hypothetical alternatives (also termed options) to evaluate and these
alternatives are characterised by attributes (also termed variables). The evaluation of the
alternatives requires trade-offs to be made; for example, travel alternative 1 is superior in
terms of cost and service frequency but alternative 2 is quicker and more accessible, and
as a result of the trade-offs between attributes, the respondent’s evaluation of the
scenarios offered indicates the relative importance attached to each attribute.

Unlike RP data, where we typically have only one observation of behaviour per person,
SP methods collect multiple observations by offering the respondent a series of scenarios
to evaluate. How the respondent evaluates the different alternatives on offer provides the
 key difference between different specific forms of SP technique. It is the response
supplied by the respondent that indicates their overall preference. The following response
scales are used:

z Choice
z Ranking
z Rating
Choice exercises typically offer the respondent two alternatives between which a choice is
made, although in some cases choices amongst three alternatives are offered, and
generally between eight and twelve different sets of choices (or comparisons) are offered.

An example of a comparison offered as part of an SP choice exercise based on

competing air and train services is as follows. The plane is quicker but more expensive,
less accessible and less frequent.

AIR TRAIN
Travel Time 50 minutes 2 hours 10 minutes
Fare £120 £80
Access/Egress 60 minutes 30 minutes
6 Frequency 4 a day Hourly
SP exercises are not restricted to the key travel attributes. An example of a more detailed
SP exercise which deals with different degrees of train integration with an air service is
given below.

TRAIN A TRAIN B
Time to Airport 2 hours 2 hours 30 minutes
Through Tickets No Yes
Through Luggage No No
Coach Transfer Yes No
The evaluation respondents are asked to provide may instead require that alternatives are
ranked in order of preference. Ranking exercises tend to be restricted to within-mode
scenarios. An example of an alternative that might be ranked in an exercise dealing with
the facilities provided on rail services which feed into airport hubs is given below.

Time on Train 2 hours

Remote check-in No
Reserved coach Yes
At seat service No
Meal provided Yes
Respondents are typically asked to rank between eight and twelve of these alternatives in
order of preference. However, some have experimented with ‘mini-rankings’, where say
four alternatives are ranked in order of preference and the respondent is given a series of
these ranking exercises.

The rating scale response can either be a semantic or metric scale. The former involves a
response scale such as definitely prefer option A or B, probably prefer option A or B, and
no preference. However, it is essentially the same as the choice approach. The metric
rating approach requires that each alternative is rated on a numerical scale such as 0-100
but it is not widely used.

As far as the total number of attributes is concerned, this is largely driven by the choice
context under consideration and the key objectives of the study. However, it is widely held
that there are limits to the number of attributes that can be covered by any one SP
exercise and few practitioners present more than five attributes at a time. If the study
requires that more than five attributes are analysed, separate SP exercises are used
which between them cover all of the variables of interest.

By far the most widely used response scale in economic applications is choice, although
the ranking approach remains popular in marketing research. The metric rating approach
is rarely used in transport applications, largely due to economists’ scepticism with the
reliability of rating scales.

Although ranking exercises tend to provide more information than choice exercises, at
least in principle, since the number of choices implicit in most rankings far exceeds the
number of choices made in a choice exercise, there are strong reasons for preferring the 7
choice approach. These are:

z Ranking exercises are more difficult than choice exercises and hence the responses
supplied can be expected to be less reliable. At best, this will reduce the confidence
that can be placed in the parameters estimated to the data, but more seriously it could
also lead to biased estimates of some parameters.
z In real world decision-making, it is choices which are made and there is rarely if ever a
need to rank alternatives in order of preference. Given the artificial nature of ranking
exercises, regardless of them being more difficult tasks, we would again expect the
quality of the responses supplied to be lower than for choice data.
z If we wish to forecast behaviour, rather than to simply estimate the relative importance
attached to each attribute, and given that behaviour is the outcome of choices, there
are compelling reasons for using a choice rather than a ranking SP exercise.
Whatever the form of SP exercise used it is widely recognised that it is important to make
it as realistic as possible. Considerable attention is usually paid to the realism of the
variations in the attributes both across different scenarios and between alternatives within
any scenario and to providing the respondent with plausible reasons why such variations
occur. Attempts are also usually made to ensure that, where the SP exercise is based
around an actual journey, the times, costs and levels of other relevant attributes are
tailored around the circumstances of the actual journey.

Stated Intentions and Willingness to Pay

We conclude this section by considering two other means of obtaining observations of

behaviour from hypothetical situations. These are the stated intentions (SI) and
willingness to pay (WTP) methods. Both are far less commonly used than SP.
 The SI approach simply asks respondents what they would do if faced with a particular
situation. The key difference between this approach and the SP approach is that there is
no explicit comparison against some other alternative. For example, a traveller might be
asked whether they would use a remote check-in facility if it were available or whether
they would make use of a low-cost airline to a particular destination. In some situations,
the approach further differs from SP in that it does not offer trade-offs across attributes: an
example is where a respondent is asked whether a journey would still be made if the cost
increased by a certain amount. The most common application of SI is to evaluate demand
for a previously unavailable alternative.

The WTP approach asks what is the most that an individual would be prepared to pay to
obtain some benefit or to avoid the loss of a benefit. It is widely used in the valuation of
environmental attributes, such as air quality, noise and recreational amenity, where it is
termed the contingent valuation method (CVM). We cover this in more detail in chapter 4
dealing with environmental valuation. It differs from the SP approach in that, in general,
only two attributes are considered: the variable which is being purchased and the units in
which it is being purchased. The latter is usually money but it could also be time. Thus the
WTP approach could take the form of asking how much an individual is prepared to pay to
save 15 minutes journey time or to ensure that flight connections are maintained or, in
time units, how much journey time they would be prepared to sacrifice in return for more
reliable services or better on-board facilities. A further difference is that the SP approach
elicits a choice or ranking which indicates only the order of preference whereas the WTP
8 approach obtains a response which indicates the strength of preference.

A special case of the WTP approach that has been used in transport is the transfer price
(TP) approach. This takes the form of asking what price increase would be just sufficient
to cause the respondent to switch to the next best alternative, all other things equal.
Alternatively it could ask what reduction in the price of some alternative is just enough to
attract the traveller to use it. The question can also be framed in terms of other continuous
variables, such as changes in journey time. The TP approach differs from the WTP
approach in that it is more explicitly behavioural, since it identifies the point where a
change in behaviour occurs, and there is no trade-off across attributes since nothing is
gained in return for the price increase.

The SP approach has a number of attractions and some drawbacks in comparison with
the RP approach based upon what individuals actually do. This is also true of the SI and
WTP approaches. Since some of these issues relate to the explanation (modelling) and
application stages, and are best appreciated after we have discussed all the aspects of
transport demand modelling, we shall leave them to a separate discussion in section 2.5.

2.3. Explanation

Once we have observed some form of travel behaviour and the factors which we believe
have an influence on it, we must estimate a quantitative relationship between the stimuli,
termed independent variables, and the response, termed the dependent variable, using
some appropriate statistical method.

Such a method will indicate the contribution that variations in each independent variable
make to the variation in our observation of behaviour. Thus parameters need to be
estimated which indicate the relative importance of each variable.
The procedure used to estimate these parameters should provide the most precise
(lowest variance) estimates for the amount of data available and should also provide
diagnostics to indicate how much confidence we can place in the parameter estimates
and how well the parameters taken together explain the variation in the behaviour we
have observed.

The quantitative relationship should also exhibit realistic properties and be as robust as
possible to errors in the data and to the assumptions we make about the relationship
between behaviour and the factors that influence it.

2.3.1. Aggregate Models

Aggregate models are based on collective behaviour, such as the number of trips or
market shares. Since these are the aggregated outcomes of the choices made by
individuals, we therefore need not concern ourselves greatly with the process used by
individuals in arriving at their travel choices since we are trying to explain what individuals
do in aggregate rather than what each individual does.

Given that the dependent variable is continuous, aggregate models can be estimated by
multiple regression analysis. This provides coefficient estimates and measures of the
degree of confidence that can be placed in the parameter estimates along with a measure
of the goodness of fit achieved in terms of how well our model can explain variations in 9
demand.

The only assumptions we need to make in aggregate modelling are that there is some
relationship between demand and the factors that influence it that can be estimated and
that can be made sufficiently general to apply to a cross-section of different routes and
which is stable over time. We will have some expectations about whether an attribute has
a positive or negative influence on demand. We expect that demand for some product
(here transport services) will increase when there is an improvement in an attribute
associated with that product and will fall when an attribute associated with that product
gets worse. We will also have views on what are plausible magnitudes of the effects of
variables on demand which are useful in interpreting the model output.

The aggregate models we consider are direct demand models, market share models and
the traditional multi-stage transportation models.

Direct Demand Models

Direct demand models conflate the various aspects of travel decision making, relating to
whether to travel (generation), where to travel to (distribution), which mode to use (mode
choice), which route to use (route choice) and various other choice dimensions into a
single demand equation. We subsequently consider models which deal with these
dimensions as separate stages.

A general form of model for the demand (V) for a particular mode (m) between two
locations (i and j) in a certain time period (t) can be specified as:

Vijmt = f (Git A jt X ijmt Z ij1t Z ij 2t ........Z ijnt )

(2.1)
 The Git variables represent the generating potential of the origin i. Clearly, the size of the
population in the origin will determine the number of trips it generates, but so will its socio-
economic characteristics and in particular we would expect that the level of income will
have a strong influence on the volume of trips.

The Ajt variables represent the attracting potential of the destination. Again population is
expected to have a strong influence upon the number of trips to a particular destination.
Other important variables are the level of business activity at the destination and its
shopping, recreational and cultural features.

Xijmt covers a range of attributes which represent the cost and service quality
characteristics of mode m which are specific to travel between i and j. We might think of
this as some composite term or as a series of separate terms. The concept of generalised
cost (GC) is widely used to conflate the effects of various attributes into a single term to
represent the overall attractiveness of, in this case, a mode of travel between i and j.

In the case of a short haul flight, the GC expression for air (a) might take the form:

GC ija = C ija + O ija + α T ija + β H ija + γ A ija + δ W ija + λ P ija + µ S ija (2.2)
C and O denote the cost of the flight and the costs involved in getting to and from the
airport. T is the flight time, H is the headway between planes, A is the time spent getting to
10 and from airports and W is the amount of airport walking and waiting time. The weight
attached to A might depend upon the modes used to get to and from airports whilst W
might be split into walk and wait time. P represents any influence from different types of
plane whilst S is some measure of the level of on-board service provided.

The overall measure is in units of costs, and all the non-monetary variables have a weight
to convert them into equivalent cost units. Thus α is the money value of time. Note that
the GC term does not have to take this linear-additive form whilst the demand model
could instead contain separately each of the attributes in equation 2.2.

The Z variables in equation 2.1 represent the degree of competition to air travel between i
and j from n other competing activities and products. Again, this might be an overall
composite measure, such as the generalised cost of competing modes, or else it could be
a series of separate variables relating to specific features of the competing modes such
as their cost and journey time.

The number of competing products that sensibly need to be covered will depend on the
level of detail in which the demand model is specified. The more detailed the model, the
more there is a need to allow for competition between other products. If the demand
model relates to the number of short haul air trips between a series of i’s and j’s, then the
main competitor might be expected to be rail and perhaps car. If the demand is more
specific and relates to air travel by British Airways, then additional competitors are rival
airlines. If the demand model is yet more detailed, relating to, say, the demand for APEX
tickets by British Airways between i and j, then the competitors are not only other modes
and airlines but other British Airways ticket types. Indeed, we might also consider
specifying separate terms for a range of different ticket types offered by the competing
modes and airlines.

Our aggregate demand model can therefore operate at different levels of aggregation. In
addition to the dimensions considered above, aggregate demand models might also split
by other choice dimensions such as route, departure time or departure day. We specify
below some examples of possible air demand models to illustrate the points made above.

The demand for air departures from a country in any time period (Vat) might be
represented as:

Vat = µPtα GDPt β Ft γ C tδ (2.3)

P represents the countries population and GDP is gross domestic product. We would
expect that the number of international air departures increases as either the population of
a country or its wealth increase. F denotes the number of flights departing and C is some
measure of the cost of air travel. As the number of flights increases or the real cost of air
travel falls, we would expect demand to increase. A more sophisticated model formulation
might distinguish between scheduled and charter services for both F and C, or indeed
separate demand models might be estimated for the two categories. We then might
additionally distinguish between journey length, such as European short-haul and
international trips.

In the multiplicative model of equation 2.3, the coefficients associated with each attribute
are interpreted as elasticities. Elasticity is an important concept in demand forecasting,
and is defined as the proportionate change in demand after the proportionate change in
some variable. Hence β is the elasticity of demand to GDP, indicating how sensitive
demand is to GDP changes. We shall further discuss elasticities in section 2.4.
11
As we have pointed out, the more detail we have about demand then so the number of
explanatory variables increases. As an example, suppose we wish to explain the demand
for travel by British Airways (BA) between various locations (i and j) on short haul routes
by APEX tickets (x). Let us also assume that, unlike equation 2.3 which is estimated to
time series data, we only have information on demand for a single year. We now must
explain why demand varies over a cross-section of routes as a function of variation in
explanatory variables across routes rather than explaining variations over time. The
demand model might be specified as:

m
V ijBAx = Pi α P jβ GDP i
γ δ
C ijBAx θ
F ijBAx ∏
k =1
C ijkλ k F ijkη k (2.4)

Key determinants of the number of trips between i and j will be the population in the origin
i and in the destination j. Other variables might be introduced to represent specific
features of the origin and destination. The level of income in a zone will also have a strong
influence on trip making. The other terms then represent the level of fare and service
quality of the British Airways APEX ticket and competing products. We have here simply
represented these by their cost (C) and the frequency of service (F). There are m
competing products, which could be other tickets offered by British Airways, the tickets
offered by rival airlines and competing rail and road services1.

In this multiplicative model, the λi and ηi are interpreted as cross-elasticities. These

denote the proportionate change in the demand for some product after a proportionate
change in the fare or service quality characteristics of a competing product.

1 In practice, direct demand models generally contain limited or no representation of

competition from other products.
 When we have to deal with data which has a cross-sectional dimension, one of the key
factors to explain is the difference in the size of different flows, and thus generation and
attraction effects become particularly important. The problem is that they are not always
easy to specify. For example, the catchment area of an airport, and hence origin and
destination populations, are not immediately apparent. There may be competition from
other airports whilst a given population will have a higher propensity to generate air trips
the nearer it is to the airport. In addition, some of the factors which influence generation
and attraction, such as the level of local facilities, and tourism and business opportunities
at the destination, are not easily represented and are often proxied by other variables
such as the number of hotel beds or employment levels.

The main advantage of cross-sectional data is that there is often considerable variation in
the attributes which allows for the estimation of more precise coefficients than otherwise.
Moreover, if we need to estimate the absolute number of trips, the issues of catchment
areas and generating and attracting potential must be addressed.

Time series models can often ignore generation and attraction effects which are specific
to catchment areas on the grounds that they vary little over time. However, a problem is
that some of the other variables which we are interested in might also exhibit insufficient
variation over time and hence reliable effects cannot be estimated. Time series models
are important in the analysis of the impact of changes in attributes over time, which is
often what we wish to forecast, and can examine lags in demand adjustments which
12 cannot be examined in cross-sectional models.

Models which pool data over time and cross-sectionally achieve the advantages of both
forms of data and are becoming increasingly popular. They also have the advantage of
being based on more data than if analysis is restricted solely to a cross-section or a time
series.

Aggregate Market Share Models

In some situations, there might be an interest in the market share of two or more
competing products and the degree of competition between them. For example, it may be
that the growth in the demand for long distance journeys can be estimated by various
means, but there is a need to know how much of this traffic might be captured by a new
high speed rail service. There is therefore a requirement for a mode choice model, and at
the aggregate level this is based on market shares. For example, there may be data
relating to the market shares of air, rail and car across a number of different routes.

The most common means of analysing the market share of different alternatives is the
multinomial logit model. This takes the form:

Z1ij
e
S1ij = n
(2.5)
∑e
k =1
Z kii

The market share of alternative 1 (S1ij) on a route is a function of its attractiveness (Z1ij)
and the attractiveness of all n alternatives. The model therefore deals explicitly with
competition. In turn, the attractiveness of each alternative is a function of a number of
relevant explanatory variables. If we were analysing the competition between air and
other modes, the attractiveness of air might be specified as:
 Z ija = τ C ija + η O ija + α T ija + β H ija + γ A ija + δ W ija + λ Pija + µ S ija (2.6)
where the terms are the same as for equation 2.2. Note that again we can impose weights
on each of the attributes whereupon Z becomes some kind of composite term such as
generalised cost or else we can enter each of the independent variables separately
whereupon the model directly estimates the parameters associated with each attribute.

Since this approach analyses the share of competing alternatives, it is not necessary to
have the generation and attraction terms that were apparent in Equation 2.1. The form of
equation 2.5 is such that the model will always forecast market shares which lie between
0% and 100%. This would not be the case if market share was simply regressed on
relevant explanatory variables.

The model can be applied to the analysis of choice contexts other than mode, such as
destination choice, route choice, airline choice, ticket type choice and other choice
dimensions. Whilst it is generally the case that where such market share models are
estimated in practice they address a single choice context, they can in principle be applied
to the analysis of more than one context, such as the joint consideration of mode and
destination.

Aggregate ‘Multi-Stage’ Models

The direct demand model described above conflates the various different choice aspects
into a single model. However, the classic transportation model has several stages dealing 13
with each of the aspects of choice separately. The model typically has four stages. Trip
generation and attraction models determine the number of trips that will be generated by
an origin and attracted to a destination. These are then allocated to particular i-j
movements using a trip distribution model. A mode choice model then allocates the trips
to different modes and, where car travel is concerned, the traffic is assigned to different
routes.

The models are not always independent of each other, as with the joint treatment of mode
and destination choice or the generation and distribution of trips, and the ordering can
differ. The models typically contain the four stages listed above, since they tend to be
estimated in the urban context. However, in the inter-urban and international context,
models dealing with operator choice, ticket type choice and other aspects would be useful
additions.

Trip generation models at the aggregate level explain the number of trips generated in an
origin in terms of its population and the average levels of socio-economic characteristics
such as income, car ownership and employment. Ideally it should contain a measure of
the cost of travel but this is often difficult to represent. The trip generation model for long
distance trips where rail and air compete might be expressed as:

Vit = f ( Pit , Yit , SE kit ) (2.7)

Vit is the volume of trips generated in some origin zone in period t. It is here dependent
upon the population in the zone (P), some measure of the average income of the origin
population (Y) and various (k) socio-economic indicators (SE), such as the proportion in
professional and managerial occupations and unemployment levels.
 Trip attraction models (trips generated to a destination) take a similar form, and aim to
explain the number of trips that each destination attracts in terms of factors such as zonal
population and land use characteristics such as employment levels, some measure of
retail facilities, school places and measures of the cultural, recreational and tourist
features of the destination. In the context of long distance trips where rail and air compete,
variables relating to tourism and business activity would be particularly important.

These generated and attracted trips are then allocated to movements between the
various combination of i origins and j destinations using a trip distribution model based
around some measure of impedance or deterrence. This might take the form of the
generalised cost of travel between i and j. Places that are farther away from each other
will capture less of the generated and attracted trips. The model can impose constraints
so that the sum of trip originating in origin i is consistent with the trip generation stage and
the sum of the trips to destination j is consistent with the trip attraction stage. The form of
this ‘doubly constrained’ trip distribution model could be:

Vijt = Git A jt Oit D jt f (GC ijt ) (2.8)

Where Git is the number of trips generated in the origin, Ajt is the number of trips attracted
to the destination, and Oit and Djt are balancing factors which ensure, to some acceptable
degree of accuracy, that the sum of trips to all destinations equals Git and the sum of trips
from all origins equals Ajt.
14
Alternatively, the trip generation/attraction and distribution stages can be combined to
obtain a model which aims to explain simultaneously how many trips are generated and
attracted between specific origins and destinations.

The mode choice stage involves the use of the market share model of equation 2.5
discussed above to allocate i-j demand to various modes. The number of trips between i
and j by air (Vijat) would then be:

Z ijat
e
Vijat = n
Vijt (2.9)
∑e
Z ijkt

k =1

Alternatively, mode and distribution can be examined simultaneously by combining the trip
distribution functions for each mode across modes so that the model predicts the number
of trips between i and j by mode.

The assignment stage traditionally involves the allocation of car journeys to routes. A
least-cost principle is used, based around say generalised cost, or else some market
share model. The principal can be extended to choice aspects relevant to public transport
modes.

We have seen that various stages can be combined, such as trip generation and
distribution, and trip distribution and mode choice. If we combine all the stages, we obtain
the single stage direct demand model discussed above and represented at a quite
disaggregated level by equation 2.4.
2.3.2. Disaggregate Models

Disaggregate models make the individual decision maker the unit of observation. Thus we
might explain the different mode choices across individuals as a function of the different
cost and service quality characteristics of each mode faced by each individual and also in
terms of their trip and socio-economic characteristics. As we pointed out in section 2.2,
these choices can be actual ones made in the market place or else responses to
hypothetical situations.

We examine three broad categories of disaggregate model. The first deals with the
discrete choices made by individuals in a single choice context, the second deals with
choices made in a multiple choice context and the third deals not with choice but rather
the number of trips made at the individual or household level.

Discrete Choice Models: Single Choice Context

Disaggregate choice models have to make stronger assumptions about how individuals
make decisions because they attempt to explain differences in behaviour across
individuals rather than the outcome of what groups of individuals do. It is assumed that
individuals choose that alternative from the n on offer to them which yields maximum
utility (U) or satisfaction. Thus individual i chooses alternative 1 if:

U i1 > U in for all n, n ≠ 1 (2.10) 15

In turn, the utility for each alternative is made up of the part-worth utilities associated with
a range of explanatory variables. In the case of the choice between air and rail on short
haul flights, the utility of air for individual i could be represented as:

U ia = θ C ia + θ O ia + α T ia + β H ia + γ A ia + δ W ia + λ Pia + µ S ia (2.11)
The variables are the same as those defined for equation 2.2 and the coefficient weights
denote the relative importance of the variables. As with aggregate models, we will have
some expectations as to the sign of the coefficient estimates. Given that travel is a ‘bad’,
and is undertaken as a means to an end, we can talk in terms of the disutility of an
alternative. Thus a variable which as it becomes larger is disliked more, such as cost, will
have a negative coefficient weight whereas a variable which is liked more as it increases,
such as service frequency, should have a positive coefficient. A number of things should
be noted about this utility function.

Firstly, overall utility is a linear-additive function of the utilities associated with each
variable. Whilst this is the default form of utility function, a wide range of other functions
with different properties can be specified. Secondly, the coefficient weights can vary
across alternatives. In this case, we might expect a minute of air time to have a greater
disutility than a minute of train time, on the grounds that trains are more comfortable.
Thirdly, we can convert the utility expression in 2.11 into a generalised cost (GC)
expression simply by dividing through by the cost coefficient (θ). Finally, we can include
socio-economic and trip characteristics in the utility function in order to better explain
choices. For example, we could allow the journey time and cost coefficients to vary across
individuals according to their journey purpose, since business travellers can be expected
to be more sensitive to time and less sensitive to cost than leisure travellers.
 Although the utility function can contain a large number of variables, the demand analyst
cannot possibly observe all the influences on each individual’s choices, whilst others are
difficult to measure or too minor to merit inclusion. An error term (εi) is therefore
introduced to represent the net effect of the unobserved influence on an individual’s
choices. Hence as far as we are concerned, individual i bases decision making on what
might be termed random utility (RUi) which is made up as:

RU i = U i + ε i (2.12)
As analysts, by definition we can proceed only by observation of Ui, yet this ignores the
influence of what is to us unobservable. We cannot be sure that alternative 1 is preferred
if it has the highest Ui, yet the analysis must proceed on the basis of this observable
component of utility alone.

The way forward is to specify the problem as one of explaining the probability of an
individual choosing a particular alternative. We would expect the likelihood of choosing
alternative 1 to increase as its overall random utility increases. The probability that an
individual chooses alternative 1 (Pi1) from the n on offer can be represented as:

Pi1 = Pr ob[(U i1 + ε i1 ) > (U in + ε in )] for all n, n ≠ 1 (2.13)

By assuming some probability distribution for the εn, the probability of choosing alternative
16 1 can be specified solely as a function of the observable component of utility. Assuming
that the errors associated with each alternative have a type I extreme value distribution
and are independently and identically distributed yields the familiar multinomial logit model
(MNL):

e ΩU i1
Pi1 = n
(2.14)
∑e
k =1
ΩU ik

This is the disaggregate equivalent of the aggregate market share logit model of equation
2.5. Where choices are made amongst just two alternatives, the logit model simplifies to:

1
Pi1 = Ω (U 2 −U1 )
(2.15)
1+ e
The coefficients in the disaggregate logit model’s utility function are estimated by the
technique of maximum likelihood to provide the best explanation of individuals’ discrete
choices. The parameter Ω is a scaling factor which applies to all the coefficients. The
purpose of Ω is to allow for the effects of the unobserved factors on choices. It is related
to the standard deviation of the residual component associated with each alternative (σk)
as:

Π
Ω= (2.16)
6σ k
The greater the unobserved influence on choices, the smaller is Ω and hence the
observable variables will have less influence.
More sophisticated estimation techniques allow for the parameters in the utility function
having a distribution across the sample rather than assuming them to be fixed across all
individuals, although the use of such models is comparatively rare. Similarly, some
estimation techniques allow more flexible forms of utility function to be estimated.

The attraction of the logit model is that it is relatively simple to estimate and apply and
there is a widespread availability of estimation software. One of its main drawbacks is
what is termed its independence from irrelevant alternatives property. This stems from its
restrictive assumption that the error term is independently and identically distributed
across alternatives, but it only applies where there are more than two alternatives. To
illustrate this problem, suppose there are only two modes, namely car and bus. Their
relative logit choice probabilities are:

Pc
= e Ω (U c −U b ) (2.17)
Pb
This ratio is unaffected by the expansion of the choice set. For example, if a train service
is introduced and captures x% of the market, both car and bus will be predicted to lose x%
of their market. However, this is clearly an undesirable feature of the model if we expect
the new train to have a larger impact on the numbers using bus than car. The same
potentially undesirable feature applies where there is an improvement to an existing
service and it will reduce the demand for all other alternatives by the same proportionate
amount. 17
Another way of saying the same thing is that the cross-elasticities are all equal. Recall that
the cross-elasticity denotes the proportionate change in the demand for an alternative
after some change in the characteristics of a competing alternative. In our example, the
cross elasticity of bus demand with respect to the characteristics of rail is forced to be the
same as the cross elasticity of car demand with respect to the characteristics of rail.

This property of the cross-elasticities being equal is a very serious limitation of the logit
model when we are dealing with more than two alternatives2. Various solutions with
differing degrees of complexity exist. The most common solution is the hierarchical or
nested logit model. This involves the specification of a hierarchical structure where
alternatives that are more similar are combined within a ‘nest’. This allows for differential
rates of substitutability between modes that are within nests compared to between modes
which are in different nests. Thus in our example of mode choice involving car, bus and
train, we would specify the hierarchical structure as:

2 The problem rarely arises in SP models since these are almost always based on
choices between just two alternatives. It is also more of a problem for forecasting than it is
for estimating relative valuations such as the value of time.
 Car Rail Bus

Rail and bus are combined in a public transport nest, since these two modes are most
similar. The logit model formulation would therefore specify the probability of using car as:

1
Pc = U pt −U c
(2.18)
1+ e
Upt denotes the utility of public transport. However, there is no such alternative as public
transport; it is simply a combination of rail and bus. We therefore need some composite
measure of the combined attractiveness of rail and bus. This is specified as:

U pt = θ log(eU b + eU r ) (2.19)
and is termed the logsum or expected maximum utility (EMU). The parameter θ is
18 estimated by the model and effectively indicates the degree to which the cross-elasticity
between, say, car and train will differ from the cross elasticity between bus and train. If θ is
one, the model collapses to the MNL. The lower is θ, then the lower are the cross-
elasticities between car and the public transport modes.

From equation 2.18 we can obtain the probability of using car and public transport (Ppt = 1-
Pc). We can then obtain the probability of using, say, bus as:

1
Pb = Ppt (2.20)
1 + eU t −U b
The hierarchical structure does not imply that individuals decide in a hierarchical fashion.
It is simply a modelling procedure that yields cross elasticities which do not suffer from
undesirable properties of the MNL model.

In this case, the cross-elasticity of car demand with respect to rail characteristics (across
nests) will be lower than the cross elasticity of bus demand with respect to rail
characteristics (within nest). In the MNL model, the cross elasticity of car demand and bus
demand with respect to, say, rail cost (Ct) are both:

∂ P c C t ∂ Pb C t ∂U t
η= = = - Pt Ct (2.21)
∂ C t P c ∂ C t Pb ∂C t
For hierarchical logit, the cross elasticity of bus demand with respect to rail cost is the
same as equation 2.21 but the cross elasticity of car demand with respect to rail cost is
now weighted by the parameter θ.

∂ Pc C t ∂U t
η= = - Pt θC t (2.22)
∂ C t Pc ∂C t
The model can be applied to a wide range of choice contexts, such as the choice of
mode, route, destination, number of trips to make or whether to make one, ticket type,
operator and time of travel amongst other things. In the vast majority of practical studies,
only a single choice context is examined. However, more than one choice context can be
examined simultaneously and it is to this issue that we now turn.

Discrete Choice Models: Multiple Choice Context

In our discussion of aggregate models, we considered direct demand models which

recognise various different aspects of choice. For example, we outlined a demand model
which related to air as a mode, British Airways as an operator and Apex as a ticket type
and contained a large number of cross-elasticity terms. This model therefore covers the
choice dimensions of mode, operator and ticket type. The latter may cover choices
relating to day of travel, time of travel and time away.

Although disaggregate choice models are typically estimated to a single choice context,
they can cover a number of different choice contexts simultaneously. As far as the
multinomial logit model is concerned, this is a straightforward process, since the
denominator term in equation 2.14 is simply extended to cover the required choices. Thus
the n alternatives might be combinations of mode, departure time and ticket type.
However, as the number of alternatives increases, the IIA property of MNL will increase
since there will be a greater range of cross-elasticities. In this example, an improvement in
the cost of a particular ticket type at a certain departure time for say air will reduce the
demand for all other combinations of ticket type, departure time and modes by the same 19
proportionate amount.

The hierarchical logit model can be extended to cover different choice dimensions, whilst
recent developments in discrete choice modelling have addressed the issue of dealing
with multiple alternatives and obtaining sensible and flexible cross-elasticity properties. An
example of a hierarchical logit model applied to choices of whether to travel by air or rail,
whether to travel first or second class and what time to depart (D1, D2, D3) is given

Air Rail

Class 1 Class 2 Class 1 Class 2

D1 D2 D3 D1 D2 D3 D1 D2 D3 D1 D2 D3

below.

The same principles apply as for the simple mode choice example of hierarchical logit
previously given. A composite utility is need to represent air and rail, and in each case it is
 made up of the combined attractiveness of first and second class travel by that mode. In
turn, the attractiveness of any class of travel by a particular mode is made up of the
combined attractiveness of different departures. In the example here, the model would be
explaining choices between 12 alternatives. Note that many other hierarchical structures
could be used; for example, placing departure time above class of travel, or combining
mode and class of travel into a single nest. Each will have different cross-elasticity
properties. It is an empirical issue, to be determined by appropriate statistical tests, as to
which is the best structure.

Individual Trip Models

The aggregate demand models discussed previously have equivalent forms at a

disaggregate level. Whereas aggregate models take the number of trips across
individuals as the dependent variable, we could instead develop models to the trip making
behaviour of individuals or households rather than their choices.

Thus a household trip generation model may explain the number of trips per week, month
or other time period of a particular type, such as urban, inter-urban or international, that a
household makes. The independent variables would include household characteristics
such as income, household size and structure, employment status, car ownership and
social class, along with land use related factors such as population density and location.
The model could further distinguish by, say, mode used, destination and journey purpose.
20 As with aggregate models, the more detailed the definition of trips, the more it is possible
to enter the time and cost characteristics of the journey and the characteristics of
competing products. However, the more detailed the model then the rarer the events. For
example, the number of shopping trips made by car per week might be a rare event.
Alternative forms of regression, such as Poisson regression, or indeed discrete choice
analysis of, say, 0, 1, 2 and 3 plus trips, would then be appropriate.

As an alternative to the number of trips as the dependent variable, there might be

instances where it is appropriate to specify the dependent variable to be the total distance
travelled, the distance per trip or the amount of expenditure.

2.4. Application

After we have observed and measured some form of travel behaviour, and have
developed statistical models to explain that behaviour in terms of a range of travel, socio-
economic and land use characteristics, we can apply the results of the modelling exercise.
There are two reasons why travel demand models are estimated:

z For the purpose of inter-attribute valuation

z For the purpose of demand forecasting
We consider each of these aspects of application separately.
2.4.1. Inter-Attribute Valuation

Inter-attribute valuation is concerned with the importance of different attributes in relation

to each other. We referred to this in section 2.2.2 when discussing trade-offs between
flight times and fares. If an individual is indifferent between a 10 minute time saving and a
50 pence cost saving, we can deduce that their money value of time is 5 pence per
minute. Similarly, if they are indifferent between 5 minutes in-vehicle time saving and 3
minutes of waiting time saving, we can deduce that their valuation of waiting in equivalent
in-vehicle time units is 1.67.

Although in principle aggregate models can be used for the purposes of inter-attribute
valuation, it is far more common that disaggregate models are used. The parameters of
the utility function of a disaggregate choice model indicate the impact that each attribute
makes on overall utility and hence the relative importance of different attributes can be
deduced in the above manner.

As a general principle, but here based upon the utility function of equation 2.11, the
marginal monetary valuation3 of time (MVoT) would be derived as:

∂U (2.23)
α
MVoT = ∂ T =
∂U θ
∂C 21
whereas the marginal valuation of headway in units of time (TVoH) would be:

∂U (2.24)
β
TVoH = ∂ H =
∂U α
∂T
The relative values are here constant because the utility function is linear-additive. It might
be more realistic that the values are not constant; for example, those on international
flights are more willing to pay to save time than those on short haul flights. This would
require that a different form of utility function was specified that permitted variations in the
value of time.

The principal reasons for inter-attribute valuation are:

z to obtain valuations in some numeraire, usually monetary terms, which allow schemes
to be appraised. For example, cost benefit analysis of road schemes requires money
values of time in order to calculate the monetary benefits to users of a new or
improved road which can be assessed against the financial costs of building and
maintaining the road. Similarly, valuations of environmental attributes would be
entered into social appraisals of, say, aircraft noise.
z to identify the best attributes that should feature in a product; for example, to
determine the necessary features of a rail service integrated into international flights.

3 that is the valuation of a very small change in time

 z to provide weights to variables to enable composite terms, such as the generalised
cost of equation 2.2, to be calculated which can then be used for modelling and
demand forecasting purposes.

2.4.2. Demand Forecasting

Having determined the effects of a range of variables on demand, we are in a position to

use the model directly to predict what demand would be for scenarios characterised by
the variables in our model.

Aggregate Models

As far as aggregate models are concerned, we can simply substitute into, say, equation
2.3 above values for P, GDP, F and C for the forecasting scenarios of interest and we will
obtain an estimate of the number of international air departures in a particular time period.
Where multi-stage models are concerned, the same principle is followed but applied to
several linked models.

Aggregate models can, and often are, applied in an incremental fashion, effectively using
the elasticity estimates to forecast the impact of changes in variables on changes in
demand. Taking again equation 2.3, the growth in demand between two time periods (1
22 and 2) in international air departures would be:

α β γ δ
Va 2  P 2   GDP2   F2   C2 
=        (2.25)
Va1  P1   GDP1   F1   C1 
If a variable does not change, we can ignore it and instead focus simply on the variables
whose effect on demand we wish to forecast. Hence less information is generally required
when using this incremental approach to forecasting.

Aggregate models are therefore relatively straightforward to apply, although considerable

efforts may be needed in building up networks of i-j movements with their associated
travel, socio-economic and land use characteristics.

Disaggregate Models

As with aggregate models, disaggregate models can be used to forecast the absolute
number of trips or in an incremental fashion to forecast changes in the number of trips.
We illustrate the method with reference to a single choice context relating to mode. The
principles are the same for the application of models that relate to multiple choices,
although the information requirements needed to use these models will be greater.

Forecasting with disaggregate models is more complicated. This is because of the non-
linear relationship between probability and utility. We will obtain biased forecasts if we
simply use average figures for times and costs across individuals rather than forecasting
demand for each individual and then summing across individuals.

Let us assume (simply for ease of exposition) that the choice context we wish to forecast
for contains only the two variables of time and cost relating to two modes A and B. The
logit model utility function we have estimated is given by:
 U A = −0.2 − 0.02TimeA − 0.01CostA (2.26a)
UB = − 0.02TimeB − 0.01CostB (2.26b)
The scenarios that two individuals would face are set out in the table below along with the
averages of the times and costs in the final row. For each individual, we can substitute the
times and costs into equations 2.26a and 2.26b to obtain UA and UB which are then
entered into the logit function of equation 2.15 to obtain probabilities of choosing
alternative A (PA) for each individual for the scenarios faced. Individual 1 has a probability
of choosing A of 0.646 whilst the probability of choosing alternative A for individual 2 is
0.931. The true share of alternative A is the average probability of choosing A across the
sample of 0.789. However, if we had used the average times and costs to calculate
utilities and entered these into the logit function, the forecast probability of choosing A
would be 0.832.

Person TimeA CostA UA TimeB CostB UB PA

1 30 100 -1.8 20 200 -2.4 0.646
2 40 200 -3.0 30 500 -5.6 0.931
Average 35 150 -2.4 25 350 -4.0 0.832
The appropriate method of forecasting is to estimate probabilities for each individual in the
sample and then to aggregate. This is termed the sample enumeration method. However,
it does require much more information since the characteristics relevant to the forecasting
situation must be known for each individual in the sample rather than using representative 23
averages.

The above procedure calculates forecasts of absolute choice probabilities. There is then the
issue of knowing the total market size to which the probability is applied. For example, if we
have predicted that rail will capture 30% of the market for short haul business trips, we need
to know the total number of business trips in order to calculate demand for the rail service.

We can also apply the model incrementally, which as with the corresponding aggregate
approach requires less information. One way to proceed is to use the elasticities implied by
the choice model. We gave the form of the cross-elasticities implied by a logit model in
section 2.3. The own point elasticity of demand for, say, rail with respect to the cost of rail,
which denotes the sensitivity of rail demand to rail cost, implied by a logit model is:

∂ ∂U
η = Pt C t = (1 - Pt ) t Ct (2.27)
∂ C t Pt ∂Ct
Elasticities for other modes, and with respect to other variables, can be similarly derived.
Note that the own (and cross) elasticities implied by the logit model can vary considerably
across different situations, in stark contrast with aggregate models which typically specify
constant elasticities. The logit elasticities vary according to the level of the variable to which
the elasticity relates (Ct in equation 2.27) and the market share of the mode in question (Pt)

Another approach is to use the logit model in incremental form. This would express the
probability of using rail in the forecast period as:

Prb e ∆U c
Pr =
f
(2.28)
Prb e ∆U c + Pcb e ∆U b + Pab e ∆U a
 Probabilities in the forecast and base periods are denoted by the f and b superscripts and
∆U is the change in utility between the base and forecast period. Where only rail changes
between the base and forecast period, this simplifies to:

Prb e ∆U c
Pr = b ∆U c
f
(2.29)
Pr e + Pcb + Pab
The forecast demand is therefore a function of the base market shares (P’s) and the
changes in utility. We therefore do not need to enter the levels for each variable into the
utility equation but need only enter those attributes which differ between the base and
forecast period. This reduces the information required to apply the model. However,
information is required on the base market share of each mode and this might not be readily
available.

As with aggregate models, considerable efforts may be involved in real world applications,
involving the building of perhaps detailed transport networks and the collection of the
relevant transport, land use and socio-economic data.

The Scale Factor Problem

We conclude this section relating to application with a mention of what has been termed
24 the scale factor problem. Recall that in the discussion of disaggregate choice models in
section 2.3.2, the consequence of the procedure for allowing us to proceed on the basis of
the observed component of utility (U) alone is that the coefficients are scaled relative to
the standard deviation of the errors (equation 2.16).

As long as the errors in choice models relate to unobserved factors which genuinely
influence actual behaviour, they are perfectly acceptable. Indeed, this is precisely what
the error term accounts for. However, when we use SP data, we must recognise that
some of the error in responses is related not to genuine unobserved utility but arises
because individuals do not necessarily behave in accordance with how they state that
they would behave. The problem is that choice models cannot distinguish between this
sort of error and genuine error. The former should not be allowed to influence the scale of
the model but we have no way of isolating it. Hence there are reasons why we might
expect the scale of an SP model to be inappropriate, and as a result the forecasts will be
biased since they are determined by the scale of the model’s coefficients. Note that since
the scale applies to all coefficients, it cancels out in taking relative valuations.

In recognition of this potential problem for SP models for forecasting, most transport
practitioners are less confident about using SP for demand forecasting than for inter-
attribute valuation. It is widely recommended that where possible SP models should be
rescaled in line with evidence from robust RP models. In recent years, joint RP and SP
models have become common. The idea is that the complementary features of the two
forms of data are exploited; the RP data gives the model the appropriate scale since it
contains genuine unobserved effects whilst the SP data brings a range of advantages
which are listed in section 2.5 below.
2.5. Comparison of Data Sets and Techniques

In this final section, we provide an assessment of the merits of different approaches to

demand forecasting. We should note that there is no one technique that is in all aspects
superior to all others. The appropriate technique to use will in part depend on the
objectives of the study and in part on other factors such as data availability, context and
resource availability.

We here provide assessments of demand analysis techniques along the following lines:

z Aggregate versus Disaggregate Methods

z Revealed versus Stated Preference
z Stated Preference versus Contingent Valuation

2.5.1. Aggregate versus Disaggregate Methods

An advantage that aggregate modelling has over disaggregate is that aggregate data,
such as the volume of trips, often exists and can be obtained at relatively low cost.
Unfortunately, it is not always readily available, such as operators’ records of ticket sales
which tend to be commercially confidential. This forces greater reliance on purpose
collected disaggregate data. 25
The key advantages of aggregate methods are:

z They are well suited to the analysis of the effects of external factors on demand, such
as economic activity, trend growth, population change and employment effects.
z Aggregate models make fewer assumptions about how individuals make decisions.
z The various aspects of choice can be conflated whereas disaggregate models dealing
with several choice contexts rapidly become complex. In particular, aggregate models
automatically include the generation of new trips whereas disaggregate models have
not dealt with this potentially important component of demand particularly well.
z Aggregate models are easier to apply since they require less information and do not
need to use the sample enumeration approach. Nor do they suffer the scale factor
problem which arises in disaggregate models if the degree of random error in the
model does not coincide with that which would apply in practice. In addition,
aggregate models are calibrated to real world behavioural responses and so the
effects of traveller misperceptions of changes in times and costs are built into the
parameter estimates. On the other hand, forecasting with disaggregate models often
makes the heroic assumption that in practice travellers would be aware of the
changes that are being investigated.
The main advantages of disaggregate methods are:

z Not only can the models be based on purpose collected data when aggregate data is
not available, but they also allow alternative forms of data, such as SP, to be used.
This allows a number of advantages of this form of data to be exploited.
z They are particularly well suited to the derivation of relative valuations since these are
obtained from the utility functions which are estimated by disaggregate models.
 z Since the analysis is focused on the individual, socio-economic and trip information
can be collected for each person and detailed analysis can be conducted of how the
relative importance of different attributes differs across individuals. Such analysis is
not generally feasible with aggregate models.

2.5.2. Revealed versus Stated Preference Methods

The RP and SP approaches exhibit a degree of complementarity. All models of consumer

behaviour are based on a quantitative relationship between behaviour (response) and
relevant explanatory variables (stimuli). The strength of the RP approach essentially rests
in its basis in what individuals actually do, which is the dependent variable in our demand
model. The attractions of the SP approach relate to the independent variables in our
demand model, and stem from its ability to control these stimuli, thereby providing an
approximation to laboratory conditions which, in many cases, would be prohibitively
expensive to create by other means.

The main advantages of the SP approach over RP methods are:

z Correlation problems are avoided, since the experimental design can ensure zero
correlations between variables yet undesirably large correlations can exist been some
variables in real world situations
26
z Sufficient variation in the data can be ensured, since the analyst can control the levels
of the attributes within the bounds of reasonableness. In the real world, some
variables do not vary sufficiently across individuals to permit robust estimates of their
effects on behaviour.
z Better trade-offs between variables can be offered than often exist in the real world
z It is possible to analyse situations or products which do not exist in the real world, or
attribute levels beyond the range of current experience
z More data per person is collected which allows more precise estimates to be obtained
z The design can ensure that what are termed ‘soft' or secondary variables are not
dominated by the key influences on choices
z There is no measurement error in the independent variables
z We can ‘design out’ variables, by specifying them to be the same for each alternative
so that they cannot influence choice, but which would have to be included in an RP
model. This is an advantage where there are variables we are not primarily interested
in but which are problematic to represent or model.
The main drawback of the SP method, as with all approaches based on hypothetical
questions, is that the responses do not necessarily provide an accurate guide to actual
preferences. In other words, respondents are not committed to behave in accordance with
their stated preferences.

