21st January, 2008
AEF has studied the Government’s forecasts of passenger demand published in November 2007. We have produced a summary of the methodology and our views on the forecasts.
We consider the general approach to be reasonable. The underlying assumptions, namely that demand is basically a function of the growth of the economy and the change in prices of flying, seem sound and have been used by other forecasters.
However, we have serious misgivings about the detailed assumptions and, therefore, about the results, in relation to:
* price elasticity of demand
* assumed oil prices
* cost of carbon
* other external costs
* no constraints for environmental reasons
* inadequate sensitivity tests
* unexplained reduction in growth after 2030
The net effect of these is that
a) the forecasts are too high (because environmental constraints and charges have not been properly factored in);
b) the forecasts give a misleading sense of precision (because proper sensitivity forecasts have not been done.