On the relationship between airport pricing models

Airport pricing papers can be divided into two approaches. In the traditional approach the demand for airport services depends on airport charges and on congestion costs of both passengers and airlines; the airline market is not formally modeled. In the vertical-structure approach instead, airports provide an input for an airline oligopoly and it is the equilibrium of this downstream market which determines the airports’ demand. We prove, analytically, that the traditional approach to airport pricing is valid if air carriers have no market power, i.e. airlines are atomistic or they behave as price takers (perfect competition) and have constant marginal operational costs. When carriers have market power, this approach may result in a surplus measure that falls short of giving a true measure of social surplus. Furthermore, its use prescribes a traffic level that is, for given capacity, smaller than the socially optimal level. When carriers have market power and consequently both airports and airlines behave strategically, a vertical-structure approach appears a more reasonable approach to airport pricing issues.     

Airport privatization in congested hub–spoke networks

This paper investigates the airport privatization issue. One congested hub and two linked local airports serve symmetric hub carriers. Passengers valuate the congestion delay cost and benefit from greater frequencies. The government considers privatizing either the hub or local airports. We find that in each privatizing scenario, welfare-maximizing public airport(s) set a charge below their operating costs in order to fully coordinate the high charge of privatized airport(s). If this fiscal deficit is not allowed, each scenario causes distortion. Interestingly, the distortion—and hence welfare losses—in privatizing a hub are smaller (larger) than those in privatizing both local airports when both passengers’ valuations are small (large); this is exactly the case when privatized local airports are strategic substitutes (complements). We also surprisingly find that retaining the hub airport as public and privatizing one or both local airports achieves the same market outcomes. We further find that if all airports are privatized, welfare becomes worse than the other scenarios; the hub airport charges lower (higher) prices than local airports when both local airports are strategic substitutes (complements).     

Airport and airlines competition: Incentives for vertical collusion

This paper develops a model of airport and airline competition in a three-stage game. We analyse incentives for vertical collusion between one airport and one airline that compete with another airport and another airline, by means of static and dynamic games. We find that incentives for collusion exist when airports and airlines have different market sizes and, under certain conditions, also when secondary airports and low cost airlines compete with main airports and full service airlines.     

A new era for airport regulators through capacity investments

Private and public airports’ optimal actions may not coincide. While private airports usually pursue profit maximization, publicly owned airports look for maximum social welfare. Thus, the prices charged by private airports may differ from the socially optimal charges and public intervention may be needed. In this paper, we analyze airport charges when an increase in frequency produces positive or negative externalities and carriers have market power. We use the methodology of game theory to show that there may exist a level of capacity for which private and social objectives coincide, so no price regulation is needed. Thus, the usual role of regulators and planners could be modified in order to decide the appropriate capacity investments for which airport regulation is no longer necessary.     

Airport demand management: The operations research and economics perspectives and potential synergies

Airport demand management aims to mitigate air traffic congestion by limiting the imbalances between demand and capacity at busy airports through administrative measures (e.g., slot controls) or economic incentives (e.g., congestion pricing, slot auctions). This paper provides an integrated synthesis of the contributions of the fields of operations research/management science (OR/MS) and economics on the subject matter. From an operating standpoint, assessing the benefits of demand management requires estimates of airport capacity and models of airport on-time performance. From a managerial standpoint, the design of demand management mechanisms can be supported by decision-making models of flight scheduling. From an economic standpoint, the welfare impact of congestion pricing, slot controls and slot auctions depends on the market structure at the airport. This paper proposes an integrated framework that underscores the interdependencies between these operating, managerial and economic aspects to foster cross-disciplinary approaches toward more effective demand management policies at busy airports worldwide.     

Revenue sharing with multiple airlines and airports

This paper investigates the effects of concession revenue sharing between an airport and its airlines. It is found that the degree of revenue sharing will be affected by how airlines’ services are related to each other (complements, independent, or substitutes). In particular, when carriers provide strongly substitutable services to each other, the airport has incentive to charge airlines, rather than to pay airlines, a share of concession revenue. In these situations, while revenue sharing improves profit, it reduces social welfare. It is further found that airport competition results in a higher degree of revenue sharing than would be had in the case of single airports. The airport–airline chains may nevertheless derive lower profits through the revenue-sharing rivalry, and the situation is similar to a Prisoners’ Dilemma. As the chains move further away from their joint profit maximum, welfare rises beyond the level achievable by single airports. The (equilibrium) revenue-sharing proportion at an airport is also shown to decrease in the number of its carriers, and to increase in the number of carriers at competing airports. Finally, the effects of a ‘pure’ sharing contract are compared to those of the two-part sharing contract. It is found that whether an airport is subject to competition is critical to the welfare consequences of alternative revenue sharing arrangements.     