Errors in SP responses may be of a random nature, such as might stem from uncertainty,
misunderstanding or respondent fatigue. However, we would not expect random error to
have an adverse impact on the valuations of the attributes in the SP exercise4. Of more
concern is error which is of a systematic nature and which may bias the valuations in
relation to each other in addition to influencing the scale of the model. The principal forms
of such response error are:

z Affirmation bias is where the SP responses are amended to affirm with the perceived
objectives of the study or to provide answers that the interviewer is expected to want.
z Responses may be amended to justify actual behaviour, in order to reduce ‘cognitive
dissonance’. This is termed justification bias.
z In the real world, making decisions is not costless as a result of data acquisition and
processing requirements. Consumers may therefore behave habitually in the sense of
not re-appraising past decisions and current behaviour. The SP exercise provides
information and requires alternative courses of action to be appraised and thus the
responses provided will not reflect the habit that underlies actual behaviour.
z Strategic or policy responses bias represents the error introduced into SP responses
in an attempt to influence the likelihood or magnitude of changes in the real world.
z Protest bias is where the responses are amended in the light of currently poor
conditions or in response to some recent undesired change.
z SP responses may not reflect actual preferences where it would be regarded to be
socially unacceptable or ‘politically incorrect’ to do so. This is termed social norm bias.
z Focus bias may arise where the SP exercise emphasises secondary variables which 27
in the real world would not receive much attention. This will lead to the importance of
these attributes being overstated.
z Where the attribute variations are too small or are unreasonably large, the levels of
the attributes combine with each other in an unrealistic manner or the absolute values
are unrealistic, they may be ignored. In such cases, the importance of the attributes in
question will be understated.
Marketing researchers claim a high validity for conjoint analysis (SP). In transport
applications, there was scepticism amongst economists about the reliability of the
approach. A major breakthrough in terms of its acceptability was the UK Department of
Transport’s value of time study, undertaken in the early 1980’s, where considerable
emphasis was placed upon tests of the SP approach by controlled comparisons with
corresponding RP models and the results were generally encouraging.

Where novel applications of SP are being considered, it is sensible where possible to

obtain RP data from a closely corresponding choice context and examine the extent to
which this evidence corroborates the evidence drawn from the SP data. This would also
be the recommendation of most transport practitioners when the purpose of the travel
behaviour analysis is to forecast demand rather than just estimating the values attached
to various attributes.

4 Although as we pointed out in section 2.4 it will influence demand forecasts through its
effect on the absolute scale of the parameters even if their relative scale is unaffected
 2.5.3. Stated Preference versus Contingent Valuation

In some areas including transport but particularly environmental valuation, which we cover
in chapter 4, the contingent valuation method (CVM) is common. As was pointed out in
section 2.2, it has some key features that distinguish it from the SP approach. We
therefore assess the relative merits of these two approaches.

The contingent valuation method is a direct valuation technique which has for many years
been used to obtain valuations particularly of goods not traded in the market-place, such
as environmental factors and recreational amenity. Respondents are given information
about the contingent market and are asked to provide a willingness to pay for the good or
service in question. The CVM can take two forms, depending on the response scale used:

z Open-ended CVM which asks directly for a maximum willingness to pay

z What is termed referendum or iterative bidding CVM where the respondent is asked
whether a specified payment would be accepted or not.
Valuations are not deduced indirectly from choice, as is the case with SP, but are directly
obtained as willingness to pay responses.

The main shortcoming of the open-ended CVM relative to the iterative bidding approach is
that the respondent finds it easier to state whether a specific amount would be paid rather
28 than to state the maximum amount that would be paid. However, the iterative bidding
procedure requires more questions, provides less information and there is evidence that
starting point bias is a problem whereby the valuation obtained depends on the initial price
in the iterative bidding process.

Rather than examining the good or service in question as a package, or simply examining
a single attribute, SP researchers attempt to break down the product into its component
attributes. This is a crucial difference between the CVM as it is typically applied, and the
SP approach, and it allows for greater flexibility both at the analysis stage and at the
application stage. A further although not unique difference between CVM and SP is that
the response scale in the latter tends to indicate just the order of preference whereas in
the former it often indicates the strength of preference.

Discussion of the relative merits of CVM and SP often view the two techniques as widely
different approaches to valuation. Whilst it is fair to say their spheres of application have
been quite distinct and there are some important differences between the two appoaches,
the differences have tended to be exaggerated and are often more a consequence of the
way the CVM or SP exercise have been designed. Indeed, CVM has been applied in
contexts which are extremely challenging, such as environmental valuation, where it is
often not possible to use SP because of the absence of any credible market in which to
express even hypothetical choices.

CVM can be seen as a special case of SP where there are only two attributes, one of
which is typically money in some form. The CVM has been more widely used for valuing
non-market goods and services such as environmental factors. It is only recently that SP
has been used in this area.

In most applications, the main differences between SP and CVM can be summarised as
follows:
z SP examines several attributes simultaneously, whilst CVM tends to look at attributes
in isolation, and in this respect SP has several advantages. Firstly, the purpose of the
study will be less obvious and hence a lesser incentive to strategic bias is expected. In
particular, CVM ‘fixates’ on cost which tends to be a more sensitive issue than other
attributes. Secondly, SP can examine interaction effects, whereby the valuation of an
attribute is dependent upon the level of some other attribute. Finally, it is possible to
detect whether budget effects are apparent, reflecting an upper limit to the willingness
to pay for specific categories of benefit.
z SP examines different levels of an attribute, whereas CVM generally does not, and
hence the SP approach supports detailed and controlled analysis of the functional
relationship between the valuation of an attribute and its level
z SP tends to ask for the order of preference whilst CVM tends to ask for the strength of
preference. Although CVM is simpler because it generally involves a single question
rather than a whole series of questions, and the information content of the single
response is high, and the SP responses can be expected to be more reliable for two
principal reasons. Firstly, it is simpler to indicate the order than the strength of
preference. Secondly, individuals routinely make choices but are rarely required to
establish the strength of preference in real life decision-making.
z Since SP is based on choice, it is possible where real markets exist to calibrate
models jointly to RP and SP data, thereby exploiting the complementary advantages
of the two forms of data and also obtaining more precise estimates because of the
greater amount of data available. 29
z SP is a behavioural model from which valuations are implied, whereas CVM is purely
a valuation model. SP is therefore more suited to forecasting applications, although
CVM can avoid problems involved in the development of choice models.
z CVM is relatively straightforward to design and analyse. In contrast, there is no unique
SP experimental design, even in a tightly defined situation, and the SP design
procedure is somewhat more complicated than for CVM.
SP requires a realistic choice context. This is straightforward where actual markets exist.
However, in some non-market situations CVM can enquire about willingness to pay in
some abstract sense whereas the use of SP would be unrealistic.
30
 3. Review Of Demand Modelling

We can view rail as both a competitor and a complement to air services. Where it is
uneconomic to provide short haul air services which feed into international flights, or
where there are congestion or environmental restrictions, rail services can act as a
complementary feeder mode. However, rail transport, particularly high speed rail, can
quite clearly also act as a competitor to air for rail journeys up to 750 kilometres.
The overall objectives of this research are to provide Eurocontrol with a thorough
overview of the state of the practice in transport research relating to competition between
rail and air and the possibilities for replacing short haul air services with rail services.
We therefore examine demand-modelling practice from three perspectives. The first is
largely mode specific, concentrating on the demand for air or rail in isolation, but in some
cases allowing for the impact of changes in one of these modes on the demand for the
other. The second is centred upon competition between the two modes, and in particular
the scope for rail services to capture market share from air. The third relates to the degree
to which there can be complementarity between the two modes.

3.1. Introduction and Objectives

The main objective of this chapter as set out in the proposal is, within the contexts
relevant to the possibilities for replacing short haul air services with rail services, to review
the practice of demand modelling with particular emphasis upon:

z the modelling of air demand; 31

z the modelling of rail demand;
z the modelling of competition between rail and air.
This review cover the evidence available to us in three different areas of:

z aggregate modelling;
z behavioural choice modelling;
z monitoring5.
Behavioural choice analysis can itself be split into studies whose primary purpose was to
explain competition or complementarity between rail and air from a demand forecasting
perspective and studies whose primary purpose was to obtain estimates of the valuations
of attributes relevant to rail and air and the links between them.

A further aim of this chapter is to provide a review of developments relating to high speed
rail and its position as a competitor to air and also to consider the potential for rail to act as
a complement to air by serving as a feeder mode.

The final issues covered in this chapter are to highlight available and potential data
sources that can be used to support modelling of rail and air demand and the competition
between the two modes and to draw the research findings together to summarise the
state of knowledge in this area and to establish the gaps in existing knowledge and
thereby identify opportunities for further research

The structure of the chapter is as follows:

5 The proposal did not cover monitoring studies but we have here included them as a
valuable tool and an important source of information on behavioural response.
 z Section 3.2 defines the scope of the chapter;
z Section 3.3 covers aggregate modelling, including studies specific to air, studies
specific to rail and studies which have in some way analysed the degree of interaction
between the two modes;
z Section 3.4 contains behavioural choice modelling which has examined competition
between rail and air;
z Section 3.5 covers behavioural choice modelling studies whose primary purpose was
to estimate valuations of attributes relative to each other;
z Section 3.6 considers monitoring studies;
z Section 3.7 discusses high speed rail developments and its position as a competitor to
air;
z Section 3.8 considers the evidence relating to rail as a complement to air;
z Section 3.9 outlines possible data sources that can underpin various forms of demand
analysis;
z Section 3.10 provides conclusions, summarising the research findings and identifying
opportunities for further research.

3.2. Scope
32
The scope of the demand forecasting research covered in this chapter is that relevant to
the possibilities for replacing short haul air services with rail services. We must point out
that in many areas covered by this review, such as inter-urban mode choice modelling,
modelling of point-to-point airline and rail demand, and valuation studies, a large amount
of work has been undertaken which, for reasons of commercial confidentiality, we cannot
report, is unavailable to us or simply remains unknown to us.

Aggregate models are well suited to the analysis of what are termed external influences
on travel demand, such as the effect of changes in levels of economic activity. They have
also been widely used to examine, where appropriate, the effects of the key variables of
timetable related service quality and fare at an aggregate level.

In contrast, disaggregate models have not been able to provide convincing evidence on
the effects of external factors to support demand forecasting practice. However, they are
well suited to the analysis of competition between different modes, and also between
other alternatives, by virtue of their very basis in the analysis of individuals’ choices. They
are also able to provide more detailed analysis of fare and timetable service quality than
aggregate methods and have unique advantages in the analysis of secondary variables
dealing with comfort, facilities, safety and security.

Our review of practical demand forecasting using the two different techniques will focus
on these areas of comparative strength.

It is not the intention of this chapter to provide a detailed account of each relevant demand
modelling study. Nor do we claim to provide a comprehensive account of demand
modelling experience relevant to rail and air, particularly given the often commercially
confidential nature of research work.
This chapter covers demand modelling practice, with an emphasis upon the development
of such models and their key features. We do not cover the detailed issues of model
application, and therefore we do not aim to address broader policy issues surrounding rail
and air and whether and in what circumstances investment in or encouragement of one
mode is favoured to the other. Given that each scheme is unique, we do not favour
generalisations but rather an insight into how we might evaluate each scheme from a
demand modelling perspective.

We here address issues both of complementarity and substitutability between air and rail.
Gaudry (1997) provides a clear distinction between the two. Air and rail are substitutes
where they are competing for the same point-to-point (OD) market and they are
complements where they act as access or egress modes for each other when serving the
‘transfer’ markets.

Since we are concerned with competition between rail and air, cross-elasticities are of
considerable interest in summarising this relationship. As defined in section 2.4, a cross-
elasticity denotes the proportionate change in the demand for one alternative (e.g., mode)
in response to a proportionate change in the fare or service quality characteristics of
another mode. Cross-elasticities are generally much smaller than own elasticities and can
be expected to vary strongly with an alternative’s market share. This provides another
reason why caution should be exercised in generalising about cross-elasticities.

The focus is upon what has actually occurred in the market place and upon the means of
monitoring and forecasting the outcomes of future developments. However, where there 33
are clear outcomes or implications from the application of the models we report these.

Although conventional rail provides competition to air in many countries, and in many
cases it is the market leader for journeys of up to 500 kilometres, it is high speed rail that
offers the possibility of achieving significant transfers of air traffic to rail and of serving a
useful complementary role.

The main emphasis of this chapter is therefore on high speed rail, although conventional
rail is covered. We therefore need to define what we mean by high speed train.

COST318 (1996, p.88) defined high speed train “to provide transport services to its users
at a speed twice higher than a car and twice slower than the plane” whilst Sands (1993,
p.205) defines it as “twice as fast as the auto, half as expensive as air”. Givoni (1999)
treats high speed as usually over 200 kph, which would allow inclusion of the X2000 in
Sweden, the InterCity 225 and diesel InterCity 125 in Britain and a number of trains
elsewhere. In our understanding, this is the most widely used definition of high speed rail.
Nonetheless, we must recognise that somewhat higher speeds are common, with many
high speed trains currently having a maximum operating speed of 300kph. For the
greatest effectiveness in attracting passengers and inducing transfer from air, these very
high speeds are essential.

High speed services sometimes have an entirely dedicated rail route, such as the
Shinkansen between Tokyo and Osaka, or use newly constructed routes for a large part
of the journey, such as many of the TGV services in France. Nonetheless, average
speeds of around 160 kph are achieved on conventional railways, as with several routes
from London, whilst tilting trains, such as the Pendolino ETR-450 in Italy and the X2000 in
Sweden, allow higher speeds on conventional routes.
 3.3. Aggregate Models

Recall that from chapter 2 aggregate models are those based on measures of collective
behaviour, such as the number of trips between two locations or the market share of
different alternatives. This section on aggregate models is split into three sub-sections
dealing with:

z Aggregate models relating solely to air demand forecasting

z Aggregate models relating solely to rail demand forecasting
z Aggregate models which deal with competition between rail and air
The first two of these areas contain a very considerable amount of research, and it is the
intention here to provide only a brief overview of the nature of this research.

3.3.1. Air Demand Forecasting

Aggregate air demand forecasting models based on the analysis of the volume of air
travel can, as we pointed out in section 2.3.1, operate at various levels of disaggregation.
The highest level of aggregation is the number of air trips per year at an international or
domestic level. A more disaggregate level is to examine trips at the route level. Yet more
34 disaggregate is to split this by the operators on a route.

As the analysis becomes more disaggregate, it is more possible and indeed more
necessary to include a broader range of variables. However, the key driver of the amount
of air trips is the level of economic activity. This influences the amount of business trips
that need to be made whilst income levels determine the ability to pay for leisure trips.

The UK Civil Aviation Authority (CAA, 1990) estimated a series of models to explain
passenger trips. The models were developed at a highly aggregated level, based upon
total air passengers in a particular time period.

For UK domestic trips, the only independent variable in the reported model is GDP, and
the estimated elasticity is 2.23. For leisure trips, a consumer expenditure index replaces
GDP, although the two are highly correlated. The elasticity to consumer expenditure was
estimated at 4.28. The leisure model also contains and air fare elasticity estimated to be –
0.6. Since no distinction is made by route, it is very difficult to allow for cross-elasticity
effects from other modes which we expect will influence air demand on these domestic
routes.

Models were also developed for short haul traffic between the UK and Western Europe.
For UK to Western Europe leisure trips, the consumer expenditure elasticity was 1.61 with
a fare elasticity of –0.35. For the reverse direction, the elasticity to GDP was 1.64. The
only model developed for short haul business travel was for trips between the UK and
Western Europe and a GDP elasticity of 2.1 was estimated.

European air traffic forecasts up to 2015 are provided for the Air Transport Action Group
(ATAG, 2000) by the International Air Transport Association (IATA). The forecasts are
based upon models calibrated to historic domestic and international passenger traffic data
supplied by each individual European Civil Aviation Authority. The key driver in these
models is economic activity. Domestic air travel is forecast to grow by 4.2% per annum
between 1998 and 2005, 3.6% per annum between 2005 and 2010 and 3.3% per annum
between 2010 and 2015. This contrasts with actual average growth between 1985 and
1998 of 4.9% per year. In part the reduced growth rates are due to reduced GDP growth
rates but also market maturity. The implied GDP elasticity is around 1.5. However, no
account is taken of the impact of further growth in low cost airlines which can be expected
to stimulate the market.

DETR (2000a) isolates the growth in the low cost market from other markets. Econometric
models of changes in passenger traffic were developed using data for the 1960’s through
to 1998. For domestic travel, models are estimated to airline’s traffic returns to the Civil
Aviation Authority. Data on international trips is obtained from the International Passenger
Survey, thereby allowing segmentation by journey purpose since this information is
available in survey based data sources.

The key explanatory variables were measures of economic activity, principally GDP, with
fare having an effect in some of the market segments examined. A problem with
analysing the effects of fare is in obtaining a reliable indicator of changes over time.
Surprisingly, no frequency effects were apparent, even for domestic travel whilst no
variables were entered into the models to discern the effects of changes in the rail system
on air demand.

The income elasticities estimated in various categories were 2.44 for UK residents short
haul international leisure trips, 2.56 for UK residents short haul international business
trips, 1.95 for domestic business trips to and from London and 0.76 for domestic air trips 35
not involving London. Demand by low cost operators is forecast to increase by 170% over
the period 1998 to 2005, compared with around 24% for UK domestic trips, 23% for UK
residents making short haul business trips and 45% for UK residents making short haul
leisure trips.

Postorino and Russo (2001) report on a demand model for domestic Italian air travel. The
model contains per capita income at the origin and its elasticity was estimated to be 2.6.
Andrikopoulos and Brox (1990) used a generalised linear expenditure system to examine
the demand for inter-urban travel by car, rail, air and bus in Canada. The income elasticity
for air was estimated to be 1.8.

Fridstrom and Thune-Larsen (1989) estimated income and fare elasticities to pooled time
series and cross-section data for domestic Norwegian air flows for the period 1972 to
1983. The income elasticity was found to be 1.46 with short and long run fare elasticities
of -0.69 and -1.63 respectively.

Abrahams (2000) reports an income elasticity of 2.23 for domestic British business air
travel and a figure of 4.28 for leisure travel. The air fare elasticity for leisure travel was
estimated to be -0.6. For trips between the UK and Western Europe, the income elasticity
was 1.6 for leisure and around 1 for business travel.

Gordon (2000) also analysed air travel demand using the UK international passenger
survey data, for the years 1970 to 1998, and estimated an income elasticity for leisure
travel of around 2. Lave (1972) estimated an income elasticity for short haul flows in the
United States of 2.7.

Toner et al. (1995) developed air demand models on six monthly air volume data for 34
domestic routes in Britain for the years between 1980 and 1991. Cost only influenced air
demand for flows over 300 miles but both time and headway influenced air demand on
 both long and shorter distance flows. The GDP elasticity was very close to 3 for both long
and shorter trips.

BAA (1978) analysed data for 12 major West European airports for the period 1965 to
1975. The income elasticities for short haul travel were 2.3 for leisure and 1.6 for
business. Lower income elasticities for business travel have been the feature of other
studies conducted around the same time (CAA, 1989; DoT, 1981).

BAA subsequently examined income elasticities relevant to London Airports’ traffic

(Doganis, 1991). The income elasticities were allowed to fall, following product life-cycle
theories for mature markets. For short haul leisure travel by UK residents, the income
elasticities was forecast to be 2 in the period 1989-93, falling to 1.8 in 1994-8 and 1.7 in
1999-2005. Moreover, because trade is found to have a more significant influence on
demand, it replaces income for business travel. This is also the case for Amsterdam
Airport, where the trade-elasticity was found to be between 0.8 and 1.0 (Veldhuis, 1988).

AEA (1989) estimated both income and price elasticities for travel between each country
in Europe and the rest of Europe. Figures are reported in Table 3.1 for high and low
income countries separately. As might be expected, travellers in richer counties tend to be
less sensitive to fares. It can be seen that the income elasticities are lower in the wealthier
countries which is to be expected since they have more mature markets.

36
Table 3.1: Price and Income Elasticities for Scheduled European Travel

Country Price Elasticity Income Elasticity

High Income Countries
Scandinavia -0.31 2.41
France -0.50 1.90
Switzerland -0.54 1.86
Germany -0.75 2.64
Low Income Countries
Portugal -0.19 3.04
Turkey -0.62 3.11
Ireland -0.92 1.52
Greece -1.21 5.59
Many airlines conduct their own detailed analysis of demand, based on their point-to-point
ticket sales in specified time periods. Unfortunately, this work is not in the public domain.

DETR (2000a) states that the, “Industry consensus is that the income elasticity is probably
just above unity and that fares elasticities range between about 0.5 for business and 1.2
for leisure”. However, there is evidence that, at least in the domestic and short haul
markets of interest, the income elasticity at least for leisure travel exceeds the widely held
convention of 1.5. Indeed, Doganis (1991, p.222) stated that, “Most demand studies in
recent years have produced results indicating income elasticities for various categories of
passengers which are usually between 1.5 and 2.5”. Care must however, be taken, since
if the model also contains other measure of economic activity, such as levels of trade, this
will discern an effect that would otherwise be attributed by GDP and the GDP elasticity
would be lower than it would otherwise be. It does seem that the income elasticity in the
business market is lower than that in the leisure market.

3.3.2. Rail Demand Forecasting

Rail demand analysis also operates at various levels of disaggregation. In most countries,
national statistics are published on rail passenger revenues and volumes, train kilometres
operated and other variables which allow models to be developed to explain rail demand
at this very aggregate level. This is the approach adopted by Perez-Palomo (1996) for
analysis of British and Spanish data and FitzRoy and Smith (1995) who examined
demand across a whole number of European railways.

Perez-Palomo (1996) estimated a GDP elasticity of 1.4 for long distance flows in Great
Britain with a negative time trend of 1.8% per annum. For flows in Spain, the GDP
elasticity was 0.39 with a very minor time trend of -0.8% per annum.

The analysis of flows at a more disaggregate level, such as on a corridor, between fairly
small zones or indeed between stations, provides the basis for a more detailed 37
investigation of rail demand and more precise estimates. This more detailed form of
aggregate analysis has been widely used in many different countries to obtain estimate of,
amongst other things, the effect of economic activity on long distance rail travel.

Lave (1972) estimated an income elasticity to a time series of rail flows in the United
States of 1.12. McGeehan analysed time series data of inter-urban rail travel in Ireland.
The independent variable used to represent economic activity was an index of real
industrial earnings for which an elasticity of 0.82 was estimated. The study in Canada by
Andrikopoulos and Brox (1990) estimated the income elasticity for inter-urban rail travel to
be 1.32.

In Britain, the analysis of ticket sales data relating to travel between stations has been
extensive over the past 30 years. This analysis has addressed the effects of economic
activity on rail demand (Jones and Nichols, 1983; Fowkes et al., 1985; Owen and Phillips
1987; Perez-Palomo, 1996; Wardman and Tyler 1998) as well as fare and timetable
related service quality. A noticeable feature of the British research is that a relatively large
amount is in the public domain.

We do not intend here to cover all the British demand forecasting studies relating to the
effects of economic activity on rail demand. Instead, we intend to focus on an important
issue which is apparent in these studies. This is the elasticity to income varies somewhat
across different circumstances.

Jones and Nichols (1983) based their analysis on four weekly ticket sales data covering
17 main flows from London between 1970 and 1976. Demand was elastic with respect to
economic activity, with the elasticity ranging from around 1 for Cardiff to 2.3 for Leicester.
Owen and Phillips (1987) specified a model which contained both a GDP term and a time
trend.
 The two are so highly correlated that they must be interpreted together. The median
GDP elasticity and annual time trend varied considerably across different flows,
presumably reflecting differences in journey purpose by route, since business and leisure
travel may grow at different rates, and also income levels will differ by route. Across the
20 flows the median GDP elasticity and annual time trend were 1.39 and –3.4% per
annum. Growth was higher on second class journeys than on first class journeys. First
class journeys are dominated by business travel, which can be expected to be closely
linked to GDP, whereas leisure travel forms the majority of second class travel and this
may well grow at a rate faster than GDP.

More recent British research (Wardman and Dunkerley, 1999) has shown that the GDP
elasticity varies across routes, distance and class of travel, and hence care needs to be
taken in the selection of GDP elasticity to be used in any particular forecasting application.

However, all the GDP elasticities and analysis of economic effects reported above relate
to conventional train services rather than high speed rail. A common practice (NEI, 1987)
is to assume that the elasticity to GDP or other measures of economic activity for high
speed rail is the same as for air. Typically, rail demand has increased at a lower rate than
air demand and hence we would expect its elasticities to economic activity variables to be
lower. There needs to be empirical testing of the assumption that high speed rail can be
treated in much the same way as air.

38 Whilst high speed train services have existed in Europe for 20 years, and in Japan for a
good while longer, we are not aware of studies which have estimated economic activity
elasticities for high speed rail or have compared them with equivalent measures for
conventional services.

3.3.3. Competition between Rail and Air

There are two ways in which, within the aggregate modelling framework, we can examine
competition between rail and air. These are:

z Develop mode specific models which contain cross elasticity terms

z Develop mode share models
The first approach is based solely on the demand for one mode, say rail. These are
generally the simplest models to develop since data on other modes is not required.
However, they are an enhancement of the rail demand models covered in 3.3.2 in terms
of their inclusion of terms to reflect the fare and service quality of competing air services.
The model therefore contains cross-elasticities, indicating the impact of changes in air on
the demand for rail. In an analogous fashion, the air demand models of section 3.3.1 can
be enhanced to include cross-elasticities with respect to rail. Whilst these models can
indicate the sensitivity of the demand for one mode on the

The second approach is based around the explanation of the market shares of different
modes. This might involve the development of an aggregate logit model, as outlined in
section 2.3.1. This model not only provides forecasts of market shares of rail and air but,
unlike the mode specific models which only provide one set of cross-elasticities, it
provides cross elasticities both of rail demand with respect to the characteristics of the air
service and of air demand with respect to the characteristics of the rail service.

When we are dealing with competition, it is cross elasticities, as discussed in section 2.4,
which are of critical interest. However, there is far less information on cross-elasticities
than on own elasticities. In part this is because operators are far more interested in the
impact of their own fare and service quality on demand since it has a larger effect and is
under their control, and in part because cross elasticities are relatively small and hence
difficult to estimate.

It is worth pointing out a method of deducing cross elasticities from the more widespread
information on own elasticities. The cross-elasticity of, say, air demand with respect to rail
journey time (ηar) can be deduced as:

Vr
ηar = ηrr δ ra (3.1)
Va
The term ηrr is the own elasticity of rail demand with respect to rail journey time, Vr/Va
denotes the relative share of rail and air and δra is termed the diversion factor and denotes
the proportion of those who divert from rail to air when there is some change in rail.

This equation is particularly useful because:

z It is generally the case that the estimation of cross-elasticities is not easy, which is 39
why many aggregate models do not contain them.
z There tends to be much more evidence on own elasticities whilst the relative shares
(Vr/Va) can often be estimated. The diversion factor (δra) can usually be established
through surveys although there may in any event be other evidence.
z Whilst the equation serves a very useful purpose in allowing cross-elasticities to be
deduced, it can also be used to check the consistency of evidence relating to own and
cross elasticities.
This equation also shows that we can expect the cross elasticity to vary considerably
across different circumstances according to the relative market shares.

Similarly we can use the Slutsky symmetry equation to deduce cross-elasticities or to

check the consistency of different cross elasticities. This expresses the relationship
between two elasticities as:

Vr Pr
η ar = η ra (3.2)
Va Pa
where VrPr is the revenue (volume V times price P) of rail (r) and hence the ratio term is
simply the relative revenue of the two modes.

These relationships can be very valuable when we are examining competition between
modes, although it must be said that there is regrettably little exploitation of them in
practical demand analysis and forecasting studies.
 Mode Specific Models with Cross Elasticities

Aggregate models of travel demand can include the effects of other modes. Thus a model
of rail demand may include terms and hence cross-elasticities relating to air demand
whilst a model of air demand could include terms which relate to rail. Models which
combine data across modes can contain variables relating to all the modes included
(Quandt and Baumol, 1966). Ideally, a demand system could be set up, with separate
models for each mode and each model containing appropriate cross-elasticity terms for
competing modes (Lave, 1972). In such a system, it would be possible to impose
restrictions between elasticities which satisfied economic theory.
We are not aware of complete demand systems that have been estimated. Whilst there
are models which contain cross-elasticity terms, which are effectively enhancements of
the models discussed in sections 3.3.1 and 3.3.2, and these are discussed below, we
should point out that the vast majority of demand models calibrated to the demand of a
single mode do not contain an explicit representation of the characteristics of competing
modes.
One of the pioneering inter-urban demand analysis studies (Quandt and Baumol, 1966)
allowed for competition between modes by including cross-elasticity effects within the
model. However, the estimated models cover air, car and bus but not rail. Lave (1972)
used a similar approach, but with separate models for each mode and now including rail
in the analysis. The analysis was based on a time series of inter-city flows in the United
40 States. Air was found to be a strong competitor to rail, with a cross elasticity of rail
demand with respect to air speed of –0.7. Similarly, early models developed to examine
travel in the North East Corridor of the United States also contained cross elasticity terms
(McLynn and Woronka, 1969).
The main purpose of the study by Owen and Phillips (1987) was to determine the
influence of economic activity on inter-urban rail demand. However, they also considered
a range of other explanatory variables. Whilst air competition was not represented in a
sophisticated way, dummy variables were used to represent whether there was
competition from an air shuttle service on the route. This was the case for flows between
London and Edinburgh, Glasgow and Newcastle. The effect on first class journeys was to
reduce them by 11%, 42% and 19% respectively, whilst second class travel was reduced
by 29% and 32% on the Edinburgh and Glasgow flows. These represent significant
inroads from air on rail demand.
Time series analysis of London based rail flows reported in Wardman (1992a) contained a
term representing the generalised cost of air. This was based on the journey time,
frequency and full fare cost of the air service which competed with rail. A statistically
significant effect was obtained, indicating that a 10% increase in air generalised cost
would increase rail demand by 3.3%.
The models of domestic air travel developed by CAA (1990) and reported above did not
contain variables relating to competing rail services or indeed other modes, even though
these can be expected to influence air demand. CAA (1990) state that, “Ideally, any model
for domestic passengers of air services would need to take full account of alternative
modes. However, any such multimodal model would take a long time to develop and the
task would be made more difficult by the lack of availability of data on the origins and
destinations of surface passengers. Nevertheless, developing such a model in the longer
term is being considered”.
One such model is reported by Toner et al. (1995) which included terms relating to rail
travel. The cost of rail did not influence air demand. This is not surprising given that
business travellers dominate these routes and are less likely to be influenced by cost
considerations. Rail headway had no influence on air demand for journeys over 300
miles, which is where rail competes less effectively. However, the headway elasticity for
shorter distance journeys was 0.20, indicating that a 10% improvement in rail headways
would lead to 2% reduction in air demand. Similarly, the effect from rail journey time on air
demand was stronger for the shorter distance flows. On flows under 300 miles, the cross-
elasticity of air demand with respect to rail journey time was 0.81, but fell to 0.26 on the
longer flows.
The results indicate that where rail competes more effectively with air, improvements in its
service quality have a larger impact on air demand. These results can be taken to relate
to business travel. We would expect larger cost cross-elasticity effects in a market with a
larger amount of leisure travel6.

Studies which have enhanced air demand models with cross-elasticity terms relating to
rail are also rare. We have stated that many airlines will routinely analyse their ticket sales
to better understand their markets but that this is commercially confidential. However,
even on short haul and domestic routes, we suspect that little attention is paid to
competing rail services.

Market Share Models 41

These models explain market share in terms the features of the competing modes. They
often take the form of the logit model of equation 2.5 in section 2.3.1 and they provide
cross-elasticities between each of the modes as well as own elasticities and market share
forecasts.

A simple linear market share model for business travel was estimated by Leake (1971).
This took the form:

Pr = 0.94 − 0.146[( Lr − La ) + 1.5( N r − N a )]

where Pr is the proportion using rail, L denotes the line-haul time for rail (r) and air (a) in
hours and N denotes the access times for each mode in hours.

The model indicates that domestic air travel would have almost disappeared where rail
provided comparable overall times and rail would have to be around three hours slower
before air achieved a 50% market share. However, this does not account for any effects
of being able to make a round trip in a day by rail.

Although we are sure there will have been other market share models developed which
have covered rail and air, we have not uncovered any studies. However, this need not
concern us unduly since the conventional form of such a model is the logit model and, as

6Leisure travel will form a larger proportion of travel than it did between 1980 and 1991
on UK domestic mainland routes.
 we shall see below, there are numerous examples of applications of the disaggregate
version of the logit to address competition between rail and air.

Moreover, these aggregate market share models can be misleading where modes are
growing at different rates, as may well be the case of rail and short haul air. A market
share model will explain the share of two modes at one point in time, but often they
cannot allow for variations in share over time due to differential growth rates.

The SNCF method of forecasting the share of traffic between rail and air is based on what
might be termed a ‘price-time’ model (BRB, 1988; Jincheng, 1996) The procedures
assumes that a traveller chooses rail or air according to which has the lowest generalised
cost. The latter is composed as the fare plus the journey time weighted by the value of
time. A distribution of values of time is used, otherwise all travellers on a route would be
forecast to choose one or other of the two modes. The model is calibrated to market
shares to estimate both the median and the standard deviation of the value of time.

3.4. Behavioural Choice Models: Modelling Rail and Air Competition

As described in chapter 2, these demand forecasting models operate at a much finer level
of detail than aggregate models, and are based on analysis of the choices travellers make
42 rather than on the relative market shares discussed in section 3.3.3.

These disaggregate models are ideally suited to the analysis of competition between
modes, because they are based on individuals’ choices between competing alternatives,
and we here review such models that have examined competition between rail and air.
These models provide cross-elasticities showing how improvements to rail services
impact on air travel, and vice-versa, and they can also be used to forecast rail and air
market shares under a variety of future scenarios.

Table 3.2 provides a summary of some of the key features of disaggregate choice models
which have covered competition between rail and air. This list of studies does not claim to
be comprehensive, in particular because there can be expected to be many commercially
confidential studies which are not available to us, but it does indicate that a large number
of studies have been conducted.

We do not here provide a detailed review of each study. Instead we summarise the key
features of the research that has been conducted. The key features that we cover are:

z Data used in model estimation

z Journey purposes examined
z Modes covered
z Attributes covered
z Perceived and ‘engineered’ values and issues of misperception
z Functional form
z Other choice contexts
z Model Outputs
3.4.1. Data Used

The attractions and shortcomings of Revealed Preference (RP) models based on actual
choices and Stated Preference (SP) models based on hypothetical choices were
discussed in section 2.5.2. A review of a large number of British disaggregate choice
studies (Wardman, 1998) indicated that SP applications dominate for urban and inter-
urban travel. The position is not dissimilar elsewhere, particularly in Northern Europe.
However, the analysis of competition between rail and air is one area where RP modelling
has maintained a strong presence. The main reasons for this are:

z The availability of data on travellers’ actual choices from routinely conducted surveys
of long distance travel, such as the International Passenger Survey in Great Britain
and TransAlpine Passenger Survey in Switzerland.
z The projects being evaluated, such as high speed lines and new fixed links, are
sufficiently important to warrant the resources necessary for extensive RP modelling.
Indeed, such large scale investments demand that the revenue projections have the
firmest possible basis in what individuals actually do.
However, SP has had an important role to play, leading not only to the stand-alone SP
models typical of urban and inter-urban mode choice studies but also to an atypical
proportion of joint RP-SP models. The attractions of SP in this context are:

z In many cases, new competition to air stems from an essentially new alternative, such
as a high speed train which offers journey times not currently experienced or what is
43
effectively a new service resulting from significant infrastructure improvements such
as a new fixed link. RP data therefore does not exist or is far from ideal for modelling
strong competition between rail and air.
z SP methods collect more data per person. This means more precise estimates can be
obtained for a given data collection cost or data collection costs can be reduced for a
given level of precision.
z The SP approach is better suited to the analysis of complex attributes, such as travel
time reliability, and to what are termed ‘secondary’ variables which are aspects of
service quality not directly related to the timetable, such as comfort, on-board and at-
terminus facilities and services, safety and security. We shall return to these issues in
section 3.4.4 and section 3.5.
z The RP approach requires the users of all the modes in question to be surveyed. If
the study is being conducted for a rail operator, or a sponsor interested in examining
the potential for high speed rail to abstract traffic from air, it is quite understandable
that airport authorities and airlines are reluctant to allow access to air passengers. The
costs of contacting sufficient air users to develop robust RP models can then be
prohibitive.
There is a general feeling that SP data validates reasonably well against RP data in terms
of the implied values of time in a number of different contexts (Hague Consulting Group
and Accent, 1999; Bradley and Gunn, 1990; Louviere et al., 2000; Oscar Faber TPA,
1993; TPA, 1992; Wardman, 1986, 1988). However, most practitioners feel that we are on
less firm ground using SP models as stand alone forecasting tools because of the scale
factor problem discussed in section 2.4.2.

In this context of rail and air competition, Oscar Faber (1995) used both RP and SP data
in their analysis of mode choice. It was found that the SP coefficients were, on average,
half that of the RP coefficients and hence the SP model would produce forecasts
 somewhat nearer to 0.5 (in this binary choice context) than would the RP model. Given
that the RP model was in this context based on a sound choice context, where travellers
were aware of the two alternatives and the choice between them offered trade-offs
amongst attributes, and hence can be taken as a reliable guide to business travellers
actual preferences, it is a little alarming that the SP model would produce somewhat
different forecasts. In contrast, however, the study reported by Louviere et al. (2000) finds
the scale of coefficients in RP and SP models to be broadly similar and hence there would
be essentially no difference between RP and SP based forecasts.

Although not involving rescaling of all of the SP parameters to be consistent with the RP
data, Kroes and Fox (2001) attempted to obtain a firm basis in actual behaviour by
rescaling the model’s constants to be consistent with the actual market shares of the
different modes.

3.4.2. Journey Purposes Covered

It is our impression that as far as competition between rail and air in domestic markets is
concerned, the emphasis has been placed on the analysis of the business market or else
no distinction has been made by journey purpose but the market was dominated by
business travel7. This is because of the importance of this market segment for revenue in
44 short haul markets where the purpose of man studies was to establish the potential of rail
to attract passengers from air. However, the growth of low cost airlines and their provision
of services over relatively short distances coupled with increases in personal disposable
income will stimulate the demand for short haul journeys by air for purposes other than
business. It will become increasingly important to examine the leisure market.

As far as inter-regional and international trips where air and rail compete are concerned,
such as between the UK and North Eastern Europe and between major European centres
such as Amsterdam and Paris, short breaks and to a lesser extent holiday trips are
important markets in addition to business travel. These markets have been examined in a
number of disaggregate modelling studies, as is apparent in Table 3.2. However, issues
of destination choice and indeed whether to make a trip at all are issues of significant
importance alongside mode choice.

Rail is clearly not a competitor on the longer distance holiday journeys, such as between
Northern Europe and the Mediterranean, where charter airlines operators dominate and
rail cannot provide a service which can compete with air journey times or indeed is as
cheap as long distance coach operations.

3.4.3. Modes Covered

We here consider the features of mode choice models in terms of the number of modes
covered, the depth of coverage of a mode when there is more than one operator and
variants upon a mode.

7 Our impression is formed by awareness of commercially confidential studies in addition

to those cited in Table 3.2.
Mode choice models effectively take two forms. They are either comprehensive in nature,
covering all the modes available, or else they deal just with those modes which are of
interest to the study, which here would be the choice between rail and air.

The former type of model is necessary where demand forecasts are required for all
modes, as would be the case if a broader social cost-benefit appraisal of a transport
scheme is being conducted. There is also a need in RP models to consider all modes in
order to obtain a satisfactory explanation of choices, particularly if air users are not just
choosing between air and rail and rail users are not just choosing between rail and air
Matters are, however, simplified here to the extent that there are only really three modes
in the market where short haul air operates. These are air, car and rail. We can treat long
distance coach as serving a different market.

If, however, we are solely interested in, say, how many travellers can be abstracted from
air by a high speed train service, an SP exercise can be presented which offers choices
between rail and air and, unlike RP models, these can be focussed on the users of one
particular mode, which in this example would be air users.

It can be seen from Table 3.2 that the models which contain SP data almost exclusively of
the binary choice form, containing just rail and air, but the RP models generally include
three modes and in some cases more. The reasons for this are, as we have stated, RP
models need to deal with all the alternatives in the choice set but SP models can deal with
just the two whose interaction is of primary interest. A commercial operator is more
interested in the latter than a broader multi-modal approach. There is also a feeling 45
amongst many SP practitioners that SP exercises should be kept as straightforward as
possible, and this has militated against the inclusion of more than two alternatives in an
SP exercise.

The rail modes covered have been conventional rail and, increasingly in more recent
studies, high speed rail trains operating at speeds of up to 300 kph8. An exception is
provided by Wardman et al. (1992) who examined competition to air from overnight
sleeper services as well as from faster daytime train services between London and
Scotland. The study found that there were some who would currently travel by sleeper to
London but, because of the unacceptable train journey time, would return to Scotland by
air. This posed more complex modelling questions, one the study was not able to
address. Nonetheless, this issue of using different modes according to direction of travel
is a neglected issue.

In this section on modes, we can also distinguish between variants of the air mode. One
of the first applications of SP in transport was to examine the potential of short take off
and landing (STOL) aircraft (Davidson, 1973). The two air modes that we consider here
are Low Cost Airlines and Helicopter.

There has been much analysis in recent years of the phenomenon of Low Cost airlines
which, particularly in Western Europe, have blossomed in the liberalised market
environment. This evolution of Low Cost Airlines and the markets they serve is discussed
in Chapter 5. However, the analysis of Low Cost Airlines has, as far as we are aware,
focused on competition between airlines and the extent it has stimulated the market whilst
the impact on rail has not been considered. It is understandable that the impact on rail of

8Consideration has, from time to time, been given to MAGLEV trains, but we are not
aware of studies that have examined its demand potential.
 the new air services is not of great concern to the airlines themselves but it poses a
serious threat to rail operators which they need to better understand.

Whilst Low Cost operators pose a potentially serious threat to rail on some routes, in a
similar manner as the threat that high speed rail poses to air on others, an overlooked
issue is that of the number of air operators who compete with rail. On some routes, such
as London to Brussels, there are a number of airlines operating, including Low Cost
Airlines. All the studies listed in 3.2 effectively treated air as a single mode. This is
reasonable where there is only one competing mode. However, as the number of airlines
operating on a route increase, we would expect the competition to rail to be stronger. The
absence of multiple air operators within the models means that this aspect of competition
cannot be adequately addressed.

One of the reasons for examining rail and air competition is the extent to which rail might
act as a feeder service into international flights, thereby reducing the number of flights at
congested airports or else releasing slots for more important uses.

For short-haul transfers into international services, rail can perform a useful task as a
feeder mode. However, helicopter or other possible forms of aircraft might be able to
provide such feeder services without taking up valuable runway capacity, although the
environmental impacts would be less favourable than for rail.

46 A recent study conducted, as far as we are aware, the first examination of the potential of
Helicopter to provide access to airports for international travel (Wardman, 2001). The 32
seater Helicopter in question was comparable to a small fixed wing aircraft. The study
covered both route and mode switching. The route switching element explored whether a
new Cardiff-Heathrow helicopter service could attract travellers away from using Cardiff
Airport and connecting into international flights at Amsterdam, Brussels or Paris. The
mode choice element examined the extent to which a new Helicopter service from Cardiff
to Heathrow could attract car, lift/taxi and trains users for journeys of between 140 and
200 miles from South Wales to Heathrow.

The proportion of traffic that the Helicopter was forecast to attract is obviously dependent
upon the level of service offered and the fare charged. Nonetheless, in all of the
circumstances considered, the Helicopter would attract more passengers than the rival
train service9. An important finding was that, amongst frequent flyers, safety issues were
not perceived to be any different to fixed wing aircraft and there was little intrinsic
preference for comparable fixed wing aircraft over Helicopter. However, of relevance to
integration between air and access modes, was the finding that time spent waiting at the
airport on the return leg of the journey had relatively high disutility. Long waits for a
Helicopter or any other connection would not be tolerated where other alternatives are
available.

