economic benefits from air transport in …€¦ · air transport was panama’s fastest growing...

ECONOMIC BENEFITS FROM AIR TRANSPORT IN PANAMA

EXECUTIVE SUMMARYAir transport was Panama’s fastest growing sector in the economy last year with growth in value added of 21.3%.

Tourism and other sectors facilitated by air transport also boomed last year.

Investors consider Panama low risk in most areas, but there is economic structure risk because of reliance on Panama Canal revenue, a large current account deficit and a high public debt/GDP. Investing further in the air transport network would help diversify this risk by supporting tourism, financial and business services.

Panama’s fortunate geographical location and service sector enclaves has enabled the dynamic, competitive service sector to make up 75% of GDP. Air transport, along with the Panama Canal, is the key infrastructure asset that makes this possible by its connections to overseas markets and trade routes.

Panama’s Tocumen International Airport is the key hub for connecting passengers between North, Central and South America. International passengers in transit make up one-third of total passengers, the highest proportion for any airport in the world handling over 2 million passengers. This is a measure of how efficiently passengers are consolidated to serve city pairs that do not generate enough traffic to justify point-to-point service.

In addition, the number of arriving and departing international passengers has doubled in the past decade, to exceed 2 million in 2006.

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Impact % Panama’s GDP

Economic benefits to passengers (consumer surplus) $336 million 2%

Supply-side benefits from a 10% increase in connectivity/GDP $12 million 0.07%

Demand-side benefits to GDP from air transport $1,035 million 6.1%

- Air transport direct impact $325 million 2.0%

- Air transport indirect and induced impacts $237 million 1.5%

- Air transport facilitated tourism $473 million 2.8%

Jobs supported by air transport (inc. tourism spending) 1 43,233 3.3% of employment

Wage income generated by air transport (inc. tourism spending) $340 million 5.9% of income

Tax revenues generated by air transport (inc. tourism spending) $114 million 7.7% of revenues

Export earnings generated by air transport (inc. tourism spending) $1142 million 9.5% of earnings

Economic benefits from air transport in Panama, 2006

Source: Oxford Economics and IATA estimates. 1This includes the impact of the spending by tourist arriving by air.

IATA Economics - www.iata.org/economics - ECONOMIC BENEFITS FROM AIR TRANSPORT IN PANAMA October 2007

The market for passengers flying to and from Panama in 2006 was worth over US$ 700 million. This generated economic benefits to passengers (consumer surplus) of an estimated $ 336 million in 2006, equivalent to 2% of GDP.

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For a small economy like Panama, with its high dependence on international service industries, air connections to key markets are vital for economic development. Panama was already well connected in 2002, but since then there have been major additions to economically important destinations, such as New York’s JFK, Madrid and Rio de Janeiro. Frequencies have risen by 53% since 2002.

Panama is the most highly connected economy in the American continent. Relative to its GDP Panama has twice the air connectivity of the United States. It’s level of connectivity has risen by 40% since 2002. This rise provides substantial wider economic benefits for Panama from its connections to the global air network.

Though Panama is already highly connected, further increases in its links can create significant economic benefits. Each 10% increase in its connectivity, relative to GDP, can increase long-term GDP by $12 million (0.07%) per annum.

Air transport also has an immediate and direct contribution to Panama’s GDP through the value-added it produces. Air transport contributed $325 million or 2.1% of value-added to Panama’s GDP in 2006.

Adding indirect benefits through suppliers, induced benefits from the spending of wage income and impacts of air travel on tourism, the total demand-side impact on Panama’s GDP is over $1 billion or 6.1%.

Air transport supported over 5,000 jobs directly and a total of over 11,000 in 2006, generating wage income of $200 million or 3.5% of total wage income in Panama. Income and corporation tax of $67 million or 4.5% of tax revenues are generated for the Government by the air transport industry.

Air transport also facilitates tourism. Last year over 700,000 non-resident vistors or 60% of tourists were delivered by air transport, spending an average of more than $1,200 each trip according to the UN World Tourism Organisation. Air transport and tourism together supported over 43,000 jobs. The industry altogether also produces tax revenues (7.7%) and exports earnings (9.5%) in excess of its 6.1% GDP share, punching above its weight in helping to address Panama’s current account deficit and public debt issues.

