Johan Fourie's blog

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How long-distance flights are good for business

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When, a few weeks ago, Tim Harris, CEO of the Western Cape’s investment and trade promotion agency Wesgro, claimed that Cape Town’s business community is likely to benefit from five new routes and four expansions at Cape Town International Airport, I was doubtful. Sure, the four new routes – which include British Airways flying three times a week to Gatwick, Lufthansa to Frankfurt three times a week, Kenya Airways to Nairobi and Livingston, as well as an Airlink route to Maun in Botswana – is great for tourism. But it was unlikely, I imagined, to stimulate sustainable investment in the city.

That is, until I read a new study investigating the impact of international long-distance flights on local economic development. The authors, Filipe Campante of Harvard’s Kennedy School and David Yanagizawa-Drott of the University of Zurich, use a fantastically innovative approach to identify a causal link between long-distance flights to a city and that city’s economic growth. They go one step further by identifying the reason for this growth impact: more flights result in a higher frequency of business links that generate investment.

So how do they do this? Campante and Yanagizawa-Drott exploit the fact that cities that are just under 6000 miles apart are distinctly more likely to have direct air links, as compared to cities slightly above that threshold. This is because of regulations that make flights longer than 12 hours much more expensive. Consider, for example, flights between Milan and Shanghai (5650 miles) and Madrid and Shanghai (6350). The first route between Milan and Shanghai opened in 2003; the route between Madrid and Shanghai only opened this year. The authors show that, globally, city pairs with more likely connections (below 6000 miles) do indeed have more connections than pairs just above 6000 miles.

But does this matter for economic growth, and if so, how? First, using satellite-measured night lights, the authors show that areas close to airports with connections just below the 6000-mile threshold grew faster between 1992 and 2010 than those with connections above the threshold. They also show that this is not just displacement of economic activity from elsewhere in the city. Second, long-distance connections increase a city’s desirability for other connections, increasing the amount of medium-distance connections and the overall quality of air links. Third, long-distance connections are good for business. The authors geolocate over half-a-million foreign-owned companies all over the world, as well as their owners. They show that in cities with direct connections, there are likely to be far stronger business links: for instance, they find over three times as many ownership links between Milan and Shanghai as between Madrid and Shanghai.

These effects are sizable. Campante and Yanagizawa-Drott estimate that a given increase in connections generates about a similar proportional increase in ownership links. “The evidence suggests that most of this increase constitutes capital flowing from relatively richer to relatively poorer countries: three-quarters of the increase in business connections could be attributed to companies in high-income countries owning companies in in middle-income ones, and a quarter in the opposite direction.” The lesson is that the movement of people leads to the movement of capital. Expect more investment in Cape Town from entrepreneurs in London and Frankfurt.

Such research also raises uncomfortable questions. Even if a route is unprofitable for a carrier, the benefit of having that route to a city’s business community and society-at-large, especially in the long run, may justify government support. Is there perhaps justification for a national carrier like South African Airways to fly to long-haul destinations like Rio de Janeiro, Beijing or Atlanta, even if these routes are unprofitable, with support from taxpayers? I would hesitate to go this far, but it does suggest that cities should do everything they can to attract long-distance flights. This can include anything from offering hospitality services to tired crew members to expanding the capacity of the airport (or even commissioning the construction of a new one).

Over the last century, the cost of human travel has fallen significantly. This has connected the world, allowing the movement of people and capital to destinations where they are likely to have the largest impact. Cities that have been disconnected have lost out; those with more frequent long-distance flights have benefited most. The good news for South Africa is that the barriers of the 6000 mile limit and air regulations have less impact now than it did in the past; the bad news is that, because these things matter less, competition from other long-distance destinations will increase. Let’s hope policy-makers in our big cities – people like CEO Tim Harris – are up for the challenge.

*An edited version of this first appeared in Finweek magazine of 6 October.

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