3.4.4. Attributes Covered

As is clear from Table 3.2, the range of variables examined at the mode choice level is
fairly standard. The models focus on the key variables of journey time, fare, service

9Admittedly, the rail service is not direct but requires a change of train. Nonetheless,
Helicopter would still attract a far larger share even if this interchange was removed.
frequency and access/egress, and rarely examine the detailed features of airline and rail
services.

A notable omission from the range of variables considered is reliability. This is often
regarded to be important by rail and air travellers and it is becoming increasingly important
in congested networks. More attention should therefore be paid to it.

A few mode choice studies have covered attributes other than the standard ones. Halcrow
Fox (1998) examined whether the award of air miles influenced the choice between rail
and air. It was found that allowing rail users to be accredited with airmiles led to a 6.2%
increase in the number forecast to switch from air to rail. The Wardman et al. (1992) study
examined the extent to which Pullman rail services influenced choice whilst Steer Davies
Gleave (1997) investigated the effect of earliest possible destination arrival times on the
choice between air and rail.

RP methods are not well suited to the analysis of secondary variables but, as we pointed
out in section 2.5.2, there are a number of advantages of SP methods in this area. The
issue is one of using SP methods to cover a wider range of attributes and, in some way,
linking the RP and SP models so that the SP evidence is used to enhance the coverage
of the RP model.

3.4.5. Perceived and Engineered Values and Misperceptions 47

The levels of the attributes that enter a mode choice model at the estimation stage can be
either those that are perceived by travellers or those that are the best estimates of the
analyst. Perceived values of the cost and service quality characteristics of the chosen and
alternative modes are those reported by individuals, and hence they must be collected in
purpose designed surveys. What are termed engineered values are those which are
estimated by the analyst. Some of these, such as journey times, service frequencies and
interchange requirements, can be fairly easily and accurately estimated. Others, such as
cost, which depends on the ticket purchased, and access and egress times, are much
more problematic.

Ideally, disaggregate choice models should be based on perceived values of the

attributes, since these are after all what influence individuals’ choices. However, a number
of the studies in Table 3.2, such as MVA (1987), Mandel et al. (1994) and Louviere et al.
(2000) based their RP models on engineered data since the data sets used did not
contain the necessary details. This often occurs with the use of routinely collected survey
data which is collected for purposes other than choice modelling10. These models
therefore run the risk that they provide a somewhat less satisfactory account of choices
than would otherwise be the case. Clearly, this is not a problem for SP models since the
attribute levels are specified by the analyst.

Another issue that arises, at the application rather than estimation stage, is that of
misperception. Steer Davies Gleave (1997) in their analysis of competition between
Eurostar and air found that there were serious misperceptions about Eurostar fares and
the journey times involved. Such misperceptions were also apparent in the study of the

10 A common deficiency is that details of the chosen mode are collected but not of the
rejected modes.
 same modes by Wardman and Murphy (1999). This has serious consequences at the
forecasting stage since if, for example, travellers perceive Eurostar to be more expensive
and slower than it really is then Eurostar will be predicted to attract more travellers than
turns out to be the case.

SP based studies obviously use the levels of the variables presented within the SP
exercise as the independent variables in the mode choice model. The situation is a little
different in RP studies. Where data is collected for the purpose of developing choice
models, it is customary to collect information not only on the choice made but also on the
surveyed travellers’ perceptions of the levels of time, cost and other relevant variables for
the chosen and the alternative modes. This the preferred approach since it these
perceived values which influence travellers’ choices.

However, modelling is often based on survey data collected primarily for purposes other
than choice modelling, such as the UK International Passenger Survey. Such data
contains information on the choice made but is often deficient in its representation of the
independent variables. In the worst case, the surveys do not ask for any details. In other
cases, information is asked only about the attributes of the chosen mode, yet the
attributes of the non-chosen modes are required in order to explain choice, or does not
cover the full set of attributes.

48 3.4.6. Functional Form

We cover several related issues here under the heading of functional form. Each can
have a significant impact on the demand forecasts obtained from a choice model.

One functional form issue relates to the form of the utility expression of equation 2.11
which enters the choice model. A particular functional form issue is that of whether there
are thresholds in demand response. In addition, different forms of choice model have
different properties, for example, in terms of the own elasticities and particular the cross
elasticities implied.

The vast majority of disaggregate modelling applications specify a utility function which is
linear-additive and where the coefficient weights are constrained to be the same across
modes. However, the question of the most appropriate functional form is one for empirical
testing rather than assumption. Although modellers continue to adopt the standard linear-
additive function by default, the issue is particularly important in this area because of the
wide range of times and costs involved. For example, the rail forecasts for Channel
Tunnel (MVA, 1987) were strongly criticised (BRB, 1988) because, “Market share tends to
depend on absolute differences in journey time; no account is taken of the fact that a
given time saving might be of less significance on a long journey than on a short one”.
Indeed, subsequent experience has shown that forecasts of long distance travel beyond
London and Paris/Brussels turned out to be too optimistic since this rail traffic has failed to
materialise to any great extent after the opening of the Channel Tunnel. Similarly, there
are reasons to expect the time coefficient in particular to vary across modes since the
comfort levels and travelling environment differ across modes.

Mandel et al. (1994) is one of the few studies which has paid particular attention to the
form of the utility function. They used Box-Cox transformations in addition to standard
linear-additive functions in order to examine a more general and flexible range of utility
functions. They found that the effect of additional service is smaller where service levels
are already good whilst a time saving of, say, 10 minutes has less effect on a long trip
than a short one.

They also found that the demand forecasts produced using the statistically superior model
with more general form of utility function were somewhat different to the forecasts
produced by the default model.

Few studies allow the coefficients to vary by mode. This is not necessarily an issue for
cost, since there is little reason to expect that the impact of money on utility is the same
whichever mode’s cost varies. Similar reasoning might also apply to service headway.
However, we might expect the disutility of in-vehicle and access/egress time to vary by
mode. To the extent that travel on a plane is less comfortable and offers fewer possibilities
for productive use of time, it will be valued more highly than train time.

Mandel et al. (1994) found the value of time by plane to be over three times that by train.
In turn, train time was valued around 30% less than car time. Wardman (2001) found that
time spent in a Helicopter was valued 20% higher than time spent on other modes. Kroes
and Fox (2001) found the value of time on high speed train to be around half of the value
of car travel time for both business and leisure travellers. The value of time on high speed
train was less than a fifth of that on plane, presumably reflecting an ability to use time
productively on the train.

The issue of thresholds is often raised when dealing with rail and air competition. A
threshold effect occurs where a variable reaches a critical value beyond which the 49
behavioural response to changes in it is drastically different. It is sometimes argued that
where a round trip journey cannot be made by train in a day and allow a meeting, which
might be a three hour one-way journey time, the journey will be made by air instead.
Changes in the characteristics of rail that do not allow this threshold to be broken will
result in little change in rail demand. If the journey is within the three hour thresholds, rail
and hence air demand will be much more sensitive to changes in the fare and service
quality of rail. Another threshold cited is that the train must be as fast as air door-to-door.

Oscar Faber (1995) examined whether threshold effects were apparent. A number of
different rail journey times were specified as thresholds within an appropriate form of the
utility function. However, no convincing effect of a threshold existed. They also examined
whether first and second class travellers had different preferences. It was found that 1st
class travellers were half as sensitive to cost as second class travellers, presumably
because of their more senior status. The two had a similar sensitivity to in-vehicle time but
first class travellers were twice as sensitive to headway.

Where there are more than two alternatives amongst which individuals chooses, the
standard multinomial logit model has the potentially undesirable properties set out in
chapter 2. The most common alternative to the multinomial logit model, as briefly
discussed in section 2.3.2, is the hierarchical logit model. Recently, a range of other types
of models have emerged with more flexible properties to varying degrees.

The Bhat (1995) study examined the heteroscedastic extreme value model. This has
more flexible cross-elasticity properties than its special case form of multinomial logit
model. It was shown that the two models produced somewhat different cross-elasticities.
In particular, the forecast changes in rail demand in the latter model were somewhat
higher than in the former.
 Louviere et al. (2000) also experiment with many different types of discrete choice model
on their RP data set. The elasticities and cross-elasticities are seen to vary somewhat
across different models, indicating the importance in this multi-mode context of identifying
the model which best explains choices.

3.4.7. Other Choice Contexts

We have discussed the issue of several operators, and implicitly the choices that need to
be made amongst them and its impact on the rail-air competitive position. Regardless of
the number of operators, there is also the issue of choices between the variety of ticket
types

Hence the choice of ticket is an important consideration. In part this is a service quality
issues, such as choosing between different classes of travel, but there are other features
such as advance purchase requirements and stopover and time of travel restrictions
associated with fares across a wide range.

Most studies have failed to deal with the issue of ticket choice in any great detail. In
forecasting rail and air choices, typical fares are assumed. However, these might be quite
inappropriate for some individuals and in some circumstances.
50
The Hensher (1997) study was the first in this context to provide a joint treatment of mode
choice and ticket choice. In addition to being offered various high speed rail scenarios for
comparison with the air service (and other current modes) within the SP exercise, the
scenarios also contained different fare relating to first class, business class, full economy
and discounted economy tickets.

The Wardman and Murphy (1999) study also differs from most studies in its examination
of more than one choice context. A hierarchical logit model was developed which covered
the choice of air versus rail in the upper nest and the choice of ticket type and departure
time at the lower level. The choice of ticket type and departure time in the lower nest was
a function of the costs of the different tickets, the difference between desired departure
time and the actual departure time, advance purchase requirements and refundability
conditions. Thus changes to departure times, whether or not associated with frequency
changes, would not only affect the number of people forecast to use each train but would
be allowed to change the overall attractiveness of rail and hence its mode share relative
to air. This approach provides a means of addressing the competition from Low Cost
Airlines.

In an exercise separate from the mode and ticket/departure time choice analysis,
Wardman and Murphy (1999) also examined choice between first and second class travel
for Eurostar services. This is an important issue, since the balance between the two can
have a large impact on rail revenue.

Hague Consulting Group (1998b) provide a very extensive modelling of different aspects
of choice, combined within a single hierarchical logit model. The model covers main mode
choice, route choice, airport and high speed rail route choice and access mode choice.
The main mode choice covers car, air, conventional rail and coach. Air is covered in much
more detail at the next level in the hierarchy, which is where the high speed rail option
enters as effectively another air option. At this level, there are different departure airports
and air routes and four high speed train stations to choose from. The models can
therefore examine a wide range of policy options. In addition, the upper nest allows for the
size of the market to expand or contract in response to changes in any of the main mode,
departure/route/station and access mode alternatives rather than simply allocating a fixed
demand between the different alternatives.

High speed trains might influence the choice of destination as well as the choice of mode.
For example, they may make short break trips to certain destinations a much more
feasible proposition than otherwise. Tao (1999) provides a rare example of the analysis of
destination choice. The context examined was that of a new high speed service between
Madrid and Lisbon. Not only did the modelling exercise examine how many current trips
between Madrid and Lisbon would be attracted from air, car and bus, it also examined the
potential for attracting trips to other destinations to either Madrid or Lisbon. However,
much work remains to be conducted into how high speed rail not only attracts trips form
air but also leads to changes in destination. This could be a significant market, given that
with increasing incomes second and subsequent holidays in the form of short breaks are
becoming increasingly common.

3.4.8. Model Outputs

The key outputs from disaggregate choice models are:

z relative valuations, such as money values of time or time valuations of having to 51

interchange
z own and cross elasticities, indicating the sensitivity of demand to changes in a single
attribute
z market share forecasts, indicating the effect of all variables for each mode when taken
together
Relative valuations are useful in product design, particularly where product differentiation,
market segmentation and price discrimination are concerned, and for evaluation
purposes, such as conducting social welfare appraisals of the full costs and benefits of
transport schemes. They also serve a useful purpose in being able to interpret the
robustness of a model both against what seems plausible and against other empirical
evidence

The own and cross elasticities can be used for forecasting purposes and they also serve
in the interpretation of the robustness of a model.

We will provide some illustrative model outputs from the studies listed in Table 3.2. These
outputs do not cover all the studies since some do not provide values of time, elasticities
or demand forecasts and they cannot always be readily deduced. Although we are
interested here in competition between rail and air, focussing on the cross-elasticities that
have been estimated for competition between these two modes serves little useful
purpose since the equations presented in section 3.3.3 clearly demonstrate that cross-
elasticities can be expected to vary strongly across different situations, particularly in line
with market share. What is potentially more illuminating is the relationship between
different elasticities and values of time.

The Halcrow Fox (1998) study estimates a rail travel time elasticity of around –1.0 and a
fare elasticity of between –0.3 to –0.4 for both business and leisure trips. It is not
 surprising that business travellers and relatively high income leisure travellers sometimes
on short breaks tight time constraints are more sensitive to time than cost.

Wardman and Murphy (1998) found that across all the flows examined, the time elasticity
for rail was –0.73 for business and –0.75 for leisure. The corresponding fare elasticities
were –0.47 and –0.64. As expected, business travellers are less sensitive to fare changes
than are leisure travellers whilst both sets of travellers are more sensitive to changes in
journey time than to changes in fare. The cross elasticity of air demand after a 5%
reduction in Eurostar journey times was 0.69 in the business market and 0.57 in the
leisure market. Thus a 5% reduction in Eurostar journey time would lead to a 3.45%
reduction in business travel by air. This indicates that, on the routes between London and
Paris/Brussels, Eurostar and plane are regarded to be very close substitutes.

Mandel et al. (1994) unfortunately did not report cross-elasticities, but own-elasticities are
reported and they varied by model form. The cost elasticities for air and rail were –0.62
and –0.25 respectively for the general model, but –0.99 and –0.13 for the restricted
model. The time elasticities for plane and train were –1.63 and –1.00 in the preferred
model and –0.75 and –0.64 for the inferior model.

Wardman et al. (1992) estimated a cross elasticity of air demand with regard to rail
journey time of 0.3 for business travellers. Surprisingly, the cross elasticity with regard to
rail fare was just as high at 0.3. The rail journey time elasticity was between –1.2 and –1.5
52 depending upon the size of the journey time change.

MVA (1987) predicted that conventional rail with the Channel Tunnel would attract 49%
on the London to Paris route and 47% on the London to Brussels route from amongst the
combined rail and air market. These increased to 55% and 56% respectively with high
speed. These seem to be accurate forecasts: Eurostar currently has 50-60% share.

Bhat (1995) reports cross-elasticities of business travel air demand with respect to the
number of rail departures, rail fare, rail in-vehicle time and rail out-of-vehicle time of –
0.053, 0.290, 0.404 and 0.504 respectively. Not surprisingly, business travellers are more
sensitive to time than cost, and more sensitive to out-of-vehicle time than to in-vehicle
time. The rail fare elasticity was –1.12, which is high by European standards but may well
reflect the low market share of rail in this context. The same reasoning applies to the rail
in-vehicle time elasticity of -1.56.

Louviere et al. (2000) report own and cross-elasticities for air, train, coach and car from an
RP model for trips between Sydney and Melbourne. These are defined in terms of
generalised cost, which is the combination of the money cost and the monetary
equivalents of the time components. An interesting finding was that in this leisure market
context, car provided stronger competition to air (GC cross elasticity of 0.58) than did train
(GC cross elasticity of 0.33). Similarly, car provided stronger competition to train (0.75)
than did air (0.43).

Hensher reports cross-elasticities between ticket types and modes; for example, how the
demand for first class air varies with its own fare, the fares of other air tickets and the
fares of various rail tickets. These elasticities can be aggregated into overall air and rail
fare elasticities for a common proportionate change in all fares. As would be expected,
given that different ticket types tend to be good substitutes, cross-elasticities between the
different fare types are relatively high.
Steer Davies Gleave (1999) do not report any cross-elasticities denoting the effect of
changes in rail on air demand. They do, however, report some rail own fare elasticities.
The fare elasticities varied by flow but, based solely on mode switching, these were
around –0.5 for fare in both the business market and the leisure market. Allowing for
generated travel, the leisure market would, as expected, be more sensitive to fare
changes than the business market.

We have argued that care must be taken with the interpretation and application of
elasticities reported in these models since they may well be highly context specific. In any
particular situation, we ideally want a choice model that has been calibrated to
circumstances that match the forecasting situation as closely as possible. Nonetheless,
some interesting findings are apparent. As expected, business travellers have higher
values of time than leisure travellers, and the values for both types of traveller are higher
than those which relate to domestic long distance travel in general. Travellers are more
sensitive to time than cost, with both own and cross elasticities relating to journey time
generally being somewhat larger than those for cost. Although care needs to be taken
with the absolute values of cross-elasticities, it is clear from the evidence that there is
significant interaction between rail and air and that high speed rail can be expected to
impact quite considerably on the demand for air travel.

53
54
 Table 3.2: Disaggregate Mode Choice Analysis of Competition Between Air and Rail
Study Modes Country Data Attributes Purpose Model2
Bhat (1995) Air, Rail, Car Toronto-Montreal RP Cost, In-vehicle time, Out-of-Vehicle time, Business MNL, HL
Canada Frequency HEV
Carl Bro et al. Air, Rail, Car, Bus, Foot Scandinavia-Continent RP&SP Cost, In-Vehicle time, Access/Egress Time, All HL
Frequency
Eberhard et al., (1998) Air, Rail, Car German domestic, RP Cost, Travel time, Transfers, Out-of-Vehicle Time Business MNL
Cross Channel, Holiday
Trans-Alpine Private
Gonzalez-Savignat (2001) Air, Rail Madrid-Barcelona SP Cost, In-Vehicle Time, Frequency, Access Time B&L BL
Halcrow Fox (1998) Air, Rail UK-France/Belgium SP Cost, Journey Time, Frequency, Air Miles B&L BL
Daly, Rohr and Jovicic Air, Rail, Car, Bus, Foot Denmark RP&SP Cost, In-Vehicle time, Access/Egress Time, All HL
(1998) Frequency

Hague Consulting Group Air, Rail, Car/Sea, Rail/Sea UK-Paris/Brussels RP&SP Cost, In-Vehicle Time, Frequency, Access/Egress Business HL
(1995) Time, Interchange Short Break
Holiday
Hague Consulting Group Air, Rail, Car, Coach Trips to, from and via RP Cost, In-Vehicle Time, Frequency, Access/Egress All HL
(1998b) Schiphol Time, Interchange
Hague Consulting Group Air, Rail, Car, Bus, Foot Sweden-Continent RP&SP Cost, In-Vehicle time, Access/Egress Time, All HL
(2000) Frequency
Hensher (1997) Air, Rail Sydney-Canberra SP Cost (by ticket type), Time, Frequency B & L1 HEV
Kroes and Fox (2001) Air, Rail, Car Amsterdam-Paris SP Cost, In-Vehicle Time, Frequency, Access/Egress B&L BL3
Time, Interchange
Louviere et al. (2000) Air, Rail, Car, Coach Sydney-Melbourne RP&SP Cost, In-Vehicle time, Out-of-Vehicle time Leisure HEV
Lyles and Mallick (1990) Air, Rail, Car, Coach Detroit-Chicago SP Cost, Travel Time, Frequency, Comfort factors All BL
Mandel et al., (1994) Air, Rail, Car German domestic RP Cost, Time, Frequency, Airport Access/Egress All MNL
Distance
Oscar Faber (1995) Air, Rail UK domestic RP&SP Cost, In-vehicle Time, Access/Egress, Idle Time, Business BL
Frequency, Class
MVA (1987) Air, Rail/Sea, Coach/Sea, UK-Mainland Europe RP Cost, Travel Time, Headway, Interchange B&L HL
Car/Sea Inc Tour
Steer Davies Gleave Air, Rail UK-France/Belgium SP Cost, In-vehicle time, Access/Egress Time, B&L BL
(1997) Frequency, Earliest Arrival, Station location
Tao (1999) Air, Rail, Car, Bus Madrid-Lisbon RP&SP Cost, In-vehicle time, Access/Egress Time, Business HL
Frequency Holiday
Wardman et al. (1992) Air, Rail UK domestic SP Cost, Train Time, Access/Egress Time, Pullman, Business BL
Sleeper
Wardman and Murphy Air, Rail UK-France/Belgium RP&SP In-vehicle Time, Access/Egress Time, Terminal Business BL
(1999) Time, Cost Leisure
Wardman (2001) Air, Helicopter, Car UK RP&SP In-vehicle Time, Airport Time, Access Time, Cost Business BL

Notes: B denotes business travel and L denotes leisure travel 1 Only the business model is reported in the paper. 2 The model forms can be binary choice logit
(BL), multinomial logit (MNL), hierarchical logit (HL) and heteroscedastic extreme value (HEV). 3 Binomial in estimation but multinomial in application.
3.4.9. Summary

We do not claim that this work is a comprehensive account of all the research that has
been conducted in this area. However, we do feel that it covers some significant pieces of
research and that it can be taken as representative of the totality of research in this area.
In summary, we make the following points regarding this important aspect of research
dealing with competition between rail, and in some cases high speed rail, and air.

z There is a need to enhance the coverage of the models to include secondary

variables dealing with comfort, convenience, service quality and safety. In particular,
analysis of the impact of travel time reliability is particularly in need of further research.
SP methods would prove valuable in this context.
z The studies, as in other areas of travel choice modelling, exhibit only limited analysis
of functional form. In this context, issues such as mode specific values, non-linear
utility functions and thresholds in behaviour could be particularly important and
warrant attention. Moreover, recent developments in choice modelling, where the
models have more desirable elasticity properties, should be exploited since the
studies that have already used them in this context have demonstrated that they make
a difference.
z There has been widespread use of RP data and the development of joint RP/SP
models. This basis in actual behaviour is commendable, but there remains a need to
validate the models against actual events in the light of new high speed trains
services. The convention within the profession is to avoid using stand-alone SP
models for forecasting wherever possible. 57
z There is a need to broaden the choice contexts considered. In particular, little is
known about ticket choice and choice of operator. These are important issues in
accurately representing the attractiveness of air travel compared to high speed rail.
Developments in the Low Cost Airline market will make these even more significant
and increase the need for them to be addressed. Similarly, relative little is known
about the impacts on destination choice of developments in short haul air and rail
services.
z There is evidence that travellers have serious misperceptions about the fares and
service quality of the different modes. This is more likely to occur in this context where
trips are relatively infrequently made by individuals. More research is needed to link
the perceptions which drive behaviour with the ‘actual’ costs and service quality. The
contribution that improved marketing might make to misperceptions also needs to be
explored.
z Furthermore, research needs to be undertaken to determine the consequences of the
common practice of modelling data which was not collected specifically for the
purposes of choice modelling and which does not contain adequate details of
individuals’ perceptions of both chosen and rejected alternatives.
z The potential for Helicopter to perform a useful role both for point-to-point travel and
as a complement to international flights has received little attention. The contribution
that it could make to congestion problems at airports needs to be examined.

3.5. Behavioural Choice Models: Valuation Studies

Valuations were defined in section 2.4.1 and essentially indicate the importance of one
attribute relative to another. The most common ‘numeraire’ used is that of money; that is,
attributes are commonly valued in equivalent units of money.
 The proposal states that the relevant attributes considered here would be those which are
relevant to attracting air users to rail services. These include aspects of service quality,
such as on-board services, comfort, facilities for working during the journey, reliability and,
for interliners, attributes which make for a more ‘seamless’ journey.

The behavioural choice models developed primarily for forecasting purposes and
discussed in section 3.4 themselves yield valuations and clearly cover variables that
influence the extent to which rail attracts from air. Indeed, these models focus on the
primary service quality variables of in-vehicle time, access/egress time and service
frequency. We therefore need not cover these attributes here but rather concentrate on
valuations of those attributes that we stated in section 3.4.9 could be used to enhance
standard models. We did point out in section 3.4.4 that the studies covered in section 3.4
did, on occasions, cover variables other than the primary mode choice variables.

As was point out in section 2.5.1, SP methods are particularly attractive for the valuation
of travel attributes, especially what we have referred to as the secondary variables. The
method has been widely used in Western Europe, particularly by railway companies, to
examine a wide range of aspects of service quality. There are extensive reviews of the
use of SP in rolling stock valuation (Wardman and Whelan, 2001) and interchange
(Wardman and Hine, 2000) as well as to value more conventional variables of in-vehicle
time, walk time, wait time and headway (Wardman, 2001). In the latter review, evidence
from 171 studies was used, the vast majority of which used SP methods.
58
We are therefore surprised by the lack of available studies relevant to either competition
between high speed rail and air or the complementary of high speed rail and air for
transfer passengers. Our feeling is that we suspect many studies to have been
undertaken but, given the contribution that the results can make to the non-price
competition and service quality differentiation that many airlines pursue, the results do not
enter the public domain for commercial confidentiality reasons.

There have been ‘national’ values of time studies which have estimated values of time for
air travellers, such as the Swedish (Algers et al., 1996) and Norwegian (Ramjerdi et al.,
1997) value of time studies. However, these add little to what we already know since the
choice models discussed in section 3.4 all estimate values of time. The main issue here
however is, as we discussed above, whether the value of time differs by mode, since this
will influence mode choice. For example, we might expect time spent on a train to have a
lesser value because of the greater opportunity to work and the more comfortable
surroundings. Nonetheless, we pointed out above that few mode choice models examine
this issue.

Two studies of which we are aware examined secondary attributes relating to the opening
of the Channel Tunnel, with its high speed services for at least part of the journeys that
will make use of it.

Euromap (1989) conducted research for SNCF, BR, SNCB and DB into various
requirements of business travellers who might use the Channel Tunnel trains. The
secondary attributes covered included various aspects of comfort, such as provision of a
shop, hostess service and various meal options, various aspects of efficiency, covering
reservations for taxis, hire cars and hotels, business centres at stations and business
lounges, and various seat reservation systems. The study found the preferences of
travellers from different countries to differ. The key variables were found to be reservation
flexibility and inclusive meal tickets, followed by a business lounge. A number of other
variables were found to possess little value, which is important for the railways to know
when planning their product.

The study of channel tunnel leisure travel (Harris Research et al., 1990) also used SP to
value various service options. The attributes covered in addition to fare were catering,
accommodation issues, luggage and travel restrictions. Again, the values attached to
each aspect varied across travellers from different countries, but generally the highest
values were attached to advance purchase and refund conditions followed by the
presence of a minibar trolley service and whether there was luggage check-in or not. The
research provided railway administrations with important information to be used in the
detailed planning of the services to be offered.

We are aware of two studies which have examine remote check-in, which is important in
the complementarity of rail and air, but the studies are commercially confidential.

The results of analysis of a helicopter link between Cardiff and London (Wardman, 2001)
are of relevance to integration between air and access modes. An important finding was
that time spent waiting at the airport on the return leg of the journey had relatively high
disutility. Long waits for a Helicopter or any other connection would not be tolerated where
other alternatives are available. Other important findings are that reliability of the
connection to the airport was important, with business travellers valuing extreme
unreliability of the connection as equivalent to 90 minutes of travel time. Business
travellers also had high values of integration. Through ticketing covering the Helicopter
and international flight was valued as equal to 20 minutes of travel time, whilst the 59
provision of through ticketing and through baggage was valued equivalent to 38 minutes.
These values indicate that integration is important. As we reported above, there was very
little difference in preferences towards Helicopters and comparable fixed wing aircraft.

Finally, Wardman and Murphy (1999) examined features related to different types of ticket
for Eurostar users. The attributes covered were advance purchase requirements,
refundability and exchangeability of tickets, class of travel, and on-board facilities and
services. These features were all found to be important, although the results are
commercially confidential.

3.6. Monitoring Studies

It is always good business practice to monitor developments after a new investment or

service pattern has been implemented. One of the key issues here is the extent to which
demand varies and the sources of new traffic. In addition, it is important, but too little
conducted, to compare out-turn demand with the forecasts of it in order to validate models
and identify any weakness either in the model structure, model parameters or the inputs
used in forecasting.

Kroes (2000) observes that there are many high speed services in Europe but there is not
as much published evidence of the experiences gained as might be expected. He cites
three reasons for this:

z Banks, operators and governments are interested in the ex ante research to justify
these expensive schemes but seem to lose interest in he project once it has been
constructed.
 z It is not possible to present detailed results of substitution because research findings
are reported in a manner that does not allow decomposition of the results or else the
reference situation is unavailable or not provided.
z The research findings are often commercially confidential, and hence either not
presented or else are only presented at a very aggregate level.
Monitoring can provide us with valuable evidence on demand growth and the amount of
transfer from air (and other modes) to high speed rail. Monitoring can take two forms. It
may be involve the observation of changes in demand, recorded through ticket sales
systems or else obtained from counts. This tends to be the cheapest form of data but it
cannot distinguish the source of the new traffic, and the extent to which it has been
attracted from different modes, destinations, routes or operators and the amount that is
newly generated travel. A more detailed approach is to conduct surveys amongst the
target population. This is easiest when dealing with travellers attracted to a mode, who
can therefore be easily contacted, but is far more difficult when there is a need to track
those who no longer use a particular mode, route, destination or operator.

TGV Sud-Est between Paris and Lyon was opened in two stages between 1981 and
1983. The train journey time was first reduced by around 30%, after the opening of the
Northern section, and the implied journey time elasticity was around –1.6. However, the
time elasticity was around –1.1 for a journey time reduction of around 25% on the opening
of the Southern section of the route. The cause of this lower elasticity was because the
60 transfer from air had been largely completed in the first phase when rail was fast enough
to provide effective competition.

The Spanish AVE service introduced in April 1992 reduced rail journey times between
Madrid and Seville from around 6½ hours to 2½ hours, making what was a very
unattractive service into one which competes effectively with air.

Table 3.3 indicates the market shares of plane, train and road before and after the
introduction of high speed rail on these two routes. The impact on rail is very large,
particularly in Spain where the improvement in rail journey time was larger.

It should be noted that the figures for TGV Sud-Est will have been influenced by a
significant amount of newly generated traffic. Wilken (2000) reports that surveys of AVE
passengers indicated that 15% of the additional rail traffic was newly generated. For this
reason, the market share figures should be interpreted with some caution.

Table 3.3: Before and After High Speed Market Shares

TGV Sud-Est AVE Madrid-Seville

Before After Before After
Plane 31% 7% 40% 13%
Train 40% 72% 16% 51%
Car and Bus 29% 21% 44% 36%
Source: COST318 (1996)

Wilken (2000) points out that air travel on the Paris-Lyon link in 1980 prior to the TGV was
180,000 passengers per annum. When the new TGV service was fully open, the air traffic
went down to 100,000 passengers and stayed at this level until 1990. What is noteworthy,
however, is that the remaining air traffic was largely made up those inter-lining at the
airport and TGV had captured virtually all the Paris traffic. The impacts on Paris-Marseille
and Paris-Nice air traffic was minimal. The effect on Paris-Geneva air traffic was not to
reduce the number of trips by any great amount but to stunt future growth.

Before and after surveys were used to monitor the effects of the TGV Atlantique service
which was opened in 1989 (COST318, 1996). This allowed more detailed information to
be obtained about the journey purpose. Unfortunately, the after survey was conducted in
a recession and a new ticketing system was introduced at the same time. An accurate
estimate of the change in demand cannot therefore be established. No figures were
supplied on the sources of new traffic to rail.

Patterson (1998) and Patterson and Perl (1999) examine the contribution that high speed
rail can make to environmental improvements through its impact on the amount of air
travel and hence number of flights. Instead of using a choice model to predict the impact
of high speed rail on air, they instead use monitoring of the effect of TGV introduction. The
TGV Sud-Est was introduced in 1981 with subsequent improvements in 1983. In contrast
with healthy growth in air demand prior to 1981, there was between 1981 and 1984 an
average annual reduction of 17% in the number air passengers between Paris and Lyon.
This reduction corresponded with an 8% drop in domestic passenger traffic at Lyon-
Satolas airport. The TGV Atlantique’s introduction led to a 5% reduction in traffic between 61
Nantes and Paris whilst annual growth rates at Bordeaux of around 10-12% fell to around
0.3%. The presence of TGV not only had a one-off impact on the amount of air travel but
it also reduced future growth levels.

Wilken (2000) recounts German experience with the introduction of high speed trains.
Although such trains have led to increases in rail demand, the impact on air travel on
short haul routes to Frankfurt Airport and between Hanover and Munich and Hamburg
and Munich have been minor. This is presumably because of the distances involved and
that train times are not as competitive with air as, for example, with TGV Sud-Est and the
AVE.

Lopez Pita and Anton (2001) provide the figures reported in Table 3.4 on rail market share
as a proportion of the rail and air markets. The impact of journey time on rail share is quite
clear, although the London-Brussels route might be expected to achieve a higher share
and the Paris-Amsterdam route a lower share. The strength of competition from air, with
low-cost operators on London-Brussels route, may explain this. Clearly, rail share is not
solely a function of rail journey time. What is noticeable however is that rail has captured
virtually the entire market on the Paris to Brussels route and our understanding there is
very little air activity between these two airports.

Table 3.4: Rail Share as a Proportion of Rail and Air Market

Route Rail Time Share

Paris-Brussels 1hr 25m 95%
Paris-London 3hr 60%
Paris- 4hr 10m 45%
Amsterdam
 London- 2hr 45m 45%
Brussels
After the opening of the Channel Tunnel and subsequent opening of the high speed line in
Belgium, Eurostar was capturing around 60% of the rail and air market between London
and Paris and around 50% between London and Belgium. Wilken (2000) reports that a
post Channel Tunnel survey of Ile de France residents found that for trips to London the
market share of air overall had fallen from 72% to 39% during the first year. The rail share
grew from almost nothing to over 30%.

Nelldal (1998) examined the impact of the Swedish X2000 tilting train, which provides
significantly faster services and improved levels of comfort and service. In particular, on
the Stockholm to Gothenberg route the journey time was reduced from 4 hours to the
critical 3 hours at which a day return trip becomes feasible. Competition with the airlines
therefore becomes effective. As a result of X2000 introduction, available statistics on
travel flows, as opposed to purpose designed ‘after’ surveys, indicated that the rail share
of the rail and air market increased from 42% in 1990 to 57% in 1996. The increase in rail
share in the business market would have been higher. Subsequent introduction of new air
services as a result of market deregulation served largely to abstract from other airlines
and airports than from the X2000.

In 1997, the Dutch Aviation Authorities commissioned the MVA Consultancy to compile as
many statistics as could be found about real-world evidence of substitution following the
62 introduction of high speed trains. The aim was to build up a database that could be used
for substitution model validation. The information collected not only include the demand
responses by mode but also information about travel times, fares and frequencies by
origin-destination pairs for all modes. As far as rail-air competition is concerned, this is a
very valuable source of information11.

Finally, we expect the transfer from air to rail to depend on the journey time offered by rail.
Table 3.5 below reports some interesting results, taken from Table 2 in Kroes (2000) who
in turn took results from Gerondeau (1997). The impact of rail’s journey time on its ability
to abstract traffic from air is quite striking. Gerondeau (1997) claimed that high speed rail
has what he termed “a very precise niche” for travel times up to 2½ hours where rail can
capture a larger proportion of the air market. For longer time, this competitive advantage
seems to disappear, presumably related to the possibility of a 2½ journey time allowing
business travellers to make a round trip in a day.

Table 3.5: Summary of Air – High Speed Rail Substitution Evidence in

Europe

Paris-Lyon (2h) 90% substitution city-city, 50-70% away from stations

Madrid-Sevilla (2hr 15)
Paris-Bordeaux (3h)
Paris-London (3h)
Paris-Amsterdam (4hr 30m)
Source: Table 2 in Kroes (2000)
75% substitution in corridor
20% substitution in corridor
25% substitution in corridor
5% substitution in corridor

11 No further information is known about this work, which we only became aware of late in
the study, except that it does not seem to have been used in any real world validation.
Kroes (2000) also points out that the available evidence concerning modal shift relates to
the O-D traffic. There is very little evidence on the transfer market. However, we can
expect that there has been very little actual use of high speed rail amongst transfer
passengers since there is currently very little integration between rail and air operators
and hence the cost disadvantage of using a high speed rail link to a hub airport rather
than a feeder air service will effectively rule out its use.

3.7. Rail’s Position as a Competitor to Air

A network of 200 km/h trains began to emerge in the 1950’s, and led to the concept of the
Trans-European-Express (TEE) through which the railways aimed to address the loss of
traffic to rival air services and to car. By the 1970’s, a network of services meeting certain
minimum quality standards had evolved, but the objectives of reversing the trend decline
in rail use. Railway organisations developed domestic inter-city services with high
frequencies and relative fast station-to-station journey times, complemented by EuroCity
services covering international destinations and replacing the TEE network. The birth of
what might truly be called high speed was in 1981, when the TGV Sud-Est between Paris
and Lyon opened with speeds up to 270km/h. Subsequent expansion took place in
France, with developments in Italy, Spain and Germany. In 1986, high speed trains
accounted for 9.4 billion passenger kilometres, increasing to 42.3 billion in 1997 (Wilken,
2000). However, high speed rail remains very much a French affair, where almost two-
thirds of all high speed passenger kilometres are accounted for.
63
The concept of a 15,000 km network of high speed routes emerged, linking all the major
cities of Europe (CER, 1989). The High Level Group of the Commission of the European
Communities (CEC, 1990) proposed an extensive high speed rail network. The 1993
Treaty of Maastricht called for a network of Trans-European lines, linking the existing high
speed lines. Of major strategic importance are the new line between Brussels and
Cologne, the extension of TGV Sud-Est to the Spanish border, the planned Alpine
crossing between Lyon and Turin and links between the French and German networks.
Existing and planned routes are outlined by Walrave (1993).

Rail’s position as a competitor to air on a specific corridor clearly depends upon the
relative generalised costs of the two modes. Where it exists, high speed rail tends to
switch the balance very firmly in favour of rail, at least for journeys up to 750km. Another
advantage that rail possesses are that its termini are well located for access to city
centres and major areas of population whereas airports tend to be on the outskirts of
cities and access is not always good. Rail is also in a stronger position where it serves
large conurbations and demand levels are sufficiently high to warrant frequent services.

However, at the national or European level, the position that rail can be regarded to hold
relative to air is clearly dependent upon the extent of the high speed network, with France
in particular but also Germany doing well in this respect. According to COST318 (1998),
by 1996 there were 2982 kilometres of high speed train network in Europe, with France
(1255km) and Germany (427km) having the most. By 2002, another 6878km were
planned, again mainly in France and Germany12. It is projected (COST318, 2000) that

12 It is clear that this will not be achieved by 2002.

 there will be 30000 km of high speed rail lines in Europe, two thirds of which will be
completely new track. An extensive high speed rail network is planned which will place rail
in a strong position to compete effectively with short haul air services.

Rail’s competitive position also depends on the attractiveness and availability of rival air
services. The European Commission had for many years been fighting for a more
liberalised air market in the Community, and this emerged in 1993 when the Third
Liberalisation Package allowed for competition and removed controls on prices,
frequencies and the number of operators. The emergence of low cost airlines poses a
serious threat, particularly in the leisure market. These operators tend to overcome
problems of capacity at principal airports by using less congested but generally less
convenient ‘secondary’ airports. This will limit their attractiveness to business travellers.
However, it is not just a matter of cost. The availability of an air service and also the
number of operators on a route will adversely impact rail demand. Lopez-Pita and Anton
(2001) demonstrate the growth in regional air transport, the number of companies
involved and the levels of service offered.

Rail’s position as a competitor to air can be addressed by two means. One is to examine
actual demand. This itself can take two forms, either time series based analysis of
changes in demand and market share as new rail services are introduced or cross-
sectional comparisons of rail and air market shares in different circumstances. The
second is to use demand models, such as those reported in section 3.4, to forecast rail’s
64 position relative to air in different scenarios. The former is the preferred of the two
approaches since it is based on actual market place behaviour.

We here distinguish between the two approaches as indicators of rail’s position as a

competitor to air. One is the position that is observed to emerge after the introduction of
high speed rail, and this is covered in section 3.7.1. The second is the competition that is
forecast to occur by transport models, and this is discussed in section 3.7.2. In either
event, we must be careful about drawing general conclusions given the widely different
features and circumstances of different schemes.

3.7.1. Observed Competition

Section 3.6 which covered monitoring studies deals with most of the findings relating to
rail’s observed competitive effects on air. However, there are a number of other points
that we can make.

Pavaux (1991) examined the impact of high speed rail on air demand. It was found the
high speed rail’s penetration of the air market was closely correlated with the travel time
offered by train. Where the high speed train offered a journey time of three hours or less, it
captured around three quarters of the combined rail and air market. However, this share
falls off very sharply as journey times increase beyond three hours. This is reflected in the
minor impact that the TGV service had on the amount of air traffic between Marseille,
Nice, Toulouse and Paris.

Similar evidence, based largely around the journey times of conventional inter-city train
services, confirms this strong relationship between rail market share and its journey time
relative to air. Table 3.6 gives an impression of the position in which rail finds itself in
relation to air. It is clear that rail’s competitive position is strongly influenced by the
journey time (terminus to terminus) difference.

Bearing in mind the somewhat greater time spent travelling to and from air termini, it
would seem reasonable to conclude that a conventional high speed train (up to 20kph)
can compete effectively with air up to say 500 km. High speed rail would aim to double the
distance over which it could compete.

Table 3.6: Rail Share (as % of Rail and Air) and Time Difference

Time Difference Rail Share

Amsterdam-Dusseldorf 1.50 Hours 95%

Brussels-Paris 1.75 Hours 95%
London-Manchester 1.75 Hours 90%
Tokyo-Osaka 2.00 Hours 80%
Amsterdam-Brussels 2.00 Hours 95%
Amsterdam-Koln 2.25 Hours 95%
Brussels-Dusseldorf 2.75 Hours 70%
London-Edinburgh 3.50 Hours 40%
London-Glasgow 3.75 Hours 45% 65
Koln-Paris 4.25 Hours 70%
Paris-Rotterdam 4.50 Hours 55%
Amsterdam-Paris 4.75 Hours 60%
Dusseldorf-Paris 4.75 Hours 60%
Brussels-Hamburg 5.25 Hours 30%
Munchen-Rotterdam 6.00 Hours 70%
Munchen-Paris 6.25 Hours 50%
Brussels-Munchen 6.75 Hours 20%
Munchen-Amsterdam 6.75 Hours 70%

Notes: Times are terminus to terminus and one way. Taken from Coopers and Lybrand
(1988)

We can observe market shares at a national level. These are available for all European
countries and show a similar pattern. For example, Wilken (2000) provides figures for
Germany. Car dominates for all distances below around 1000 km where air becomes the
most used mode. Rail’s share is highest between 400 and 900 km, where it always
exceeds 10% across all modes but never reaches 20%. Rail share is greater than air for
distances up to 850 km. For distances beyond that, air share increases dramatically and
rail’s falls off sharply.

However, such very aggregate measures, whilst indicating broad areas where different
modes are strong, do mask considerable variations in relative shares according to the
particular circumstances prevailing on a corridor or route. The figures in Table 3.6
demonstrate quite convincingly the expected relationship between rail share and the
journey time difference between rail and air. The figures would be more striking if
restricted to business travel. However, it is clearly the case that other factors are at work
on particular corridors.
 Whilst we are not aware of many models which will translate rail and air characteristics
into relative market shares and cross-elasticities, it is widely held that two thresholds exist
in the business market. The first threshold is that rail will hardly be considered if it cannot
accommodate the business trip in a single day when air can. This requires a round trip
journey time of less than six hours. An example of where rail is not competitive is the
route between London and Edinburgh where, until recently, the rail journey time was
around four and a half to five hours in relation to eighty minutes for air. Air captured
approximately 80% of the business market (as opposed to the total market in Table 3.6),
with the remainder being split fairly evenly between daytime and sleeper trains (Wardman
et al, 1992).

The second threshold is where rail becomes competitive with air and can hope to attract
around half of the business market. Providing that other aspects of service quality and
fare are not drastically different between air and train, this is at a terminus to terminus
journey time difference (rail-air) of around two hours. An example of this in the UK context
would be London to Newcastle. For journey time differences less than this, rail starts to
dominate the business market, as is the case between London and Leeds with a one hour
difference.

Different thresholds are used in a study of the socio-economic impact of a European High
Speed Rail Network (Halcrow Fox et al., 1992). It uses a 4½ one-way journey time
threshold for the success of high speed rail in the business market and a 5½ threshold for
66 the short break leisure market.

Some other evidence is available on the impact of rail on air demand from analyses of the
proposed high speed train developments in Europe. According to Airbus Industrie (Air
Transport World, 1990), “Over short distances in Europe, the emergence of HST systems
will capture part of the short-haul traffic of up to 1 hour of flight time between densely
populated urban areas. The expected diversion of potential air-traffic demand will be
noticeable in cases where the total train-trip time is similar to the total air-trip time…. of the
order of 50%”. In a review of evidence on inter-modal interactions, Dodgson (1990)
states, “In conclusion, air traffic forecasts are clearly thought to be susceptible to
competition from rail (and vice-versa).” The chairman of Air Inter, who has experienced
the introduction of TGV competition, claimed that some European airlines did not
appreciate the effect that a new high speed rail service would have on their market share
(Interavia Aerospace Review, 1989).