Airport capacity choice under airport-airline vertical arrangements

This study investigates the effects of airport-airline vertical arrangements on airport capacity choices under demand uncertainty. A multi-stage game is analysed, in which competing airlines contribute to capacity investments and share airport revenues. Our analytical results suggest that for a profit-maximising airport, such a vertical arrangement leads to higher capacity but may not increase its profit, whereas for a welfare-maximising airport, such an arrangement has no effect on capacity or welfare. Capital cost savings brought by airport-airline cooperation, if any, always lead to higher capacity, and to higher profit for a profit-maximising airport and higher welfare for a welfare-maximising airport. Numerical simulations reveal that win-win outcomes may be achieved for an airport and its airlines without government intervention.     

Apron capacity at hub airports—the impact of wave‐system structure

At hub airports, dominant airlines/alliance coordinate their flights in time with the aim of increasing the number (and quality) of connections, thus producing a wave‐system in traffic schedules. This paper addresses the impact of concentrating aircraft into waves on airport apron capacity. Existing models for apron capacity estimation are based on the number of stands, stand occupancy time, and demand structure, differing between representative groups of aircraft served at an airport. Criteria for aircraft grouping are aircraft type and/or airline and/or type of service (domestic, international, etc.). Modified deterministic analytical models proposed in this paper also take into account the wave‐system parameters, as well as runway capacity. They include the impact of these parameters on the number of flights in wave, stand occupancy time, and consequently apron capacity. Numerical examples illustrate the difference between apron capacity for an origin–destination airport and a hub airport, under the same conditions; utilization of the theoretical apron capacity at a hub airport, given the wave‐system structure; and utilization of the apron capacity at a hub airport when point‐to‐point traffic is allowed to use idle stands. Furthermore, the influence of different assignment strategies for aircraft stands in the case of hub airports is also discussed. Copyright © 2016 John Wiley & Sons, Ltd.     

Joint impact of competition,ownership form and economic regulation on airport performance and pricing

The combined impact of ownership form, economic regulation and competition on airport performance is analyzed using data envelopment analysis to measure cost efficiency in the first stage and regression analysis to measure the impact of the environment in the second stage. The empirical results of an analysis of European and Australian airports over a 10 year timeframe reveal that under relatively non-competitive conditions, public airports operate less cost efficiently than fully private airports. Irrespective of ownership form, regulation is necessary to emulate competitive forces thus pushing airport management towards cost efficiency and reasonable pricing policies. Under potential regional or hub competition, economic regulation inhibits airports of any ownership form from operating and pricing efficiently. Although public and fully private airports operate equally efficiently in a competitive setting, private airports still set higher aeronautical charges. Furthermore, mixed ownership forms with a majority public holding are neither cost efficient nor low price, irrespective of the level of competition.     

Dealing with the efficient allocation of scarce resources at congested airports

The existing slot allocation mechanism, based on the International Air Transport Association (IATA) system and its complementary version of the European Union (EU) regulation, produces rather poor capacity allocation outcomes for congested EU airports since it fails to properly match slots requested with slots allocated to airlines. Inefficiencies during the initial allocation are mainly due to the problem complexity in conjunction to limited decision support available to slot coordinators. On the other hand, substantial inefficiencies give rise to severe slot misuse and unreasonably low utilisation of airport resources running already into scarcity. The objective of this paper is to develop an optimisation-based model implementing the existing EU/IATA rules, operational constraints, and coordination procedures with the ultimate objective to better accommodate airlines’ preferences at coordinated airports through the minimisation of the difference between the requested and the allocated slot times to airlines. The results of the model are assessed and compared vis-à-vis the allocation outcome produced according to current slot coordination practice in three regional Greek airports. The proposed model produces very promising results and demonstrates that there is large room for improvement of the efficiency of the current allocation outcome in a range between 14% and 95%. The discussion of the model results is complemented by a sensitivity analysis highlighting the importance of declared capacity and the magnitude of its influence on slot allocation efficiency.     