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The importance of investing in improved connectivity to major overseas markets is shown by an analysis of the addition of a new air service to New York’s JFK airport which generated 30,000 new passengers each way, boosting traffic by 3% in 2006. This is estimated to generate $10 million in economic benefits for passengers, $16.9 million in additional GDP, 340 jobs, $6 million of wage income and $2 million in additional tax revenues within Panama.

The importance of keeping airport charges in line with efficient costs is shown by estimating the impact of an hypothetical 50% increase in charges from their current level of $25.4 per departing passenger. It is estimated that this would add 2.2% to the average return fare, reducing passenger numbers each way by almost 25,000. This would cause economic costs to passengers, due to higher travel costs, totalling $7.4 million. There would also be wider costs for the Panamanian economy, with GDP down $13 million, a loss of 272 jobs, wage income down $5 million and tax revenues down $2 million.

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FASTEST GROWING ECONOMIC SECTOR IN 2006 Air transport was Panama’s fastest growing sector in the economy last year with growth in value added of 21.3%. This performance topped a successful year in a number of sectors, which produced growth in the whole economy of 8.1%. The economic strength seen in 2006 raised average GDP growth over the past five years up to 5.8%, keeping Panama among the fastest-growing economies in Latin America;

Air Transport was the Fastest Growing Sector in Panama’s Economy in 2006

Tourism and foreign investment played a significant role in supporting strong economic growth last year. Construction was up over 17%, thanks to booming local and foreign investment in residential and commercial real estate. Internationally-oriented financial services grew by 12.8% while commerce expanded 11.3%. Commercial activity was propelled by strong retail sales and a 22% rise in tourists. As a result of the latter, the hotel and restaurant industry saw growth of 12.5% last year. Much of this economic activity was facilitated by air transport.

The outlook is positive. A forecast slowdown of world trade growth will dampen growth in Panama’s export-oriented service sector. However, this will be largely offset by the economic stimulus provided by Canal-related inward investment and construction activities. Last October a referendum approved a US$5.3 billion (one-third of annual GDP) investment to expand and modernize the Panama Canal.

AIR TRANSPORT CAN REDUCE ECONOMIC RISKLooking further ahead, diversification continues to be important. Panama is considered by investors to be relatively low risk in most areas. However, reliance on Canal revenue is considered to be a significant economic structure risk for Panama (alongside a large current account deficit and a heavy public debt/GDP ratio). The expansion of air transport, and the support that gives to tourism financial and business services, will help to broaden the economy and reduce that risk.

Total GDP 8.1%Agriculture 7.4%Fishing -5.9%Mining 16.2%Manufacturing 5.1%Construction 17.4%Financial services 12.8%Commerce 11.3%Retail 13.7%Colon Free Zone 11.6%Hotels & restaurants 12.5%Electricity & water 3.6%Transport, warehousing and communications 13.0%Panama Canal 10.9%Air transport 21.3%Telecommunications 16.0%Real estate 5.3%

Source: Contraloria General de la Republica

Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk

October 2007 BB BBB BBB BBB B

Source: Economic Intelligence Unit


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LINKING PANAMA’S ECONOMY TO THE WORLDPanama’s economic development has been closely linked to its very fortunate location and to the creation of three key enclaves for service sector businesses: the Canal, the Colon Free Trade Zone, and the international banking centre. Interaction among these enclaves and the country’s unique monetary policy with full dollarisation, stimulated the development of complementary service activities, in particular international business services.

This has created a dual economy. The dynamic, competitive, service sector makes up 75% of GDP, and is highly integrated into the international economy. Air transport, along with the Panama canal, is the infrastructure that makes this possible by its connections with overseas markets and trade routes. In sharp contrast the industrial and agricultural production sector is not internationally competitive and caters primarily to the domestic market. Domestic flights carried only 9% of total air passengers last year and less than 1% of air freight.

Panama is a small country, with an area of 75,512 square kilometers and a population of 3.2 million. Despite this, the strength of the internationally-integrated service sector has allowed the Panama economy to generate faster economic growth than average in Latin America and the Caribbean for the past 20 years. Air transport has been a major enabler of this expansion.