The UK Civil Aviation Authority certainly regards high speed rail as a threat. It believes
(CAA, 1990) that the impact of high speed rail would be a loss of 60% of short haul
business traffic and close to 100% of the short haul leisure market.

As far as the impact on air is concerned, the 50% reduction in demand between Paris and
Lyon led to a 25% reduction in departures (Wilken, 2000). COST318 (1996) indicates that
the introduction of AVE between Madrid and Seville reduced the number of flights from 71
per week to 40. This retrenchment by the airlines, as well as having environmental and
congestion benefits at airports, will tend to reinforce the rail demand effect.

Patterson and Perl (1999) point out that after the introduction of TGV there was a sharp
reduction in the number of flights and there was also a movement towards smaller planes.
In the years after TGV Sud-Est introduction, the increase in Lyon-Paris aircraft
movements was only 0.53% per year, compared to a 9.3% increase per year between
Bordeaux and Paris which at the time had no TGV service. Thus not only did TGV have
an immediate impact on the number of flights, it also limited subsequent developments.

Whilst it might be concluded that high speed rail does not completely replace air, even
though it does lead to a reduction in the number of flights, this is not entirely true. The
Thalys service between Paris and Brussels has, in our understanding, led the airlines to
pull out of this route. Noticeably, however, the train service here, at around 1½ hours, is
very quick whilst, at least in one direction, there is no need for short haul flights to provide
international connections.

3.7.2. Forecast Competition

A number of studies have used demand models, typically based around the type of
disaggregate mode choice modelling covered in section 3.4, to forecast what the effect
would be on air demand of various forms of competition from rail.

Hague Consulting Group (1990) examined the maximum potential to transfer Schiphol
related air travel to high speed rail for distances up to 1000 km. This would increase the
number of slots for international flights given environmental constraints on airport
development. Choice models were used to predict transfer to rail under a variety of
scenarios. The potential for substitution of air travel was estimated to be quite substantial,
ranging from 2 to 5½ million passenger journeys per year relative to between 40 and 60 67
million passengers in total predicted for 2015. This was followed by two other Dutch
studies.

Hague Consulting Group (1993a) provided forecasts of the possible size of substitution
from air to high speed rail using essentially the same methodology but more recent data
and a broader range of policy scenarios. The potential for substitution of Schiphol related
air travel for the most likely scenario for 2015 was estimated to be between 2.8 and 4.1
million passenger trips per year, depending on the macro-economic assumptions. With
the aid of policy measures to encourage substitution, including pricing measures to
discourage short distance flights, the potential substitution could be increased to a
maximum of between 6.5 and 7.8 million passenger journeys per annum.

Hague Consulting Group (1993b) investigated the measures necessary to achieve the
highest possible level of substitution of air trips by rail for destinations up to 500 kilometres
away. This study broadened the consideration of factors to cover issues other than the
attractive journey times offered by high speed rail. It demonstrated that rail’s position as a
competitor to air depended upon attractive fares relative to air and on the provision of
frequent services, high levels of at-station and on-board facilities. The substitution
potential ranged from 2.6 million passenger journeys per year for the reference case to
7.7 million for the maximum substitution scenario. This is compared with 15.1 million air
passenger journeys, both direct journeys and interliners. However, it was demonstrated
that the policy objective of transferring 10 million passenger journeys to rail could not be
achieved without forcing short distance air passengers to switch to rail.

Kroes (2000) summarises the position relating to forecasting of the substitution of air
demand by high speed rail services for the Netherlands, and this is reproduced as Table
3.7. The studies indicate that substitution depends very heavily on the speed of high
 speed rail, with almost no transfer for maximum speeds of 200 kph up to 28% for
extremely high speeds of 400 kph.

Table 3.7: Summary of Air and High Speed Rail Substitution Forecasts for
the Netherlands

PASO 1990 3-15% substitution of all Schiphol air travel (2015)

IEE 1993 5-13% substitution of all Schiphol air travel (2015)
HSS 1993 4-13% substitution of all Schiphol air travel (2015)
HSL South 1994 0.9-1.7 million passengers in corridor (2003)
HST East 1996 Circa 20% substitution in corridor (2005)
HST North East 1998 1-28% substitution in corridor (2010)
Note: IEE 1993 is Hague Consulting Group (1993a) and HSS 1993 is Hague Consulting
Group (1993b) both of which are discussed above. Source is Table 1 in Kroes (2000)

COST318 (1996) contains the results of studies which have forecast the impact of high
speed rail on air. The high speed trains planned for between Madrid and Barcelona will
reduce rail journey times by just over 4 hours. Average door-to-door times by rail will be
around 4 hours compared with 2½ hours by air. It is forecast that in 2022 rail share will be
68 33% as opposed to 10% whilst air will fall from 56% to 40%. Road falls from 34% to 27%.
Taking into account traffic generation, the reduction in air traffic is 13%. The impact is
relatively small here, since the door-to-door journey time by rail is around 3 hours 50
minutes compared to the somewhat lower 2 hours 40 minutes by air.

COST318 (1996) covers various Italian studies. The high speed train on the Milan-Naples
corridor would obtain 81% of its traffic from the existing rail line, 15% diverted from road
and 4% from air. On the Turin-Venice route, 78% would come from the exiting line, 14%
from road, 2% from air and the remainder newly generated. The impact on air demand is
not reported. These studies indicate the limited amount of traffic that can be attracted from
air when the initial mode share for air is itself low.

ECAC/EURAFOR (1996) examined the potential for high speed train substitution and its
impact on airport capacity at Amsterdam, Dusseldorf, Frankfurt, London and Paris. High
speed train times were based on the Community of European Railway’s high speed rail
network master plan. The impact on air demand was based on evidence from air
substitution by rail in Germany and the TGV Sud-Est, with the change in air demand a
function of the station-to-station time of the high speed train service. Around 60% of traffic
substitutes at journey times of two hours, including interliners, whereas at a six hour
journey time the air demand is unaffected.

The switch from air to rail on short haul services would vary between 8% of terminal
passenger volume at Amsterdam to 20% at Paris, with an average of 12% across all five
airports. However, this assumes that interlines will transfer in the same proportion as the
O-D travel. Revised forecasts were based on lower proportions of interliners switching to
rail, which resulted in 8% of all terminal passengers switching across the sample of
airports. Transferring the results to the rest of Europe, it was estimated that the high
speed network would reduce the number of passengers by 10% and the number of air
transport movements by around 6%.
The German Aerospace Centre (DLR) forecast the impact of the proposed German high
speed rail network on air travel (Urbatzka et al., 1999). Diversion rates were based on
observed substitution rates, primarily on the Hannover to Wurzburg and Stuttgart to
Frankfurt lines, as a function of high speed journey times. The reduction in air demand
varied across airports and routes. For example, between Frankfurt and Cologne where
the train time is one hour, 80% of the O-D demand will switch, whereas the average for all
air trips to Frankfurt would be 25%. On other main links, the substitution rate varied
between 10 and 50%. The subsequent effect on air demand growth was substantial:
between 1995 and 2010, the original demand growth of 75% was reduced to 45%.

The review conducted by MVA for the Dutch Aviation Authorities of evidence of the modal
transfer following the introduction of high speed rail is clearly valuable in assessing the
position of rail relative to air but only recently became aware of this study and have not
been able to include its findings in this report.

An important issue in rail’s position as a competitors to air is that it is very much

dependent upon being able to deliver attractive journey times. This is in turn dependent
upon very considerable investment in infrastructure and trains which, in many cases,
cannot be entirely justified on purely financial or even broader economic grounds. For
example, the High Speed Train Oost project, linking Amsterdam with Arnhem and
Frankfurt and onward via Switzerland to Milan was able to attract very substantial
volumes of patronage and substitution from air but the investment and operating costs
were such that the operation of the line was unlikely to become profitable (Hague
Consulting Group, 1998a). The Dutch Ministry of Transport announced in June 2001 that 69
the scheme had been abandoned.

Both observation of what has occurred in practice and the output of demand models
indicates that the impact of high speed rail will depend on journey length. This is entirely
to be expected, since rail will become less competitive as distance increases.

Wilken (2000) reports an application of the MATISSE model (Morellet and Marchal, 1995)
to describe market shares on the Paris Sud-Est corridor. The MATISSE model was
calibrated to data derived from this corridor both before and after TGV introduction. The
application demonstrates how, for all journey purposes, the high speed rail share as a
proportion of the combined high speed rail and air share varies with journey length. A very
clear relationship is apparent, with rail predicted to have a share over 80% for journeys up
to 500km and of 60% or more for journeys up to 750km. Even at 900km the share is
around 500km. The relationship between share and journey distance is clearly influenced
by the precise journey time, cost and service frequencies offered by the two modes.

The model was also applied to examine the proportionate change in both air and rail
demand by distance as a result of high speed train introduction. For journeys around
500km, high speed rail leads to a halving of air market share. This falls as distance
increases, so that at 750km the reduction in air market share is around 10% and
effectively negligible for distances over 800km.
 3.7.3. Summary

There is a large amount of evidence relating to rail’s competitive position relative to air.
COST318 (1996, p.12) conclude that, “Bearing in mind those limitations13, it is
nevertheless clear that the comparison of the results of those studies shows a huge
variety of impacts of high speed rail on air traffic. The main factors are probably the time
of journey with high speed rail, the initial modal share of air services often correlated with
distance, and the structure of the demand, especially business/non business, without
forgetting the strong influence of supply attributes such as fares and frequencies”.

It is clear that high speed rail can impact on the demand for air, but its effect is critically
determined by the journey time offered. Whilst journey time is expected to be the principal
determinant of the effect on air demand, particularly in the business market, other
variables such as price, frequency and accessibility will influence the precise modal
shares in both the business and leisure markets.

There is a need to draw together the two strands of research, relating to monitoring and
forecasting, to examine the extent to which forecasting tools can provide an accurate
account of actual behaviour.

70 3.8. Rail as a Complement to Air

We presented definitions of air-rail complementary and competition in section 2,

distinguishing between the point-to-point (O-D) market and the transfer market of inter-
liners. We define rail as a complement to air not in the sense of local access to and
egress from airports but in its potential to act as a feeder mode to international flights in
the place of short haul flights. COST318 (1996, p.11) defines complementarity “….. to
replace feeder flights connecting with long-distance flights, by high speed ‘feeder’ trains
benefiting in the optimal case of direct connections at airports and compatible timetables”.
ITA (1991) defined complementarity as follows: “Two modes of transport will be regarded
as complementary for the user when their successive utilization is either necessary or
simply preferred to the utilization of a single transport mode for a journey between two
cities”. Such complementarity might operate through a code-sharing agreement, or else
the airline itself might purchase or lease some trains and operate its own service.

There are two main reasons why rail could provide a useful complement to air in this
context, both due to the replacement of short haul flights. Firstly, it would reduce
congestion at airports, or at least free up scarce capacity for more lucrative long distance
flights. Secondly, it would lead to a reduction in adverse environmental impacts. Grayling
and Bishop (2001) point out that auctioning of slots at congested airports would displace
some domestic and short haul services. Indeed, such trends are already apparent. The
number of regional airports served by Heathrow has fallen from 19 to 10 between 1989
and 2000 (British Air Transport Association, 2001), with evidence that travellers from
regional airports are increasingly choosing to interline at Schiphol in response to
drastically improved frequencies (Grayling and Bishop, 2001).

13 Relating to variable information availability across studies regarding the kind of results
produced, description of the context and specification of the methodology
There might be other reasons for replacing short haul flights with connecting rail services.
Such rail services might be more attractive to travellers, and thereby increase airline
revenue. This could occur if services were more reliable. Alternatively, the rail services
might be less costly to operate.

Givoni (2001, p1) states that, “An increasing amount of research has been carried out in
recent years on the interaction between high speed train (HST) and air passenger
transport, especially in the light of the congestion problem faced by the air transport
industry. Almost any new book or paper regarding the air transport industry congestion
problem mentions the option of HST (e.g. Whitelegg 2001, DETR, 2000b, Cost318 1998,
ECAC/EU, 1999 and others). Most studies, however, consider the two modes to be in
competition. Complementarity is only mentioned in the sense that rail is used to improve
access to airports”.

A large number of airports have rail links to the city that they serve and sometimes the
surrounding area. These are provided either by dedicated services or as part of a
suburban system or an underground/metro network. Although we have excluded these
from our definition of complementarity, there are a surprisingly large number of airports
which have long distance rail links. According to Cost318 (1998), there are current or
planned long distance rail links at 32 airports in 29 cities and 15 European countries.
There are cases of rail links between airports, such as between Charles de Gaulle and
Lyon-Satolas and between Zurich and Geneva airports, with a plan for a high speed link
between Basel and Zurich airports.
71
However, very few of these are exploited to provide rail services which complement air.
The examples of which we are aware of long distance rail access to airports are
discussed below. These relate to the Lufthansa Airport Express, the Alitalia ‘surface
aircraft’ and collaboration between Air France and SNCF.

The Lufthansa express was a pioneer of co-operation between rail and air in terms of rail
acting as a substititute for air in providing access to international flights. The first Airport
Express ran in March 1982 between Frankfurt Airport, which is Lufthansa’s hub, and
Dusseldorf some 190km away, and called at Bonn and Cologne. The interior of the train
was the same as a Lufthansa plane, with service similar to business class flights but
superior seating. Check-in was completed during the train journey and baggage was
checked through to the destination. Four trains a day in each direction were provided, but
they were by no means high speed, requiring 2½ hours for the 190 km.

Lufthansa managed the increasing air transport demand without having to increase the
number of short haul flights. According to Cost318 (1996), about a third of the passengers
between Dusseldorf and Frankfurt used the Airport Express. The number using the Airport
Express in 1991 was equivalent to around 3000 Boeing 737 flights.

In May 1990, an additional service was introduced between Frankfurt Airport and
Stuttgart. The new high speed track allowed the 155 km journey to be made in 85
minutes. Cost318 (1996) point out that a 1991 survey indicated that 65% of the train users
would have used the plane to access Frankfurt Airport if the train had not operated. Had
Lufthansa not had the Airport Express, and had been forced to cut back air connections to
Frankfurt, traffic would have been lost to other airports and, as a result, other operators.
 However, both Airport Expresses were discontinued in 1993, partly because of the high
charter rates being charged by Deutsche Bundesbahn, and instead compartments on
regular services were reserved for the exclusive use of Lufthansa passengers.

This provides a more frequent service than the airport express. Moreover, since 1995,
there has been integration between Lufthansa’s and DB’s booking systems so that
Lufthansa can reserve seats directly on DB trains and does not have to reserve entire
compartments. Nonetheless, soon after its introduction the revised service was attracting
only 50% of the previous number of Airport Express users. The reasons were
unsatisfactory handling of baggage and the lack of a separate Lufthansa brand identity.

However, sound commercial reasons for rail substitution may remain. In July 1998,
Lufthansa and DB signed an agreement to transfer domestic short haul routes to
Frankfurt Airport to rail once high speed services became operational. The aim is to
release slots for international flights.

In 1992, Italian Railways and Alitalia collaborated in the provision of links to Rome’s
Leonardo da Vinci Airport and railway stations in Naples and Florence. Trains were for the
exclusive use of air passengers and were integrated within Alitalia’s reservation and sales
system. Passengers could check-in at the railway station. The service ran for two years
but was then abandoned because it did not satisfy commercial requirements. Other than
this, no information on the reasons for the failure is available.
72
According to Grayling and Bishop (2001), Air France and SNCF have come to an
agreement to use rail from Paris to Marseille to release slots at both Charles De Gaulle
and Orly airports. There are also direct, fast trains between cities in Switzerland, such as
Berne and Lausanne, to Geneva and Zurich Airports. The trains have an IATA code, train
and air schedules are co-ordinated, train connections are given on air schedules and
travel agents issue a common ticket.

Rail links do not have to be to major airports, such as many of those previously
mentioned. In Germany, it is anticipated that the new high speed rail terminal at Cologne
Airport will attract travellers who would otherwise depart from the more congested airports
at Dusseldorf and Frankfurt.

In addition to analysing competition between rail and air on point-to-point (OD) flows,
Urbatzka et al. (1999) also examined rail-air complementarity in the context of the
German high speed network. The situation examined was the substitution of flights
between Cologne, Dusseldorf, Stuttgart and Nurenburg and the hub airport of Frankfurt
with high speed trains. On these routes, there were 800,000 inter-liners and only 215,000
who were travelling to Frankfurt itself in 1998. Hence the much larger market from the
point of view of the railway operator is the inter-liners who can be attracted through
complementarity rather than the O-D traffic which is subject to competition.

Urbatzka et al. (1999) estimated that for the forecast year of 2010 the substitution of air
feeder services to Frankfurt Airport leads to 1.4 million passengers for high speed rail
services. This compares favourably with their estimate for the whole of Germany of a
transfer of O-D passengers from air to high speed rail services of 3.7 million. The possible
complementarity of rail and air can, in some instances, be regarded to have considerable
favourable benefits for rail.
Wilken (2000) concludes that, “We can state that a successful air/rail complementarity has
been demonstrated in several European countries, in particular in Switzerland and in
France”. He lists a series of conditions that must be satisfied for complementarity to be
effective. These are:

z Rail and air services need to be interconnected, and only trains stations in terminals
can guarantee this;
z There needs to be close co-operation between the air and rail companies to achieve
‘seamless’ interchange, including common ticketing, through baggage, rail terminal or
on train check-in and co-ordinated scheduling;
z Common marketing of combined services in computer reservation systems.
COST318 (1996) specifies the conditions in which complementarity is most likely to be
effective in making a significant contribution to the utilisation of air system capacities.
These are, “….. appropriate times of journeys by HST (between two and three hours in
present conditions), a high potential of traffic (especially for business purposes
considering the average structure of air demand) between conurbations served, and at
least one of these suffering from air traffic congestion”.

To be successful, the Italian experience reminds us that there needs to be a sufficient

amount of feeder traffic in particular corridors for the services to be financially viable. This
is likely to be the case in densely populated regions, such as Western Europe, whilst
integration of the links within existing services will be a more attractive proposition
financially than running dedicated services.
73
In the context of increasing delays at airports, Lopez Pita and Anton (2001) state, “It is
hardly surprising, as a result, that the actual airlines are requesting the collaboration of the
railways to replace air services with railway services over distances where land transport
modes can ensure service quality. This was the background which coincided with the
LUFTHANSA airline’s request in 1996 for the railway to replace the plane for those trips
which could be made by the former in a 2 to 3 hour time interval”.

Givoni (2001) lists three reasons for the limited degree of air-rail co-operation so far.
Firstly, the ‘frenzy’ for inter-airline alliances which began in the mid 1990’s has occupied
airlines’ top management. Their concern has been to position the airline in the alliance
formation, leaving no place for the major changes involved in a new form of operation.
Secondly, there are no environmental limitations yet which would stimulate interest in
complementarity. Thirdly, the high speed network is still developing, and there are
considerable uncertainties about what will emerge and how long it will take. Such
uncertainty is not conducive to involvement from the airlines.

Although the French TGV acts as a competitor to air for domestic based journeys and
particularly those centred around Paris, it also acts as a complement to air. This is
because the TGV was the first high speed train in the world to be linked directly into an
airport. Both Charles de Gaulle airport in Paris and Lyon-Satolas airports have stations on
the high speed network, enabling international travellers to connect into their flights by
train. In the early 1990’s, substitution became an important part of Dutch National policy
and as a result Schiphol Airport will be directly served by the new Amsterdam-Brussels
high speed line.
 3.9. Data Sources

There are essentially three different types of data that are of concern to us in this
consideration of air and rail demand forecasting and particularly the degree of interaction
between them. One is the availability of data upon which aggregate travel demand
models are calibrated, which we discuss in section 3.9.1. Another is the data required to
develop disaggregate travel choice models, which is covered in section 3.9.2. Finally, we
consider in section 3.9.3 the data that is needed for model application.

We must point out that given the infrequency of international and long distance travel
compared to urban travel, there is generally much less data on the former trips than the
latter.

3.9.1. Data for Aggregate Models

Data at the national level on the passenger kilometres travelled by each mode and their
market shares is widely available for European countries, both in national publications and
EUROSTAT documents. It is often the case that there are disaggregations by distance
travelled and journey purpose. Similarly, figures on international travel are available on
departures and arrivals at the aggregate level of country, region or point of
74 arrival/departure.

However, this data is of little use for modelling purposes other than to indicate very broad
trends and to estimate national level elasticities. This may be adequate for some
purposes, such as planning for airport capacity on the basis of the number of departure
per year. However, what is required when we are analysing demand for travel in more
detail, as with competition between rail and air or to explain differential growth rates
across routes, is data disaggregated by mode and specified at the route level or origin-
destination level.

As Wilken (2000) points out, the position from the perspective of transport analysts and
forecasters is far from desirable in this respect. He states that, “The knowledge of travel
flows by mode in interregional transport is limited since data of the number of origin-
destination (OD) passengers on city pairs or region to region links are generally not
available, in particular for rail and car travel. In air transport of Germany, information on
airport to airport flows is provided by official statistics, in rail transport, passengers are
counted for market research purposes of railway companies, they are, however, made
available only for special studies, and car travel flow data do exist only as model results,
since the counting of car travellers on interregional routes is a very costly matter and
realised only in special cases. This is the reason that we have only a patchy knowledge of
the demand size and structure and of modal shifts and trip generation changes due to
supply improvements, especially in rail transport”.

The International Civil Aviation Organisation (ICAO) can provide time-series data on
passenger traffic between specific airports. Such data was used by Patterson and Perl
(1999) in their analysis of the effect of TGV on French domestic air flows and, for a range
of international flows, by Dresner and Tretheway (1992) in an analysis of the effects of
market structure on air fares. At a less disaggregated level, air demand data is readily
available from the ICAO Digest of Statistics.
Indeed, the European air forecasts provide IATA are based on data supplied by each
European Civil Aviation Authority. This generally distinguishes passenger traffic into
scheduled and charter. However, according to ATAG (2000) some countries, such as
Germany and Sweden, no longer make this distinction

The position is that air demand data at a route level is available. This will support the
estimation of detailed models, which can include terms specific to rail to establish the
effects of improvements to rail, including new high speed rail services.

Demand data for rail is available at very aggregate national and regional levels, but more
detailed point-to-point data has to be released by the relevant train operator, or some
strategic national organisation overseeing the rail network. Such data has supported a
considerable amount of research but clearly its availability is dependent upon the co-
operation of the railway industry.

3.9.2. Data for Disaggregate Models

There are two sources of data here. One relates to that which is routinely collected,
usually by government organisations, to monitor long distance and international travel.
The other is data specifically collected for modelling purposes.

Most countries conduct national travel surveys and international passenger surveys and 75
these have formed the basis of numerous demand modelling exercises. However, we
have already pointed out that these are not ideal for modelling purposes since they do not
collect information on the full set of key explanatory variables for both the chosen and
rejected modes.

Choice data can be purpose collected. For RP models, users of each mode amongst
which choices are to be explained must be contacted. Whilst this is always feasible, it can
be very expensive when direct access to the users of a particular mode is not granted by
the operator. This is particularly so when we are dealing with infrequently made long
distance trips.

SP data can also be collected in order to develop choice models. This has advantages
that it is not necessary to contact users of all relevant modes whilst the fact that multiple
choices are offered to each individual means that more precise estimates can be obtained
than with RP methods and this offers the potential to reduce data collection costs.

3.9.3. Data for Application

Aggregate models often provide elasticities which are then applied in an incremental
fashion to forecast changes to current demand levels. We therefore need data on these
current demand levels. If a model has been developed to such data, it is likely that there
will be equivalent data available for forecasting purposes. Otherwise reliance will have to
be placed on other data sources.

These other data sources are needed when using disaggregate choice models to forecast
demand. A common problem with disaggregate modelling studies is the unavailability of
 data at the origin-destination level. We have stated that air data is often available, and that
rail data can be obtained but requires the co-operation of train companies. Other than
that, we are reliant on surveys to determine the base demand patters to which the mode
choice models are applied. This is expensive given the infrequency of long distance trip
making and the need to obtain adequate samples to fill a large number of different origin-
destination movements.

Two other possible sources of data are previous studies and data collected by
commercial agencies. The case studies selected in many European Union funded
research projects quite sensibly select their case studies based upon the availability of O-
D data in previous studies. With regard to data collected by commercial organisations, the
European Travel Monitor is a commercial data based compiled from a large number of
travel surveys carried out in many European countries. The main purpose of the surveys
is to establish tourist travel, and hence the database is much more accurate for non-
business than for business travel. The number of business trips contained in the data set
is relatively small and the survey method is likely to introduce bias into the number of
recorded business trips. Users of the data set have found it to be suspect for business
travel. Not only can aggregate statistics be purchased, which indicate mode shares and
provide estimates of the total amount of inter-regional and international travel within
Europe, but an attraction of the data base is that individual survey records are available
and this will support model development. A major drawback of this data set is the
expense. The price of the raw material is very high and even the aggregate statistics are
76 quite costly to acquire14.

Many EU funded research projects have suffered from the limitations of poor quality inter-
regional and international travel data at the required level of detail and disaggregation.
This has been a widely and long recognised problem in European research projects.
There are databases which cover the whole of Europe, such as those owned by
PROGNOS of Switzerland and INTRAPLAN of Germany, but we do not know the
accuracy of these data sets. Whilst there has been much discussion of improving the
situation with regard to international and inter-regional data, it is our understanding that
little progress has been made15.

3.10. Conclusions

The overall objectives of this research are to provide Eurocontrol with a thorough
overview of the state of the practice in transport research relating to competition between
rail and air and the possibilities for replacing short haul air services with rail services.

We have covered studies which have developed aggregate models of both short haul air
and rail demand, with an emphasis on the impact of economic activity on demand and
competition between the two modes. Only a few of these studies included terms which
represented competition between air and rail and there is considerable scope for further

14 More information about this data set can be found on www.ipkinternational.com

15 This position should hardly be surprising, since the in many countries there are
problems with the availability of good quality data for inter-urban travel.
work to determine how changes in one mode, and particularly the improvement of rail
services, impacts upon the other.

Whilst these aggregate models provide a large amount of evidence on the impact of
economic activity on rail demand, and despite the fact that high speed train services have
been operational for many years, we are not aware of any studies which have estimated
income elasticities for high speed rail and compared them with values obtained for
conventional rail. This would then test the widespread practice of treating high speed rail
as the same as air as far as trend growth is concerned.

We have also shown that there are relationships amongst cross-elasticities and also
between cross-elasticity and own elasticities which can be used to deduce cross-
elasticities. These are useful not only because there tends to be less evidence on cross-
elasticities on own elasticities but also because they provide a means of checking the
consistency of any estimates that are to be used in a particular situation. They also
demonstrate that cross-elasticities can be expected to vary considerably across different
circumstances. Our feeling is that awareness of these relationships and hence their
exploitation in practical studies is rather less than it should be.

We have shown that a considerable amount of research has been conducted which has
developed disaggregate mode choice models to explain competition between air and rail
or high speed rail. However, we also pointed out that further research is warranted in this
area. In particular, there needs to be additional consideration of secondary variables,
related to such factors as comfort, convenience, information, service quality, integration 77
and security. The absence of detailed treatment of reliability is quite surprising given its
importance to rail and air travellers and that unreliability is likely to increase as networks
become more congested. Other issues that warrant further attention are the role that
Helicopters could play, both for point-to-point and transfer passengers, given increasing
congestion at airports, and validation of models and forecasts against observed demand
changes as a result of high speed rail. Future studies should exploit recent advances in
choice modelling, and use models with more desirable elasticity properties, whilst
functional form should receive more attention.

There is a fair amount of evidence available from monitoring of the impact of high speed
rail. These are important in determining high speed rail’s competitive position relative to
air. We have also seen that forecasting models largely based around the disaggregate
mode choice models also have a role to play in this respect. We have provided evidence
which demonstrates that high speed rail can and has had a large impact on air demand.
This impact depends very strongly on the journey time offered by rail, and will also be
influenced by other issues such as frequency, fare and accessibility to the network. It
seems fair to conclude that high speed rail can compete effectively with air for distances
of 750 km, but the impact diminishes rapidly for longer distances. There is variation in the
performance and impact of different high speed schemes and care must be taken in
transferring results from one context to another. This is in line with the cross-elasticity
being expected to vary across different situations as we have pointed out.

We have refrained from generalising since various demand parameters vary across
different situations. We have seen that income and fare elasticities for air travel vary
between countries according to their wealth whilst the impact of high speed train on air
travel depends on train journey times and overall journey distance. Cross-elasticities
between rail and air of various variables will differ according to market share and the
 socio-economic composition of the travel market. Care must be taken to use the most
appropriate figures.

High speed rail might also serve as a complement to air by replacing short-haul feeder
services and thereby achieving environmental and congestion related benefits. Much less
research has been conducted into the demand impacts of air-rail complementarity than
the demand effects of air-rail competition. In particular, further research is required
relating to the factors that are believed to be critical to the success of air substitution by
rail. These factors relate to air-rail integration, through ticketing, baggage handling and
other such matters.

The schemes that have operated have met with mixed success, and there have not been
many schemes. However, they are likely to become more common as increasing
pressure on airports, both from a congestion and an environmental perspective, leads
airlines to seek substitutes or else new charging or regulatory regimes force it. Research
will then be required to underpin decision making in this area. The role that helicopter
might play in providing short haul feeder services should also be evaluated.

Kroes (2000) makes some interesting observations about the transfer market and rail-air
complementarity. He states that, “But, particularly in the case of the transfer market, there
are a lot of additional requirements that need to be met before a significant volume of
substitution will actually happen. This, together with the fact that the transfer market is a
78 much less stable one than the OD market, makes air-rail substitution in this market
segment a rather uncertain bet. It would seem wise to concentrate air-rail substitution
ambitions primarily on the OD market, and consider any possible substitution in the
transfer market as a highly welcome but rather uncertain extra”.

High speed rail will not by any means provide a complete solution to the congestion and
environmental problems facing the air industry. Whilst large reductions in air demand can
be achieved, high speed rail does not stop future growth. A high speed network for
Europe would only reduce flights by 9% of all scheduled flights in Europe and 6% of all
flights. Thus the effect on capacity is minor, even without further growth. Other measures
would be needed to reduce flights, but then the need for rail as an alternative would
increase dramatically.

We have discussed the situation relating to data availability. Whilst much of the further
research we recommend can be conducted through the use of purpose collected data,
there would still remain problems of applying the results if sufficiently reliable origin-
destination matrices were not available.

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84
 4. Valuing The Environmental Effects Of Transport

“The long term policy target must be to achieve improvements to the environmental
performance of air transport operations that outweigh the environmental impacts of
growth. This is a very ambitious benchmark, notably in the field of CO2 emissions……”
CEC, 1999

The objective of this aspect of the study is to provide a thorough overview of the state of
the art with respect to the valuation of the environmental impacts of transport, with a
particular emphasis on rail and short haul air travel. The focus is on the effects of the
infrastructure associated with the modes in operation rather than the impacts of new
construction. We will not therefore explore issues such as severance, land use and
ecological impacts, in detail. The work focuses on the main environmental impacts of rail
and air operation, namely:

z noise;
z local and regional air pollutants and
z climate change.
Valuation of the external costs of transport has in recent years been the subject of a large
amount of research both to value individual impacts and to assess the impacts of
individual modes in absolute terms and relative to other modes. With respect to air travel
recent work includes that reported in Pearce and Pearce (2000) suggesting that noise
nuisance alone at Heathrow may be imposing costs of £37-66 million per annum.
IWW/INFRAS (2000) estimate the total annual environmental costs of air transport in the
UK to be 5.6 billion ECU, a similar estimate for the rail sector is 1.0 billion ECU.
Assessments of the environmental costs imposed by different modes are now being 85
applied in the policy area.

The European Commission in its White Paper on infrastructure charging suggested

charges for air operation should be linked to noise and emission costs (1998). The
Commission has also supported research investigating the implications of taxation of
aircraft fuel (CEC, 2000), finding that such a tax would have to cover all flights to and from
the EU in order to have any significant environmental impact. The more recent transport
policy white paper (CEC, 2001) clearly expresses support for taxation of kerosene and
considers unilateral action for intra-EU flights given the difficulty in reaching international
agreements. The same document also refers to proposals for “differential enroute air
navigation charges to take account of the environmental impact of aircraft” (CEC, 2001). A
number of airports, mostly in Europe, already impose charges which reflect the noise
costs, usually as a landing fee related to the type of aircraft and its noise level (IATA,
2000).

This is also an area of policy interest to the UK Government at present with a consultation
paper on future of aviation (DETR, 2000a), and an anticipated white paper on aviation in
2002. Although the Government has not yet accepted environmental valuation in its
appraisal methods (DETR, 2000b), a recent study for DETR of road surface transport
costs applied values to air pollution, noise and CO2 emissions (Sansom et al, 2001).
Moreover, DETR has recently issued a paper containing values for noise, air pollution and
climate change from aircraft (DETR, 2000c). These figures suggest an environmental
cost of £3 per passenger (short haul) and £20 per passenger (long haul). However:

“It should be stressed that the environmental damage cost estimates which form the basis
for these figures are illustrative and subject to high levels of uncertainty.” DETR 2000c.

This chapter is structured in the following way. Section 4.1 gives a brief overview of the
key environmental impacts of transport. Section 4.2 discusses the methods available to
 value the environmental impacts of transport. Section 4.3 examines key studies which
aimed to value the environmental impacts of transport, with an emphasis on those which
cover air travel. Section 4.4 contains examples in which values have been applied to
estimate the environmental cost of different modes and corridors. Section 4.5 draws
conclusions and identifies gaps in understanding in this area and makes
recommendations for future research.

4.1. Environmental Impacts of Transport

The range of environmental impacts from transport include the following:

z Noise and vibration

z Local air pollutants (CO, lead, PM10)
z Regional air pollutants (NOX and SOX)
z Global air pollutants (CO2 and other greenhouse gases)
z Pollution of land and water courses through oil extraction and transport operation
z Community severance
z Visual intrusion
86 z Landscape
z Amenity
z Extraction of raw materials
z Waste disposal
z Land use
z Land take
z Demolition of properties and destruction of habitats
z Disruption during construction
In this study we are concerned with the impact of transport operations, we will therefore
take the infrastructure as given. Issues relating to land take and demolition will not
therefore be addressed. However, where demand and service levels change significantly,
changes in land use may follow, for example, development of hotel and parking space
around airports and further development of the infrastructure may be required, such as
new terminals, new runways, extra platform capacity etc. These possibilities should
however be considered in modal comparisons.

Some would include safety and accidents under the category of environmental impacts.
However, these are really social and economic impacts and have fairly well established
valuation processes (Jones-Lee, 1987, Chilton et al 1998).

4.1.1. Why value environmental impacts?

Environmental impacts are an unintended side effect of transport operation. As such they
impose real costs on people and the environment and this cost is uncompensated. They
are externalities. It is now a common position that such external costs of transport should
be internalised via charging mechanisms (see for example: CEC 1995, Nash 2001).

Uses for valuations of environmental impacts include:

1. To aid movement towards a consistent and comprehensive evaluation process.

Where, for example a cost benefit analysis includes monetary values of investment,
user benefits and costs and safety, but the environmental impacts are presented
separately as a combination of quantified and qualitative indicators. The weight given
to environmental impacts by decision makers is unknown and may not reflect the
actual costs imposed.
2. Are existing charges imposed to address environmental impacts set at the right level?
For example, noise related landing charges at airports. The ICAO policy is that any
charges may only recover costs of alleviation or prevention: does such expenditure
reflect the costs imposed on those who endure the noise?
3. There are a number of ways in which various environmental costs are given implicit
values, for example:
o progressive regulation of vehicle noise emissions
o landing and take-off fees related to noise levels
o noise barriers and insulation
o compensation payments. 87
These methods may not be consistent, implying different values for the same noise
impact and may not reflect the values of those who experience the noise.

There is also a case to be argued against the concept of valuation of environmental

impacts. Partly because of the complexity of the process:

z some impacts are poorly understood, for example the impacts of aircraft on
stratospheric ozone depletion
z some impacts are poorly perceived, for example, local or regional air pollution
z some impacts may disperse immediately, e.g. noise, while others may have
cumulative effects, e.g. lead
z some methodologies are flawed, this issue will be addressed in section 4.2.
The process is undoubtedly complex, and different impacts require different methods, but
this is not a reason to abandon the principle, though it is a reason to exercise caution.
The other main argument is that it is wrong in principle to attempt to value environmental
impacts. This argument rests on a strong sustainability case, using the precautionary
principle, arguing that key stocks of non-renewable resources should be preserved and/or
that a certain critical level of, for example, landscape of a high quality be defined and then
preserved absolutely. The precautionary principle is increasingly accepted in relation to
valuation of climate change, where the cost of achieving a specific target reduction in
emissions is often used (INFRAS/IWW, 2000).
 4.2. Valuation Methods

Valuations should as far as possible be those of individuals with direct or indirect

experience of the impact. The most obvious benefits and costs accrue to those directly
affected, for example, the benefits residents might obtain from a quiet local environment.
However, certain aspects of the environment may also be subject to valuation by those
who do not experience them, this might be:

z to preserve the option of experiencing at a later date, for example, viewing blue
whales or visiting the Yorkshire Dales.
z Individuals may derive a benefit from knowing of the existence of blue whales, even
though they have no intention of trying to view one.
z Individuals derive a value from knowing that future generations will be able to
experience, say the Lake District, a bequest value.
z Individuals may be altruistic and hence be willing to pay for benefits experienced by
other, for example, noise reduction.
These indirect effects are rarely valued, save in some Contingent Valuation Method
studies of natural resources, and are not the focus of this paper which concentrates on
the direct effects. They are included above for completeness.

88 There is a range of potential methods and almost as many ways of classifying said
methods. Here, three categories are used: Revealed preference: that is observed
behaviour in the market place that may be used to infer values of environmental impacts:
Stated preference: which uses explicit questioning on behavioural intentions to reveal
value of environmental impacts and finally methods which do not rely on individual
valuations but implicit values or costs.

1. Revealed preference
o Hedonic pricing
o Travel cost method
2. Stated preference
o Contingent valuation
o Stated preference
3. Alternative cost methods
o Replacement cost
o Consequential cost
o Shadow prices
 o

4.2.1. Revealed Preference Approaches

Hedonic Pricing

Hedonic pricing involves assessing the variation in the market price of one good in order
to deduce the value of another. If the variable of interest is noise, an equation relating
house prices to a number of factors, including noise could be developed.

House prices = f(house characteristics, accessibility, social and environmental

characteristics)

With an adequate sample of houses, it is then possible to estimate a linear regression

model to identify the value placed on certain environmental characteristics. There are of
course many problems with this approach (see, for example Willis and Garrod, 1999 or
Bateman 1993, for a detailed treatment of the issues):

1. Sample selection, the technique requires variation in the environmental impacts to be

valued as well as the independent variables, this variation has to be quantifiable.
89
2. Complete model specification is likely to be difficult due to problems in obtaining data
on the full range of variables. Explanatory variables in the equation are likely to be
correlated, leading to specification problems.
3. Do house purchasers have perfect knowledge of all the characteristics of the houses
they are choosing between? Does the housing market operate freely? House
purchasers’ choice is obviously limited at any one time. The housing market has
significant transaction costs. The method cannot value impacts on those who cannot,
for whatever reason, move away. Another issue relating to the housing market is
whether it is one market or several determined by exogenous factors, e.g. race,
income or politics or by information constraints. If sub-markets exist each may require
its own hedonic model unless the determining variables of the sub-markets may be
included in the model.
4. How do purchasers discount future costs or benefits?
5. Is it possible to measure "intangible" effects such as a river view?
 Table 4.1: Estimated impact on house prices of a change in noise levels
Location Impact of one unit change in Leq
United States
North Virginia 0.15
Tidewater 0.14
North Springfield 0.18 - 0.50
Towson 0.54
Washington 0.88
Kingsgate 0.48
North King County 0.3
Spokane 0.08
Chicago 0.65
Canada
Toronto 1.05
Switzerland
Basle 1.26
Neuchatel* 0.91
Zurich* 0.9
Note : Equivalent continuous sound level (Leq) equals a level of constant sound (in dB(A)s)
90 which would have the same sound energy over a given period as the measured fluctuating
sound under consideration.
Source : Pearce and Turner (1990), and Tinch (1995)

This method has often been used to value noise from transport most commonly that from
aircraft and road traffic. Table 4.1 shows a range of study results expressed as a
percentage change in house prices per additional decibel of noise. In section 4.3 we will
examine studies that have addressed noise from aircraft specifically.

Travel Cost Method

This method may only be used to estimate recreational use values of destinations and is
included here for completeness. There are two approaches: zonal where data is gathered
on site, individuals allocated to zones and trip generation per zone estimated, enabling
estimation of a demand curve and consumer surplus. The second is the individual
approach, which obtains more detailed responses and estimates the consumer surplus for
individuals.

T = g(travel cost, fee, attraction of site, attraction of alternative sites)

Where T is either trips per head is based on zonal data or trips made by an
individual.

This approach is very problematic:

z It captures use values only

z It assumes a site is separable from its surroundings.
z There is difficulty in handling multi-purpose trips, one response is to ask respondents
to allocate points to destinations.
z What is the appropriate value of travel time. It could be a conventional leisure time
valuation, but in certain circumstances the trip is part of the leisure experience, and
the utility of travel time may not be negative.
z Measuring the attraction - what about alternative destinations?
Table 4.2 shows recreational values for forests, using the zonal method. Values obtained
using zonal as opposed to individual data vary considerably (Garrod and Willis, 1999). To
take the values in Table 4.2 as an example, using the individual approach the value for
Brecon falls to £1.40, while that for Lorne increases slightly to £1.53, values for four out of
five decrease.

Table 4.2: Estimates of forest recreation values derived from the TCM
Forest Recreation Annual visitor Recreational values (£)
value per
visitor (£) numbers

Total Forest Per Hectare

Cheshire 1.91 225,000 429,750 449
Ruthin 2.52 48,000 120,960 59
Brecon 2.60 41,000 106,600 42 91
Lorne 1.44 10,000 14,400 2
Buchan 2.26 84,000 189,840 27
Source : Benson and Willis (1990). All values in 1988 prices.

This method is included for completeness, it not appropriate for valuing the most relevant
environmental impacts from aircraft. However, there is potential for developing route
choice models that could explore the impacts of environmental factors on say pedestrian
route choice.

4.2.2. Hypothetical Market Choices

These approaches attempt to obtain individual valuations through direct questioning on

response to hypothetical scenarios. The theoretical and practical advantages and
disadvantages of these methods are addresses in chapter 2, sections 2.3 and 2.5. Here
we consider their appropriateness for valuing environmental factors only.

Contingent Valuation

Contingent valuation techniques attempt to elicit an individuals willingness to pay (WTP)

in order to secure a specific state of affairs or their willingness to accept compensation
(WTA) for it to be changed. In theory the values obtained should be the same, in practice
WTA exceeds WTP in most cases. A range of explanations have been offered to explain
this difference, largely in two groups: the first that there may be an error or bias, the
second that the key may be an “endowment” or loss aversion effect (Garrod and Willis,
 1999, go into the arguments in some detail). The true value may lie between estimates
obtained using WTP and WTA.

Example question:

A firm proposes to undertake a major tourist development in your neighbourhood

(details attached). Without revenue from this development, your local tax bill will
have to increase.

What is the maximum increase in taxes you would be willing to pay to avoid the
necessity for this development to go ahead?

Source: adapted from Mitchell & Carson, 1989.

Table 4.3 shows some examples of values derived using this method.

Table 4.3: Willingness to pay for environmental goods as estimated by the

CVM
Study Good Value
Bateman, Willis and Garrod Recreation and environmental £77/household/yr
(1993) preservation in the Norfolk Broads
Willis and Garrod (1993) Landscape preservation in the £26/household/yr
92 Yorkshire Dales
Cummings et at (1986) Air quality improvements (poor $14.54/month
quality improved to fair) in a US city
Source : Bateman et al 1993

Table 4.4 illustrates the difference in values between willingness to pay to prevent the loss
and willingness to accept compensation for the loss, the ratio in both areas being close to
three.

Table 4.4: Contingent valuation estimates of the value of the Newcastle

green belt
(£ 1981)
(Average payment per household per year)

Measure Brunton Park Melton Park Overall

WTA 65 127 104
WTP 23 42 35
Source : Garrod & Willis, 1999

CVM has in recent years been used to address the environmental impacts of transport
(Soguel, 1994, Fietelson et al 1996 and Maddison and Mourato, 1999). Fietelson et al is
discussed in section 4.3 as it addresses airport noise, and Maddison and Mourato is
discussed here as an example of the method. This study involved the valuation of the
tunnel option for the A303 as it passes Stonehenge, together with the dismantling of the
A344, compared to the status quo. Photographs and maps were used together with a
verbal description:
“This picture (current scenario) shows the current situation with Stonehenge in between
two roads: the A344 and the A303. Traffic noise can clearly be heard whilst standing next
to the stone circle. The roads prevent visitors from wandering over most of the
surrounding National Trust area.

