BCA is a valuation technique that is used to assess and compare alternative options to provide investment justification. The FAA requires BCAs for airport capacity projects with capital investments of over $10 million from Airport Improvement Program (AIP) discretionary funds. But realistically, they can also be requested for smaller projects.
The FAA published the Airport Benefit-Cost Analysis Guidance in 2009 to provide clear guidance on the execution of project-level BCAs. All BCAs summited to the FAA are required to conform to these general requirements, which consist of twelve specific tasks. Each task can be addressed in one of the three project phases as defined below:
PLANNING
Sensible and prudent project planning requires thorough and thoughtful consideration of the tasks ahead. In the planning phase, project objectives must be clearly identified, operational assumptions on future airport conditions specified, and reasonable alternative scenarios screened and established. All alternative scenarios should be examined and considered to the extent possible because, even after the initial identification of reasonable alternatives, eventual changes in project parameters may introduce additional options for evaluation.
Depending on project complexity and scope, the choice of capacity/delay simulation tool may be an integral factor for a BCA. Smaller projects or projects of low complexity may use simple spreadsheet models to estimate capacity, delays, and costs. But particularly for larger projects, discrete-event simulation tools are likely the primary platform for identifying and quantifying future operational benefits.
The selection of an appropriate simulation tool is crucial to ensure an efficient and effective BCA process. Simulation tools inherently have different functional capabilities, fidelity (or level of detail), complexity, and naturally differing resource and level of effort requirements.
Figure 2 below shows a high-level comparison of commonly-used simulation tools for airport planning and design based on important selection parameters:
Whereas RDSIM and ADSIM are more macroscopic simulation tools, TAAM and AirTOp provide gate-to-gate aircraft simulation capabilities which include realistic Air Traffic Control (ATC) functionality and aircraft performance. Capacity and delay metrics that can be extracted by these higher fidelity gate-to-gate tools are naturally much more detailed. But as simulation tool and scenario complexity grows, the level of effort quickly grows from weeks to several months to complete simulation studies in support of BCA efforts.
The remaining items to be defined/specified in the planning phase are:
- Evaluation Period: Requirement life, physical life, economic life
- Benefit Type: Reduced aircraft and passenger delay, passenger value of time, noise abatement, emissions, delay propagation
- Project Related Costs: Acquisition / construction costs, maintenance costs, replacement costs
- Sensitivity Analysis Parameters: Discount rate, construction schedule, fuel and emission costs, fleet mix
- Estimated Level of Effort: Amount of work and budget required
ANALYSIS
Analysis tasks – particularly for larger projects – require simulation models to measure any operational and financial impacts of alternative scenarios compared to the status-quo baseline. Financial models are used to convert operational impacts into today’s dollar value and to evaluate variability. Even though analytical models take simulation results as inputs, the two can be modeled in parallel:
Capacity Simulation Modeling
Airport capacity projects subject to AIP grant funding considerations require the use of capacity/delay simulation tools to measure potential benefits. These projects typically use the following process:
Financial Modeling
Capital outflows and projected operational benefits must be compared in present-day financial terms. There are different analysis methods to determine the financial feasibility of a project. The most widely used present-value comparison methods are Net Present Value (NPV), Benefit-Cost Ratio (BCR), and Internal Rate of Return (IRR). The modeling and calculation of NPV, IRR, and BCR is rather straightforward but the complexity lies in the identification and quantification of benefit types. Benefit types can range from aircraft and passenger delays to noise abatement, emissions, and delay propagation. However, it is generally most practical for BCAs – especially for AIP grants – to focus on the comparison of aircraft and passenger delay related costs:
Value of Passenger Time: The U.S DOT recommends the use of $44.30 per hour as the cost of passenger time (in 2013 dollars) for all types of airline passenger travel (leisure and business combined)
Aircraft Operating Cost: Consisting of fixed and variable costs. From a practicality point of view, many projects generally assume that delay has a marginal impact on fixed costs. Variable costs include fuel and oil, maintenance, and crew costs and can also be further differentiated by flight segment (airborne, ground, at-gate). A snapshot of these costs is shown below in Figure 4:
REPORTING
A final BCA report should include a detailed account of the alternative scenarios investigated and the associated benefits and costs. It should state the assumptions on hard-to-quantify benefits and costs, and the sensitivity of results to uncertainty.
The FAA Benefit-Cost Analysis Guidance adds several recommendations and best-practice guidelines that may support the identification and selection of preferred alternatives based on the BCA analysis:
Net Present Value
The FAA recommends that the alternative with the largest positive NPV (if any) be given primary consideration as the preferred course of action. Note that the operative word is “consideration”. The recommended alternative is not automatically the one which has the largest positive NPV. All relevant data such as hard-to-quantify benefits and costs and uncertainty must also be considered in selecting the preferred alternative
Hard-To-Quantify Benefits and Costs
In selecting between alternatives that have approximately equal NPVs, particular weight should be assigned to the alternative with the preponderance of qualitatively described benefits. Moreover, the airport sponsor may believe that a lesser-ranked project from an NPV perspective has very important hard-to-quantify benefits that would make it preferable to other alternatives. In this case, the sponsor may select the lesser-ranked project provided that the reasons for selecting this project are clearly described
Uncertainty
Sensitivity analysis may reveal that an alternative with a lower NPV ranking also has a much lower risk of failing to realize net positive benefits. In such cases, the project sponsor may justify the selection of the lower-ranked alternative, particularly if potential failure of the higher ranked alternatives would lead to large economic losses. Comparison of alternatives from the standpoint of risk will be greatly facilitated by the generation of probability distributions around expected NPVs
LESSON LEARNED
Based on our experience with BCA studies and the associated capacity/delay simulation efforts, proper project planning and communication is key to a successful BCA study.
Project planning is an integral aspect of project management and BCA’s are no exception. A constructive and well laid-out project plan is the cornerstone of a successful BCA. The importance of project rationalization, communication, and validation of project assumptions also cannot be understated to ensure the timely execution of BCA.
Since airport planning projects typically involve various stakeholders, any disagreement or miscommunication in project assumptions can lead to a standstill situation. To minimize this risk, any assumptions used in the BCA must be synchronized with other project efforts and communicated in clear and concise manner on a regular basis so that these costly situations can be avoided.