The economics of air transport in Europe

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Since 2010, tourist numbers have grown rapidly across Europe, primarily enabled by growth in air passenger transport. Significant further growth is forecast, with movements by air likely to grow by around 10% over the next five years. This growth is facilitated by airport expansion and generoustax arrangements for the aviation sector. The air transport industry claims the positive economicimpacts that tourists can bring as its own, but rarely, if ever, takes responsibility for the economic downsides.

This report dissects the economic impacts caused by rising international air tourist arrivals. It is NEF’s second report, taking a deeper look at the economic impacts of air transport growth in Europe, and focusing particularly on whether the economic impacts of air transport are beneficial and fairly distributed among regions and social groups.

Our original contribution is a new model of the house and rent price effects of incoming air tourists across 12 major European economies. Using relationships informed by recent academic research and original modelling, we present projected impacts on house and rent prices resulting from international air tourism over the period 2019 – 31. We evidence a wealth transfer where property owners benefit at the expense of renters, with real annual rents in some of Europe’s largest tourism economies expected to rise by more than €150 per year over the next five years. These rises, which represent national average increases, will be concentrated in tourist hotspots and will primarily burden lower-income households.

Residents of social housing and those in rent controlled accommodation likely experience some level of short-term protection against direct price increases. But, on the open market, rent prices are highly sensitive to house prices (with close to 100% pass-through). Over the long term, most of the house price impacts of air tourism growth are likely to pass through to renters. Even where they do not, e.g. as a result of government policy action, renting households can become trapped in their home (ie experience an opportunity cost as their ability to move or buy their first home is limited by rising prices).

We also present evidence that the upward pressure on house prices from growth in tourism arrivals may lead to negative productivity outcomes in the wider economy. In countries such as Spain, Portugal, and Italy, the misallocation of capital caused by property price spikes from 2019 to 2031 would be expected to result in around a 0.4 – 0.5% reduction in whole-economy business investment. An industrial strategy that overemphasises tourism could reasonably weaken higher-productivity sectors, harming the long-term viability of industries and jobs.

Having identified the distortive wealth transfers of air tourism growth, the remainder of our analysis looks at the extent to which communities (particularly lower-income) are compensated for the losses they experience. This means looking at how more traditional impact domains of job creation, wages, and business ownership dividends are shared across the population.

Alongside a historical rise in air tourist arrivals, jobs in hospitality have grown rapidly, suggesting that inbound tourism has made an important contribution to bringing down unemployment rates in many major tourist destinations. Yet, evidence shows that air tourism growth has failed to deliver real wage growth and that the largest tourism-receiving countries are among the worst performers.

All the countries in the group that saw real wages decline still saw large rises in aggregate gross value added (GVA), but all bar the Netherlands saw a decline in productivity (GVA per employee). Italy, France, and Spain were the worst performers. The large overall rises in real GVA point to the creation of value somewhere in the economy, but living standards for the majority of tourism workers have not improved. Business owners in many European nations are capturing large aggregate and proportionate shares of the value created through inbound air tourism.

The share of GVA captured by large businesses (250+ employees) has changed over time. In the accommodation services sector, where large businesses are more dominant, very large increases in the large-business share were seen between 2013 and 2023 in Greece, Spain, and France. Interestingly, while large businesses concentrate ownership and profits, there is little evidence that consolidation has increased productivity or wages. In Poland and Portugal, where the large-business share has been in decline, productivity and wages have improved.

Europe’s extensive reliance on air-tourism-led growth presents a range of major social and environmental risks. Those risks amplify as physical, environmental, social, and cultural saturation points for unabated tourist inflows are reached. We evidence weakness in the quality and reality of promised economic gains when factoring in wealth and welfare transfers away from low-income local communities. We show that over the long term, the air tourism industrial strategy not only costs the environment dearly but may also disadvantage wider business sectors and reduce productive investment in favour of rent seeking and extraction.

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