The duality of the economy has problems as well as successes. Unemployment and poverty rates are high and the distribution of incomes is very unequal. Tourism has strong potential for bringing income and economic activity across the country and is now being developed more rapidly. The Panama Canal has become an increasing source of visitors but air transport remains the largest and fastest growing channel for bringing tourists into the country.

Source: Instituto Panameno de Turismo

The Canal is now bringing many visitors on excursion packages. Also a majority of non-resident arrivals by air are travelling for leisure purposes. However, 37% of non-resident air passengers are travelling on business or to attend conferences.

Leisure passengers are obviously vital to support the growing tourist sector. However, business passengers not only spend but enable the development of the key service sector industries such as financial and business services.


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Panama is an important destination in its own right for tourists and business travellers. However, Tocumen International Airport is perhaps more important as a key hub connecting passengers between North, Central, South America and the Carribean. International passengers in transit make up one-third of total passengers. This is the highest proportion of tran-siting passengers for any airport handling over 2 million passengers a year in the world today. It is a measure of how efficient-ly traffic is consolidated in Panama to serve city-pairs that do not generate enough traffic to justify point-to-point service.

Due to relative short travel distances within Panama there is substantial competition from other modes of transport which has severely limited the potential for air transport in the domestic market. Domestic traffic has risen in the past few years but is no higher than 10 years ago, and less than 10% of the total. The same is true for domestic air freight. Because manufacturing is a small proportion of Panama’s economy, even international air freight shipments at around 80,000 tonnes are less than 20% higher than a decade ago.

Yet the highly internationalised and integrated Panamanian economy generates a very large demand for international air passenger trips. Tourism has also been actively developed in recent years. As a result the number of international passengers has doubled in the past decade.

Passengers Domestic International Total

Arriving/dep. Transit

Million Million Million Million Million % Change

1996 0.31 1.51 1.08 0.43 1.81

1997 0.34 1.73 1.21 0.52 2.07 14.0%

1998 0.34 1.79 1.28 0.51 2.14 3.3%

1999 0.33 1.71 1.23 0.47 2.04 -4.7%

2000 0.27 1.93 1.30 0.64 2.21 8.3%

2001 0.24 2.10 1.49 0.61 2.34 6.3%

2002 0.23 1.94 1.30 0.64 2.17 -7.7%

2003 0.22 2.08 1.42 0.65 2.30 6.1%

2004 0.24 2.36 1.60 0.77 2.61 13.5%

2005 0.28 2.71 1.77 0.94 2.99 14.8%

2006 0.31 3.16 2.04 1.12 3.47 15.8%

Source: AAC

The development of air travel in the past decade

ACCELERATING GROWTH IN AIR TRANSPORTThe number of international passengers has more than doubled in the past decade. International air transport has grown faster than the rest of Panama’s economy.


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ECONOMIC BENEFITS TO AIRLINE PASSENGERSThe key economic value from air transport is the benefit received by airline passengers and shippers themselves. Passengers are obviously willing to pay the air fare. But a large number of passengers will value the trip more than the cost of the fare, for the pleasure of the tourist visit or the value of the business contract achieved through the trip. Economists call this value, over and above the fare, consumer surplus.

In 2006 the market for passengers flying to and from Panama totalled US$672 million, with an average one-way fare of $286 and 2.35 international and domestic arriving or departing passengers. Using a price elasticity of passenger demand of –1 we estimate that passengers gained surplus value worth $336 million in 2006.

The Economic Value of Flights to Passengers over and above the Cost of the Fare, 2006

Source: PaxIS Plus, ACC

SUPPLY-SIDE BENEFITS FROM CONNECTIVITYFor a small economy like Panama, with its high dependence on international service industries, air connections to key markets are vital for economic development. These air transport connections are a key infrastructure asset for the economy, a facilitator for the growth and development of modern industries.

Panama has a great location to act as the major hub airport connecting South and Central America, to the US and Carribean. These air transport connections to destinations of major economic importance are also key channels of economic stimulus to the business sector in Panama.

These connections provide the modern service industry sector in Panama with access to global markets, enhancing links within and between businesses and providing greater access to resources and to international capital markets.