This picture (2000m tunnel option) shows what the site would look like if the A344 was
dismantled and the A303 became a dual carriageway. But with this option a 2km (1 mile)
tunnel would be built for the A303 as it goes past Stonehenge. The A303 would then be
invisible from Stonehenge and it would be impossible to hear the traffic whilst standing
next to the stones. Visitors would be able to walk over the entire National Trust area.”

One sample consisted of visitors interviewed on-site, the other households across the
country. A payment ladder was used, an example of which is given below.

£/year 9or X
nothing 9
50p 9
£1 9
£2 9
£3 9
£5
£7
£10 X 93
£12 X
£15 X
£17 X
£20 X
£25 X
£30 X
£40 X
£50 X
£60 X
£70 X
£80 X
£90 X
£100 X
£150 X
£200 X
Over £200 X
The final result gave an average net value per household of constructing the tunnel of £8,
if aggregated to represent UK households the total net value is £149 million. This value
represents the whole value of the road in the tunnel as opposed to the road on the level,
including noise.

Stated Preference

Stated preference techniques offer respondents a choice between (usually) two

scenarios, where they are required to trade-off one aspect against another. This approach
is well established in transport and has been used to establish the values of non-work
time used in UK Government appraisals (Highways Agency et al 1997). The method has
 more recently been applied to investigate the environmental impacts of transport
(Wardman et al, 1998, Saelinsminde, 1999 and Arsenio et al, 2000). Table 4.5 gives an
example of a stated preference trade-off involving environmental factors.

Table 4.5: Stated Preference trade-off

A. B.

Car Journey times: Car journey times:

As now 33% faster

Bus journey times: Bus journey times:

As now As now

Noise levels: Noise levels:

As now 50% better

Air quality: Air quality:

Twice as bad 50% better

Council tax: Council tax:

94 £12.00 per week £22.00 per week
Source: ITS, EPSRC Land use/transport interaction project.

There are specific issues when attempting to value environmental impacts using methods
involving questioning individuals:

z representation of the impact at different levels in the questionnaire

z linking perceived levels and values to physical measures of the impact and
z ensuring that respondents have an understanding of and preferably experience of the
impacts they are being asked to value.
The first two points are addressed in Arsenio et al (2000) and this section draws heavily
on parts of that paper. The question of representation is how to communicate to the
respondent the meaning of the different attribute (or impact) levels they are asked to
evaluate. The method used will reflect the nature of the attribute. Where an attribute has
an objective unit of measurement and this is one to which respondents can easily relate,
there is no difficulty. The time and money cost of a journey are attributes where there is
an objective measure and this is easily understood. However, even in this case, it is
necessary to be very specific in the descriptions used: time could spent walking, waiting
or in-vehicle and if in-vehicle in free flow or congested conditions: cost could be the fare,
petrol, parking or some combination of motoring costs. Other journey attributes are less
easy to define clearly, for example, comfort, safety and image. Similar problems apply to
environmental impacts where there are two main cases:

1. There is an accepted physical measure of the attribute, for example, dB(A) for noise,
but this has no real meaning to individuals.
2. There is no accepted objective unit of measurement of the effect, for example, while
levels of different air pollutants can be measured, what is air quality as a concept?
 Other impacts where objective measurement is difficult include landscape effects,
townscape, visual intrusion and severance.
The key attributes of interest in this paper are: noise, air pollution and greenhouse gas
emissions, all of which can be measured in some way. It might be argued that this
method should not be used to value greenhouse gas emissions as respondents are
unlikely to be fully aware of the potential impacts on the climate of changes in emissions
and said changes are uncertain and a long way off in terms of time. However, noise and
possibly air pollution are impacts that people experience on a day-to-day basis and can
relate to different levels. The issue then is how to represent changes in these variables in
a way that is meaningful to a respondent. A range of methods has been used to portray
noise to respondents and these are reviewed here.

Categorical Variable: an attractive and simple option is to present noise as a categorical

variable, perhaps as a scale ranging from “very noisy” through a neutral point to “very
quiet”, or through the use of a verbal or pictorial description indicating levels of annoyance
or impact on behaviour (Hoinville, 1976; Hensher and Battelino, 1992; MVA and Accent
Marketing, 1993; & Maddison and Mourato, 1999). There are two problems with this
approach, firstly the need to link the response to an objective measure, this is a problem
for any approach. Secondly, there is a boundary effect, a certain change in noise levels
may be perceived and may have a value to the respondent, without actually causing them
to move from one category to another, this method would give them a zero value for the
change. Alternatively, for those already near a boundary, a very small change may move
them between categories, with an implied value of change that may exceed the reality. 95
Proportionate Change: specify a proportionate change from the current situation. This
method has been used to assess changes in noise (Baughn and Savill, 1994 and Soguel,
1994) and noise and air pollution (Wardman et al, 1998; Saelensminde, 1999). However,
some respondents may not have a clear grasp of percentages, even when rounded and
fairly large changes such as 50% are used. The problem of relating responses to an
objective measure, still remains, as what is a perceived change of 50% is not easily
converted to an objective measure due to the non-linear nature of the decibel scale.

Laboratory simulation: whereby respondents can experience the noise levels under
experimental conditions, this approach has been used to explore noise and annoyance.
The artificial environment and whether respondents reply as they would were they actually
in their own homes are outstanding questions. Garrod et al (2000) visited respondents
home and played them different levels of noise, as part of a study of the benefits of traffic
calming schemes.

Pictures/photographs/verbal descriptions: an approach fairly common in valuation of

for example, landscape and its features and visibility. An example already discussed is
Maddison and Mourato (1999) where a verbal picture of the combined effects of the road
is drawn.

Experience: bases the different levels of the attribute on situations which the respondent
has recently experienced. In this way familiarity with the situation is maximised and an
objective measure is also possible to anchor the scale. This approach was used in a
study of air pollution from traffic in Edinburgh. Respondents were asked to choose from
two lists, one with sites of good air quality and one of sites with bad air quality, the place
with which they were most familiar and rate these in comparison with air quality at their
 home. These locations were then used in the stated preference experiment (Wardman et
al, 1998).

Where possible the experience route would appear to be preferred. It has been utilised
effectively in studies of rail rolling stock, where issues relating to comfort, ride quality etc
are difficult to present, but where respondents have experienced different types of rolling
stock, a comparison is possible (Wardman & Whelan, 1998 and 2001). However, this is
an area where the method will often be determined or constrained by the nature of the
attribute.

The second issue is the link between the physical measure, the individual perception of it
and the value placed on it. In the case of noise linking the intensity of the sound to the
perceived loudness. Using the decibel scale a 10 dB increase in sound equates to a
perceived doubling in the loudness (Nelson, 1980). However, there is also the question of
whether individuals evaluate the magnitude of the noise or the difference between two
noises, Shepard (1981) suggests the latter. Such that individuals may well differ in their
absolute ratings of two noises, but a greater similarity is expected in the difference
between the two ratings. A remaining issue is the link between perception and
annoyance.

These above are challenges to be met in the application of stated preference to the
valuation of environmental impacts.
96
4.2.3. Alternative Cost Approaches

This set of methods, do not attempt to obtain individual valuations of any benefits or costs,
but seek to value in terms of costs incurred.

Replacement Costs

For certain environmental attributes, principally those relating to landscape, built

environment and habitat, there is the possibility of replacement in some form:

asset transplantation can the existing feature be moved? e.g., an old building

asset reconstruction can it be recreated elsewhere? e.g., a wildlife habitat might

be created at a different location, with the original inhabitants moved to the new
site. Or if woodland is taken for a road, can replanting elsewhere act as a
replacement facility?

asset restoration can a degraded site elsewhere be restored as a replacement?

Then as with the other techniques, this cost may be weighed against the expected
benefits to decide whether it is worthwhile. This approach is only relevant if the
expenditure is actually entered into the appraisal.

Opportunity Costs

“This approach values the benefits of environmental protection in terms of what is being
foregone to achieve it” (Garrod and Willis, 1999).
This approach could be used to investigate the costs of regulation and environmental
restrictions. Where an environmental impact has multiple sources, for example CO2 this
is a way of identifying those sectors of the economy where reductions may be achieved at
least cost. It can also be applied to the costs of mitigating actions: what we give up, either
as individuals or society to improve an environmental situation or prevent further
degradation. The latter type of example includes:

z Conwy Crossing in Wales, a tunnel was selected to carry the road in order to avoid
spoiling the views of Conwy Castle. The NPV of the tunnel option was £5.4m less
than that of the bridge option. In which case the view was valued at least £5.4m after
discounting.
z Skye Bridge, linking the island of Skye with mainland Scotland. £300,000 (approx)
was spent on protection for local otters, building defensive walls to prevent them
climbing onto the bridge.
At an individual level it is possible to look at expenditure on goods that mitigate impacts,
e.g. double glazing, as a measure to reduce noise impacts. However, such purchases
may be carried out for a range of reasons, in this case including heat insulation and
security, and also would not be expected to represent the full cost of the externality to the
individual.

Consequential Cost

Identify the consequences of a policy or project and then value them. The most common 97
application is the use of dose response methods, to examine, for example, the impact on
human health of increased particulates, the impacts on forests or agriculture of acid rain
or the effects of vibration on buildings. In later developments this is expressed an “impact
pathway” (see ExternE project, Bickel et al, 1997 and 1999).

If it is possible to accurately estimate the impact, for example, the loss of trees as a
response to sulphur and nitrate emissions. It might then be possible to cost the loss in
terms of commercial forestry, or going back to alternative cost, the cost of reducing
emissions. Pearce (1995) provides examples of cost estimations based on dose response
relationships, including figures for Jakarta. Note that this method is dependent on values
derived from elsewhere, it does not generate them itself.
 Table 4.5: Economic costs of Air Pollution Damage to Human Health in
Urban Areas, selected figures for Jakarta (1990)
Impact Mortality cost Morbidity Total Health Cost p
US$m cost US$m
Cost US$m Capita US$
Particulates 113 44 157 19
Nitrogen 0 1 1 <1
Oxides
Lead 26 36 62 8
Total 139 81 220 27
Assumes : Value of a statistical life $75,000, Population 8.2 million. Morbidity effects
include; restricted activity days, outpatient visits, hospital admissions, respiratory illness
among children, asthma attacks and respiratory symptoms.

Source : Pearce 1995

98
4.3. Valuation Studies

In this section we review a number of the most relevant valuation studies, selecting where
possible those which focus on the impacts of air and rail transport. Studies are grouped
according to method and impact. Amongst the revealed preference methods, we include
hedonic pricing which has been extensively used with respect to the valuation of noise
and air pollution, but we omit the travel cost method, which is not appropriate to the key
impacts under consideration. We look at both contingent valuation, extensively used in
the environmental economics field and stated preference, extensively used in the
transport field. Despite the extensive use of the hypothetical market methods in the two
related fields of the environment and transport, there are relatively few studies applying
such methods to the environmental impacts of transport.

4.3.1. Hedonic Studies of Noise

A large number of studies have used an hedonic pricing methodology to assess the
impacts of noise from transport (for example, Pennington et al, 1990; Uyeno et al, 1993;
Collins and Evans, 1994 (who use a different form of analysis); Levesque, 1994; Tomkins
et al 1998; and Lake et al, 2000). In this section we focus on two key papers on noise
from airports (Nelson, 1980; and Schipper, 1998) which draw together evidence from a
number of previous studies using hedonic pricing. We also include the work of Bateman
et al (2001), which is the most recent study in the UK, and both reviews the literature and
develops an hedonic model for Glasgow.

Nelson (1980) reviewed 13 studies containing noise valuations for 18 airports. The
comparator variable is the Noise Depreciation Sensitivity Index which represents the
percentage depreciation in property values resulting from a 1 dBA change in noise levels.
He found a range from 0.4% to 1.1%. He also identified a range of problems encountered
in attempting to compare studies, some of which represent flaws, while some simply
reflect differences in definitions or approach:

z Risk of bias if accessibility is not included, as airports are employment centres,

employees may be willing to trade noise and access. Tomkins et al, (1998) found that
for residential properties around Manchester Airport, the benefits associated with
accessibility often outweighed the disbenefit from noise. Earlier work by Pennington
et al (1990) at the same airport had not included an accessibility variable, and in a
specification that allowed for area quality, the noise variable was not significant.
z Variations in the definition of accessibility.
z Use of different types of property or combinations, e.g. rental, owner occupied.
Collins and Evans (1994) found that detached houses had a higher noise discount
than semi-detached or terraced houses. In this context Uyeno et al (1993) found a
higher noise discount for condominiums (flats) that for detached housing. This then
raises the issue of the existence of sub-markets within the housing sector and how
these should be treated.
z Variation in the level of discrimination in the noise variable, from fairly coarse contours
to specific estimates. Levesque (1994) takes this question further to break down
noise into different elements including the number of events and their average EPNL
(Effective Perceived Noise Level), finding that the loudness and variability in the 99
loudness of events was more important than the number.
z Variation in the precision of house price estimates, from census tract data (USA) to
actual sale price.
z Range of sample sizes.
z Range of explanatory variables.
He concluded that a noise discount of 0.5% to 0.6% is common and that higher values
may be linked to higher incomes and hence property values. While identifying flaws in
previous studies, he suggests that the body of evidence is sufficient to provide order of
magnitude or lower bound estimates for decision makers. Levinson et al (1998) review 21
hedonic studies of noise depreciation near highways providing 30 values for locations and
11 studies of noise depreciation near airports providing 17 values. The studies took place
between 1960 and 1990. The authors exclude a set of values for 1960, restricting the
time covered to 1967 to 1990, and having done this obtain an average for both sets of
studies of 0.62%. The inclusion of the 1960 figures would have increased the average for
the airport sample, as they are the three highest values.

A recent paper (Schipper et al, 1998) undertook a meta-analysis of the results of 19

earlier studies, providing 30 estimates of noise values at airports. A key aim of this study
was to explore the possibility of value transfer in this area, that is the application of values
derived in one location to a different one, thus avoiding additional survey costs. If any
variation in study results is explainable in terms of, for example, year of study, income
levels or study specification there is clearly a potential for value transfer. In the studies
reviewed the range of values of the Noise Depreciation Index (similar formulation to that
used in Nelson, 1980) is from 0.10% to 3.57%, this last value is an outlier, with the next
highest value being 2.3% and only these two exceed two. The mean is 0.83% and the
median 0.61%. The authors suggest that the value has crept up slightly from the common
values reported by Nelson, above.
 Schipper et al, (1998) perform a regression analysis which finds that the average property
price is a key explanatory variable, indicating that the noise discount is higher amongst
wealthier communities, as suggested earlier by Nelson (1980). The form of the model
also appears to have an influence with log-linear or semi-log forms producing lower
values than other forms, e.g. Box-Cox. Data collected in 1960 was found to give higher
values, possibly linked to the newness of the problem. There is also a small but positive
time trend in the values.

The two studies are extremely useful in attempting to identify the reasons why valuations
differ and hence the precautions to be taken when undertaking an hedonic pricing study
or when considering adopting the values from a study elsewhere.

A recent UK study took a data set of the selling prices of 3500 properties in Glasgow
(Lake et al 2000, Bateman et al 2001). 327 characteristics were identified for each
property, in the broad categories: structural, neighbourhood, accessibility and
environmental. The data set did not include any information on the internal characteristics
of the house, (e.g. number of room, central heating etc) except total floor space. The
preferred model contained 39 variables (including dummies), mostly relating to the
characteristics of the building itself. Two noise variables were included, aircraft noise and
an estimation of road traffic noise using the DETR Calculation of Road Traffic Noise
(1988). The final estimate was that for each increase in road traffic noise of 1dBA,
property prices fell by 0.202%. The final equation also contained a term for aircraft noise,
100 yielding a reduction in house prices of 0.25% for every unit increase in the NNI. This is a
fairly low estimate compared to studies above.

4.3.2. Hedonic Studies of Air Pollution

Air pollution is a difficult impact to measure in this way, as the impacts are not necessarily
well perceived by those affected. However, the method has been applied extensively,
mostly with regard to urban air pollution in the USA and in earlier studies largely to the
issue of visibility (see for example, Brookshire et al, 1982). A recent paper (Smith &
Huang, 1995) reviewed and undertook a meta-analysis of 37 studies providing 86
measures of willingness to pay for improved air quality in cities in the USA. They were
also able to compare these results with the damage costs of air pollution and the benefits
of reducing pollution to meet national air quality standards.

The measure used is Marginal Willingness to Pay (MWTP) for a one unit reduction in total
suspended particulates (micrograms per cubic metre). The sample mean is $109.90 and
the median is $22.30, this suggests that outliers play a more important role in these
studies of air pollution, than in the noise studies discussed earlier where the ratio of
median to mean was 1.32 (Schipper et al, 1998) as opposed to 4.9 here.

Models were estimated using two different approaches, ordinary least squares regression
and a minimum absolute deviation. The second was adopted in part to address the issue
of the outlying observations. The results suggest that the level of total suspended
particulates has a negative effect on MWTP, real income has a small positive effect and
the property vacancy rate has a negative effect (presumably operating as a proxy for
neighbourhood quality). The other variables of significance are all related to the model
specification and timing of the study and include: the number of neighbourhood
characteristics included (+), whether actual price data was used (+), whether the model
was linear, semi-log or log-linear (all +), ordinary least squares (-), year of census data
1960 or 1970 (both +, 1970 less so), year of data (+), was the study unpublished (+). The
models suggest that more recent studies have produced higher values. However, the
authors that this is “not necessarily evidence of increasing scarcity of air quality”, as the
approach has evolved over the years and more recent studies are likely to have improved
data, usually using real prices and more complete and improved model specifications.
They also suggest that the higher values found in unpublished studies may reflect a
“publication bias”, which perhaps leads to self censorship of such results.

The authors compare the results of the meta analysis (estimated for four cities), with an
average for previous hedonic studies ($109.90) and a valuation of reduced mortality costs
(mean value of life $5 million). In this comparison they examine the reduction in PM10
required to meet national air quality targets in four cities, see table 4.6 below.

Table 4.6: An illustrative benefits transfer (annual benefits 1982-84 106 US$)
City % reduction in Value of life Mean MWTP Meta MWTP
average PM10
Anaheim 0.5 8.2 2.2 1.7
Chicago 5.3 180.0 40.6 11.5 101
Los Angeles 18.8 781.0 254.4 76.2
St Louis 20.5 367.0 87.2 66.5
Source: Smith & Huang, 1995

The values are very different even within cities, the values based on mortality rates are far
higher than those from hedonic models, even using a simple mean, which skews the
value towards the higher outliers in the sample (leaving aside any queries over the value
of life used, which is described as a mid-estimate, even if it is on the high side, morbidity
costs do not appear to have been included, only additional deaths). The key problem
appears to be that people do not fully perceive the health risks of air pollution and so this
is not reflected in the hedonic values obtained. Where impacts are not fully perceived we
cannot rely on individual preferences to reveal the full value of the impact.

4.3.3. Conclusions on the Hedonic Pricing Approach

The method is suited only to impacts where the effects are fully perceived and understood
by individuals making decisions in the market of interest. This condition applies more
strongly to noise effects than to those of air pollution. A large number of studies exist,
which could be said to form a body of evidence on noise. However, even where, like
noise the impact is well perceived there may be imperfections in the housing market that
do not allow those who would like to express a preference for quiet to do so. It is possible
to define three components of the damage caused by noise (Fietelson et al, 1996):

1. Depreciation costs experienced by property owners

 2. Loss of utility to those who remain, who are perhaps constrained by the transaction
costs of moving
3. Relocation costs incurred by those whose stay: Transaction and moving costs, will
make the current house more attractive than it would otherwise be (Palmquist, 1992).
There is an additional element a loss of “personalized advantages” (Walters 1975) or
a preference for staying put. This issue was explored by Dynarski (1986) through the
use of variables in a hedonic model to reflect attachment to a house or location such
as knowing the neighbours, relatives close by and regular attendance at social
activities, finding positive coefficients.
Point 2. will not be reflected in a hedonic pricing study. Relocation costs may not be
separately identified. Moreover, the data is not normally sufficiently detailed to include
averting behaviour such as double glazing, which mitigates to a degree the costs of noise.

Direct comparison of studies applying hedonic pricing is difficult due to differences in

functional form, quality and scope of data, definitions of variables such as accessibility,
the level of discrimination of the measure of the impact being valued e.g. the noise
contour, omitted variables and others.

102 4.3.4. Contingent Valuation Studies of Noise

While Contingent Valuation is a popular method amongst environmental economists,

applications in the context of transport noise are still rare. Soguel (1994) applied the
method to in a survey of two hundred households to assess the cost of traffic noise in
Neuchatel, Switzerland. Variables which tended to increase the value of noise were:
children in the household, a male respondent, net income and socio economic group,
while those serving to reduce the value were: insensitivity to noise and free riding. Soguel
proceeds to compare his results with those of previous studies in Switzerland, see table
4.7.
Table 4.7: Summary of Studies of the Willingness to Pay to halve the noise
exposure level (Swiss Francs)
Study Hedonic valuation Contingent valuation
Pommerehne 1988 81 75
Maggi & Iten 1988 70
Soguel 1991 60
Soguel 1994 Equation 1 95 – 56*
Equation 2 80 – 67*
Note: *in each case the lower figure has been adjusted to take note of the zero values of
those who do not perceive noise to be a problem.

Source: Soguel (1994)

The author concludes that the values are comparable (using a margin of error of +/-50%)
and externally validate the values obtained using CVM.

Fietelson et al, (1996) applied the method in the context of airport noise. The survey
distinguished between owner occupiers and renters, for owner occupiers a four bedroom
house and for renters a three bedroom house was used as the example, reflecting the
state of both markets. A telephone survey was used first asking respondents how much
they would pay for the house with no aircraft noise, then for the same house but subject to
various combinations of different levels of noise exposure, frequencies of noise
disturbance and overhead flights. Frequency and severity of noise were found to be
significant as was the level of noise. Noise insulation had an influence in offsetting part of
the losses from noise. When converted to a noise discount (based on Ldn) the values for
owner occupiers are 2.4 to 4.1% and for renters, 1.8 to 3.0%. The lower values for rental
property could reflect the easier movement available in that market segment.

4.3.5. Contingent Valuation Studies of Air Pollution

A recent application is that by Riera and Penin (2000) considering the impacts of new
road infrastructure. A standard CVM questionnaire was implemented by phone to 300
respondents, this was followed up, where respondents permitted by a postal survey using
a contingent ranking technique. The options posed were:

A: 10% reduction in air pollution and pay $80

B: 20% reduction in air pollution and pay $200

C: 30% reduction in air pollution and pay $280 103

D: 40% reduction in air pollution and pay $400

E: No reduction in air pollution and pay nothing.

Source: Riera and Penin, 2000

Respondents were asked to rank the options in order of preference. The results
suggested that residents of Barcelona and Madrid were willing to pay $10 for a 1%
reduction in air pollution (1995 figures). The authors then went on to use these estimates
in a Cost Benefit Analysis of a major tolled motorway in Barcelona.

Previous studies using CVM to assess the impacts of air pollution are fairly large in
number but are not usually applied to transport specifically. A review of 13 such studies
was conducted by Smith & Osborne, (1996) with the aim of testing the ability of CVM to
reflect the size of changes in the impact under study, in other words, is the willingness to
pay directly related to the size of change. They focused on 13 studies of visibility in
National Parks, and used five of these in their meta-analysis, the sample was reduced to
five due to differences in approach. They did find such a relationship. Amongst the
problems faced in undertaking such an analysis was the difficulty in finding a common
measure of visibility, a proportionate change was most common.

4.3.6. Contingent Valuation of Climate Change

A very difficult impact to address through social survey techniques due to limited
understanding of the impacts and the uncertainties and long time frames involved.
However, (Berk & Fovell, 1999) have addressed the issue by exploring the willingness to
 pay of residents of Los Angeles to prevent certain climate scenarios occurring, expressed
in terms of changes to local weather conditions, hotter/cooler and drier/wetter. Site
specific estimates of willingness to pay were obtained. While often a majority would pay
to avoid an increase in temperature, there is usually a proportion of the sample that would
pay to achieve the opposite. Indicating that little is clear-cut when it comes to climate
preferences. This study does suggest a way of portraying climate change to the public in
a way that can be understood and that elicits preferences.

4.3.7. Conclusions on CVM

The CVM approach has been used extensively in environmental economics, but only
relatively recently with respect to the environmental effects of transport. Above, we have
focused on studies on noise and air pollution, it has also been used to assess overall
impacts, for example the Maddison and Mourato (2000) reference discussed earlier. The
problems relating to CVM outlined in chapter 2 apply. However, Fietelson was able to
identify the contributions of different elements of noise nuisance from a CVM survey,
suggesting that relativities between locations with different levels of noise may be well
picked up in this approach. While Berk and Fovell (1999) suggest that even the more
difficult issue of climate change can be addressed, at least at the level of local weather
conditions.
104

4.3.8. Stated Preference Studies of Noise and Air Pollution

“Stated choice experiments are now the most popular form of SP method in transportation
and are growing in popularity in other areas such as marketing geography, regional
science and tourism.” Hensher (1994).

Applications of the stated preference approach are still relatively rare in environmental
economics and there are very few examples of application to the environmental effects of
transport and we have identified only one that explicitly addresses the issue of
environmental nuisance from aircraft. Here we consider that experimental work and
recent papers that apply stated preference to the environmental effects of transport,
particularly noise and air pollution, namely, Wardman et al (1997 and 1998), Saelinsminde
(1995 and 1999) and Arsenio et al (1999 and 2000).

A small scale stated preference study, 46 interviews was undertaken around Leeds-
Bradford airport by Armentia (1994). Three characteristics were included in the stated
preference experiment: house price, number of daytime flights and number of night time
flights. The models estimated suggest that those living in properties worth around
£65,000 are willing to pay around £5160 (8% of the price) for a reduction in daytime flights
of 10 per day, when there are no night flights. The equivalent figures for a £95,000
property are £9820 and 10.3%. However, these values diminish rapidly in the presence
of night time flights, falling by almost 50% in the presence of 5 night time flights. Night
time flights are clearly perceived to be the problem. This study was small scale and does
not include a variable to directly represent noise, neither was there any attempt to link
values to perceptions or absolute noise levels.
The Saelinsminde papers (1995 and 1999) are based on a study involving in-home
interviews of a representative sample of 1680 residents of Oslo and Akerhus in 1993.
The choices offered were based on car journeys with varying characteristics. An example
is given below:

Table 4.8: Choice Experiment: Saelinsminde 1999

Car Journey A Car Journey B
Noise from road traffic reduced by 20% Noise from road traffic reduced by 20%

Local air pollution caused by road traffic Local air pollution caused by air traffic
reduced by 20% reduced by 60%

In-vehicle time = 30 minutes In-vehicle time = 40 minutes

Fuel cost for the journey = NOK 25 Fuel cost for the journey = NOK 30
Source: Saelinsminde 1999

Other choice sets include CO2 emissions and dust and dirt from traffic. The proportionate
changes are from as now unfortunately there is no measurement of existing levels in this
study. Results are shown in Table 4.9. 105
Table 4.9: Willingness to pay for environmental improvements in
Oslo/Akerhaus, 1993: NOK per percentage point of change per year per
household
Factor Values from games 2 & 3 Values from games 4 & 5
Local air pollution 127 – 255 85 – 169
Noise 45 – 90 41 – 81
Dust and dirt 105 – 205 43 – 85
CO2 116 – 233 51 –102
Source: Saelinsminde 1995

Games 2 and 3 were based on a journey, while games 4 and 5 were based on future
transport policies. The author concludes that the results from games 4 and 5 are the most
reliable because:

z respondents were asked to pay for a year or a month, rather than for one journey,
which probably brings the budget constraint into play in a more realistic manner.
z Values of journey time in games 4 and 5 are closer to those found in game one, which
did not contain any environmental factors.
The values were then used to estimate the willingness of residents to pay for a 50%
reduction in environmental nuisance, see table 4.10.
 Table 4.10: Willingness to pay for a 50% reduction in environmental factors
in Oslo/Akerhus per year
Factor WTP of population of WTP per annoyed person
Oslo & Akerhus
NOK
Millions of NOK
Local air pollution 1,732 – 3,465 9,100 – 18,100
Noise 830 – 1,661 3,200 – 6,400
Dust and dirt 871 – 1,743 2,800 – 5,600
CO2 1,046 – 2,091
Source: Saelinsminde, 1995

The author then goes on to compare his results with earlier studies using different
methods in Norway, the closest values are from earlier CVM studies, with hedonic pricing
producing the lowest values (Saelinsminde, 1999).

Wardman et al (1997 and 1998) interviewed 403 residents of Edinburgh, in their homes
using a computer based stated preference experiment in 1996. A CVM question was also
included. The factors included in the SP were: noise, air pollution, journey time by bus,
106 journey time by car and council tax.

It was intended to relate the results of the household surveys on the valuation and
perception of noise and air pollution to actual physical measures taken on the streets
surveyed. Traffic noise measurements were taken at mid-link and junction locations at
house facades. The 18 hour L10 dB(A) measure was selected to reflect UK practice in
traffic noise appraisal (Department of Transport, 1988). Nitrogen Dioxide (NO2) was
selected as a proxy measure for air pollution due to its role in influencing local pollution
and strong link to road traffic emissions.

The presentation of changes in the environmental variables posed problems as scales

based on decibels or pollutant parts per million or grammes per cubic metre are not easily
or generally understood. Even where respondents understand such measures it may still
be difficult to use the scales to express perceptions of noise or air quality. Two
approaches were considered:

z percentage changes from the existing conditions, an approach which has been
applied in studies valuing environmental impacts (Saelensminde & Hammer, 1994,
Saelinsminde, 1999)
z comparision with familiar locations.
For air quality we tested both presentational methods. The locations, five with good air
quality and five with bad air quality and the NO2 levels measured are shown in Table 4.11.
 Table 4.11: Sites Used in Air Quality Presentation and NO2 Levels (µg/m3)
Worst Sites NO2 Best Sites NO2
1 Gorgie Road 38 1 Clermiston Hill 18
2 Leith Walk 54 2 Carrick Knowes Golf Course 19
3 Clerk St 38 3 Arthur's Seat 11
4 Festival Square 34 4 Colinton Playing Fields 13
5 St John's Road 45 5 Braid Hill 24
Source: Wardman et al 1997

Each respondent was asked to select the site from each list with which they were most
familiar. They were then asked to rate each site and their own home on a scale of 0 to
100 (where 0 represented very poor air quality and 100 represented very good air quality).

The percentage change method indicated an improvement from the current situation in air
quality as a reduction in air pollution, hence a negative change and vice versa. Noise was
expressed as a percentage change for all respondents. As is the case with air pollution a
negative change indicates a reduction in noise and hence a quieter environment.

The selected payment vehicle was the local council tax, which is banded according to 107
property value and is paid by all households, except those in receipt of full benefits. One
of the advantages of the computer based survey method developed was that the
respondents actual reported council tax payment was included as the base allowing the
other levels to be generated as absolute money values.

A range of money values were derived, as the method allowed discrimination between
proportionate change and the known locations approach for air, locations with and without
actual measurements, and the extent and direction of the change, see Wardman et al,
1998 for a discussion of these results. When the values are linked to physical measures
of the impacts, some comparison is possible. It was found that values of air pollution
derived from the location method were around 29% lower than those from the
proportionate change method, at 14.9 and 21.1 pence per week per unit of NO2
respectively. The value of noise is estimated to be around 3 to 5 pence per week per
percentage change in noise levels. Other findings include:

z A strong and positive income effect.

z The value placed on noise reduction has a monotonic relationship to perceptions of
existing levels of noise, with those reporting a very noisy environment having the
highest values.
z The value placed on improvements in air quality are also related to starting conditions,
but the relationship is less clear, however, those reporting the worst conditions were
willing to pay most.
z The CVM question produced a number of zero values, some of which were protests at
the payment vehicle and the likelihood of improvements actually occurring. When
zero values were included, the valuations were lower than the SP valuations.
 z The value of avoiding a deterioration in environmental quality was higher than that
attached to securing an improvement. A result also found by Loehman et al (1994)
when exploring WTP for gains and losses in visibility and health using the CVM.
Many of these issues require further research in order to clarify the relationships. Arsenio
(1999, 2000) is currently modelling data obtained from an investigation of traffic noise in
Lisbon. This study is a novel application of SP to the valuation of road traffic noise by
residents in Lisbon, Portugal. It is set within the context of households’ choices amongst
different apartments in the same block of flats with different levels of exposure to the main
sources of traffic. Traffic noise is evaluated alongside a number of other housing attributes
in the SP exercise. An advantage of the approach adopted, is that the respondents were
familiar with different levels of noise in different flats according to elevation and location
relative to the main road. As presentation of noise levels and changes in noise levels is
problematic in SP, asking people to choose between different flats, with different noise
exposure, with which they are familiar gives a way of avoiding the need to present a
measure of noise.

A CAPI survey was conducted amongst 412 households, generating 4944 observations
for the modelling stage. Noise levels were measured (220 indoors and 106 outdoors) to
give a noise estimate for each household to allow relationships to be developed between
values, perceptions and physical measures.

Results are based on standard logit and mixed logit analysis of the SP responses. A large
108 range of variables has been examined to establish the degree of preference
heterogeneity across the sample. These include current exposure to traffic noise,
household income, averting behaviour, attitudes to traffic noise and household
characteristics. Issues of functional form, such as improvements and deteriorations in
traffic noise and dependency of the marginal value on the absolute level of noise, were
also examined and found to be important. The noise variable contained in the models was
expressed both using respondents’ perceptions as measured on a rating scale and the
equivalent physical measures taken in situ (Leq dB(A)). A comparison of the performance
of these models was made. The research is also undertaking a comparison of the SP
based values against those obtained within the same study from the more conventional
contingent valuation method and with values obtained from RP models based on
households’ actual apartment choices. Results thus far are provisional.

4.3.9. Conclusions on Stated Preference

Stated preference is clearly the preferred approach when seeking individual valuations of
impacts that are clearly perceived and understood. Its advantages over other methods
were set out in chapter 2. However, in seeking to obtain individuals valuations of
environmental impacts there are a number of issues to be addressed including
presentation and the linking process between perception, attitudes, values and physical
measures of impacts.
4.3.10. Consequential Cost Studies of Air Pollution

Krupnick et al (1997) review 20 studies of the damage costs of air pollution from transport,
before outlining their own approach. The review highlights the great range of estimates
available for, for example, the air pollution related damage costs per gallon of petrol used,
which start at $0.01 and extend upwards to $3.16. This reflects the range of impacts
included, the precise methods used, the estimates of damage functions used and the
value of life. The authors select a wage premium approach to estimating the value of life
(or avoiding death, taking a best estimate from Viscusi (1993) of $3 to $4 million. Viscusi
emphasises the wide range of uncertainty in estimates of the value of life and suggests
that they may be used to “provide a broad index of the overall desirability of a policy”.
Krupnick et al estimate the costs associated with transport air pollution emissions
including the impacts of refineries. They discuss some of the issues which create
problems in arriving at an accurate estimate of additional deaths:

z Death rates may be higher on days when PM10s are high, but below normal for the
next four or five days.
z Evidence from cross sectional studies doesn’t always adjust for other varying factors
between locations
z Uncertainty as to whether there is a threshold effect
z Uncertainty as to which particles have the most severe effects.
Here we have a method that attempts to identify the physical impacts and then value 109
them. But the systems that need to be analysed are complex and not necessarily fully
understood. The authors conclude that the costs of PM10 alone are between $0.04 and
$0.08 per gallon and emissions from refineries add another $0.01 per gallon.

The ExernE project (Bickel et al, 1997) developed an “impact pathway” approach. This is
a clear process through from the modelling of emissions and dispersion, through the
assessment of physical impacts on people, buildings and vegetation to finally place
money values on these impacts. This study bases values of health and life on years of
life lost, which yields far lower values than the value of a statistical life. Values of an acute
death brought forward are estimated to range from £2,600 to £1.4 million (Department of
Health, 1999), making their application problematic.

4.3.11. Shadow Pricing of Noise

A recent study by Praag and Baarsma (2001) took a slightly different approach to
establishing a value for noise disturbance from aircraft. They undertook a survey of
disturbance and then modelled well-being or utility as a function of noise and other
characteristics. They found that insulation partially reduces the impact of noise. The
authors then estimate the required compensation as a percentage of net income: 0.63%
to 2.15% without insulation, 0.22% to 0.74% with insulation. The study goes on to
estimate the costs to the Dutch Government of such compensation at various levels of KU
(Kosten Unit) ranging from 24.33m guilders at >20KU to 0.40m guilders at >40KU (where
20KU is roughly 55 to 58 Lden in dB(A) Baarsma, 2001). At a 20KU critical level this
implies a compensation cost per flight of 61 guilders or 0.66 guilders per passenger.
 4.3.12. Conclusions

We have reviewed a range of valuations studies using different methods. Certain

approaches, for example, hedonic are popular in certain contexts, for example the
valuation of traffic noise. Others with clear potential are less developed in this area, for
example, Stated Preference. Substantive reviews and meta-analysis exist within method.
However, even within method comparisons of results are difficult due to variations in
approach, data, scope etc. Very few studies have applied more than one method to the
same case, hence directly comparable, between method examples are very rare. There
is clearly scope both for development of promising techniques and studies which compare
methods through application.

4.4. Application Studies

There are three main applications of the values of environmental externalities from air
transport:

z to derive optimal pricing strategies

z to use in appraisal of schemes and measures
110 z to assess targets for reductions in emissions, which is really part of the second point,
but is usefully identified separately.
In this section the focus is on applications in the field of air transport.

4.4.1. Optimal Charges for Noise at Airports

According to Morrell & Lu (2000) while more than 60 airports in 16 countries apply noise
charges to commercial flights, generally in the form of a surcharge or discount on landing
fees, none are based on actual measures of nuisance imposed. The authors develop an
approach to estimating the social cost of noise at Amsterdam Airport Schiphol based on
the noise discount rates arrived at through hedonic pricing studies. They take 0.60 to
0.62% to be the average noise discount value, where NEF is the descriptor. However,
this value is then adjusted in order to match the scale of the “Kosten Unit” which
measures noise levels and annoyance. In applying these values, they produce an
estimate of average noise social cost per landing of 623.6 euros, while the current charge
intended to reflect the cost of noise abatement is 157.3 euros per landing.

Nero & Black (2000) examine the charging mechanism at Sydney (Kingsford Smith)
Airport. Here the charge is designed to pay for a programme of mitigation measures.
Aircraft with noise levels below 265 EPNdB are exempt and the maximum charge is
$1490 (DC10-30 Chapter II). The charge is not designed to reflect perceived costs of
noise but to pay for mitigation measures.
4.4.2. Charges for Air Pollution from Aircraft

A key study here is that conducted by Bleijenberg and Wit (1998), their work aimed to
identify charging mechanisms that would effectively reduce aircraft emissions while
minimising any adverse impacts. They took two main approaches to finding suitable
charge levels, firstly the cost of meeting targets and secondly charges based on the
valuation of the impacts of air pollution. The first approach draws on the policy in
Sweden, where civil aviation has explicit targets for reduction of CO2, SO2, NOx and HC.
The target for CO2 is stabilisation at 1990 levels by 2020 and a 20% reduction by 2050. In
order to meet the 2020 target a charge of $0.40 to $3.60 per kg of fuel would be required,
that is 200% to1800% of current fuel prices (calculations assume that CO2 from aviation is
increasing at a rate of 2% to 4% a year and a fuel price elasticity of –0.4 to –0.5).

In arriving at values for the impacts of air pollution, the authors use earlier review work by
ECMT and their own work, and produce the shadow prices shown in table 4.12.

Table 4.12: Shadow Prices for Air Pollution ($ per kg)

Pollutant Recommended Range
CO2 0.05 0.02 – 0.10
NOX (ground level) 5.2 3.7 – 7.9
VOC 5.2 3.7 – 7.9
SO2 4.1 2.6 – 5.3 111
Bleijenberg and Wit, 1998

The range of values for CO2 reflects three different approaches to valuation:

z a low value derived from current policies and the estimated economic damage caused
by climate change;
z a medium value derived from the costs of stabilising emissions in Western Europe
and
z a high value in line with IPCC recommendations on emissions reductions.
The last two are both target based, but utilise different targets.

The authors comment on these values “Their order of magnitude appears to be more or
less accepted in Europe”. The study goes on to produce charges based on these values
for specific flights, see Table 4.13.

Table 4.13: Estimated Charge Level for Two Specific Flights ($)
Aircraft F50 F50 B747-400 B747-400
Load 67% 67% 67% 67%
Distance 500km 500km 2,000km 2,000km
Pollutant Low High Low High
CO2 46.7 234 1429 7145
NOX 5.3-24.2 11-106 156-811 333-3615
VOC 5.2 11 68 146
SO2 1.7 3.6 54 111

Total 59 – 78 260 – 354 1707 – 2364 7734 – 11017

Per km 0.12 – 0.16 0.52 – 0.71 0.85 - -1.18 3.87 – 5.51
 Per passenger 1.4 – 1.8 6.1 – 8.3 3.1 – 4.2 13.9 – 19.7
Per 1000pkm 2.8 – 3.6 12.1 – 16.5 1.5 – 2.1 6.9 – 9.9
Per kg fuel 0.08 – 0.11 0.35 – 0.48 0.08 – 0.10 0.34 – 0.49
Bleijenberg & Wit, 1998

These charges are based on modern aircraft older ones may be expected to have higher
emissions. The authors also provide a comparison of charges with those that would be
appropriate for other modes, table 4.14

Table 4.14: Energy use, emissions and environmental charges per

passenger kilometre for long distance travel
Energy CO2 NOX VOC SO2 Charge
use g/pkm g/pkm g/pkm g/pkm
MJ/pkm $/1000pk
m
Aircraft
500km1 2.2 160 0.47 0.06 0.05 11
1500km2 1.6 115 0.40 0.03 0.03 8
Car
Petrol3 2 pass 1.5 110 0.08 0.03 0.02 6
Diesel3 2 pass 1.3 100 0.39 0.05 0.03 7
112 Diesel4 1 pass 3.2 235 0.76 0.09 0.07 16
Train
High-speed5 0.7 40 0.24 0.01 0.06 4
Conventional6 0.8 50 0.28 0.01 0.07 4
Long-distance
coach7 0.3 20 0.29 0.02 0.01 3
Ferry8 0.6 50 0.92 0.04 0.98 12
1
Average of 2 modern aircraft types (F50, B737-400) load factor 65%, detour factor 1.2;
2
Average of 4 modern aircraft types (B737-400, B757-200, B7667-300ER, B747-400),
load factor 65%, detour factor 1.15; 3Modern medium sized petrol or diesel car, detour
factor 1.3;
4
Modern large diesel car, detour factor 1.3; 5Average electricity production in North-West
Europe (1990), load factor 65%, detour factor 1.25; 6Conventional international train,
average electricity production in North-West Europe (1990), load factor 40%, detour factor
1.35; 7Modern touring car on diesel. Load factor 65%, detour factor 1.3; 8Load factor
60%, detour factor 1.1

Source Bleijenberg and Wit 1998.

Charges for coach and train would be lower than for other modes as their emissions per
passenger kilometre are lower. For the next step the authors select a mid-point value
based on internalising external costs of $0.20 per litre of fuel, the resulting charge levels
are illustrated in table 4.15.
 Table 4.15: Estimated emission charge levels in $ for five aircraft types and
two distances (load 67%, charge equivalent to $0.20 per litre of fuel)
Aircraft & distance Charge per Charge per Charge per
movement passenger 1000pkm
500km
F50 189 4.4 8.8
B737-400 594 4.3 8.6
2000km
B737-400 1676 12.1 6.0
B757-200 2222 12.1 6.0
B767-300 2819 15.4 7.7
B747-400 5740 10.3 5.1
Source: Bleijenberg and Wit, 1998

Existing landing charges for the B737-400 are around $5000, so for short flights the
charge is around 10% of existing charges, for the B757-200 charges are around $8000,
so the charge would be around 20% of current fees. The authors therefore suggest that
the additional cost per passenger would be $4 for a short trip and $10-15 for a long flight
(oneway).
113
The study then goes on to assess the relative performance of different charging regimes:

z emission charges
z revenue neutral emissions charges
z emission charges on landings and take-offs
z fuel charge (including emissions standards)
z movement based
against five different criteria:

z environmental effectiveness
z economic distortions
z legal issues
z implementation
z distributional complications.
While there is no clear winner across the five criteria, the best performance on
environmental effectiveness is estimated to come from an emission charge or a fuel
charge package including a charge on fuel bunkering in the EEA, a charge on landing and
take-off emissions and NO2 standards.

Perl et al (1997) estimate the costs of air pollution at Lyon-Satalos Airport. The costs of
air pollution are drawn from six earlier studies, which used a range of methods: damage
costs, willingness to pay and avoidance costs. The authors develop four scenarios based
on exposed population (urban/rural and strength of environmental preferences. They
derive values of $3.6 million to $6.6 million for 1994, with costs set to increase over time.
 In a later paper the authors (Perl et al, 2001) revise these estimates down by 22-24%
after discovering an error in their original emissions data.

