OCR 2880 (ACE) - Calculating the Traffic Growth

The OCR 2880 case study has some data tables which encourage students to consider the historical and projected growth rates of activity at ACE. It is easy to get these percentage calculations wrong, and to draw some potentially misleading conclusions…

Both Table 2 (cargo and mail tonnage) and Table 4 (projected air traffic movements) look at the growth of ACE traffic over a period of time.

Table 2 looks at the historical growth in non-passenger tonnage from 1996 to 2008. Both cargo and mail have grown substantially over that period. But what is the annual percentage growth?

One commercial analysis of the case says the annual growth in cargo is 16.8% and mail is 12.9%. This is calculated by simply dividing the difference between the final 2008 value and the starting 1996 value by the number of years covered (12). Is that the correct answer? No. It takes no account of the nature of compound growth. It significantly inflates the actual growth rate in cargo and mail tonnage. That calculation is just an arithmetic mean. Not very helpful.

The correct percentage growth to calculate is a “compound annual growth rate” (often shortened to “CAGR”). CAGR is widely used to describe the growth over a period of time of some element of a business, for example revenue, units delivered etc. That is the right approach to the growth rates achieved historically by ACE, and also provides a basis for evaluating the projected growth up to 2016 in Table 4.

So, for Table 2, the correct CAGRs for the growth in cargo tonnage are cargo (9.6%) and mail (8.1%). As you can see, quite a difference.

The projected CAGR for cargo up to 2016 is 5.6%.

Using this data, a student can begin to make some sensible and accurate comments about the realism of the objectives set by the business.