Panama was already well connected in 2002. But since then there have been major additions to economically important destinations, such as New York’s JFK, Madrid and Rio de Janeiro in Brazil.

International Routes, May 2002


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The number of destinations has risen by 38% since 2002. Frequencies have also grown rapidly in recent years and are up 53% over the same period;

Capacity serving a couple of key destinations in the US, Miami and Newark, has fallen over this period reducing the economic benefit or economic connectivity of these expanded services. However, new services to JFK and Brazil have more than made up. Weighting the destinations by their economic importance and measuring the seats available shows that air or economic connectivity has risen by 40% between 2002 and 2007.

International Routes, May 2007


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Recent research has shown that there is a significant link between air connectivity and business productivity and economic capacity, which drives long-term GDP. It is important for Panama to retain good connections to key hub airports within the network to support and expand the long-term benefits to GDP that this can provide.

Source: IATA Economic Briefing: Aviation Economic Benefits, June 2007

Not only has Panama’s connectivity improved over time, but it is extremely high relative to other countries in a similar situation. It is the most highly connected economy in the whole American continent by far.

Relative to its GDP, Panama has more than twice the connectivity of the United States. Compared with major Latin American economies, Panama has several times the connectivity of even an economy with a strong export sector like Chile.

There are several major economic factors that determine the long-run level and growth of a country’s economy. Assets such as natural resources, larger well-educated populations and energy resources are critical. However, all other things being equal, the level of air connectivity can also have an impact on long-run economic performance. IATA estimates that Panama would receive a US$12 million per annum increase in its GDP from each 10% increase in connectivity, relative to GDP. This highlights not only the constraint that relatively low connectivity can place on economic growth, but also the substantial economic benefits that have been generated through increases in Panama’s connectivity levels.

Air connectivity per US$billion of GDP Impact on GDP from a 10% increase

Panama 0.448 + $12 million (0.07%)

Panama has the highest connectivity in the Americas

The Impact on Panama’s Long-run GDP from Improvements in its Level of Air Connectivity

Source: IATA


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DEMAND-SIDE BENEFITS TO PANAMA’S GDPAir transport also has an immediate and direct contribution to Panama’s GDP in an accounting sense through the value-added it produces, or the profits and employee wages that flow from that activity.

This contribution has risen as air transport boomed in the past couple of years. By 2006 it was estimated that air transport contributed US$325 million of direct value-added to GDP or 2% of total economic activity in Panama. But there are substantial additional indirect effects to add to this direct contribution to GDP.

Source: Oxford Economics

Building up the demand side benefits for Panama’s GDP

Panama Air Services: Economic benefits

US$mn 2001 2002 2003 2004 2005 2006

GDP Summary

Direct 168.5 184.6 196.1 212.5 268.0 325.1

Indirect 69.7 76.9 79.0 87.5 114.1 148.9

Induced 45.5 49.8 52.9 57.4 72.4 87.8

TOTAL 283.7 311.4 328.0 357.4 454.4 561.7

Employment Summary

Direct 4438 4644 4867 4821 5066 5149

Indirect 3032 3324 3353 3262 3721 3893

Induced 1978 2153 2247 2138 2361 2295

TOTAL 9448 10121 10466 10222 11148 11337

Wages Summary

Direct 50.1 50.9 58.6 66.9 90.2 117.4

Indirect 25.8 27.4 27.6 30.4 38.1 49.7

Induced 16.8 18.4 19.6 21.2 26.7 32.4

TOTAL 92.7 96.7 105.8 118.5 155.0 199.5

Tax Summary

Direct 14.9 16.7 19.4 24.2 35.2 46.2

Indirect 6.1 6.6 6.9 7.5 9.9 12.9

Induced 4.0 4.3 4.6 4.9 6.3 7.6

TOTAL 25.0 27.5 30.9 36.6 51.3 66.7



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In addition to the direct contribution to Panama’s GDP from the value-added created by airlines, there are additional impacts through economic activity stimulated in the supply-chain (indirect impacts) and through the spending of wages generated within the air transport sector (induced impacts). The additional value-added created through indirect and induced impacts almost doubled the $325 million of GDP directly contributed by air transport to $561 million or 3.3% of Panama’s GDP.