4.4.3. Charges for All Externalities

Pearce and Pearce (2000) have attempted to derive an “externality tax” for Heathrow. For
this purpose externality has been taken to include air pollution, noise and climate change.
Values for noise are taken from the meta-analysis of hedonic pricing studies undertaken
by Schipper et al (1998) (reviewed in section 4.3.1). A house price depreciation index of
0.6% per unit change in Leq is used. For air pollution a “consensus” from the literature is
used, the sources are not totally clear. The value of CO2 of £29 or $50 a tonne does
appear to be low, although this is also the “high” value used by Sansom et al, 2001.
Although this study includes noise which Bleijenberg and Wit do not, the charge levels
derived are lower per flight, by around 50%. However, on a per passenger or per
1000pkm figure they are much closer, suggesting a variation in load factor and other
assumptions.

This work has been used by DETR producing their paper on valuing the external costs of
aviation (DETR, 2000c). The DETR paper expresses some concerns about the certainty
of the values used:
114
z suggesting a lower noise discount of 0.2% based the impact of road traffic noise found
by Bateman et al (2001) (reviewed in section 4.3.1)
z suggesting a higher value for climate change of $80, but note that this is still based on
marginal damage costs rather than prevention costs
z express uncertainty as to the appropriate value of a statistical life lost to air pollution,
where estimates range from £2,600 to £1.4 million.
The DETR paper contains revised results, reported here as table 4.16.

Table 4.16: Estimated environmental costs per passenger and per

passenger kilometre in £ (central estimates)
Aircraft type and Total Per passenger Per 1000pkm
distance
Short haul
B737-400 245 2.50 2.75
A320 285 2.18 3.23
MD82 350 3.30 3.60
B757 412 3.01 3.27
A310 395 2.90 3.17
Long haul
A340 3,613 20.24 3.21
B747-400 5,140 18.49 2.88
B767-300 2,499 18.45 2.89
B777 3,804 18.05 2.78
Source: DETR, 2000c
This suggests charges per passenger of £3 (short haul) and £20 (long haul), with similar
costs per passenger kilometre. These are similar to those arrived at by Bleijenberg and
Wit (1998) for short haul, however, the long haul value is substantially higher here. This is
partly explained by a higher value of CO2 and noise, although this omission would also be
expected to increase the DETR values for short haul over the Bleijenberg and Wit values.
Using the charges in the table, DETR estimate that short haul fares would increase by
around 3.5% and long haul by around 6%. They estimate a reduction in demand of 3%
and 5% respectively using a fare elasticity of demand of –0.8.

A further study by Lu and Morrell (2001) follows their work on charging for noise, by
incorporating noise and air pollutants into the assessment of charges at Schipol Airport.
For noise they use a NDI of 0.62% as reported by Levinson et al (1998) from a review of
earlier studies (whereas Schipper et al, 1998 concluded that this value may now be
slightly higher). With respect to air pollutants results from four earlier studies using a
damage cost approach are reviewed and averaged as being appropriate for ground level
movements, landing and take-off. The authors conclude that there is still uncertainty a
degree as to the impacts caused by aircraft at cruising altitude. However, NOx is included
in their assessment during cruise as it has a high cost.

The figures produced for the average cost of noise are the same as in the earlier paper
(Morrell and Lu, 2000), but here there is also an estimation of marginal cost, which is
much higher, with an average of 2875 euros, as opposed to 624 euros for the average
costs. The cost of air pollutants is given for three scenarios and a range of aircraft:
average figures are given below: 115
z landing and take-off 244 euros
z landing and take-off plus 30 minute cruise 696 euros
z landing and take-off plus average cruise 4967 euros
The estimates that include a cruise element of a flight, are probably a lower bound as only
NOx is considered and the same value is applied as for ground level emissions

In combining the costs for noise and air pollution, the total flight costs are not included,
due to implementation issues. However, four scenarios are produced listed below with
the average values:

1. Average noise cost + emissions during landing and take-off 868 euros
2. Average noise cost + emissions during landing and take-off + 30 minutes cruise 1320
euros
3. Marginal noise cost + emissions during landing and take-off 3119 euros
4. Marginal noise costs + emissions during landing and take-off + 30 minute cruise 3571
euros
The revenue collected ranges from 171 million euros to 708 million euros. The authors
then proceed to relate these charges to existing costs of operation, see table 4.17.
 Table 4.17: Environmental charges as a percentage of airline operating
costs for four scenarios (euros per landing or %)
Plane 1 2 3 4
B737-3001
Charge 476 674 1588 1786
% operating costs 7.9 11.2 26.3 29.4
% airport charges 58.5 82.8 195.1 219.4
%operating+airport costs 7.0 9.9 23.2 26.1
% engine cost3 233.9 331.2 780.4 877.7
B747-4002
Charge 2156 5768 6510 10122
% operating costs 4.0 10.7 12.0 18.7
% airport charges 91.7 245.2 276.8 430.4
%operating+airport costs 3.8 10.2 11.5 18.0
% engine cost 73.6 196.9 222.3 345.6
1
109 seats, 70% LF, 16.03 tonnes payload, all departing passengers.
2
405 seats, 70% LF, 59.65 tonnes payload, 60% of departing passengers.
116 3
B737-300 two engines, B747-400 four engines.
Adapted from Lu and Morrell 2001

It is clear from this table that charges could represent a considerable proportion of total
operating costs. The engine cost comparison has been included to allow consideration of
the cost effectiveness of investing in cleaner engines. The equivalent fare increases per
passenger are: 4.4 to 16.4 euros for the B737-300 and 5.3 to 25 euros for the 747-400.
The short haul values are similar to those found by Bleijenberg and Wit and DETR, while
the long haul values fall somewhere in between. Applying a fare elasticity of –1.2 the
authors estimate a reduction in demand of 1.3 to 4.9% for the smaller aircraft and 0.4 to
2.0% for the larger aircraft, where the fare increase forms a much smaller proportion of
the average fare.

4.4.4. Assessing the Costs and Benefits of Policy

Values of environmental impacts may be used to assess the benefits and costs of past
and current policies and legislation. Morrison et al (1999) have assessed the costs and
benefits of the 1990 Airport Noise and Capacity Act in the USA. This Act enforced a
deadline of 1999 for the phasing out of Stage II aircraft, the aim being to reduce the noise
externalities around airports. Carriers have the option of retro-fitting “hush kits” or
replacement, the analysis reported is based on replacement costs. Costs are assumed to
arise from the acceleration in depreciation of Stage II aircraft and the replacement
programmes or airlines. The study covered 56 scheduled passenger airlines in the USA
(covering the major and national carriers). Excess costs of the regulation are estimated to
be $10 billion. No allowance is made for the higher efficiency of Stage III aircraft, as
airlines are expected to factor this into their normal replacement strategy.
The benefits of noise reduction are assessed nationwide using values derived from
hedonic studies. Only properties experiencing noise levels above 65dB(A) are included,
the authors cite the FAA in influencing this choice, through work which suggests only
minimal disturbance below this level. This is however, a high cut-off point. The authors
take the estimate of a 0.6% depreciation in house prices per additional decibel from
Schipper et al (1998). They then adjust it upwards to 1% in order to allow for impacts on
recreational land, businesses etc. The 1% depreciation rate is then applied to homes
only. 800,000 homes are estimated to benefit by an average of $6,000, with total benefits
of $5 billion.

The authors conclude that the law has imposed excess costs of $5 billion. Note however,
that the analysis does not include any other external benefits of Stage III aircraft, such as
reduced emissions of air pollutants. The authors suggest that a tax of $127 per take-off
and landing would reflect the marginal social noise costs and have been a more efficient
solution. However, the method used to estimate the marginal noise costs, appears to
treat each movement as contributing an incremental impact, which isn’t necessarily linked
to the ways in which noise is perceived.

Another example is the recent work by DEFRA (2001) to assess the costs and benefits of
measure to reduce particulates. In assessing the benefits they came up against the
problem of the range of values available for acute deaths brought forward. The key
comparisons between measures are therefore conducted on the basis of cost
effectiveness analysis. Measures in heavy manufacturing and the domestic sectors are
seen to be most cost effective, the transport measure less so, though there is some 117
uncertainty about the costs, which makes it difficult to discriminate between fitting
particulate traps and switching to no sulphur diesel.

4.4.5. Modal Comparisons

Evidence from valuation studies has been used to compare modes usually in terms of
costs per 1000 passenger or tonne kilometres. Levinson et al (1998) draw together
results from a number of studies of air pollution, see table 4.18.

Table 4.18: Costs of air pollution: US cents per passenger or tonne

kilometre (1995)
Mode Hansson Kageson Planco Swiss INFRAS & Levinson
& T&E MoT IWW et al
Markham
Cars 0.43-1.44 0.47-1.86 2.26 0.15 0.35-1.33 0.35
Trucks 1.03-1.71 0.50-0.71 1.48 1.69 0.52-2.77
Rail-pass 0.17-0.37 0.08 0.13 0.00 0.08-0.44
Rail-freight 0.22 0.08 0.20 0.00 0.03-0.15
Air 1.08 0.70 - - 0.18-1.09 0.09
Shipping 0.20 - 0.22 - 0.15-0.91
Adapted from Levinson et al 1998

Although there is considerable variation between studies, and within study ranges, there
is however, a degree of consensus that rail is the best performer in terms of air pollutants.
 4.4.6. Corridor Studies

A number of studies have included estimates for particular corridors, these illustrate the
role of local conditions and differences between modes. Here we include only those
which cover air. Weinrich et al (1998) report results for the Frankfurt – Milan corridor for a
range of modes, work undertaken as part of the QUITS project, see table 4.19.
Table 4.19: Specific external costs of passenger road, rail and air traffic per
trip, direction Frankfurt – Milan, 1995. All values in ECU per 1000pkm
Mode & Air Global Noise Accidents Total
section pollution warming external
costs
Road
Frankfurt-Basel 14.77 5.11 4.37 13.16 37.41
Basel-Como 12.98 5.17 1.82 31.63 51.60
Como-Milan 34.25 5.60 7.35 27.48 74.68
Frankfurt-Milan 15.63 5.16 3.83 19.64 44.26
Rail
Frankfurt-Basel 2.95 2.82 2.79 0 8.56
Basel-Como 0.18 0.09 0.52 0 0.79
Como-Milan 4.62 2.81 0.31 0 7.74
118 Frankfurt-Milan 1.71 1.54 1.62 0 4.87
Air
Frankfurt-Milan 9.60 8.55 3.76* 0 21.91
*value taken from IWW/INFRAS 1995
Source: Weinrich et al, 1998

This study adopts the impact pathway approach outlined by Bickel et al, 1997 & 1999. In
the above table the values for air pollutants use the Years of Life Lost approach rather
than the Value of a Statistical Life, which would yield higher values. The climate change
value is based on damage costs, but is at the high end of the spectrum, 170 ECU per
tonne. While noise values appear to come from a Swedish CVM study. Rail clearly
produces the best environmental performance. Air performs better than car on this route,
even if the high accident costs associated with the car mode are ignored.

Corridor results are also reported in IWW/INFRAS (2000). This study undertook a wide
review of valuation studies from which to derive the values used within it. For noise,
willingness to pay and health effects were considered. Air pollution estimates are derived
from World health Organisation studies. Climate change is assessed in terms of
avoidance costs. The target chosen (based on IPCC recommendations) is a 50%
reduction from a 1990 base year by 2030. The shadow price or opportunity cost derived
is 135 euros (range 70 – 200). CO2 emissions from air transport are given a double
weight to reflect concerns about high level emissions (IPCC, 1999). Table 4.20 shows the
results for the Paris – Vienna corridor (PV) and the Paris – Brussels corridor (PB) (HSR =
High-speed Rail Thalys).
 Table 4.20: Corridor Costs Euros per 1000 pkm
mpact PV Car PV Train PV Air PB Car PB HSR PB Air
Accidents 15.9 0.6 2.6 14.0 0.6 9.2
Noise 0.3 1.3 1.2 1.5 0.1 1.6
Air Pollution 2.1 2.2 0.7 3.5 2.3 0.9
Climate Change 18.9 4.2 21.0 18.7 4.8 30.2
Urban Effects 0.2 0.0 0.0 2.1 0.0 0.0
Up/downstream 2.9 3.3 3.2 2.9 2.6 5.6
Total 40.2 11.7 28.7 42.8 10.4 47.5
The authors comment that load factor has influenced the results, with the high-speed train
in Paris-Brussels corridor benefiting from a high load factor which makes it look more
attractive than conventional rail on a per passenger kilometre basis. Again train is clearly
best on environmental grounds. Air is less attractive on the shorter route, partly again
because the plane is assumed to have a lighter load, but also because road access costs
make up an increasing proportion of the total emissions (IWW/INFRAS, 2000).

The PETS study (Pricing of European Transport Systems, EC 4th Framework) utilised
current best evidence on the marginal social costs of different modes and compared this
with fees and taxes already paid. The study utilised a number of case studies to assess
the situation across differing conditions. In the urban case study (Lisbon) a key finding 119
was that car use was underpriced and bus and rail overpriced. However, the interurban
corridors the results suggest that all modes are overpriced (Nash et al, 2001). Table 4.21
shows the results for the cross-channel study area.

If the change in prices indicated in Table 4.21 were implemented, rail use would rise
slightly at the expense of air and car. However, note that this study does not include
noise costs of aircraft during take-off and landing. The global warming estimate is
considerably lower than that of Bleijenberg and Wit (1998) who utilise target reductions for
CO2 while Nash et al use damage costs. Nash et al also include all fares and taxes in
their estimates, this is a key point in that their work attempts to establish the contribution
made to internalising externalities by the current price and tax structure, whereas other
studies often seek to identify the externality then add to existing prices. However, for air
Nash et al imply this would probably be correct given the competitive environment and
lack of general taxes.

“ For inter-urban transport, however, in no case were the changes in mode split from the
introduction of efficient pricing very large; the belief that proper allowance for air pollution
and global warming would lead to a major diversion from road and air to rail does not
appear to be supported by the empirical analysis” Nash et al 2001
 Table 4.21: Changes in Cross Channel passenger prices (ECU/100
passenger km)
Compenent Car Train Aircraft
Producer Cost
Infrastructure wear and tear 0.351 (1) (2)
Increased PT frequency - 16.360 (2)
User Cost
Congestion (time delays) 0.12 - -
Mohring effect - -2.856 -
External Costs
Accident cost (low) 0.164 0.012 0.001
Accident cost (high) 0.898 0.058 0.007
Air pollution 0.397 0.098 1.366
Global warming (low) 0.363 0.070 0.608
Global warming (high) 1.035 0.197 1.718
Noise 0.794 0.319 n/a
Total price relevant cost (low) 2.189 14.002 1.976
Total price relevant cost (high) 3.595 14.176 3.091
120 Total taxes and charges 4.331 17.020 4.247
Change in charge (low) -2.142 -3.018 -2.272
Change in charge (high) -0.736 -2.845 -1.156
(1) included in increased PT frequency; (2) nets out with passenger fare.
Source: Nash et al, 2001

It is worth noting here the work of Patterson and Perl (1999) and Patterson (1998)
exploring the potential for high-speed rail to attract replace air for short haul journeys and
the potential environmental benefits. They looked at the impact of TGV lines on domestic
air travel, finding that at minimum a slowing in the growth of air traffic occurs and that for
some flows, especially the shorter ones, for example, Paris-Lyon falls were recorded.
One reason why high-speed rail looks particularly friendly in terms of air pollution in
France is the extremely high share of nuclear in electricity generation.

A study for future reference is that by Watkiss et al (2001) comparing the environmental
impacts of air with rail for short haul routes in the UK. The study concludes that for most
emissions: CO2, CO, NOX and VOCs rail performs better, on SO2 air performs better and
for PM10 the two modes are roughly equal. No monetary valuation was carried out in this
study.

4.5. Conclusions

This chapter has reviewed the methods available for valuing the environmental impacts of
transport and examined the most relevant examples of the application of these valuation
techniques to the air and rail modes. We have then examined the use to which such
values have been put, largely in attempting to assess the right charges or fees required to
internalise effects. Key findings are:
1. There is a large body of evidence on values from existing studies. However, this
varies by impact and methodology. There is reliance on hedonic pricing methods and
dose response or impact pathway approaches. Applications of promising methods
such as Stated Preference are still uncommon in this area.
2. Noise is most commonly valued using an hedonic pricing approach. The local and
regional impacts of air pollution are usually assessed using dose response or impact
pathway approaches – both of which are reliant on values from other sources,
although hedonic approaches are popular here too. Greenhouse gas emissions are
often approached using costs of reducing emissions, as the both the impacts and their
valuations are uncertain and many of the effects are in the distant future.
3. Direct valuation methods are less common. Although the Contingent Valuation
Method is very popular in environmental economics, applications in the context of
transport emissions are rarer, although studies exist covering all three of the key
impacts addressed here. It is our opinion that Stated Preference is a better option and
it is emerging in studies of noise and air quality.
4. There are some outstanding issues to be addressed when using direct valuation
methods where further work is called for, for example on the presentation of the
impact levels to respondents. In the context of noise this may be done in a range of
ways, descriptive, proportional, locational, simulation etc. Many approaches have
been used, but rarely within the same study, making judgements as to the preferred
approach difficult, although Wardman et al (1999) express a preference for the
locational method over proportional change in the context of air pollution.
121
5. There are also issues which direct valuation techniques can explore further:
differences between household and individual valuations, gains and losses, exposure
effects and self-selectivity, individual characteristics and attitudes and the
“confounding factors”, for example the way people trade airport access against noise.
6. A key issue in valuation is the establishment of links between individual valuations,
attitudes, perception and the physical measurement of impacts. This is a difficult area
where a range of expertise is called for.
7. There is a longer term role for revealed preference models. Whilst hedonic models
identify noise effects, disaggregate housing choice models may be able to do so more
effectively. Similarly, a destination choice or route choice approach could be used
within SP or RP, where there is a well defined choice context and clear trade-offs (see
chapter 2 for more on choice models).
8. There is heavy degree of reliance on the existing body of valuation studies, even
though, there are large degrees of variation in the estimated values. These values are
being applied in policy contexts to examine the environmental performance of different
modes, to determine charging and taxation regimes and with appraisal to assess the
value of policies or investments.
Research Issues

Research issues are implicit in the above, however, promising areas are:

1. The application of stated preference techniques to value the external costs of

transport modes. Studies some of the issues raised in points 4 to 6 above would be
particularly innovative, for example, comparisons of different ways of presenting
impacts.
 2. Studies which apply more than one method for purposes of comparison are also
required.
3. Exploratory work on innovative applications of methods, for example, applying
disaggregate housing choice or route choice models in seeking to value
environmental impacts.
4. There is a need to get underneath the figures used in studies which seek to apply
values to derive charges to assess whether they are consistent but the changing pace
of knowledge on values explains difference or whether they are inconsistent due the
range of valuation methods used. The inconsistency is clear in the treatment of
climate change where damage costs and prevention costs will produce very different
values. There may now be a large enough number of studies for a synthesis or meta-
analysis to be useful.
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128
 5. The Air Transport Market

In this chapter, we review developments in the air transport market. After a scene-setting
overview which underpins the whole chapter, we consider three specific areas:

z the evolution and impact of low cost airlines (section 5.2);

z hubbing, network structure and airport development (section 5.3); and
z assessing the impact of possible future regulation scenarios (section 5.4).
The focus throughout is on scheduled passenger services. We conclude with some
lessons from the past and guidance for the future.

5.1. Overview

In the last 50 years, technological innovation in air transport has revolutionised the market
and outstripped that in any other mode. Only supertankers (in shipping) and high-speed
rail have been comparable innovations elsewhere, though the impact of the latter is only
just working through as the European network expands and develops and still has much
development to come. Innovation in aviation has centred on the development of the jet
engine, first as a turbo-prop and later as a pure jet. Successive developments have
improved the jet engine's efficiency and propulsive power, thus making it cheaper to carry
more. There have also been improvements in airframe design and in control systems
which has resulted in successive improvements in aircraft speed and size. This in turn has
led to significant jumps in aircraft productivity. 129
The aircraft technology development plus other developments in navigation, Global
Positioning Satellites and so on have resulted in decreasing real costs per capacity tonne-
km. This is the true significance of the developments: not the new planes for the spotters
to look at, but the reduced costs of production and hence prices, with the stimulating effect
on demand. Even during the fuel crises of 1973 and 1978, real costs only rose a small
amount - much less than other world prices - because the airlines accelerated the
introduction of bigger and more fuel-efficient aircraft and engines.

By any yardstick, the airline industry has grown enormously. Over 1955-69, average
annual growth worldwide was above 14%, with 10% pa growth in the 1970s and 8% pa in
the 1980s. The crude growth rates, though, disguise some very different regional trends.
Asia-Pacific and North American airlines have seen very big growth, with less for Europe
and Middle East and less still for African airlines. This has changed the structure of the
international industry. In 1973, European and North American airlines generated almost
75% of international scheduled RPKs. By 1992, their share had fallen to just over a half
with the rise of especially Cathay, Singapore, Korean, and Japan airlines, all in the world’s
top ten; the far Eastern airlines now account for about one third of RPKs.

The growth is not difficult to explain. Falling real prices, coupled with high per capita
income growth in developed countries - and even higher growth in disposable income -
has led to a boom in demand for non-business air travel. For each 1% GDP growth, we
can expect maybe 2% air travel growth (Doganis, 2001). Again, over-capacity in the early
1980s led to falling prices which reduced the effects of the global depression. Two
features have characterised this growth: non-scheduled i.e. charter services grew even
faster than scheduled, especially in Europe, though liberalisation has started to blur the
distinction; and, notwithstanding the growth and some fairly respectable financial
performances (for example, British Airways from 1980 until recently), as a whole the
 industry has struggled to make significant profits. This has been true in the US as in
Europe. In the US, the reason given is competition between the airlines; in Europe, the
allegedly inefficient effects of state ownership and control.

Growth continued, with 65% growth in the 1990s, an annual rate of about 5%, and is
forecast to continue in the longer term, an expectation of up to 5% pa for the next 20
years – or two and a half times as much traffic by 2020. The immediate crisis will pass,
as did the Gulf War crisis. Airline demand is quite volatile, growing rapidly in times of
economic expansion, contracting sharply at times of slowdown. Longer term, the effect of
liberalisation on routes other than just Europe or North Atlantic will continue to depress
average yields thus further stimulating demand. Add in the new low-cost airlines which
open up air travel to new consumers and stimulate extra discretionary journeys by higher
income groups and we have a problem – how do we accommodate it all and should we?
As the UK Royal Commission on Environmental Pollution 1994 report put it, “An
unquestioning attitude towards future growth in air travel, and an acceptance that the
projected demand for additional facilities and services must be met, are incompatible with
the aim of sustainable development.” Increased environmental awareness means we
have gone beyond predict and provide as regards the road network – whither the skies?

These questions can be answered at different levels - global, regional (Europe), national
and local – though the focus here will be at the regional level. We must address issues of:
drivers of growth; competition; congestion; and environment and sustainability.
130
Looking at the global level and the world balance of (economic) power, both within the
airline sector and more generally, we have seen that the dominant airline players have
been US, European and Pacific Rim. The first two of these operate in at least partially
liberalised markets. Regional liberalisations are also being pursued through the likes of
ASEAN (SE Asia), ECOSUR (S America), OAN (Africa). States will have to come to
terms with the emergence of multinational carriers, either through merger or through
alliance and, at least in European terms, size of state coupled with size of former empire
look to be the key determinants of survival. The balance between transport/economic
efficiency and surrender of sovereignty – at least regarded as such by some – is not a
comfortable one.

Liberalisation in Europe has been a key determinant of demand growth and has provided
the stimulus provided for airlines to be competitive. Internationally, the first moves came in
the early 1980s as the United States followed its own domestic deregulation with attempts
to renegotiate less restrictive bilateral air service agreements with various European
governments. In Europe itself, the UK-Eire and UK-Netherlands routes have been almost
completely deregulated since the mid-1980s, and the UK domestic routes since the early
1980s. Alongside these liberalised bilaterals, the European Community introduced a
series of ‘packages’ of liberalisation measures from 1987. The evidence has been of
increased frequencies and reduced prices - but these have been crucially dependent on
the number of operators. Two operators is not sufficient to guarantee improvements - it
has been when three operators have contested a route that the big price reductions have
been seen. However, many EU routes are currently too small to require this number of
operators; something between 40 and 50 flights a week are required to support two
operators, and between 75 and 100 to support three (Pryke, 1991); but in July 1993, only
10 intra-EU international routes exceeded 80 flights per direction per week and a further
20 or so domestic routes (CAA, 1993). By January 1996, 64% of EU routes were
monopolies and only 6% had 3+ carriers (Forsyth, 1998).
A feature of the global industry since the mid 1980s has been the relatively low and stable
price of aviation fuel. Whereas at the height of the price in 1980 fuel accounted for about
30% of airline costs, and contributed to the low profits of the early 1980s, the long-term
downward trend has contributed to lower costs such that fuel now accounts for about 15%
of airline costs. Doganis’ summary is that long-term price stability or just modest real
increases can be expected though with the possibility of sudden short-term shocks
(Doganis, 2001). International and European governments’ views on taxation of aviation
fuel will be of considerable importance in the future.

Another critical trend has been the decline in the real average revenue per passenger-
kilometre. Liberalisation of price controls has permitted this, liberalisation of entry and the
stimulus to competition has enforced it, the competition being both existing airlines and
new entrants. The extra capacity thus provided had to be filled and fare reductions with
ever more targeted price discrimination has been the way to do it. In the United States, a
feature of the deregulated industry has been an increasing proportion of passengers
travelling on reduced or deep discounted tickets although the unrestricted fares have, if
anything, risen (Morrison and Winston, 1995). In Europe, the average yield from
discounted tickets has fallen from 63% of the normal economy fare in 1985 to less than
50% by 2000 while the proportion of travellers using such tickets has risen from 57% to
over 70%.

The combination of lower yields, increased interest payments and, from 1999, higher fuel
prices suggests in the short term a reduction in airline profitability. Even British Airways,
which had maintained profitability in the early 1990s post-Gulf War downturn, entered into 131
loss which Doganis (2001) argued was essentially a supply-side problem. The demand-
side downturn post September 11 has clearly worsened the financial prognosis and, we
have to assume, will accelerate the moves to alliance and merger in the European
industry, such consolidation having been a consistent characteristic of the US industry
since 1978.

Congestion at airports is a feature of the European industry which is not common

elsewhere. European airports have much less capacity than in the US. Of the top 25
international intra-EU routes in 1991, 19 involved a congested airport at one or both ends.
Demand in Europe is heavily spatially concentrated in the “hot banana”, an axis from
Manchester in the north through Benelux, Germany and France to Barcelona and Madrid
in the south. While there have been some capacity enhancements, the policy of the
European Union is to “limit the construction of new airports” and it is estimated that by
2005, 25 out of the 29 busiest airports will have runway capacity shortages and 26 out of
29 terminal capacity shortages (AEA, 1996). Graham and Guyer (1999) quote a median
percentage increase in capacity (measured by maximum hourly movements) of 45%
between 1996 and 2015, far below the expected increase in demand. While some of the
increase can be accommodated by increased plane size, there is a conflict between the
forecast growth and the enhanced frequency – frequency being a key weapon of
competing airlines – on the one hand and the (lack of) availability of capacity. Dennis
(2002) cites the ICAO conclusion that only Munich, Copenhagen, Milan Malpensa and
Oslo of the top 20 airports have sufficient capacity ‘for the foreseeable future’. Button and
Stough (2000) provide tangible evidence of the effects – more than 25% of flights delayed
due to congestion at the worst affected airports.

All in all, we have a situation where further development of the European aviation market
cannot and will not just be a grossing-up or replication of existing patterns. The nature of
the game has changed, with single service class low cost carriers challenging the
 established full service airlines, increasing congestion at major airports restricting the
scope for further growth and, indeed, changing the nature of the markets served, and
increased likelihood of European Union regulations aimed at internalising externalities as
part of the move towards “fair and efficient pricing”. The remainder of this chapter deals
with these issues in more detail.

5.2. Low Cost Carriers

5.2.1. Introduction

This section addresses the subject of the Low Cost Carriers (LCC) in the airline industry. It
focuses on the European carriers, but it also provides some brief comments on general
aspects of this segment of the market.

In 1994, fewer than 3 million passengers per annum were using low-cost scheduled
European carriers, and a majority of those by one airline – Ryanair. Since then, entry by
operators such as Easyjet and Virgin Express has seen the market grow strongly. By
1999, patronage figures had risen to around 17.5million, a growth rate much higher than
132 the other scheduled European airlines but still only 3% of intra-EU traffic. As a response to
the success of the new entrants, the majors have introduced their own low-cost
subsidiaries (BA: Go, now divested; KLM: Buzz) with others expected to follow. All the
low-cost airlines have built on the experience of Southwest in the US incorporating many
if not all the following features:

z point-to-point;
z no frills single service class;
z homogeneous technology (B737);
z low cost, low fare avoiding expensive congested major airports.
It is notable that, with the exception of Virgin Express based at Brussels, they are mostly
UK/Eire-based.

The existence of LCCs in the scheduled air market is not new: they have been around in
the United States since the Civil Aeronautic Board's deregulation of 1978. "Physical entry
by new low-cost firms specially adapted to the deregulated environment is easy because
of the mobility of capital equipment, availability of a highly mobile skilled labour costs, and
the availability of many indivisible factors of production on a contract basis" (Levine,
1987).

In the United States, the LCC sector has been characterised not only by easy entry but
also by easy exit. In the early years it proved a quite unstable market, as was observed by
Levine, 1987: "Then why have so few new entrants survived and even fewer prospered in
competing with the holdovers? Of the truly new entrants spawned by deregulation, none
at this writing has shown consistent profitability and only a few can be said to be assured
of survival. ". The pattern was repeated in other jurisdictions, for example the (repeated)
failure of Compass in Australia.
The European airline industry has been a fully deregulated environment since 1997; this
status permitted the expansion and entry of some important players in the LCC segment,
such as Easyjet and Go. In Europe, of course, there had long been a low cost sector, the
charter airlines providing a no-frills product as part of an overall Inclusive Tour package.
This market is rather different and outside the scope of this review. We review the main
characteristics of the LCC segment; analyse of each European LCC and study their
market positioning; demonstrate a model of city entry; summarise the literature; and finally
identify gaps in current knowledge.

5.2.2. Characteristics of the LCCs

The Low Cost Carriers (LCCs) are those firms in the airline industry that provide services
at much reduced prices on account of their target of operating at unit costs much lower
than the average in the market. In terms of Gialloreto’s stratification of airlines according
to market positioning (Gialloreto, 1988), LCCs are type-2 carriers demonstrating cost-
leadership over a segment of the industry. This definition is sufficiently general to permit
understanding their most commonly observed characteristics (Doganis, 2001):

z homogeneous fleet;
z point-to-point with frequent service instead of hub-and-spoke operations;
z short-haul markets and consequent low stage-length; 133
z avoidance of congested airports;
z no frills/in-flight meals;
z no class differentiation;
z rapid turnaround time;
z very high aircraft utilization;
z high load factors.
All these characteristics constitute the Southwest benchmark, which, according to
Whinston and Collins (1992) has resulted in unit costs that are 50 to 70 per cent lower
than the US major airlines. By following this standard, the European LCCs have been
able to maintain their costs within this interval, when compared to other European airlines:
Table 5.1 summarises the results presented by Doganis (2001), and presents details of
the costs differences between an important LCC, Easyjet (EZY), and British Midland
(BMD):

Table 5.1: Cost comparison: Easyjet versus British Midland

Direct Operating Costs EZY BMD DIF
1 Cabin/flight crew 0.43 0.92 -53%
2 Fuel 0.35 0.55 -36%
3 Airport Charges 0.55 1.20 -54%
4 En-route 0.39 0.41 -5%
5 Maintenance 0.58 0.75 -23%
6 Depreciation 0.02 0.26 -92%
7 Aircraft rentals 0.80 1.23 -35%
8 Insurance 0.00 0.02 -100%
Total Direct 3.12 5.34 -42%
 Indirect Operating Costs EZY BMD DIF
9 Station costs 0.01 1.36 -99%
10 Handling 0.31 0.40 -23%
11 Passenger services 0.04 0.63 -94%
12 Sales/reservations 0.18 0.47 -62%
13 Commission 0.01 0.78 -99%
14 Advertising/promotion 0.27 0.31 -13%
15 General and administration 0.17 0.44 -61%
16 Other 0.06 0.14 -57%
Total Indirect 1.05 4.53 -77%

Total Operating Costs 4.17 9.87 -58%

Source: Doganis (2001)

It can be seen in Table 5.1 that EZY achieves savings in all items of direct and indirect
operating costs (the column "DIF", which accounts for the percentage difference). The
total savings are approximately 58 %, and the most impressive reductions are related to
the items depreciation and insurance of the aircrafts (direct) and station costs, passenger
services and commission to agents (indirect).

Another way of analysing the cost saving presented in Table 5.1 is by representing each
134 cost saving as a percentage of EZY's total cost savings (Table 5.2). This permits the
identification of the seven most important items of cost advantage of a LCC, that is, those
which represent the most significant share of all observed reductions. In Table 5.2 it is
made clear that "station costs", "commission", "airport charges" and "passenger service"
represent almost 60% of the savings. When added to "crew", "aircraft rentals" and
"sales/reservations", the total increases to 80%, that is, seven items explain four fifths of
the savings.

Table 5.2: LCCs Major Cost Savings as a Percentage of Total Savings

Costs Savings (%) Sum (%)
Station costs 24% 24%
Commission 14% 37%
Airport Charges 11% 49%
Passenger services 10% 59%
Cabin/flight crew 9% 68%
Aircraft rentals 8% 75%
Sales/reservations 5% 80%
General and administration 5% 85%
Depreciation 4% 89%
Fuel 4% 93%
Maintenance 3% 96%
Handling 2% 97%
Other 1% 99%
Advertising/promotion 1% 99%
Insurance 0% 100%
En-route 0% 100%
Source: Doganis (2001)
Entry by LCCs is basically a phenomenon of fully or partially deregulated airline industries,
and this is the reason why it is recent in Europe (the Third Liberalisation Package made
the deregulation effective only since 1997). As Doganis (2001) states: "While relatively
new to Europe, the low-cost formula is not new to the United States. Since the early
1970s many new US airlines have adopted a low-cost, no-frills strategy".

Another important characteristic of the LCC segment is its instability in terms of entry and
exit. There seem to be periods of substantial entry with consequent decrease in the
concentration levels of the industry, and these periods are followed by bankruptcy,
mergers and exit. Since the first deregulation measures in the United States, there have
been at least two main phases of entry: the first, until the beginning of the eighties
(Southwest Airlines, People Express, etc), and the second, between 1993 and 1995
(ValueJet, Western Pacific, jetBlue, etc).

5.2.3. Analysis of the European LCCs

Ryanair (RYA)

z Considered by many industry analysts the best-established European low-cost airline

(Sull, 1999);
z Based in Dublin, London Stansted, Shannon and Brussels;
135
z Aircraft: Boeing 737-200A, 130 seats (Sull, 1999);
z Has continued to use travel agents;
z Do not offer any complimentary drinks or catering or in-flight entertainment; snacks,
sandwiches and drinks are available for purchase at fair prices;
z Began its operations in 1985;
z 1998: ordered up to 45 new Boeing 737-800 aircraft worth $2bn (Sull, 1999);
z 2000: After-tax profit of 77.6 million dollars (26% gain over 1999); 5.6 million
passengers (13 % more than 1999); source: Air Transport World 9/2000;
z Summer 2001: tickets for one pound and for free (notable marketing strategy).
Easyjet (EZY)

z Based in London Luton, Liverpool, and Amsterdam;

z Aircraft: Boeing 737-300, 148 seats (Sull, 1999);
z completely avoid travel agents and rely exclusively on direct sales;
z Does not offer catering (sandwiches, etc. can be purchased);
z Completely ticketless;
z Experienced direct retaliation from KLM (on the route London - Amsterdam);
z Plans for substantial expansion.
Go Fly (GOF)

z Doganis (2001): "British Airways’ initial response to the challenge of low-cost new
entrants was not to try and fully match their lowest fares. In time, however, it changed
 its tactics. Not only did its own low fares move much further down but it also set up
Go, its own low-cost carrier";
z Now divested by BA;
z Completely ticketless;
z Offers its passengers pre-assigned seats;
z Do not offer catering (sandwiches, etc. can be purchased).
Virgin Express (VEX)

z The only low-cost development that has been outside the UK/Eire, based in Brussels;
z Doganis (2001): "Virgin is in a unique position because on five of its busiest routes out
of Brussels, those to Heathrow, Gatwick, Stansted, Barcelona and Rome, it code
shares its flights with Sabena which has withdrawn from these routes. Sabena buys
about half the seats on these flights on a firm block seat base and at a fixed price and
requires a two-class cabin and in-flight catering";
z Aircrafts: Boeing 737-300 with 148 seats, and 737-400 with 170 seats (Sull, 1999);
z Uses both tickets and travel agents.
Buzz (BUZ)

z Launched by KLM; Doganis (2001): "Given the market share of low-cost airlines, the
136 entry of KLM into this market segment was expected. It was after all following British
Airways".
z Aircraft: BAe 146;
Tables 5.3 and 5.4 present the cities served by the European LCCs inside and outside the
UK and Eire region as of August 2001. The "X" represents a city served and the "B"
represents a city where the LCC has its basis of operations.

Table 5.3: Cities Served by the LCCs in the UK and Eire

City Country RYA EZY GOF BUZ VEX
Aberdeen UK X
Belfast UK X X
Birmingham UK X
Bournemouth UK X
Bristol UK X B
Cardiff UK X
Derry UK X
Edimburgh UK X X
Glasgow UK X B
Glasgow Prestwick UK B
Inverness UK X
Leeds UK X
Liverpool UK X B
London Gatwick UK
London Heathrow UK
London Luton UK B
London Stansted UK B B B X
Manchester UK X
Newcastle UK X
Cork Eire X
Dublin Eire B X
Kerry Eire X
Knock Eire X
Shannon Eire B
 Table 5.4: Cities served outside UK/Eire
City Country RYA E ZY GOF BUZ VEX
B russels B elgium B B
A m sterdam Netherlands B
S alzburg Austria X
V ienn Austria X
P raha Czech Rep. X
A arhus Denm ark X
Copenhagen Denm ark X X
E sbjerg Denm ark X
Helsinki Finland X
B iarritz France X
B ordeaux France X
Carcassonne France X
Cham bery France X
Dinard France X
La Rochelle France X
Lyon France X X
M arseille France X
M ontpellier France X
Nice France X X X
Nim es France X
P aris France X X
P erpignan France X
P oitiers France X
S aint-Etienne France X
Toulouse France X
B erlin Germ any X
Cologne Germ any X
Duesseldorf Germ any X
Frankfurt Germ any X X
Ham burg
M uenchen
Germ any
Germ any
X
X
137
A thens Greece X
Reykjavik Iceland X
A lghero Italy X
A ncona Italy X
B ologna Italy X
Genova Italy X
M ilan Italy X X X
Naples Italy X
P escara Italy X
P isa Italy X
Rom a Italy X X
Torino Italy X
Trieste Italy X
V enice Italy X X
V erona Italy X
Oslo Norway X
Faro P ortugal X
A licante S pain X
B arcelona S pain X X X
B ilbao S pain X
Gerona S pain X
Ibiza S pain X
Jerez S pain X
M adrid S pain X X
M alaga S pain X X X
M urcia S pain X
P alm a S pain X X
Goteborg Sweden X
M alm o Sweden X
S tockholm Sweden X
V asteras Sweden X
Geneva Switzerland X X
Zurich Switzerland X
 5.2.4. LCC Market Positioning

This section aims to provide some insights on the market positioning of each of the main
European LCCs; by 'market positioning' it is meant how each of them has located itself in
terms of some characteristics of the cities served (average population, average distance,
location, number of cities served), that is the markets the operators have chosen to enter.
Figure 5.1 presents the average O-D haul for each LCC.

Figure 5.1: - Average O-D Haul by LCC

GOF

EZY

VEX

RYA

BUZZ
138
400 500 600 700 800
Miles

Figure 5.2 presents a general distribution of the O-D hauls in the LCC segment. Clearly
the airlines avoid the very short hauls which have high costs per mile and the very long
hauls beyond the range of a 737.

Figure 5.2: - O-D Haul Distribution

40%
35%
30%
25%
20%
15%
10%
5%
0%
250 450 650 850 1050 >1050
Miles
Figure 5.3 shows the countries served by the LCCs with a clear bias towards southern
Europe for destinations. This is not surprising given the focus on leisure travellers.

Figure 5.3: - LCCs' Preferred Destinations

25% 24%

20% 17% 17%

15% 13%

10%
6% 5%
5% 3% 3% 3%
2%

0%
G aly

Be n
UK

De ire
ce

nd

Sw rk
y

m
e
an
ai

iu
ed
an

la

E
It
Sp

nm

lg
m

er
Fr

er

it z
Sw

139

Figure 5.4 shows the share of destinations for each carrier in selected
countries
Figure 5.4: – operator shares of destinations by country

UK gof FRANCE GERMANY

vex
27% buz
4%
35%

ezy gof
32% vex 12% buz
3%
80% gof
20%
ezy
15%
rya
38% rya
34%

SPAIN ITALY SWITZERLAND

vex
12%
gof
41% gof
rya 30%
buz ezy
55%
12% 87% buz
13%

vex
ezy buz 10%
35% 5%

Figure 5.5 presents the percentage of the cities served that are situated along the
Mediterranean coast. There is a clear distinction between operators: a “Ryanair standard”,
 focused on non-Mediterranean markets (followed by BUZ) and an “Easyjet” standard,
focused on Mediterranean cities (followed by GOF and VEX). In the latter case, the
percentages of Mediterranean destinations are more than 50% of total cities served.

Figure 5.5: - Percentage of Mediterranean Destination

GOF

EZY

VEX

RYA

BUZ

25% 35% 45% 55% 65%

140 Finally, Figure 6 gives an idea of the market positioning of the European LCCs:

Figure 5.6 - European LCCs' Positioning

2400
Average Population

VEX
1800
EZY
1200
BUZ GOF
600 RYA

0
500 550 600 650 700 750 800
Average Haul

number of destinations

The different colours in Figure 5.6 represent the two patterns of percentage of
Mediterranean destinations, (low for Ryanair and Buzz, high for the others) whereas the
size of the circles represents the number of destinations chosen by each airline.

Some interesting conclusions can be drawn from the previous analysis:

z It seems there is a trade-off between average haul and average population in the
LCCs' market positioning; that is, when choosing between two given cities, they tend
 to exchange population for distances, and thus to only consider lower population cities
(which means lower market potential other things equal) if the distance is notably
much higher (and thus the unit cost in terms of miles can be reduced);
z RYA tends to prefer closer destinations with lower population, but with the positive
characteristic of avoiding competition with the charters and the strong seasonality
present in the Mediterranean market; it also seems to have higher sensitivity of city
choice to its population (it tends more intensively to give up miles for population when
choosing cities); BUZ tends to follow this standard; RYA is also more likely to choose
secondary airports;
z EZY tends to prefer destinations further away with higher population, tending to
compete with the charters. VEX and GOF can be regarded as competitors in the
same market.

5.2.5. Impacts of the LCCs

We present a brief summary of the literature pertaining to the effects on market

development. Note that very little is known about the price and income elasticities of
demand faced by LCCs. Clearly we expect a higher elasticities than the average for short-
haul operations because of the leisure-oriented focus of the services offered; but we are
not aware of any hard evidence. The UK government’s forecasting procedure simply
assumes that on a route currently served by conventional operators with at least 100,000 141
passengers a year, the entry of a low cost operator will grow the market by 50% and that
20% of the original traffic will switch to the LCC.

Impacts on Demand

Doganis (2001) indicates that the total London-Barcelona traffic grew 25% in 1996 and
27% in 1997; London-Glasgow traffic grew 21% in the first twelve months after the entry
of EZY and RYA; Birmingham-Dublin: traffic increased from 150-200,000 to 600,000 in
three years.

Mason (2000): considers the potential for business travellers to start travelling by LCCs:

z While some of the routes entered by LCCs are clearly leisure oriented (e.g. Palma,
Ibiza, Venice and Nice), anecdotal evidence suggests that a significant number of
travellers are using these services for business related trips;
z "So far the low cost phenomenon has had its main affect on the UK market and the
main network carrier, British Airways, has responded by starting its own low cost
airline, Go Fly, in a strategy that is similar to those adopted by US majors in the face
of strong low cost competition (United Shuttle for United, Delta Express for Delta, and
newcomer MetroJet for US Airways). Major EU carriers will need to assess whether
they can retain their short haul business travel markets by continuing to pamper their
business passengers, or whether to move into the low cost arena themselves. The
evidence from the US market is that the latter is more likely, as major airlines will seek
to retain market share at the cost of maintaining yield. And this they will do in the most
cost efficiency method (for example, by setting up regional feeders, low cost
subsidiaries or franchise operations)".
 Impacts on Competition

The most important papers about the impacts of LCCs in the competition in the market
are based on American evidence, the main ones being Whinston and Collins (1992) and
Windle and Dresner (1999).

