Research Projects

Incorporating Shock Events into Traffic Forecasting and Airport Planning In Reserve

Airport forecasting and planning has tended to focus on gradual and incremental change (rising traffic levels as the economy grows), but it is arguable that infrequent one-off events (COVID-19, 9/11, etc.) have had as much impact on airport development as macroeconomic conditions.

The objective of this research is to specifically address how airports can incorporate large-scale, unpredictable shock events into traffic forecasting and airport planning (both physical and financial).

Background (Describe the current situation or problem in the industry, and how your idea would address it.)

Aviation activity forecasts are a crucial part of airport infrastructure, financial, and operational planning. Airport operators, airport planners, and other stakeholders require reliable and reasonable forecasts as inputs to many aspects of airport planning and operations. The forecasting process tends to be based on backward looking analysis of the factors that affect traffic development, while making assumptions about the future environment (e.g., economic growth) that draws heavily on current conditions ("business as usual"). Clearly, the future is uncertain and reliable and usable forecasts require a recognition and understanding of the risks and uncertainties facing the development of future traffic levels.

ACRP Report 76: Addressing Uncertainty in about Future Airport Activity Levels in Airport Decision Making (2012) laid out a theoretical and practical framework for identifying and quantifying risk and uncertainty facing aviation traffic forecasts along with practical models to prepare and compute risk-based traffic forecasts using scenario modelling and Monte Carlo simulation methods.

One of the recommendations for further research put forward in ACRP Report 76 addressed major unexpected external shocks such as the pandemic. As noted in the report:

"Rare, high-impact events are events of significant consequence for which there is a sparse historical record from which to develop statistically predictive patterns. Such events nonetheless pose material challenges for airport activity forecasting and planning. One is identifying and anticipating them … the second is anticipating their impact on demand and formulating an appropriate planning response." (page 109)

The COVID-19 pandemic has made clear the vulnerability of the aviation industry (along with many other sectors of the economy) to shock events. In the immediate aftermath of the shut-down and quarantine measures, airports are having to manage the impact of massively reduced air passenger volumes and air services along with the need to accommodate new air cargo demands. Longer term concerns arise on the speed and extent of the traffic recovery and the impact on the sustainability of certain airlines and air services. Airports will also need to manage possible new regulations and passenger processes related to health screening and profiling. While the aviation industry has experienced pandemics before (SARS, H1N1, MERS) which have negatively impacted traffic, the massive and global government, consumer, and airline response to the current event is unprecedented.

Past shock events have also exerted profound impacts on the aviation industry. While recessions are not so unusual as to be unexpected, the scale of the 2008/09 Global Financial Crisis was greater than anything experienced since 1929 and resulted in changes to the structure and development of the aviation market. Obviously, the 9/11 terrorist attacks impacted traffic development, industry structure and airport facility requirements (security screening, etc.). Looking further back, there have been other shock events: the 1981 strike by the U.S. air traffic controllers union and the resulting multi-year supply side reduction in aviation capacity.

Shock events can have profound financial impacts on airports. Not only is revenue reduced due to traffic loss, carrier and airport tenant bankruptcies can result in losses of accrued revenues and revenue erosion during recovery as discounts may be needed to re-stimulate traffic and attract carriers.

While airport forecasting and planning has tended to focus on gradual and incremental change (rising traffic levels as the economy grows), it is arguable that these infrequent one-off events have had as much impact on airport development as macroeconomic conditions. Predicting the exact nature of such events is largely impossible, preparing for the possibility of these events could provide substantial value to airports and the stakeholders and communities they serve.

Objective (What is the desired product or result that will help the airport industry?)

In just the last two decades, the aviation industry has been impacted by three major shock events that have brought about short- and long-term changes to the industry. These include the 9/11 terrorist attack in 2001, the 2008/09 Global Financial Crisis and the COVID-19 pandemic. While the industry has adapted to these events and traffic eventually continued to grow, the impacts for individual airports can be profound and long-lived: de-hubbing, the loss of a major carriers, entry of ultra low cost carriers, new passenger processing requirements, etc. Impacts were not uniform (e.g., dehubbing), affecting some airports severely.

Traditional airport forecasting and planning is largely based on a continuation of "business as usual" and generally does not give much focus to the possibility of such events, even though these events led to material changes in airport management and design. One reason is that predicting the nature, timing and scale of such events is almost impossible - many are "Black Swan" events that are without precedent. (A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.