Air transport is highly capital intensive but nonetheless is a significant employer. It also generates a large number of additional jobs in the supply chain and supports jobs in other industries through induced impacts. Air transport directly employs over 5,000 employees, but supported a total of 11,337 jobs last year.

The jobs air transport supports are highly productive because of its capital intensity and the skills required for many functions. As a result they are relatively well paid. Air transport generates 0.9% of total employment in Panama but 3.5% of wage income.

Demand-side Contributions from Air Transport

Panama Air Services: Economic impact(includes direct, indirect and induced effects)

GDPUS$mn

Employ.jobs

WagesUS$mn

TaxesUS$mn

ExportsUS$mn

2001 283.7 9448 93 25 131

2002 311.4 10121 97 28 144

2003 328.0 10466 106 31 151

2004 357.4 10222 118 37 167

2005 454.4 11148 155 51 196

2006 561.7 11337 200 67 261

Contribution to Panama’s totals

GDP Employ. Wages Taxes Exports

2001 2.4% 0.9% 2.1% 2.4% 1.6%

2002 2.5% 0.9% 2.2% 2.6% 1.9%

2003 2.5% 0.9% 2.3% 2.7% 2.0%

2004 2.5% 0.8% 2.4% 3.0% 1.9%

2005 2.9% 0.9% 3.0% 3.8% 1.9%

2006 3.3% 0.9% 3.5% 4.5% 2.2%

There is an even larger proportional contribution to taxation and therefore to supporting government spending programmes. Since wage income is relatively high and air transport companies are profitable, contributions to income and corporation tax are significant. Direct payments of tax by the air transport industry are estimated to be $46 million. Adding indirect and induced impacts generates a total contribution to financing Panama’s public spending of $66 million or 4.5% of total tax revenues.

Air transport also makes a significant contribution to export earnings, an important facet given the size of Panama’s balance of payments current account deficit. Over $260 million of exports are generated, some 2.2% of total exports.

BENEFITS FROM TOURISMAdded to the direct and multiplier effects through the economy from air transport, the industry also facilitates tourism. Over 700,000 tourists or 60% of the total arrived by air transport last year. Average spending by each visitor is also high at over US$1200 a trip.

The impact from the tourists delivered by the air transport industry boosted Panama’s GDP by an additional $473 million last year or 2.8% of GDP.

Tourism is labour rather than capital intensive so this supported almost 32,000 jobs or 2.5% of total employment in Panama. Since employment in tourism is less productive than in air transport, wages are relatively lower and total wage income generated in tourism is less than in air transport at $140 million or 2.5% of the total.

Since wage income is lower the amount of income tax generated is somewhat lower at $47 million or 3.2% of total taxation. However, considerable export income is generated at over $880 million of 7.3% of total export earnings.



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Demand-side Contribution from Tourism

Panama Air Services: Tourism impact(includes contribution of air travellers’ spend)

GDPUS$mn

Employ.jobs

WagesUS$mn

TaxesUS$mn

ExportsUS$mn

2001 263.9 24709 100 26 481

2002 313.0 24513 97 31 510

2003 331.2 24635 97 33 544

2004 380.5 26902 109 38 615

2005 411.8 28032 114 41 702

2006 473.1 31895 140 47 881



2001 2.2% 2.3% 2.3% 2.5% 6.0%

2002 2.6% 2.2% 2.2% 3.0% 6.7%

2003 2.6% 2.1% 2.1% 2.9% 7.2%

2004 2.7% 2.2% 2.2% 3.1% 6.9%

2005 2.7% 2.2% 2.2% 3.1% 6.8%

2006 2.8% 2.5% 2.5% 3.2% 7.3%

Panama Air Services: Overall economic benefits(includes tourism impact)

GDPUS$mn

Employ.jobs

WagesUS$mn

TaxesUS$mn

ExportsUS$mn

2001 547.6 34157 193 51 612

2002 624.4 34634 194 59 654

2003 659.2 35101 203 64 694

2004 737.9 37124 227 75 783

2005 866.2 39180 269 93 898

2006 1034.9 43233 340 114 1142



2001 4.6% 3.2% 4.4% 4.9% 7.7%

2002 5.1% 3.1% 4.4% 5.6% 8.6%

2003 5.1% 3.1% 4.5% 5.7% 9.2%

2004 5.2% 3.1% 4.6% 6.2% 8.8%

2005 5.6% 3.1% 5.2% 6.9% 8.7%

2006 6.1% 3.3% 5.9% 7.7% 9.5%

Demand-side Contributions from Air Transport and Tourism



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Actual situation in 2006 Estimated contribution of the PTY-JFK route