The effect of code-share agreements on the temporal profile of airline fares

This paper aims at investigating how the pricing strategy of European airlines is affected by code-share agreements on international routes. Our data cover several routes linking the main UK airports to many European destinations and includes posted fares collected at different days before departure. By analyzing the temporal profile of airline fares, we identify three main results. First, code-share increases fares especially for early bookers. Second, the higher prices in code-shared flights are offered by marketing carriers. Finally, in single operator code-shared flights (unilateral code-share), the pricing profile is flatter than under parallel code-share.     

Demand uncertainty and airport capacity choice

This study analyzes the effects of demand uncertainty on airport capacity choices. It shows that demand uncertainty will not change optimal capacity choice if demand variation is low and capacity cost is high; otherwise the optimal airport capacity under demand uncertainty will be larger than the case when a deterministic mean demand is considered. These conclusions are robust with respect to the different market structures considered in this study and hold for both profit-maximizing and welfare-maximizing airports. The moderating effects of commercial revenue, capital cost, and airport operation cost on airport capacity choice are qualitatively the same in the cases of uncertain demand and deterministic demand.     

Modeling taxi drivers’ decisions for improving airport ground access: John F. Kennedy airport case

Taxi service is an important component of airport ground access, which affects the economic competitiveness of an airport and its potential positive impact on the surrounding region. Airports across the globe experience both taxi shortages and excesses due to various factors such as the airport’s proximity to the city center, timing and frequency of flights, and the fare structure. Since taxi drivers are independent entities whose decisions affect the taxi supply at airports, it is important to understand taxi drivers’ decision mechanisms in order to suggest policies and to maintain taxi demand and supply equilibrium at the airports. In this paper, New York City (NYC) taxi drivers’ decisions about airport pick-ups or cruising for customers at the end of each trip is modeled using logistic regression based on a large taxi GPS dataset. The presented approach helps to quantify the potential impacts of parameters and to rank their influence for policy recommendations. The results reveal that spatial variables (mainly related to proximity) have the highest impact on taxi drivers’ airport pickup decisions, followed by temporal, environmental and driver-shift related variables. Along with supplementary information from unstructured taxi driver interviews, the model results are used to suggest policies for the improvement of John F. Kennedy (JFK) airport’s ground access and passenger satisfaction, i.e. the implementation of taxi driver frequent airport server punch cards and a time-specific ride share program.     

The impacts of changing flight demands and throughput performance on airport delays through the Great Recession

Several significant events between 2007 and 2009 impacted flight demands and the abilities of the three major New York area airports to handle demand. This paper assesses the results of applying a probabilistic simulation method – which isolates the individual contributions of changes in flight demand and changes in airport throughput performance to changes in flight delays – to diagnose how these different events may have caused operational changes at these airports, and in turn, how the results may be used to inform policies for appropriate countermeasures. The analysis revealed two key observations. Firstly, certain patterns in throughput performance shifts caused the most significant delays, and were more likely to have been caused by controller staffing issues rather than caps. Secondly, relatively constant average delays from one year to the next may result from significant demand drops accompanied by large throughput performance degradations at an airport. This suggests that not only operational limitations on capacity encourage airlines to reduce schedules, but that changed demands can also impact throughput performance. Overall, the analysis indicates that caps may not have provided their fully intended delay benefits. Although they successfully reduced overall flight demands at LGA and JFK, they also directly limited throughput performance at critical times, in turn limiting delay benefits. In addition, demands at the busiest times of the day appear to be relatively inelastic to these operational limitations, insofar as demand profiles at EWR and JFK remained “peaky” in 2008 and 2009. Also, the recession was largely responsible for reducing demands at the airports in 2009, but the delay benefits of this were dampened by a corresponding throughput performance degradation. Based on the above observations, a more direct demand management policy combined with policies that focus on maintaining high staffing capabilities at critical times of the day may be considered, to reduce the likelihood of major queue formation on days that do experience sustained demands. The results also suggest that a more flexible caps system, particularly during times of heavy queues, could be explored. Although airport practitioners have keen understandings of how their airports operate, without the support of quantitative analysis tools, it can be more difficult to argue the need for appropriate countermeasures. An analysis such as the one presented here can provide the detailed quantitative substantiation required to build cases for these targeted policy directives and infrastructure investments.     