The main findings of Whinston and Collins (1992) were:

z Entry of People Express (1984-1985) in the United States market: expansion into 24
new domestic (non-slot-constrained) nonstop markets (data from 1980-1984);
z Dramatic fall of roughly 35% in the average price of incumbents on the 15 markets
entered by People Express in a given year;
z Almost no change in average price in markets not entered in a given year;
z People Express's average fare in the first quarter of the year following entry was an
average of 19% below the incumbent airline's mean fare after its response;
z Entry of People Express is associated with an increase in incumbents' number of
tickets sold and capacity (+25%, flight frequency);
z Conclusion: incumbents on routes entered by PE suffered significant value reductions
(they lost roughly $3 million to $6 million in value when entry was announced): this
142 demonstrates the existence of profits or sunk costs (or other barriers to mobility) prior
to PE's entry: prevention of equalisation of profits across routes.
Windle and Dresner (1999) found:

z the entrance of a low cost carrier leads to lower prices on routes it has entered;
z potential increase in consumer welfare on account of the entrance;
z in short haul markets where LCC do not compete, established carriers significantly
increased prices in the 1994-1995 time period: in a hub and spoke system this
alteration of the price structure may be undertaken to pay for the costs of operating
the hub;
z do established carriers significantly lower their prices when faced with competition into
their hub airports by a LCC (ValuJet versus Delta at Delta's hub in Atlanta)?
Conclusion: Delta lowered its fares on competitive routes terminating in Atlanta in
response to competition by ValuJet; it also lowered its fares on routes flowing through
its Atlanta hub to compete with ValuJet.
Impact on Consumer Welfare

Windle and Dresner (1999) found that the presence of a LCC on a route has a spillover
impact onto other competitive routes. Consequently, the consumer welfare gain from the
operation of the LCC is likely to be larger than previously estimated by the literature.

5.2.6. Conclusions

We have seen that the low cost carriers have particular features in common which
differentiate them from other airlines. In order to survive long-term, they must maintain
their competitive advantage, that is their strong cost focus. Airlines which lose this focus
will go the way of Debonair. It is also important for the LCC to become one of the two
major carries (in terms of market share) on the routes they choose to operate. Southwest
in the USA has survived in part because it only enters where it thinks it can become the
dominant player. This suggests that the entry tactic is to avoid routes which are already
heavily competed. We can expect the LCCs which survive to continue to develop new
markets.

5.3. Hubbing, network structure and airport development

The historical development of European airlines as flag-carriers based at capital city

airports, coupled with colonial history and the desire in the early days of aviation to
promote links with the colonies mean that hubbing at major airports is already an
established practice within Europe (unlike in the US where hubbing was a post-
deregulation phenomenon). This ensures that airlines have an incentive to allocate some
of their scarce slots for flights which, at first glance, would seem not to be the best use of
the resource thus easing passengers’ transfer between flights. At Brussels, for example,
some 45% of Virgin Express’s traffic is changing planes. It is unclear, though, whether this
sort of interconnectivity could or should survive in a world with competitive entry and
congested airports: will an operator reserve scarce slots for marginal services when it (or
a competitor) could make more money using them for other routes? And even if it does,
will that be an efficient use of resources?
143
Key issues addressed in this section include:

z network structures;
z access to major airports for new entrants;
z inter-airport competition.
z availability of capacity at airports;
z forecasts of growth;
z the identification of flows with potential for mode-switching;

5.3.1. The Structure of the European Aviation Network

Many studies have shown that deregulation of domestic air service in the United States
produced benefits for US consumers (see, for example, Morrison and Winston, 1995;
Meyer and Menzies, 2000). Part of that benefit has come through the widespread
adoption of hub-and-spoke networks. On recasting the route structures, airlines were able
to offer a wider choice of destinations with higher frequencies for many OD pairs but at a
cost for some passengers of increased journey times. At first, it was thought that
liberalisation would lead to loss of service to small communities. In practice, this has not
been a problem for although small communities have sometimes lost service to non-hubs
or to small hubs, many have gained increased service to large hubs with consequently
increased online connections (Butler and Huston, 1990).

In Europe, a number of factors suggest that there will not be as radical a restructuring of
the network as in the US:
 z travel distances in Europe are shorter. So for many significant OD pairs, transfer via a
hub incurs too great a time penalty. In 1991, seven out of the top ten intra-EU routes
were 650km or less and even the longer ones such as Paris-Madrid have no obvious
intermediate hub (CAA 1993);
z competition from other modes. In particular, the High-Speed Rail services compete
effectively especially on distances below 500km. For the more price-sensitive less
time-sensitive leisure market, rail can compete over distances up to 1000km (Graham
and Guyer, 1999);
z international bilaterals. These affect the ability of airlines to merge, for example if KLM
and BA were to merge, one of them would lose rights since either the former KLM
services from Amsterdam to Russia could no longer be regarded as primarily Dutch-
owned or the former BA services from London could not be construed as primarily
British-owned (Burghouwt and Hakfoort, 2001a).
These factors contribute to some degree of agreement in the few studies of the European
network (Burghouwt and Hakfoort, 2001a, 2001b; Caves, 1997; Dennis, 1998, 2001,
2002; Graham, 1998; Graham and Guyer, 1999). The key features of agreement are:

z the continuing primacy of the four major hubs (London Heathrow, Paris Charles de
Gaulle, Frankfurt and Amsterdam);
z a continuing role for secondary hubs (in large part the hubs of the second-rank
144 carriers) with some inter-continental traffic and a substantial level of intra-European
connectivity;
z continued development of services at secondary airports with a particular role in
providing point-to-point services avoiding congested major hubs.
Bourghouwt and Hakfoort (2001a, 2001b) propose a hierarchy of airports, namely:
primary hubs; secondary hubs; primary regional airports; secondary regional airports; and
tertiary regional airports. While all categories saw growth in seat capacity exceed 50%
between 1990 and 1998, it is clear that the smaller airports have had higher growth in
intra-European capacity while the primary hubs have increased their dominance in the
intercontinental market.

Table 5.5: Share of airport categories in total seat capacity (%), 1990-1998
Share in capacity in 1990 (%) Share in capacity in 1998 (%)
Intra-European capacity
Primary hubs 31 25
Secondary hubs 31 29
Primary regional airports 17 17
Secondary regional airports 12 18
Tertiary regional airports 8 11
Intercontinental capacity
Primary hubs 44 50
Secondary hubs 37 34
Primary regional airports 10 9
Secondary regional airports 8 5
Tertiary regional airports 1 1
Source: Burghouwt and Hakfoort, 2001b
Intercontinental traffic growth has been focused on the hubs of the main alliances, viz.
Amsterdam, Heathrow, Charles de Gaulle and Frankfurt. It is expected that this will
continue since restrictions on airport capacity at primary hubs means that a more
fundamental route restructuring to provide a classic hub is unachievable. For example,
British Airways has to rely on what has been termed “continuous” – or random – hubbing
with connections being made simply through a high volume of services. This is in contrast
with the classic pattern of a wave of arrivals followed by a wave of departures which is
then repeated throughout the day. Schiphol is the most developed example in Europe
with four major and two minor waves a day (Graham and Guyer, 1999). 60% of KLM’s
traffic comes from transfers across this hub.

Another indicator of the changing role of different types of airport is given by the number
of direct destinations served.

Table 5.6: Average number of direct destinations served 1990-1998

Growth 1990- Number of
1990 1998
1998 (%) airports 1998
Primary hubs 160.0 200.5 25.3 4
Secondary hubs 98.1 128.4 30.9 11
Primary regional airports 59.5 71.4 20.0 12
Secondary regional 34
24.1 38.5 59.8
airports
Tertiary regional airports 4.2 5.5 31.0 399 145
Source: Burghouwt and Hakfoort, 2001b; own calculations

It must be pointed out that these figures obscure some important variations: for tertiary
regional airports, almost 30% had an increase in destinations served while 22% had a
reduction and some lost all service. Many of the service terminations were at very small
airports in peripheral regions of Europe as predicted by Reynolds-Feighan (1995). In
contrast, routes between large hubs and regional airports – the classic hub-spoke – have
shown large growth in both frequency and capacity. All the major carriers have developed
their networks of feeder routes, often operated by regional affiliates and in many cases
connecting the regional airports to non-domestic hubs. In part, this is due to the greater
flexibility offered by the new range of regional jets such as the Canadair Regional Jet and
the Embraer 145 (Graham and Guyer, 1999; Dennis, 2002). Until the mid-1990s, the
technology choice faced by airlines was either to operate 120 seat jets (B737, DC9) or to
offer the lower quality turbo-props, the smaller jets such as the F28 having rather high
costs per seat-km. the CRJ and the 145, offering cost-effective jets of smaller capacity
have opened up new markets meaning longer thinner routes – too long for a turbo-prop,
too thin for a 737 – can now be operated. Dennis (2001) gives the example of
Lufthansa’s service between Manchester and Munich which, in 1993, was operated by a
737 once daily with a load factor of 30%. Changing to a twice-daily CRJ from 1995, traffic
more than doubled with load factors rising to a more sustainable 59%.

In the United States, 96% of regional jets operate connecting services into hubs. In
Europe, there is less scope for this. Although feeding into major hubs is the strategy which
maximises connectivity for passengers and is also the strategy which helps carriers such
as KLM punch above their weight in international terms, the scarcity of slots at major hubs
and the lack of ring-fencing for regional services means there has been much more point-
to-point growth. Regional aircraft generally only require short runways, but the major EU
airports lack such facilities leading to inefficient use of runway space by small aircraft.
 Airport operators applying either efficient or profit-maximising prices will inevitably end up
charging much more per passenger to smaller aircraft, the result of which being the
almost total removal of regional aircraft from such as Heathrow. Perhaps this is where
Paris CDG can gain a competitive advantage; Dennis (2001) sees scope for the new
runways there to allow the development of both domestic and regional networks.

As well as service to hubs and new, thinner, routes, there are three other market sectors
which secondary airports can seek to serve effectively: charter and low cost; high yield
centre-to-centre business traffic; and overflow/relief airport. Of course, secondary airports
cannot hope to offer the range of services available at major airports, nor, normally, the
frequencies although for some niche markets which the majors decline to serve they may
do so.

Although low cost carriers are dealt with in more detail in section 5.2, here we simply note
that many of them choose to operate out of less-favoured secondary airports. In some
cases, that is out of choice – Ryanair chooses to use Oslo (Torp) even though
Gardemoen has capacity. One reason is the airports’ pricing strategy: Manchester, for
example, is a high-priced airport so Easyjet uses Liverpool instead and Ryanair has
reduced its service in the Manchester-Dublin route, diverting to Liverpool and Leeds-
Bradford instead (Barrett, 2000). Other airports offer low prices to establish themselves:
Luton charged Easyjet only £1.60 per passenger for the first five years (now increased to
£5.50 with some protest!) as an incentive even though their published tariff was between
146 £12 and £16 (Dennis, 2002). Aer Rianta, the Irish airports operator, has offered discounts
since 1993: a discount of up to 90% for new routes and traffic growth; a discount of 25%
on low-fare routes to Britain; a 50% winter landing charge discount; and a IR£1.50
discount per passenger for use of a low-cost pier. This scheme was worth IR£9 million to
Ryanair in 1998, almost a quarter of its profits of IR£37 million (Barrett, 2000).

A sub-group of tertiary airports enjoys city-centre locations with operations restricted to

small high-performance aircraft. Examples include Belfast City, Berlin Templehof,
Florence, London City and Moenchengladbach. As well as access time advantages for
passengers and shorter processing times, the steep ascents and descents also leave a
smaller noise footprint than other airports. This is an expensive operation, so likely to
appeal to business traffic rather than leisure. According to CAA (1997), 62% of the
passengers at LCY are travelling for business purposes, compared with 42% at LHR and
16% at LGW. There is also an advantage of being to operate to tighter schedules
because there is no need to build in an extra safety margin to allow for possible
congestion. For example, flights from Amsterdam to London City are scheduled 20
minutes quicker than flights to Heathrow. Moenchengladbach promotes itself as offering
unlimited slots and cheaper user charges compared with heavily congested Düsseldorf
Rhein-Ruhr. It has the advantage of a dedicated train link to the principal airport.

There is a further challenge to secondary airports especially not to become over reliant on
one principal carrier. For example, the development of capacity at Stansted allowed
Ryanair to move from Luton with some damage to Luton’s position (Starkie, 2002).

5.3.2. Capacity, Congestion and Traffic Growth

As noted in the introduction, European airports are regarded as having capacity problems
even though innovations in air traffic management and control have managed to increase
utilisation. Table 5.7, below, pools information from a number of sources on delays,
capacities and planned capacities.

Table 5.7a: Worst European airports for delays on departure 1997

Airport average delay
Total flights percentage delayed
per movement
Athens 68102 39.7 11.78
Madrid Barajas 132350 32.9 6.78
Palma de Mallorca 74123 25.3 5.28
Nice 64014 25.4 4.94
Düsseldorf 91368 28.2 4.91
Geneva 62592 25.3 4.71
Lyon Satolas 50394 24.1 4.49
Marseille Provence 46751 23.2 4.43
Barcelona 106866 22.0 4.41
Brussels 134942 25.1 4.37
Source: Button and Stough, 2000

It should be noted that Athens has built a new airport at Spata since these figures were
derived.

Table 5.7b: Worst European airports for delays on arrival 1997

average delay per 147
Airport Total flights percentage delayed
movement
Athens 67790 28.5 8.29
Milan Linate 91829 35.8 7.14
Barcelona 107139 31.4 6.35
Madrid Barajas 131659 34.3 6.01
London Heathrow 218132 29.9 6.00
Paris Charles de Gaulle 200538 26.9 5.49
Paris Orly 122318 27.8 5.03
Nice 63932 23.5 4.64
Tenerife Sur Reina Sofia 27055 22.1 4.44
Source: Button and Stough, 2000

Table 5.7c: Actual and Planned Maximum hourly movements at selected

airports
Percentage
Airport 1996 2015
increase
Amsterdam 86 140 63
Athens 32 80 150
Barcelona 30 55 50
Brussels 60 80 33
Copenhagen 69 80 16
Düsseldorf 36 65 81
Frankfurt 70 100 43
London Gatwick 43 48 12
London Heathrow 82 85 4
Madrid 43 50 16
Munich 70 110 57
 Paris Charles de
76 120 58
Gaulle
Paris Orly 70 80 14
Rome Fiumicino 56 701 25
Stockholm Arlanda 66 100 52
Zurich 60 100 67
Source: Graham and Guyer, 1999

In almost every case, capacity growth is less than needed to cope with forecast
passenger demand growth although many regional airports have the capacity to cope with
more than just local or regional traffic (Graham and Guyer, 1999). While some of these
airports serve either secondary or peripheral cities, others are in the “hot banana” and
thus have at least some potential for traffic diversion from the majors. The balance
between catering for predicted growth and addressing environmental concerns is
currently struck at the point of allowing terminal extensions (though Heathrow’s T5 has
had a battle) but generally against new runway build. Graham and Guyer (1999) quote a
survey that found 47 airports expanding or planning to expand capacity but only 12
thinking of new runways. This must necessarily mean more passengers per flight and
hence bigger aircraft at the hub airports with more local traffic being transferred to the
High-Speed Rail networks being developed. This will allow the major airports to
concentrate on intercontinental travel which, as we have already seen, is where recent
148 growth has come from. However, HSR is largely restricted to the northern part of the
dominant axis where the dense city-pair markets necessary to make HSR work are to be
found. HSR is not a solution for the 50% of the passenger market which is Inclusive Tour
traffic. However, the fact that such operators and their passengers are quite happy to fly
from local airports and/or fly at off-peak times reduces the problem. Graham and Guyer
(1999) conclude that HSR thus offers some contribution to the problem of airport capacity
but that it is not a comprehensive solution.

5.3.3. Summary

We have seen that in Europe, unlike in the United States, liberalisation and market growth
has not led to a universal strengthening of traffic at primary hubs. However, certain traffic
types have become more concentrated at primary hubs: intercontinental flights. It is
expected that the continued development of global alliances, together with possible
consolidation of the European carriers once regulatory issues have been resolved, will
strengthen this tendency.

We have also seen that, in part as a result of the congestion at major airports but also
because of the geography of Western Europe, smaller airport types have increased their
share of intra-EU traffic and have potential for further growth. This traffic growth is not
spread evenly over all routes, with secondary to hub being particularly strong.

Regional airlines (in alliance with major carriers) flying from regional airports are likely to
play an increasing role, the prospects enhanced by the new small aircraft which enable
capacity to be matched with demand through plane size reduction rather than through
frequency reduction. The growth will continue to come from both feeder services and hub
bypasses. Feeder services will be less dependent on domestic hubs as we see a regional
airline in one country in alliance with a major carrier from another.
5.4. Possible future scenarios

In this section, we review the prospects for the air industry under alternative assumptions
as to the state of the world, paying particular attention to the possible effects of
environmental and/or competition regulation on the development of the air industry. We
start with possible effects of policies aimed at reducing environmental damage and then
turn to issues of market power.

5.4.1. Environmental charges

There is a vast range of studies of the environmental effects of air transport and the
effects of internalising some of the externalities (see section 4). Lu and Morrell (2001) for
example estimate noise and emissions effects at Amsterdam airport for a range of aircraft
types, arriving at weighted average social costs of £540 to £2200 per landing depending
on the precise charging mechanism used, the higher figures more accurately internalising
the externalities. For the B737-300, which accounts for 35% of ATMs at Schiphol, full
social cost pricing is estimated to increase airline direct operating costs (including airport
charges) by 26% leading through to a fares increase 4.1% and a reduction in demand of
4.9%.

This relationship between fares and demand is crucially determined by the price elasticity 149
of demand (see sections 2 and 3). If anything, Lu and Morrell’s price elasticities seem a
little high: Dargay and Hanly (2002) estimate short-run elasticities of between –0.13 and –
0.24 for travellers to and from the UK and 20 other countries (mostly European) with long-
run elasticities between –0.31 and –0.58. Similarly, Toner, Wardman and Whelan (1995)
present evidence from the UK domestic market, with particular emphasis on competition
between air and rail, of between –0.1 and –0.33 in the short run, the latter elasticity being
for trips over 480km.

Table 5.8 below applies Toner et al.’s (1995) results to a range of scenarios. It must be
stated that these are averages across a range of journey lengths and with varying
degrees of rail competition. However, because the central estimates of the elasticities are
broadly in line with those of Dargay and Hanly, the effects of various policies can be
assumed to be accurate on average. Clearly, different particular flows characterised by
different fares, journey times, degrees of competition and mix of business/leisure will vary
around these average figures. Nevertheless we are confident that these sorts of effects
would follow consequent upon the improvement of rail travel or the worsening of air travel.

To see the potential for various strategies to reduce air travel, Toner et al. (1995)
examined:

z Rail journey time reductions of 5%, 10% and 20%;

z Rail fare reductions of 5%, 10% and 20%;
z A per round journey air tax of £5, £10 and £20;
z The introduction of VAT at 17.5% on public transport fares;
z The effect of increasing air congestion causing journey times to increase by 5 minutes
and 10 minutes.
 A tax of £5 per passenger had at that time recently been introduced for air travellers
taking off in the UK to destinations within the EU, with a £10 tax for destinations outside
the EU. The issue of imposing VAT on public transport fares is one which appears every
few years or so in Britain, but has not yet been implemented.

To these scenarios, we have added: a rail journey time reduction of 50%, which is closer
to the sort of speed improvements associated with the development of extensive High-
Speed Rail services; an air passenger tax of £40 per round trip, noting that Lu and
Morrell’s figures equate to something like £30 per trip; and an increase in air journey times
of 30 minutes to reflect substantially greater congestion at the major European airports.

Table 5.8: Reductions in air travel (%) from various policies

IMPROVING Reduction in rail fare Reduction in rail journey time
RAIL
-5% -10% -20% -5% -10% -20% -50%
Fall in demand 0.7 1.3 2.7 2.2 4.3 8.3 25.0
WORSENING Air passenger tax Increase in air journey VAT
AIR time @
£5 £10 £20 £40 +5 min +10 +30 17.5%
mins mins
Fall in demand 1.1 2.3 4.5 8.0 2.1 4.1 10.5 1.3
150 Source: Toner, Wardman and Whelan, 1995; own calculations

In the air v rail market, travellers are much more sensitive to service quality than to price.
Thus, even 20% reductions in rail fares will reduce air demand by only 2.7%; and the air
passenger levy of £5 looks more like a good revenue raiser than a serious attempt to
divert people to other modes. Air passengers on shorter flows will, though, divert to rail if
there are significant journey time reductions. Even then, with the forecast growth in
domestic air travel at a little over 4% per annum for short haul traffic on the Department of
Transport's calculations, and rather more on our figures, a 20% reduction in rail journey
times will choke off only two years' growth and even a doubling of train speeds will only
stop 5 years’ air demand growth. Given the likelihood of lower airline fares as a result of
liberalisation and greater competition between operators, it seems rail investment on its
own will not be a long-term solution. Instead, the EU’s policy of using market-based
mechanisms to internalise environmental externalities under the polluter pays principle
together with stronger regulations on noise and emissions is more likely to suppress the
demand for air travel by making users pay the real costs.

5.4.2. Concentration in the airline industry

The growth of world airlines and the fact that even big players such as BA are looking to
merge/ally with others gives some cause for concern in respect of the development of
monopolies. When coupled with hub dominance – which all the European majors have to
some extent – and the franchising out of feeder services to acquiescent regional airlines,
the possibilities of markets being fixed seem far from remote. Paradoxically, the fact that
alliances (or cartels) by their nature restrict output or curb capacity growth should allow
better use to be made of existing facilities without the same pressures for infrastructure
expansion. It may not be good for competition or the passenger – reduced frequencies,
increased prices – but it could work.

The thrust of regulatory policy, though, has been liberalisation and stronger ant-trust
measures. The Third Package was clearly about competition and so, in a European
context, the relief of the tensions caused by conflicting aims will depend on the relative
strengths of DGs IV and VII (Competition and Transport respectively) compared with DG
XI (Environment). Note also the attitude of the OECD is that “Liberalisation policies should
seek to lower barriers to entry….Competition policies should seek…to prevent anti-
competitive effects of agreements or mergers” (OECD, 2000). Barriers to entry include
things such as access to scarce landing slots.

The saving grace may be that airlines are, in fact, rather promiscuous when it comes to
choosing partners. In 1993, BA bought a 20% share in USAir with a view to possible
merger. In 1996, BA swapped partners to join an alliance with American possibly feeling
threatened by United’s alliance with Lufthansa and judging that USAir, a big six but not a
big three player, was not powerful enough. That fell foul of the regulatory authorities, went
a bit quiet and BA talked instead about merging with KLM. Those talks failed partly
because of the problem of negotiating bilateral with third countries. As a result of cooling
ardour, KLM went off to join with Alitalia and NorthWestern while BA tried to make up with
American. While we are still waiting for the banns to be read and the size of the dowry (in
terms of landing slots at Heathrow) to be agreed, KLM and Alitalia have split up and BA is
making eyes at KLM once more.
151
There is a serious side to this. Changing alliances can unstabilise an airline or make it
vulnerable. Singapore, Delta and Swissair had a long-standing alliance. Singapore left to
join Lufthansa’s Star Alliance and Delta joined up with Air France in the latter’s first move
into the mating game. Two years down the line, we see where Swissair is not to mention
Sabena in which Swissair had a 50% stake. Once Swissair had the stake in Sabena, they
withdrew from Geneva-Brussels and Sabena withdrew from Zurich-Brussels: effectively,
capacity was cut back and prices kept high.

Given all this, there is a need to encourage the smaller airlines – BMI, Virgin, the low-cost
carriers – to provide a check on the behaviour of established incumbents. There are two
drawbacks with this: lack of capacity at many European airports and the environmental
consequences of encouraging even more air travel. There is, as ever, no easy solution.

5.5. Conspectus

Where does all this leave us?

Most evidence suggests that passengers only really start to see substantial benefits from
competition when there are four airlines on a route. A consolidation of the European
carriers into three big groups based around Air France, BA and Lufthansa could well spell
higher prices unless Easyjet and Ryanair and the other LCCs can exert sufficient pressure
at the margin. We might also see some anti-competitive practices on North Atlantic
routes as well if each big Euro carrier allies with one US company; we then rely on niche
carriers such as Virgin or BMI to act as moderating influences. Encouragement of the
smaller players, including granting access to slot-constrained airports, is vital to ensure a
healthy competitive environment.
 That conflicts with environmental issues. Either we dampen the expected demand growth
or we commit to the expansion and development of more airports. The EU position is to
seek to “rationalise traffic with the aid of air traffic management regulations and the use of
larger aircraft”, together with promoting the development of high-speed rail lines as an
alternative to air for distances up to about 600 kilometres. The rail sector is likely to be a
significant competitor on these short-to-medium distance flows, although there is still a
problem with the regions of Britain and also the southern part of the EU’s main axis. Rail
will limit the possibility of anti-competitive behaviour in the air sector over the core area of
European activity and may ease the congestion problem at airports by freeing up some
slots for those flights which do not have rail alternatives.

The other environmental problem is hydrocarbons. Under the 1944 Chicago convention,
airlines enjoy substantial tax exemptions, particularly from taxes on kerosene. This
applies to international, intra-EU and domestic flights alike. (The US has introduced a
limited tax on cargo (note not passengers) on domestic flights.)

Such exemption provides no incentive for airlines to use the most efficient aircraft and
thus contribute to reducing CO2 emissions. It also distorts the balance between air and
other modes. Similarly distorting is the absence of VAT. The EU is keen to get kerosene
tax on the international agenda and even if it cannot obtain global international
agreement, it is considering abolishing the exemption on intra-Community flights. That
then creates problems – how to apply it to non-EU operators on intra-Community flights?
152 Sweden taxes flights where a (suitable) rail alternative exists. Another way would be to
alter the structure of en-route air navigation charges to take account of the environmental
impact – old planes pay more.

Consideration of the EU view takes us back to the question of how we accommodate the
forecast growth. The latest Common Transport Policy document deals with air under the
heading “Controlling the growth in air transport”. That must be the future.

Overall, we can conclude with some lessons from the last ten years:

z Deregulation has led, and will continue to lead, to significant benefits, though there are
concerns about firms with market power;
z The strongest role of competition is to keep costs down, especially when used in
conjunction with privatisation;
z Competition is likely to lead to airlines carving out specialist niches in order to be able
to compete, for example, LCCs;
z There is likely to be an even greater move towards concentration in the European
industry, through take-overs, mergers and strategic alliances;
z There thus remains a role for regulation in monitoring potential abuse of market
power;
z Congestion and slot scarcity is likely to exacerbate abuse of market power;
z ‘Predict and provide’ is not an option;
z The situation could change dramatically as the rail network improves and if the EU
tries to implement "Fair and Efficient Pricing in Transport" and internalise externalities
such as noise and pollution.
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156
 6. Overview Of Potential For Rail Movement Of Air Freight

This chapter is intended to provide a background into work undertaken to examine what
rail transport, and in particular high-speed (HS) rail, can offer airfreight operations as well
assessing known attempts to actually use rail. Previous work in this area has
demonstrated that the airfreight market is not homogeneous and the potential for transfer
of traffic to rail varies between the various market sectors. The advantage which rail is
claimed to have over both road and air is that large volumes can be moved in a single
train. However, in practice problems arise related to aggregation of such volumes, and the
degree to which premiums can be charged in order to cover the costs of technological
development of high-speed rail freight vehicles and their operating costs.

This chapter, based on available literature16 and knowledge of the area, examines the
subject under the following headings.

z Overview of the subject

o Review of previous work
o Defining high-speed rail freight and networks
o Premium freight traffic by rail already operating
z Potential rail use by air freight market sectors
o General airfreight (rail as a complimentary and competitor mode)
o Road feeder services and possible conversion to rail feeder services
o Mail and postal traffic 157
o Couriers and integrators
z Data sources and methodology available for future studies
o Governmental publications
o Airport statistics
o Other sources
o Collection of volume and revenue data
o Stated preference methods based on choices between alternative freight
scenarios
z Direction of future research.
o Current situation
o Operational and economic problems likely to be encountered in transfer to rail
o High-speed or medium speed rail technology
We conclude by drawing together research findings and identifying what we regard as the
key areas for future research and possible development in this area.

16 Much work in areas relevant to this review is commercially confidential. We are aware
of three studies undertaken at the European level of involving collaboration between
different railway administrations which looked at the potential for high speed rail freight but
we have been unable to obtain these reports. Our impression is that the findings of the
studies were not as favourable to high speed rail as might have been hoped and hence,
for political reasons, they have not emerged.
 6.1. Overview of the Research on the Subject

The railways of Europe see airfreight as an opportunity to bring premium rated freight
traffic on to the High-Speed (HS) rail links in the same way as they have gained
passenger traffic from both air and road. Work undertaken on their behalf by market
research companies and academic institutions has examined the size, shape and value of
the potential market. Unfortunately only a limited amount of information from this work is in
the public domain, and detail of flows between city pairs which may be of most interest to
rail is difficult to obtain. There has also been a limited degree of technological
development of HS rolling stock for freight undertaken by SNCF and DB in France and
Germany.

6.1.1. Review of Previous Related Work

An initial problem is the lack of a definition of what is express freight. Many operators, be
they road hauliers, airlines, or integrators, have their own specific weight and size limits.
As a result many of the studies undertaken in this field have also produced their own
definition, often depending on the sponsor of the work. There has been rapid expansion of
the market for express freight and it is now seen as an essential service for business
158 (Gouin, 1996):

z To optimise transport and distribution of high value and perishable products

z To meet the needs of ‘zero defects’ operations
z To allow internationalisation of production and trade
z Generally to achieve the greater flexibility required in a modern economy.
The rapid growth of the sector, exceeding general economic growth in all Western
industrialised nations, has been demonstrated by several authors (Savy, 1993; Jalard and
Leroy, 1993). The operators have been shown to make up of a wide range of companies
from diverse backgrounds, much of the airfreight being generated by forwarders, postal
organisations and integrators, rather than the airlines themselves
(EUROSTAF/EUROSIRIS, 1995).

The types of networks developed by operators have been assessed. They consist of four
basic options, though in practice a mix is often seen as the optimum solution (Vulin,
1992):

z Linear networks, usually uni-modal, essentially links in a chain between depots along
the route.
z Web type networks, involving many cross-flows between depots, providing many
routes through the web.
z Hub and spoke networks, essentially American and Australian in origin, and used
mainly be operators from such countries for their European networks.
z Multi-hub networks, which are a halfway solution between webs and hub and spoke.
European air hub locations are based on flying times from other key European cities, and
road access times from major cities near the hub. In current market conditions the
Amsterdam, Lille, Cologne triangle appears to be the best area, though as Eastern
Europe develops the ideal location may tend to move eastwards.

Studies examining the costs and tariffs of the express market have shown that within the
UK parcels market trucking accounted for about 17% of the value of the market, though
long distance trucking only 3% (Davies Robson, 1997/98). This indicates that of the high
revenues generated by operators only a small fraction is spent on the long haul trunking
of traffic.

An examination of published tariffs and interviews with managers (principally those of

UPS, ParcelForce and Diamond Express) indicates that a high proportion of express
parcels are in fact delivered on a 2 or 3 day schedule which allows overland carriage by
road (or potentially rail) at normal speeds. Where delivery is for the next day (or in the
extreme by 0830 next morning) the rates charged escalate rapidly. The escalation does
not depend entirely on distance but on the options available for night time movement and
the volumes concerned (Tweddle, 1998).

Published tariffs and interviews also give an indication of the demands of high-speed
services, though many large consignors will be able to negotiate substantial discounts.
The UPS tariff shows that their 0830 next day service within the UK costs about 3.1 times
that of the standard service, while allowing an additional 90 minutes reduces the mark-up
to just 1.4 times that of the standard tariff. In the case of European destinations the
escalation factor actually declines with distance to 2.2 times the standard service from the
UK to destinations in Greece or Finland, partly reflecting the low volumes which inflate 159
operating costs even for the standard overland service.

The ParcelForce tariff exhibits a similar pattern of escalation factors. However, urgent
parcels from mainland UK to the Channel Islands face escalation factors greater than 9,
which reflects the fact that only a small volume is air freighted to the islands, whereas
larger volumes for the standard service (four days in this case) are sent by road and sea.

Most express parcels and freight operators offer a mixture of services (usually between
four and six) in terms of transit time; with slower services generally generating higher
volume flows which allow the unit costs of collection, delivery and sorting to be minimised
(DB 1995). In the case of the smaller volumes demanding high transit speeds, the trunk
movements between more distant sorting centres use air transport-the premium in the
tariffs reflecting the use of this mode. It is this premium (or part of the premium between
road and air) which is available for high-speed rail freight operations, provided the rail
services offered are complementary to the express carriers existing networks.

Regrettably there is little published information on the volume of express parcels traffic
which demands air movements within Europe, or the sector lengths over which rail might
be competitive. This is an important issue for high-speed rail planning as it is only this
segment of the market where a significant freight rate premium can be obtained to finance
the cost of high-technology rolling stock required to provide commercial speeds in excess
of 200 km/hr.

There appears to be differences between the railway companies as to the market at which
they should be aiming. SNCF see the HS market as up to 2 tonne consignments and a
distance of up to 1500 km, whereas DB are examining the use of swap bodies of up to 20
tonnes. The main market is seen as being related to airfreight networks and this indicates
 that the main method of handling goods will be the 10-foot airfreight pallet base in a
number of variants (Wilckens, 1994).

Work by DB for the DUEFRACO workshop (sponsored by France and Germany) has
estimated that the costs per kilometre for the carriage of four 10’ air freight pallets to be
DM1,80-2,00 for HGV; DM5,00-6,00 for ‘Frachexpress’; and DM10,00-12,00 for
aeroplane. This requires aggregation of freight from a number of carriers loaded on to a
HS train, which raises issues of capacity utilisation. The main findings of the workshop
were that on the Cologne-Brussels-Paris route the number of 10’ air pallets was estimated
to be together with travel times as follows:

Sector Time Pallets Sector Pallets

Paris-Brussels 2:05 34 Brussels-Paris 23

Paris-Cologne 19 Cologne-Paris 10
Brussels-Cologne 2:30 10 Cologne-Brussels 15
The report from the workshop proposed two HS freight trains between Paris and Cologne,
departing at about 2000 and 0900 with arrivals around 0400 and 1700. If the train was
extended to Berlin it would take 9 hours 46 minutes from Paris, the Cologne-Berlin sector
taking 5:11.
160 Other potential routes examined were Frankfurt to Marseilles via Paris and Lyon, and
Munich to Bordeaux via Paris. The latter could be used a HS train hub.

Various HS train networks can be considered. The two most important are services linking
city pairs (or linking cities to major international airports), and hub type operations with say
a hub based in Paris which would allow development of a European network of HS freight
services. The latter would require rapid interchange in order to keep city-to-city transit
times to a minimum. The trump cards of HS rail are seen as (Jalard and Leroy, 1993):

z The ability to connect major Western European centres in about 3 hours travel time
z Probably lower prices than air
z Greater carrying capacity than air, and the ability to handle heavier and bulkier
consignments
z In the case of France, the ability to construct ‘TGV-fret’ terminals at or near major
airports.
One effect of HS rail gaining some of this premium rated traffic is that train paths would be
required on the HS rail network at night, when most infrastructure maintenance takes
place. This will affect the planning of infrastructure maintenance as this must not impinge
on the quality of service offered by HS freight trains (Anderson, 1995).

Recent work undertaken in France concluded that there was unlikely to be a shift of air
cargo to rail in the short term. That HS rail could substitute for some air express freight if
volumes were sufficient, while the non HS rail option could also substitute for part of the
airfreight movements currently using road (LATTS-ENPC 2000).

A paper published this year claims 5% road feeder service (RFS) traffic could transfer to
rail, and that airports with 150 tonnes per day of outbound traffic could use rail cost
effectively. The authors used a growth rate of 15% pa in air cargo to forecast that at least
seven major European airports would meet the level of traffic required by the year 2010
(Terzis et al. 2001). This rate of expansion may be high; though air cargo expanded very
rapidly at Europe’s 20 largest airports, up 34% form 6.63mt to 8.883mt between 1995 and
1999, expansion at this rate may not be sustainable (EU 2000).

The Terzis et al. study did not adopt a case study approach, and it seems this type of
research produces more optimistic results. Where case studies examine the varying
service requirements of parties involved, the outcome tends to be less optimistic
regarding the success of transferring air cargo to carriage by rail.

6.1.2. Defining High-Speed Rail Freight and Networks

A question very relevant to this study is “what is high-speed rail freight”? The answer can
vary depending on who is asked. High-speed (HS) in Europe has been defined by the
Union Internationale de Chemins de Fer (UIC), the international body representing
railways, as rail services having a maximum speed in excess of 250 km/hr, giving an
average (or commercial) speed of 200 km/hr between stations or railheads (UIC 1995). In
order to achieve such speed it is generally necessary to construct new railway
infrastructure, and to develop new rolling stock for services on the new lines.

A network of these high-speed routes being constructed is steadily extending across

Europe. The most extensive network is the TGV network in France, the first European 161
country to begin HS passenger and freight services. It has attracted much more
passenger traffic than anticipated in terms of modal switch to rail from both air and road,
and also generated traffic. The SNCF network also has the only true HS freight in Europe
in the form of a number of postal trains. However, most networks plan, or are considering,
carrying parcels on HS passenger trains, such as Eurostar trains between London, Paris
and Brussels (DB 1997b).

High-speed routes now exist in Germany, Italy, Spain, Holland and Belgium, though they
are not all connected to each other. That in Spain is an isolated standard gauge route
from Madrid to Seville and may never be connected to the rest of the system. A short HS
link in under construction in the UK between London and the Channel Tunnel, though in
general the policy in the UK has been to upgrade parts of the existing network rather than
build new infrastructure.

The latter option is also likely to be applied to many rail links throughout Europe where
traffic levels could not possibly justify the cost of the HS infrastructure, or the new line
cannot be constructed for other reasons, such as topography of urban development.
Many routes can be upgraded to allow maximum speeds of 200 km/hr, though restrictions
may be fairly common on such lines. Upgrading can be achieved at relatively low cost by
improving existing lines by undertaking programmes of easing curves and the introduction
of advanced signalling and train control. Such upgraded routes may be used by HS rolling
stock in order to extend the network of locations served, producing average speeds of
some 120 km/hr. The improvements to the existing network also benefit existing rail rolling
stock, including freight vehicles.

There are also proposals to build a very high-speed line in Germany which would allow
maximum running speeds of 450 km/hr. Construction is unlikely to be completed within
 ten years, assuming the plans goes ahead. The operating costs are unknown, but are
likely to be relatively high.

6.1.3. Premium Freight Traffic Currently on Rail

Only one true High-Speed (HS) freight operations exists. A freight version of the French
TGV train has operated since 1984 carrying postal traffic, initially on the Paris, Macon to
Lyon route. This has since been extended Avignon. Since the service was introduced the
French postal service has altered the methods used for the trunk movement of mail and
packets, in particular the air network it uses has been extended and is now based on
Charles de Gaulle Airport.

We believe that the TGV Fret train sets now carry mainly parcels with premium rated
postal traffic only forming a small part of the cargo. As a result, the French postal service
may not have considered HS rail as a option for new investment, the TGV’s being the only
postal traffic currently using rail in France. Nevertheless, the units have been a technical
success providing large volume capacity and high-speed technology, the cargo weight
being potentially restricted by low axle weights, though this is not a problem with the
parcels traffic carried.

162 Also in France the first conventional trains to run on high-speed lines started running in
October 1997. Two pairs of trains run under the ‘SERNAM 200’ banner between Paris,
Chevalert and the south-west (Toulouse), and between Paris and the south east
(Orange). The maximum line speed is 160 km/hr using conventional wagons, but it is
hoped to raise this to 200 km/hr when specially modified wagons are available. Each
service offers the equivalent capacity of 48 lorries, the aim being to compete with express
operators and airlines for overnight deliveries (Modern Railways, 1997).

Probably the largest movement of premium freight in Europe is in the UK operated by Rail
Express Systems, subsidiary of the private operator English Welsh and Scottish Railways
(EWS). It was originally set up by the nationalised, though commercially aware, British
Rail, which contracted to carry mail in dedicated mail trains at speeds of up to 110 mph
(177 km/hr). The contract unusually contains penalty and reward clauses based on on-
time train performance of 95%. The Railnet (as Royal Mail calls it) fills a niche between
road and air, and covers gaps in the air network which are often the result of night time
flying restrictions. As a result they still retain some travelling Post Offices (TPO) on which
staff sort mail en-route. Royal Mail has expressed some dissatisfaction with aspects of the
operations which vary by route, and recently extended its air network as a result of
disruption to its mail trains following the Hatfield rail crash.

The rolling stock is not HS but adapted bogie vans hauled by locomotives, and electric
multiple units (emu’s) based on a passenger design. The rail routes link most of the
conurbation’s in the UK, though few passenger stations are now used to load mail. The
Railnet uses dedicated road rail interchange terminals to minimise transfer times; so of
these are combined, or close to, sorting offices. Recently new locomotives have been
introduced capable of 125 mph (200 km/hr) but the rolling stock has yet to be modified.
The network and timetable are shown in Figure 6.1 and Table 6.1.
 163

Figure 6.1: Royal Mail Railnet Services. Source: Rawlinson 2001.

164

Table 6.1: Royal Mail Railnet Time Table. Source Rawlinson 2001
Swedish Railways (SJ) have followed a similar pattern to BR. They now move pre-sorted
mail on three rail routes, Stockholm to Malmo and Gothenburg, as well as Sundsvall to
Malmo, using adapted emu designs. Both SJ and Rail Express Systems, are now
investigating raising speeds of mail trains to a maximum of about 200 km/hr.
Other postal organisations in northern Europe have felt unable to continue the use of rail
operations for mail, though there are one or two examples of parcels utilising intermodal
trains in the UK and France. ParcelForce are currently undertaking trials using piggy back
trailers on an overnight train from Daventry (near their midlands hub) to Glasgow, though
again this is switching traffic from road to rail. In recent years most other rail movements
of premium freight traffic have undertaken the form of trials and have involved airlines and
an integrator.

One major international integrator has attempted trial operations using rail, though not
‘high-speed’, for a 3-month period during 1991. In conjunction with SNCF and SNCB (the
French and Belgium rail operators), DHL operated a train between their hubs in Paris and
Brussels. Unfortunately the trial was not successful, the reasons we were given at the
time were:

z Average speed was no better than road. Though line speed was 160 km/hr compared
to a road vehicles 80 to 90 km/hr, the advantage was lost in changing between diesel
and electric locomotives, and between electric locomotives near the border. The
locomotive changes coupled with border delays led to an unacceptably extended rail
transit time.
z The lack of airside rail freight terminals at major European airports is a disincentive to
using rail. In the trial, material had to be transferred between the rail terminal at
Brussels Vilvorde and the air terminal at Zaventem, generating costs and delays.
z Rail pricing is along ‘average cost plus’ principles, whereas air and road pricing is 165
market driven.
z The flexibility of rail equipment is restricted when compared to other modes, often
being network or route specific (e.g. Channel Tunnel stock, which DHL also
assessed).
z Rail infrastructure, especially on high-speed routes, is mainly maintained at night
making availability of suitable paths to produce the required transit times and reliability
difficult to obtain.
In recent years there have been a number of trials using rail for the movement of air
cargo. They include:

z Frankfurt to northern Germany using Cargo Sprinters, which are based on diesel
multiple unit (dmu) technology. The traffic is consigned by forwarders rather than
airlines, using swap bodies. We believe the costs are either subsidised or underwritten
by Flughafen Frankfurt Main (Frankfurt Airport).
z Milan to Amsterdam using swap bodies fitted with roller bed floors carrying airfreight
pallets on behalf of KLM. We understand the trial was technically successful, but the
use of conventional intermodal trains resulted in a poor service compared with road.
z Milan to Zurich carrying loose airfreight in swap bodies on behalf of Swiss Cargo. This
was discontinued, mainly due to uncompetitive rates.
z A proposed Frankfurt-Basel-Zurich rail trial was not undertaken because of high rates
and unsatisfactory pathing (the Frankfurt-Basel rail line is congested). Swiss Cargo
rejected the use of Cargo Sprinter dmu’s on this service because they were
considered to have insufficient power for the grades on the route.
As the above trials demonstrate, currently rail seems to have difficulty in providing reliable
services at competitive costs. It is also apparent that some of these trials are supported by
 the airport authorities in an attempt to alleviate road congestion around airports; air side
congestion seems less of a problem.