Approach (Describe in general terms the steps you think are needed to achieve the objective.)

The focus of this research project will be divided into two major themes:

• research on and evaluation of current methods for addressing shock events in systems forecasting and planning, covering multiple sectors and disciplines; and

• application to the airport forecasting and planning environment.

These themes will draw upon the practical experience of the research team in developing risk-based traffic forecasts to provide important insights into the current and future use of this innovative methodology for traffic forecast development.

Evaluation of the Application of Risk-Based Forecasting Methods

i. Conduct an ex post evaluation of the impact of past shock events on airport activity finances and planning. Particular focus will be given to examples of innovative approaches airport have applied to mitigate shock events. It is anticipated by the time this work is commissioned, sufficient time will have passed to develop an initial assessment of the impact of COVID-19.

ii. Conduct research (literature review, interviews, etc.) on methods for incorporating shock events into business forecasting in other sectors of the economy (finance, project planning, energy infrastructure, other network industries, etc.). As well as forecasting, the research will examine approaches for addressing shock event in the planning and operations of businesses.

New Techniques and Improved Methods for Addressing Shock Events

i. Research and develop a theoretically sound and practical method for modelling covariances and interactions between risk factors in the simulation model. For example, how the onset of a shock event (e.g., a pandemic) may influence the likelihood or magnitude of other risk factors (e.g., magnitude of a recession or likelihood of the failure of an airline). Research into this area highlights the interaction between risk factors and will be important to understand and model to create more realistic and robust results. To our knowledge, risk factor covariance has not been studied in the transportation forecasting sector but examples exist within the financial sector.

ii. Based on the above research, develop a series of guidelines and best practices tailored to airports for addressing shock events in the forecasting and planning process. This will include discussion of shock events modelled from practical forecasting experience, "black swan" extreme shock events, and guidance into how to relate potential shock events to actual airport planning. Develop approaches to overcome challenges in adopting and use of the methodology with partners and stakeholders who may be unfamiliar with these techniques.

Cost Estimate and Backup (Provide a cost estimate and support for how you arrived at the estimate.)

The COVID-19 pandemic has triggered the largest downturn in worldwide activity in the global commercial aviation industry since World War II. Along with past shock events, this emphasizes the need for airports to develop forecasts and long-term plans that are, as much as is possible, resilient and sensitized to future "black swan" events.

Since the publication of ACRP Report 76, its risk-based forecasting methodology has been employed in actual traffic forecasts for airports in the United States and around the world for a variety of airport infrastructure planning, airport financial planning, regulatory analysis, and transactional financial planning applications. While ACRP Report 76 provides some of the tools to address this need, there has been nearly a decade of practical experience and application since its publication, providing lessons for improvement and enhancement.

Furthermore, in the wake of the massive shock to the global commercial aviation industry caused by COVID-19, it is an appropriate time to develop an updated evaluation of the risk-based forecasting process and explore extensions to the method to better consider shock events in airport forecasting and planning.

Estimated cost is $450,000 which includes ancillary costs and expenses. Estimated time for the project is eighteen (18) months including three (3) months for review and revision of a draft final report.

Related Research - List related ACRP and other industry research; describe gaps (see link to Research Roadmaps above), and describe how your idea would address these gaps. This is a critical element of a synthesis topic submission.

To our knowledge, there has not been any significant research into incorporating shock events into airport forecasting and planning. There has been research into general risk and uncertainty:

• ACRP Report 48 Impact of Jet Fuel Price Uncertainty on Airport Planning and Development (2011).

• ACRP Report 76: Addressing Uncertainty in about Future Airport Activity Levels in Airport Decision Making (2012).

• ACRP Report 163: Guidebook for Preparing and Using Airport Design Day Flight Schedules (2016).

• ACRP Synthesis 2: Airport Aviation Activity Forecasting (2007).

• Bhadra and Shaufele, Probabilistic Forecasts for Aviation Traffic at FAA's Commercial Terminals (2007).

• Reilly, Moergeli, and Sander, "Risk-Based, Probabilistic Cost Estimating Methods", proceedings of the World Tunnel Congress (2015).

• Washington State Department of Transport, Project Risk Management Guide (2018).

Idea No. 467