Incorporating negative externalities into productivity assessments of US airports

This paper analyses the efficiency of 44 US airports for the period 2005–2009. In addition to the conventional outputs (i.e., passengers, flights and cargo), we consider three undesirable externalities of airport activities: delays, noise and local air pollution. We adopt a directional distance function approach and perform a second stage analysis to investigate potential determinants of efficiency. Our base case results with only the positive outputs show that the greater the average aircraft size serving an airport and the larger the dimensions of the airport, the higher the technical efficiency. However, our results are sensitive to the inclusion of the undesirable outputs. The implications are that the inclusion of these externalities into the calculation of efficiency may impact policy decisions.     

Airport congestion pricing and passenger types

We consider a public and congested airport served by airlines that may have market power, and two types of travelers with different relative values of time. We find that in the absence of passenger-type-based price discrimination by airlines, it can be useful to increase the airport charge so as to protect passengers with a great relative time value from excessive congestion caused by passengers with a low relative time value. As a result, the socially efficient airport charge can be substantially higher than what we learned from the recent literature on congestion pricing with non-atomistic airlines.     

The economics of airport noise: How to manage markets for noise licenses

This paper discusses various issues in the implementation of a local market for aircraft noise licenses to solve the noise externalities harming the residents located near airports. The design of such markets is affected by aircraft heterogeneity, wind contingencies, peak times, runways capacity constraints, hub strategies, and airport planning is discussed.     

Role of the Railways in the Future of Air Transport

Abstract

The role of the railways in the air transport industry is usually limited to provision of access to airports. However, the development of high-speed rail networks and the congestion and environmental problems faced by the air transport industry suggest the railways could have a greater role in working with the airlines to provide an integrated transport service for medium-distance journeys (up to 800 km). Many air journeys involve two flights and a transfer at a hub airport. The alternative being investigated here would replace air journeys by a rail journey and a flight, and a transfer between them at the hub airport. Such integration could offer a positive alternative to aircraft on some routes and lead to railway journeys to airports becoming part of air transport services, and not only to provide access to them. Integration could therefore provide a better use of available air capacity rather than duplicating some high-speed rail routes and services.     

Congestion spill effects of Heathrow and Frankfurt airports on connection traffic in European and Gulf hub airports

We develop two stage fixed-effects single-spill and double-spill models for congestion connection spills of London Heathrow and Frankfurt airports on 9 hub airports in Europe and the Gulf. Our panel data covers connection traffic from 1997 to 2013 for Heathrow and 1997 to 2011 for Frankfurt. The single-spill results support strongly that the connection spills from Heathrow’s capacity limitations do strengthen competing hub airports of major alliance groups and to a lesser degree one Gulf hub. The double-spill model for Heathrow and Frankfurt shows nearly asymmetric overall spill characteristics between the two airports. Our results underline the influence of airline network strategies on congestion spills as European airline networks are shaped by alliances and umbrella mergers. Thus, the airline network perspective in airport capacity expansion decisions needs to play a greater role, as indicated by our asymmetric results for overall spill effects between Heathrow and Frankfurt airports.     

Flying with climate liability? Economic valuation of voluntary carbon offsets using forced choices

This study aims to examine how key aspects of voluntary climate action influence economic values of aviation carbon offsets using an Australian case study, where voluntary carbon offset programs for the aviation sector were active under a carbon tax between July 01, 2012 and July 17, 2014. An online survey was administered during the period using choice experiments. This rare and short-lived Australian experience is useful to gain insights into how individuals respond to the new public policy in terms of the perceived economic value of voluntary offsets for air travel. According to the estimation results, supporters of the mandatory tax policy held a welfare value of voluntary carbon offsets for their domestic flights that is three times larger than non-supporters (i.e., $AU27.83 vs. $AU9.40). It is $AU12.27 on average per ton of carbon offsets per person for domestic flights and $AU0.92 for international long-haul flights. The findings endorse that individuals seem to attach personal responsibility for carbon emissions (i.e. climate liability or carbon conscience) to frequent domestic flights, but not so much to intercontinental flights. Furthermore, reported flight frequencies by respondents did not place any significant impact on economic values of voluntary carbon offsets in both domestic and international frameworks. A coupled approach between forced choices and certainty responses was adapted, where no-choice options were retrieved, potentially improving choice experiments. Results suggest that airlines should consider simplifying their carbon offset programs to fixed levels (e.g. £3, £10, and £20 as in the case of British Airways), regardless of geographical boundaries, while governments should promote both mandatory and voluntary climate measures in tandem.