The European situation can be contrasted with North America, where express road freight
and parcels operators such as UPS and US Postal Service do make use of rail services
using orthodox American intermodal technology, containers and trailers on flat cars
(TOFC). UPS spend about $500m per year on rail, mainly for parcels on standard service,
premium services mainly using air. In the USA this is partly because such intermodal
services are given priority over other freight, and passenger services, resulting in high
quality transits. A joint service by BNSF and Conrail offers a 76-hour transit coast to coast,
between North Jersey and Los Angeles with a 15-minute service guarantee (Archer,
1996; Longenecker, 1996).

Recent technical improvements made by US rail operator Amtrak have resulted in 90 mph
(145 km/hr) trains. The premium charged for traffic on such services reflects where the
operator stands in relation to its competitors; about 15-20% above other intermodal
operators, but 10-15% below the air option (Bascombe, 1998).

6.2. Potential Rail Use by Air Freight Market Sectors

166 Airfreight is not a homogenous product, but may be broken down into a number of
sectors, each with its own service demands and requirements, and their fulfilment is a
pre-requisite to transfer of traffic to rail movement. Even when this occurs only a limited
number of routes are likely to prove competitive for rail.

6.2.1. General Air Freight Characteristics

The major flows of airfreight are long haul international movements. Apart from some
perishable traffic and urgent mail and spare parts, most does not require absolute speed.
The reason air is chosen is that customers cannot wait until the next movement by ocean
transport to arrive. This allows airlines and other airfreight operators to move cargo
overland for considerable distances to major airports where they consolidate traffic for the
long haul flights, either as belly cargo in the holds of passenger aircraft, or by dedicated
cargo aircraft.

The long haul airfreight sector is characterised by severe peaks and tight deadlines. Most
outbound traffic from Europe is despatched by shippers mainly on Thursday afternoons
and Fridays (about 60% of London Heathrow’s exports are in this period). This pattern of
movements creates unbalanced flows on most routes within Europe by day of week even
though the weekly traffic figures may appear to be more in balance. As a result equipment
may only be required for a limited number of movements per week, and have no return
load available. This creates problems of under-utilisation and high costs.

Table 6.2: UK Airfreight 1996

Traffic (tonnes)
Domestic EC Other international

All UK airports 122618 377317 1283417

Of which(ow)
Heathrow 8653 175794 856040
Percentage of each class 7 46 67
Source: Derived from CAA 1997
Airlines use various strategies to cope with long haul movements. For example, British
Airways charters freights as required, whereas KLM and Lufthansa have freighter and
combi aircraft in their own fleets. There are also specialist freight airlines such as
Cargolux and FedEx which carry for other operators as well as moving traffic on behalf of
their own customers.

Generally, domestic airfreight flows within European countries are small, an important
component being overnight mail traffic. However, flows within Spain are more substantial,
especially to other major Iberian cities. This may in part be due to the underdeveloped
road system in Spain and domestic air traffic may decline as the road network is
improved.

Though very urgent long haul airfreight traffic is generally taken direct to the nearest
international airport the practice for the majority of traffic is rather different. It is usual for
operators to try to ‘build’ (aggregate and assemble) airfreight pallets for through
movement at the first opportunity in the journey in order to minimise double handling,
which is costly, and to avoid potential damage to cargo, and to minimise delays (dwell
time) at airports and other terminals. The pallets may be built at regional receiving
centres, other airports, by freight forwarders or at the shippers’ premises. 167
Once assembled, most pallets will then be moved by road to a major international
airport, though some is flown within Europe for transfer. ‘Air freight’ consists not only of
the freight carried in aircraft (either as belly hold freight in passenger aircraft, or in
cargo or combi aircraft) but also the freight carried to and from airport hubs by road
vehicles, many of which have their own flight numbers and are advertised in airline
timetables; these are known as Road Feeder Services (RFS). The latter is the
predominant method used for the intra-European sector of a service connecting with
long haul flights at major European airports. In 1996, more than 88% of total cargo at
Amsterdam was transferred to of from road, whereas this figure at Heathrow was 83%
in 1997. On the other hand the figure in the case of Brussels airport in 1996 was 51%
reflecting the fact that this airport is the European air hub for the major integrators and
couriers, DHL and Emery.

Many RFS movements, particularly long distance ones, are intended to expand the
catchment area for cargo collection and delivery, at the expense of other airlines which
may have a hub nearer the consignor of receiver. In previous work it has been found the
airlines will not release data on their RFS traffic flows as it can indicate the extent to which
they have penetrated their competitor’s markets.

Airfreight has two modes of operation. Either it may be booked on a specific flight, or the
customer specifies only the required delivery time at the destination. The latter allows the
airline to decide on the flights and routing used, using scheduled or non-scheduled
passenger or cargo aircraft in order to maximise yields.
 6.2.2. Road Feeder Service Characteristics

Road feeder services (RFS) generally deliver long haul cargo to a major hub airport
overnight. Arrival is normally required before 0600 or 0700 to enable despatch to inter-
continental destinations. Although there are some very long RFS routes, most depart from
their origin points by 2000 or 2100 the previous evening which gives a maximum transit of
9 hours and at an average journey speed of 60 km/h on a good road network suggests
journeys of up to 550 km.

RFS services are based on a ‘scheduled flight’ which minimally is a single lorry, or
sometimes van. However, the unbalanced and sometimes unpredictable nature of the
airfreight referred to above means that on certain feeder routes it may be necessary to
book/acquire duplicate trucks at short notice in order to handle larger volumes. In previous
work we have been given an example of 15 trucks being required instead of the normal
one vehicle. These fluctuations in demand are important when assessing the potential of
rail to carry this class of freight. Assessing the limited flow data obtained showed that
traffic between Madrid and Milan indicated a range between 60 tonnes eastbound and 10
tonnes westbound in the same month, and 23 tonnes eastbound and 281 tonnes
westbound in another single month; considerable imbalance in direction and demand.

As cargo is palletised from origin to destination wherever practicable, the constraint on

pallet size is minimally imposed by loading considerations for belly-hold freight. In
168 practice, this often means that the pallets, particularly their height, are sub-optimally small
for lorries. As a result many RFS movements have spare volume within the vehicle and a
low payload. However, the comparative cheapness of road permits this to be tolerated
within the overall service and price offered to the customer.

In general, it can be said that airlines and other airfreight operators trade-off the low cost
and slow speed of lorry movements against reduced handling and time delays at airports,
especially where through freight pallets are concerned.

6.2.3. Prospects for Shifting General Air Freight to Movement by Rail

In the case of intra-European airfreight, as well as airmail, there are two ways in which the
railways may be able to gain business, either by:

z competing directly with the airlines for the traffic, or

z acting as a complimentary mode to air for long haul inter-continental traffic in the form
of rail feeder services. In this case competing mainly with road for the distribution of
cargo to and from major European airports.
Premium short haul freight traffic won from air is likely to form small volumes on any
particular route. For example, previous work indicated that the largest average daily air
freight flow is 134 tonnes from London Heathrow to Frankfurt, with typical flows being
more like the 14 tonnes per day Amsterdam Schipol to Paris Charles de Gaulle. Many
short haul charter cargo or mail planes carry between 5 and 15 tonne payloads, so rail
competition does not depend on volume, but the ability to offer a train service which at
least equals the speed and reliability of air, at a lower cost than chartering an aircraft. The
low volumes suggests that rail may also be able to carry pallets or containers on certain
scheduled passenger services in direct competition to scheduled air services, as is now
the practice on some Eurostar trains between London and Paris or Brussels.

The situation regarding long haul international air freight is somewhat different Significant
flows to and from the UK’s main international airports (Heathrow, Gatwick and
Manchester) are moved by road over long distances. Other UK airports tend to serve the
economic regions in which they are situated. Much of this traffic is transported by road as
the combination of modes provides the overall service required by the shipper at minimum
cost. Similar traffic patterns exist to international airports throughout Europe though RFS
services cross national boundaries to a greater extent than where the UK is concerned, so
substantial flows are available for rail movement, by conventional as well as High-Speed
Trains, provided the required service criteria can be met. However, as little of this traffic is
time critical the demand for high-speed rail will be small.

Many major international airports also act as hubs for flows of international freight and
mail. For instance, mail arrives at London Heathrow from Canada bound for many
European countries and may be sorted and flown to destinations such as Warsaw. Links
to airports would allow rail networks to compete for some of this traffic.

Rail may have difficulty gaining freight traffic currently carried in the holds of passenger
aircraft. This is largely because it is too important a source of extra revenue to the airlines
for them to allow it to change mode, and in previous work airlines when interviewed on
this matter have indicated that they would compete with rail on the basis of avoidable
costs, as any revenue generated above this threshold increases aircraft yields. Even 169
current rates could decline as a result of excess capacity. Some of this traffic which is for
connecting flights is captive to the airline concerned.

There may be the possibility of some intra-European freight on dedicated cargo aircraft
switching to rail if rail can guarantee adequate service specifications at a lower price than
by cargo aircraft (taking account of changes to aircraft utilisation). Excluding aircraft
movements by the integrators, the number of dedicated intra-European cargo aircraft is
not great, however.

Probably the greatest potential for airlines is to switch to rail some RFS service
operations, provided cost and service specifications are at least as good. This would in
most cases mean that direct rail access to airports (and in particular to the freight
terminal) would be needed allowing transhipment of through air pallets directly to airport
handling agents, thus minimising dwell time and transfer costs. However, most of this
traffic is relatively short distance and does not demand high-speed.

Previous analysis of RFS operations shows they are used in a number of circumstances:

z Short distance distribution between airports or between airports and delivery depots.
This requires short transit times, and the freight may move during the day or night.
Rail may not be able to compete here.
z Inter airport movements to cover periods when one airport is closed, such as at night,
and air movement is from an alternative airport. This type of RFS operations takes
place usually at night, and may require a regular high-speed, low volume, shuttle
operation. Rail may have a role to play if the airport has a rail freight terminal and
small rail vehicles are available.
 z Long haul RFS movements used to assemble inter-continental air cargo at major
airports such as Frankfurt and Paris. Rail may have a role to play here, especially if
air/rail freight terminals are provided at key airports. With a few possible exceptions,
this traffic does not require excessively high-speeds and so high-speed rail technology
would not be needed.
In the case of inter-continental air cargo to major airports, most airlines required the traffic
to be available at each airport by about 0600. This indicates that rail operators would have
to consider dedicated trains to each airport concerned in order to maximise freight
volumes and the catchment area of the rail option.

RFS operations in Europe use vehicles that may vary from a large articulated lorry to a
small van. Large trucks are generally limited to 90km/h for international journeys, though
domestic limits vary (96 km/h in the UK; 80 km/h in France). However, vehicles of less
than 12 tonnes GVW (7.5 tonnes in the UK) are subject to higher speed limits which vary
by country.

In future, restrictions on lorry operations may increase which will limit RFS operations. If
night time bans become widespread, trucks will not be able to reach railheads which are
remote from the airport, further strengthening the case for direct rail freight access to key
airports. Airports which could build air/rail cargo terminals within their boundaries include
Brussels, Frankfurt (already in use), Manchester, Cologne, and Milan. An underground rail
link is proposed for Schipol. In addition to Frankfurt, the other three main European cargo
170 airports, Heathrow (both main line and tube), Schipol and Charles de Gaulle have rail
links, but only for passengers.

6.2.4. Problems for Air Freight Using Rail

Some of the problems facing the rail option have already been alluded to. Rail must be
able to maximise flexibility in terms of departure times, and unbalanced flows of traffic.
The aggregation of traffic from various airlines and forwarders in order to generate
trainload volumes leads to compressed transit time windows, without offering customers
any advantage.

The limited statistics available show that the majority of traffic moved by RFS operations is
of relatively short distance, with only a small proportion being moved to distant
international airports, mainly to access more direct flights or obtain reduced charges. Of
UK air trade in 1991, 6000 tonnes of exports and 4000 tonnes of imports were transported
to or from a mainland European airport by road and sea, that is only 2.5% of export air
freight and 1% of imports (DTp, 1993).

In a previous study interviewees indicated that RFS services have expanded since the
above survey was undertaken, though there remain strong relationships between an
airport and its local hinterland. The 1991 survey estimated that of the total air trade
exports from the London area, 91% used one of the London airports, 74% using
Heathrow. High-speed trains offer little benefit over these short distances to the London
Airports as the costs and time of doing so diminish any advantage. so high-speed rail can
offer little here. Medium speed trains using the European High-Speed Rail Network
(EHSRN), however, may gain advantages in pathing and reliability at operating costs
close to road. For unless high-speed rail offers users of general air freight services
significant benefits above those currently available, users will not be willing to pay the
premium freight rates required to cover the high capital and operating costs of high-speed
rail technology.

6.3. Potential Transfer of Air Mail Traffic to Rail

International as well as national postal services are facing increased competition for their
traditional items. It is only for letters as opposed to packages and express items that post
remains dominant, carrying just over 80% of the total. Though the letters business is
increasing slightly (about 1% in 1996), it has suffered from substitution by electronic
messages, initially from fax but increasingly from e-mail, which is forecast to grow by at
least 20% per year. International postal services’ outbound letters business is also
suffering from competition from private sector operators and other postal services which
send representatives across borders to persuade customers to hand over international
mail to their own processing systems.

Regarding parcels and packets, the post’s core international business lies in the none
urgent sector. Again, though outbound parcels traffic was increasing by about 4% per
year in the mid-1990’s, the integrators (such as DHL, UPS, TNT and Federal Express)
have increased their market share. Growth in the express postal business is slowing as
the market approaches maturity and was between 5% and 9% in Europe and North
America, but much higher in parts of the Far East and Latin America who have less 171
developed markets. Like letters, urgent document traffic have been adversely affected by
electronic messages. The main integrated express operators have sought to protect their
volumes by moving into the parcels business. In turn some parcels operators and postal
administrations have persuaded customers that time-certain but slower delivery at lower
prices is more attractive for many items than overnight express delivery at high prices.

6.3.1. Characteristics of European Mail

Priority international mail in Europe is normally ‘day C’ delivery whereas domestic within
many European countries is next day delivery (day B). This applies, for example, to the
UK and Germany, though the French postal service only provides this level of service
within each Department. Post is normally collected day A, and in the case of domestic
priority mail sorted overnight for day B delivery, which means that it must be at the
delivery sorting office in the early hours of the morning. In the case of international mail
and long distance mail in France the postal services have so far been unable to establish
the necessary transport services, and most international mail is currently sent to a
nominated international sorting office (in the case of the UK this is in London) moved to
the destination countries nominated inbound sorting office during day B, then incorporated
into the destination countries sortation system so that it arrives at delivery sorting offices
early on day C.

Transport is usually by road, often over long distances as the time windows allow this
mode to be used. A typical example is mail from the Netherlands and Belgium to Spain, a
distance of over 700 km, the vehicle from Amsterdam to Zaragosa collecting Belgium mail
en-route. Because of low volumes, the normal practice is to route vehicles via
intermediate concentration points.
 Over longer distances priority mail is flown both within Europe and inter-continentally.
Flights used tend to be scheduled passenger services or alternatively space may be
booked on scheduled freighter aircraft. Normally a regular contract exists.

Mail using standard services tends to use road throughout, though there are exceptions.
The charges are based on the road transport costs, often using international groupage
hauliers, with delivery specifications depending on length of haul.

Postal organisations have been traditionally strong in the provision of relatively high
quality, low cost services. However, these services may not be comprehensive enough to
meet all demands in a modern market place, and could lead to diversification to defend
national markets from foreign competition, including competition in European domestic
markets from foreign integrators.

6.3.2. Characteristics of Domestic Postal Services Within European

Countries

Domestic postal administration varies from one country to another in terms of quality of
service provided and charges to users. The UK and Germany have a next day delivery
option covering most of the country; in France next day delivery is mainly restricted to
172 destination in the same Department as the origin.

All three of these countries postal services operate air networks. In the UK a multi-hub air
network conveys about 215 tonnes per night, with payloads typically in the 3.5 to 5 tonne
range. The Royal Mail ‘airnet’ is an integrated system also incorporating road and rail
modes. Generally air carries priority (first class) mail, though most mail is flown to the
offshore islands and Northern Ireland.

In Germany an air network was originally based on a central hub at Frankfurt (handling
about 350 tonnes per night) with a subsidiary hub at Leipzig. With increased volumes, and
incorporation of the former East Germany the system has changed to a multi-hub
configuration, though Frankfurt still handles about 250 tonnes per night. Rail is no longer
used for mail in Germany. France has a centralised air hub at Paris Charles de Gaulle
airport, with high-speed rail vehicles used on the Paris-Lyon-Avignon route only.

The volumes of mail moved over some routes within European countries are large. In the
UK the London to Warrington and the London to Newcastle routes each justify two mail
trains each way per night, and additional day time services to meet the peak Christmas
volumes.

Most European postal administrations offer a low-cost option based on road transport
movement and sortation taking place when priority mail has been dealt with. However,
where a next day delivery service is offered the time window between the despatches and
receiving sorting offices is of the order of 4 to 6 hours. This restricts the range of road
truck movements, and can provide rail with a niche between road and air if the rail
operator provide the service required. However, volumes of priority mail on many
corridors are low and for rail to be economic it may need to be combined with either non-
priority mail (as occurs in the UK) or freight traffic from other operators.
6.3.3. Prospects for Shifting Postal Traffic to Rail

The average length of haul of UK domestic air cargo is 350 km; a high-speed rail service
with an average running speed of 200 km/hr could link two terminals this distance apart in
1hr 46min, about 1 hour longer than an aircraft flying between two airports that far apart.
The mail would have to be moved and from the related rail or air terminals. This indicates
that rail has a potential in the mail market.

In future the trunk movement of mail traffic is likely to become more concentrated as
postal administrations concentrate sorting operations at fewer, highly automated, hubs.
This will also encourage larger volumes, so the mail which remains on rail in future may
be handled more cost effectively and profitably.

The former British Rail (BR), then still a nationalised industry, responded when Royal Mail
undertook concentration of sorting offices by agreeing to operate a reduced number of
mail trains with higher average speeds. Though they are not ‘high-speed’ services, they
use medium speed passenger vehicles capable of up to 110 mph (177 km/hr) which have
been adapted to allow Royal Mail wheeled containers to be loaded.

NS Cargo also have proposals to introduce a network of international rail services from
Holland to Frankfurt, Basel, Zurich, Paris and Milan intended for air freight and airmail
traffic using wheeled containers to speed loading, but this will not use high-speed trains.

Volumes of international priority mail are very low, often less than 5 tonnes per day even
173
between neighbouring countries. Currently this could only be carried economically by rail
if combined with other (non-mail) traffic, or on passenger trains. High-speed may not be a
requirement except on longer routes given the level of service offered by the postal
administrations.

Volumes of domestic priority mail are much higher between major cities. Coupled with
short transit windows, a potential niche market exists for rail though the service demands
mean that dedicated trains may be required. An example of this is the TGV Fret trains
operating on behalf of La Poste between Paris, Lyon and Cavaillon (near Avignon). Also
in France the parcels carrier SERNAM operates a rail network using conventional trains.

A number of operators have in the past expressed the view that high-speed trains would
be expensive to operate compared to small air freighters. Because of low volumes on
many routes small low-cost trains travelling at medium speeds may be more cost
effective. High-speed rail freight technology still has to be developed, requires dedicated
infrastructure to achieve maximum speed, and as a result may produce higher unit costs
than air transport. Royal Mail, Swedish Post and SERNAM have adopted medium speed
small train option in the UK, Sweden and France. In Germany UPS and Deutche Post
examined the possibility of a joint rail network using medium speed technology, possibly
similar to Cargo Sprinter dmu’s, but this has not so far come to fruition. This may be
because of the high access charges which are believed to be charged by German
railways operators. The general assessment is that rail maximum speeds in excess of 200
km/hr lead to rapid increases in costs in terms of capital, maintenance and energy
consumption, and that such trains may not therefore provide cost effective services on the
limited number of routes on which they would be required.

Privatisation of national postal administrations may result in higher quality international

services being offered, due to either co-operation between administrations or former
 national administrations extending their operation across national boundaries. Volumes
are likely to remain comparatively low, and mail operators would then be direct
competition with couriers and integrators, offsetting some of the gains in volume.

In a previous study interviews with eleven mail and parcels operators revealed one
existing high-speed rail movement, that in France, and one potential route. The latter was
in the UK from Willesden (London) to Shieldmuir (near Motherwell, Scotland) with a
requirement to carry 15 tonnes of mail per night each way, at an average speed of over
200 km/hr, and at a cost less than that of the currently chartered 737 freighter. However,
this route is not part of the EHSRN proposals for new infrastructure and only parts of the
route are planned to be upgraded for speeds of 225 km/hr.

6.3.4. Problems for Postal Traffic Using Rail

One of the claimed advantages of rail is that it can handle large volumes compared to air,
and to a lesser extent road. This may also be rail’s undoing because in order to achieve
high volumes and minimise unit costs traffic need to be aggregated in trainload quantities.
This requires concentration points where traffic is assembled be road, at or near main
sorting offices. Intermediate stops can also increase traffic volumes but offset any speed
advantage. If dedicated trains are required in order to meet service requirements then the
174 cost of their services must be less than for air movement

Combining mail traffic with parcels and that from integrators increases volumes but may
constrain the transit time window for rail, given the variations likely to be found in the
transfer times to and from various sorting centres and hubs. Thus high-speed rail
technology may be required without producing significant benefits to the customer over
either air or road transport.

Night time and weekend lorry bans have become fairly widespread in many European
countries but mail traffic is normally exempt from these restrictions. Any extension to
cover mail is unlikely to benefit rail as postal administrations would be unable to offer
national next day delivery services without using road as part of the service.

6.4. Couriers and Integrators

In the light of saturation of the North American market, from about 1980 US and
Australian integrators targeted the European continent. By the late 1980’s, the five leaders
(UPS, FedEx, GDEW, TNT and DHL) had a turnover of some 25.7 b Euro and operated
over 1,000 planes and 200,000 road vehicles worldwide (Jalard and Leroy, 1993).

6.4.1. Characteristics of Courier and Integrator Operations

Integrators move consignments of small parcels and documents, often using hub and
spoke transport networks. Integrators are so called because they aim to offer a complete,
fully controlled transport system, as far as possible with their own land and air vehicles
and handling facilities. They have been changing focus from their origins in domestic
small package overnight operations into major international operators with sophisticated
communication and control systems, which provide the basis for on-line booking and
tracking systems for customers. Couriers are particularly strong in the market for
extremely urgent traffic where speed is more important than price.

It is possible for a number of local courier companies to form a national or regional

network and offer cost effective competition to the market leaders. The existence of
companies of this type, such as Diamond Express (based in Leeds and serving most of
the UK national market) limit monopoly powers of the major international integrators.
However, the existence of several operators dilutes the volume of traffic any individual
carrier handles on a trunk route adding to the problems of traffic consolidation if rail
movement is being considered.

Most integrators and couriers have generally rationalised their use of transport by using
air for inter-continental traffic where they contract to use belly space with airlines such as
British Airways (DETR, 2000) and for longer hauls across Europe, and road for short
distances between hubs. They are, however, prepared to consider whatever mode(s)
might best suit the services they provide, DHL even using canal boats in Amsterdam. The
trade off between mode and distance is illustrated in Figure 6.2 which is from DHL’s
Network Planning Group, though cost is also a factor considered.

Figure 6.2: Modal Capability Chart 175

2 City Stop (AIR)

3hrs high-speed
Rail (>300 km)

3hrs
(Van)
300 km

HUB

Up to 4hrs
Conventional Rail (Sorting en
3hrs
route) 320 km
Truck

3hrs by Air
(all Europe)
(300 – 1400 km)
Source: DHL Network Planning Group
 Integrator and courier operations remain labour intensive, especially for collection and
delivery. Their success also depends on effective use of automation and information
systems, and good utilisation of extensive and well located fixed facilities which are
optimised to achieve adequate flows to produce acceptable unit handling costs.

International traffic represents only about 15 per cent of total business; hence the
structure of the industry is determined very largely by domestic considerations. However,
there are now a number of primarily international operators including DHL and Federal
Express. Many companies aim to be able to offer integrated global coverage but few will
achieve this. More will achieve European or regional coverage through acquisition and
partnerships.

Although considered to be one market sector, each integrator has a different strategy and
tends to be more successful in winning some types of traffic than others. For example,
DHL specialise in the overnight document market throughout Europe as well as inter-
continental traffic. They only have a minimal penetration in the domestic markets of
European countries, pricing off potential business except in the case of major contract
customers.

On the other hand, while UPS have a Euro express service they are committed to
developing markets within European countries. They already have a strong position in the
German parcels sector but less so in the UK. TNT is a mirror image, with their strength
176 mainly in the UK, though the group is being broken up following a take-over. Emery world-
wide is more oriented towards larger consignments such as pallet loads, using manual
sorting mainly at Brussels.

Other integrators tend to use highly automated hubs so sort overnight mail and packages.
UPS have their European hub at Cologne, as did TNT until February 1998 when they
moved to Liege. The move is believed to be partly due to restrictions on the number of
night time flights at Cologne. DHL have the largest volume and have changed to a multi-
hub system. The original hub at Brussels is estimated to handle 1,000 to 1,300 tonnes per
night. Other hubs (as well as those of other integrators) are believed to handle between
400 and 700 tonnes per night but the companies are very reluctant to confirm these
figures as they are considered very confidential. However, depending on the degree of
automation, investment in a hub can only be justified on a throughput of several hundred
tonnes per night, and the location must have access by road as well as an air regulatory
environment giving full freedom rights.

City pairs with sufficient volumes between them are often served by road, or in some
cases air, directly to avoid the cost of movement via a hub. In general traffic is collected in
the region of origin up to late afternoon, 1700 in major cities, and must be concentrated at
one of that countries outbound gateways by 2100 for next day delivery to be achieved.
The maximum time to a European central hub is about three hours, allowing two or three
hours for sorting, then three hours for onward transport to the destination country.
Pressure on the hub can be reduced by short distance trunk movements arriving early,
and high volume routes having both early and late movements, perhaps an HGV followed
by last minute collections in a van.

A three hours transit window to or from the hub gives each mode of transport a maximum
operating radius around an integrators hub. The radii are as follows:

z HGV (truck) 250 km

z LCV (van) 300 km
z Rail (conventional) 240 km
z Rail (high-speed) 250-600 km (transfer time dependent)
z Air 300-1400 km (covering all Europe)
For high-speed rail to enter this market and have any impact, the hub to train transfer
times must be minimised, and if dedicated operation is being considered, the cost must be
lower than air. If traffic is to be aggregated, then transfer times and differing time windows
of potential users will restrict the radius over which rail is competitive.

Parcels operations by integrators such as UPS are similar to express road haulage and
groupage operations, though in general overnight European traffic has a very low
maximum weight per item to allow automated sorting. In the case of domestic services
within European countries, or within regions of Europe, larger shipments are accepted by
some integrators, even pallet loads.

The method of sorting and the location of hubs depends on the volume. In the case of the
UK domestic traffic, most integrators have a hub located in the English Midlands. This can
be used to serve virtually the whole of the UK mainland and achieve next day deliveries.
However, the largest operators, ParcelForce and Securicor Omega Express (SOE) use
multi-hub systems.

In Germany UPS uses a multi-hub system. Most traffic lies along a north-south axis from 177
Hannover to Munich, plus Stuttgart, Berlin and Hamburg. The substantial volumes along
this corridor led the company to investigate the use of rail, though not high-speed
services, based on multiple units with automatic couplers. It was thought that this would
allow efficient operation using train sections which would be coupled for the main trunk
movement, say from Wurzburg to Hanover. UPS may examine rail in other parts of
Europe if the traffic volumes are high.

In the case of multi-hubs the transport time window is greater than the three hours to a
central hub. In the case of direct services between city pairs it can be up to 9 hours. Many
such links are operated by road vehicles, and some longer distance routes by air. Rail
could compete for some of this traffic, but volumes on most links are low.

Long-term survival of integrators may depend on their ability to control, if not actually own,
a network within Europe or part of Europe. They may be reluctant to hand over the long
distance movements to rail operators until a high degree of reliability is demonstrable.

6.4.2. Prospects for Transferring Courier and Integrator Traffic to Rail

There are prospects for rail for high volume flows from individual companies between
airports, or between gateways and hubs, over distances of 300 to 600 km. Rail must be
less costly than air. Rail competitiveness is increased where a rail transfer station can be
provided within the airport, especially if the airport is an integrators hub or gateway. Direct
city-to-city traffic may use rail, but volumes are small so integrators preference would be
general user trains which they can use as required, rather than dedicated freight trains.

Most couriers and integrators plan, or say they are considering, carrying parcels using
High-Speed passenger trains. The courier Esprit Europe already uses Eurostar trains
 between London and Paris and Brussels, while SERNAM uses both Eurostar and Thalys
trains on some routes for its same day (‘Flash’) service. These are competing with belly
hold freight on passenger flights.

6.4.3. Problems for Courier and Integrator Traffic Using Rail

Many potential opportunities for transfer of integrator traffic are likely to be frustrated by
the combination of low volumes and short transit windows. The combination mitigates
against the aggregation of traffic so rail will be less able to use large capacity in order to
reduce unit costs in competition with other modes, whether it is air or road.

The market for overnight documents and packets in Europe has expanded rapidly (though
there are signs of a lower rate of increase in the future) and while one centralised hub is
used to serve the Continent, volumes on major corridors to the hub also increase.
However, it seems that eventually multi hub networks become more cost effective for very
large operations, and this process then reduces volumes of traffic on the main long
distance corridors where rail would be most competitive.

Restrictions on transport, mainly to reduce noise nuisance at night, has mixed benefits for
the transfer of traffic to rail. Extensive lorry bans may result in the use of vans in order to
178 circumvent the effects of the ban, which will erode the cost differential between road and
rail as well as air on longer corridors.

Night flying restrictions may encourage the use of rail in some networks. However, night
flying restriction already influences hub location by integrators. Recently constructed hubs
have shown a tendency to locate at smaller regional airports such as Vitoria (E), Liege (F)
and Bergamo (I), where direct rail access may be difficult to justify given the low volumes
of traffic, freight as well as passenger.

Many airports which are open at night can only accommodate a limited number of night
time flights. This means that integrators are likely to choose different locations for major
hubs in order to avoid possible capacity constraints. Rail would then be more limited in
attempting to aggregate traffic consigned by different integrators.

Some integrators, including DHL and Emery, operate their full air networks only four
night’s per week, as they can fulfil their service demands on most routes at weekends by
use of road movements. This implies low utilisation of any dedicated train sets.

6.5. Express Road Freight

Although this report is primarily aimed at assessing the potential of rail as a substitute for
airfreight movements, an overview of express road freight is also presented. This is to
provide a balanced view, as currently the next best alternative to air is express road rather
than rail, and any restrictions on airfreight movements are likely to benefit this mode rather
than rail. A previous study produced a couple of examples of the strength of competition
from express road freight to air (Tweddle, Fowkes and Nash, 1995, 1996):
z On opening of the Channel Tunnel, one express operator Securicor Omega curtailed
its airfreight movements and was sending about 140 vehicles per month using Le
Shuttle freight services.
z A Greater London to Duisburg service in 11.5 hours, seven days per week, with traffic
won from air.

6.5.1. Characteristics of Express Road Freight Operations

This sector differentiates itself from the general road freight industry in a number of ways,
though definition is difficult because of the many overlapping activities of the operators
concerned. The most important factor is that express road freight services are operated
between a number of depots, allowing driver changes en-route, the vehicle not being
stopped because the driver has completed their legal working hours and has to take a rest
period. As a result the load is kept moving rather than being delayed as it would be with
traditional road haulage operations. Examples of this type of operation are (Tweddle,
Fowkes and Nash, 1996):

z Scotland to Italy in 36 hours with two driver changeover points, one in northern and
one in southern France.
z South East England to Northern Italy in 24 hours with one driver changeover in
Central France. 179
Express operators also tend to offer their clients added value services. These include
storage (sometimes inventory control) and distribution and consolidation of loads from
several origins on behalf of one shipper. In addition, many operate regular time tabled
groupage services, assembling a number of consignments (typically thirty) on one vehicle.

Premium freight rates are charged for such services, which appear to be about 10%
above normal rates and generally allow goods to be delivered one day earlier than
orthodox road haulage. As rates and services offered vary between operators, an overall
estimate of the premium is difficult. The costs of offering express services increase as a
result of the provision of more depots and driver changeover points. However, these are
largely offset by improved utilisation of equipment.

Express road services are only differentiated from orthodox operations over distances in
excess of around 550 km, or 9 hours driving. On routes such as UK to Italy, previous work
indicates that approximately one in five shipments use these express services (Tweddle,
Fowkes and Nash 1996).

Some of the traffic using express road services is relatively dense when compared with
general airfreight, and the costs of air for this type of product may be the reason for
choosing road. Many express road freight vehicles carry loads in excess of 20 tonnes,
and apart from problems of air movement this has implications for rail axle loads when
considering transfer of such traffic to the use of high-speed rail technology.
 6.6. Data Sources and Methodology Available for Future Studies

Although general data is available from governmental sources detailed figures for
corridors are not published to protect issues of confidentiality. Other sources include
airports and surveys undertaken for various purposes.

6.6.1. Data Sources

Data at the top level is provided by state government European statistical publications,
usually compiled to establish mode split. Such data is of little use for detailed planning or
assessing the market for a new type of freight service. In the UK the CAA publish annual
statistics for freight and mail traffic at major UK airports split between domestic, EC and
other international classification (see table 6.2 above). Air transport movements (ATM) are
also given.

More detailed data is published by individual airports, and some are willing to make more
detailed data available by country pairs or individual terminal pairs. However, this is often
patchy and inconsistent in detail in order to protect confidentiality of airlines using the
airports, though such data can give interesting insight into the European airfreight market
(Table 6.3)
180
Airlines and integrators are very reluctant to provide information as they do not wish their
competitors to gain an insight into their operations. Generally postal authorities, while they
do not publish detailed figures, will be more co-operative in the provision of information.

Other data, such as origin-destination traffic flow data, has been collected by various
organisations for a variety of purposes, though often this is considered confidential to the
study in question. A number of studies have been undertaken regarding the use of rail for
premium freight traffic, and these are likely to be the most useful for future studies,
providing data from them can be obtained.

If we want to examine whether rail can attract traffic from air, secondary data is not
sufficient for the task. Moreover, primary data might not even be available. For example,
we might wish to develop mode choice models along the lines outlined in Chapter 2 but
we cannot do this using Revealed Preference data if there are no instances where air
faces competition from high-speed rail. Partly as a result of this, freight analysts have
turned their attention to the possibilities offered by SP data.

Table 6.3: European Air freight traffic

Air freight between major European airports (tonnes/yr)
(2 way totals)
Airport(s)* Amsterdam Brussels London London Manch- Madrid(1)
Heathrow Stansted ester
Code AMS BRU LHR STN MAN MAD
Year 1996 1996 1997 1997 1994 1996-7

Amsterdam n/a 479 18707 522 13290 1414

Brussels 0 n/a 9570 0 661 1486
Cologne 0 7857 3853 13745 0 0
Frankfurt 3234 10244 33570 1513 1571 1269
London* 20714 21517 90 68 1431 4119
Luxembourg 0 270 0 101 0 0
Paris* 3514 2682 11421 5545 1177 3938
Madrid 2680 15454 7824 355 477 n/a
Manchester 6122 0 519 97 n/a 34
Milan* 7826 2508 9382 69 262 2569
Rome* 2502 2428 11721 0 93 2117
Vienna 2283 3458 3911 0 0 284
Zurich 3936 3452 8462 0 2064 1107

Total European 125613 224355 198858 34341 63169 -

Total Airfreight 1082846 456232 1169333 102323 96900 -

Notes: n/a not applicable

- not available
(1)
Iberia Cargo only, other carriers also operate to/from Madrid (e.g.
Lufthansa: Madrid to Cologne)

Derived from data supplied by airports 181

6.6.2. Methodology Available for Future Studies

If data could be gathered on volume and revenue data together with service
requirements, the analysis of this would provide a sound basis for assessing on which
corridors rail may be competitive with air or provide complimentary services. Unfortunately
airlines are unlikely to be willing to co-operate in such a study if they perceive rail as a
competitor. As a result volume data may have to be sought from airport operators.

As far as the service requirements of customers are concerned, some of the obstacles
may be overcome by using SP surveys based on hypothetical choices between
alternative freight scenarios. The SP approach was described in Chapter 2.

Potential users would be asked to choose between two or more alternative modes, with
differing charges and service levels. The SP experiments can be designed to use
computer software, and adapt to individual respondents needs based on answers
previously provided. The method can produce valuations for such items as time, reliability
and choice of mode or type of technology used. Any premium that users are willing to pay
for an improvement in service quality can be estimated in order to determine whether the
additional costs of higher speeds on the rail network can be commercially justified.

Initially, SP experiments in transport were conducted using pen and paper face-to-face
interviews or by self-completion questionnaires, with both methods sometimes involving
cards showing one or more alternatives. The responses were later entered into a
computer. The growth of computing power, especially in portable machines, made it
 possible to enter responses at the time of the interview, reducing the possibilities of
mistakes, and to show the alternatives to the respondent on the computer screen.

Background questions could be asked ahead of the SP experiment, the responses

entered directly into the computer and available to ‘customise’ the SP experiment to the
respondent. By that we mean setting the attribute levels ‘around’ the current levels
experienced by the respondent. Furthermore the design could offer bigger time savings,
say, to respondents currently travelling for a long time. Infeasible small travel times can
be checked for and the experiment amended. Customisation is therefore a big help in SP
design.

Adaptive Stated Preference (ASP) takes the process one step further, and amends
attribute levels offered in later stages of the experiment in the light of responses to
earlier stages. For example, a respondent who would not pay £5, for a new transport
facility, would not be asked if they would pay £10, until it becomes clear that the earlier
response was a mistake.

One great advantage of ASP, when studying freight, is that the experiment will be able
to cope with a wide range of ‘true’ valuations of service improvements. By ‘true’
valuations we mean the unknown population valuation that the experiment is trying to
recover. Some commodities will be highly perishable and so have a very high value of
scheduled journey time and a great aversion to delays. The firm transporting these
182 commodities might transport other sorts of commodities, so that we could not be sure
in advance which commodity they would choose for the experiment. Furthermore,
some commodities will have different attribute valuations at different times. For
example, a car radio being supplied as a part of a Just-in-Time supply chain will have
higher journey time and reliability valuations than a car radio moving to a retail sales
point as a stock item. The ability of an ASP to adjust its questions quickly, in the light
of earlier responses, is clearly very valuable.

There is now a large literature on a wide number of applications of the SP approach to

freight demand analysis in a variety of different circumstances. A thorough and recent
review is provided by Danielis and Rotaris (1999).

While SP studies may provide data on the premium users are willing to pay, and the type
of service preferred, the reaction of existing operators to new competition is more of a
judgement.

6.7. Direction of future research

As described in previous sections, the current situation is that there are a small number of
rail movements of mail and parcels in Europe which fall in a niche market for rail, where
road is near to its distance limit within the time constraints, and the movement would be a
short haul flight by air. The aggregation of premium and standard service traffic helps
justify the rail costs by using rails volume capacity in order to reduce the number of road
vehicles used in addition to an aircraft. The commercial decision to use rail in such
circumstances is a combination of the airfreight cost for the premium rated traffic, plus the
road transport costs avoided by the introduction of a rail service. Only one of these
examples uses high-speed rail vehicles, the rest using conventional freight or modified
passenger rolling stock, though some flows use the HS rail infrastructure.
Research already undertaken indicates that rail, and particularly HS rail, may have a role
to play in the airfreight market though this appears to be limited to a relatively small
number of corridors. Success depends primarily on the cost of operating HS rolling stock.
If it proves to be less than that of an aircraft then rail can be substituted as an alternative
mode. If, as seems more likely, the operation of HS trains is more expensive than an
aircraft, but the higher capacity offered allows unit costs to be lower than air, rail can only
compete if traffic from more than one carrier can be aggregated on to the HS trains.
Previous studies have examined the traffic on the Paris, Brussels Cologne route and
indicate that rail may be cost effective, if aggregation takes place and the estimated costs
of the modes are correct.

The direction for future research is for more detailed work on the long term costs of HS rail
technology to determine more precisely the costs involved. Detailed design work will also
determine the type of airfreight pallets and mail containers which may be loaded on to the
specialised HS vehicles, and this should be related to the traffic on corridors where
premium freight volumes are high.

In a larger number of cases more conventional rolling stock operating at medium speeds
is likely to be appropriate for use by airlines, integrators and postal services. These are
less likely to switch traffic from air, but offer an alternative to the extensive use of road
vehicles over longer distances especially to replace road feeder services used by airlines.
183
Such intermediate rail technology is already in use on a number of European networks. A
major obstacle to their more extensive adoption seems to be lack of faith in the ability of
rail operators to provide a high quality of service, particularly regarding reliability. This
indicates the rail operators should direct their efforts into the improvement of service
quality rather than technological fixes in the short term. If successful, potential users of HS
rail freight services may be more co-operative and become involved in the development of
such services.

Another area which could change the competitive balance of the modes of transport are
environmental taxes and subsidies. Most European rail networks are currently subsidised,
though the policy of the EC is that freight should not receive a subsidy in the long term.
Such a policy would indicate that any new HS services are unlikely to receive support. On
the other hand, modes which are shown to cause environmental pollution may have taxes
imposed upon them, and such taxes are more likely to impose larger costs on road and
air, less on rail and water transport.

We feel that the future research needs in this area are not so much theme based, such as
the impact of unreliability or the development of mode choice methodologies, but are
rather case study based, examining specific rail and freight proposals in particular
corridors It can be dangerous to generalise results to all situations. However, we would
conclude that if rail cannot compete on the core Western European high-speed network,
where freight flows are relatively heavy, it will have great difficulty competing elsewhere.
 6.8. Conclusions

In order to respond to the demand for next morning delivery, express operators of various
kinds have built systems designed for overnight operation but distances coverable clearly
depend on mode used and, with the exception of a few mail trains, these are road and air.
The densest flows of traffic are on those axes linking the major European metropolitan
areas and encourage the use of US style hub and spoke systems. Although road and air
are predominately used at present, operators appear interested in using rail to reduce
congestion around airport hubs, and minimise any impact of environmental restriction on
the other modes. Rail seems most suited to the 400 to 800 km distance band, or perhaps
longer distances on some routes.

More detailed planning of potential rail use needs knowledge of markets and technological
effectiveness of rail:

z What will the European High-Speed Network look like in the years to come?
z What type of flows will need very fast delivery?
z What routes will generate sufficient volumes to justify the use of rail?
z How can the main airports for airfreight traffic be served by rail?
Concerning rail technology, decisions depend on:
184
z Will high-speed rail be cheaper than an aircraft?
z If not, will unit costs of aggregated traffic be lower than air?
Previous work suggests that there is insufficient volume to justify dedicated high-speed
trains for servicing the hubs of individual integrators. As their volumes increase multi-hub
operations are more cost effective and so are becoming more common, which further
limits the ability of rail to offer a cost effective service. Aggregation of traffic between major
European metropolitan areas appears to be the way forward, especially if rail/air terminals
are developed at airports. The main metropolitan areas between which this would apply
are likely to include Paris-London, Paris/London-Brussels-Amsterdam-Cologne, and
Hamburg-Cologne-Frankfurt-Milan. These are all cities which have high-speed rail links
either planned or built. All this indicates that future investigations should concentrate on
studying rail corridors, rather than looking to rail as a general alternative for traffic over a
specific distance.

There may also be a market for transferring some national flows from air or road to major
rail corridors within countries, but few are likely to need high-speed rail technology.

Following the example of the air transport industry in converting older passenger aircraft
to carry freight by conversion of high-speed passenger rolling stock (when available)
would reduce costs and risks considerably. This would avoid the cost of developing new
high-speed rail vehicles. Alternatively make space available on passenger trains to carry
freight. This is the approach that was adopted by airlines in developing their cargo
business.

Though detailed quantitative data on air freight has been made available to previous
studies regarding intra-European traffic, it is clear that little traffic currently being flown
would transfer to rail as the costs of moving belly hold traffic are relatively low. Some
airlines have claimed that the costs of older converted air cargo planes are only two or
three times that of road, limiting any price rail may be able to charge.

Though volumes appear to be low at present, traffic carried by integrators is increasing

steadily. In addition, if the postal authorities in Europe were to launch a joint high quality
service at some time in the future this could result in a substantial increase in traffic
volumes which may help justify greater use of rail services.

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187
For more information about the
EEC Environmental Studies Business Area
please contact:

Ted Elliff
Environmental Studies Business Area Manager,
EUROCONTROL Experimental Centre
BP15, Centre de Bois des Bordes
91222 BRETIGNY SUR ORGE CEDEX
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Tel: +33 1 69 88 73 36
Fax: +33 1 69 88 72 11
E-Mail: Ted.Elliff@eurocontrol.int