Departing passengers 1,036,508 30,901

Economic benefits to passengers ($ million) 336 10

Boost to GDP ($ million) 561.7 16.9

Boost to Employment 11,337 340

Boost to Wage income ($ million) 199.5 6

Boost to Tax revenue ($ million) 66.7 2

The Economic Contribution in 2006 of the New Route from PTY to JFK Airport

ESTIMATING THE BENEFITS FROM NEW SERVICESThere have been several major new routes opened from Tocumen International Airport in recent years. In fact the addition of services to New York’s JFK and Madrid airports account for one-third of the improvement in Panama’s connectivity in the past six years. The table below shows estimates of the economic contribution of the new route to JFK airport.

Last year this market supported over 30,000 passengers travelling to New York (and a similar number of the return journey), an addition of 3% to traffic.

We estimate this new service created economic benefits to passengers over an above their ticket price (consumer surplus) of US$10 million in 2006.

In addition this new market created wider economic benefits for Panama, including $16.9 million in GDP, an extra 340 jobs, wage income of $6 million and additional tax revenues for the Government of $2 million.

Source: IATA

ESTIMATING THE ECONOMIC COST OF CHARGESAeronautical revenues at Tocumen International Airport totalled US$26.3 million in 2006, consisting of landing fees and a $20 international departure charge. Since there were 1.04 million departing passengers last year this implies airport charges averaged $25.4 per departing passenger or 4.4% of the average return fare in 2006 of $573.

The table below estimates the economic cost to Panama of a hypothetical 50% increase in airport charges.

Actual situation in 2006 50% rise in airport charges Change

Aeronautical charge/ departing passenger $25.4 $38.1 $12.7

As a % of average return fare 4.4% 6.6% 2.2%

Departing passengers 1,036,508 1,011,589 -24,919 (-2.4%)

Economic benefits to passengers ($ million) 336 328.6 -7.4

Boost to GDP ($ million) 561.7 548.2 -13

Boost to Employment 11,337 11,065 -272

Boost to Wage income ($ million) 199.5 194.5 -5

Boost to Tax revenue ($ million) 66.7 64.7 -2

The Economic Costs of Higher Airport Charges

There would be an increase in aeronautical revenues of $12.7 million but this would be more than offset by the economic costs to passengers and the wider economy in Panama. The direct impact on passengers is estimated to be a loss of economic benefit (consumer surplus), due to higher travel costs, of $7.4 million.

The impact of reduced air traffic and the reduced spending of these visitors is estimated to reduce annual GDP in Panama by $13 million, cause a loss of 272 jobs, reduce wage income by $5 million, and reduce Government tax revenues by $2 million as a result of lower corporate and income tax payments.

METHODOLOGYEconomic benefits to passengers are estimated as explained on p6.

Economic benefits from producers are proxied by operating profits. Data on p1 for 2006 shows airlines only, since airport financial results were not published at the time of writing.

Supply-side benefits from connectivity were estimated based on the methodology published in ‘Airline Economic Benefits: IATA Economics Briefing No. 8, July 2007’.

Demand-side benefits to GDP and benefits from tourism were estimated by Oxford Economics using their global economic model and satellite models.

The benefits from new services was estimated by measuring the addition to passenger numbers and using the analysis provided by Oxford Economics, assuming a linear impact from a percentage increase in passenger numbers.

The economic costs of charges were estimated as explained in the last section above together with the use of the analysis provided by Oxford Economics, assuming a linear impact from a percentage increase in passenger numbers.

Brian Pearce

[email protected]

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A 50% rise in airport charges would raise the cost of travelling to Panama by 2.2%. Best practice academic studies show that on average there will be an 11% fall in passenger numbers for every 10% rise in air fares. So Panama would receive almost 25,000 fewer visitors as a result.

Source: IATA


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