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.     

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.     

Intercontinental-airport regulation

This paper analyzes strategic interaction between intercontinental airport regulators, each of which levies airport charges paid by airlines and chooses its airport capacity under conditions of congestion. Congestion from intercontinental flights is common across intercontinental airports since departure and arrival airports are linked one to one, while purely domestic traffic also uses each airport. The paper focuses on two questions. First, if both continents can strategically set separate airport charges for domestic and intercontinental flights, how will the outcome differ from the first-best solution? Second, how is strategic airport behavior affected by the extent of market power of the airlines serving the intercontinental market? We see that strategic airport pricing and capacity choices by regulators lead to a welfare loss: the regulators both behave as monopolists in the market for intercontinental flights, charging a mark-up and decreasing capacity. This welfare loss even overshadows possible negative effects from imperfect competition within the intercontinental airline market. We further discuss how the presence of multiple regulators on one continent or a simple pricing rule might constrain the welfare loss created by strategic airport regulation.     

Effects of corruption on efficiency of the European airports

The effect of corruption on airport productive efficiency is analyzed using an unbalanced panel data of major European airports from 2003 to 2009. We first compute the residual (or net) variable factor productivity using the multilateral index number method and then apply robust cluster random effects model in order to evaluate the importance of corruption. We find strong evidence that corruption has negative impacts on airport operating efficiency; and the effects depend on the ownership form of the airport. The results suggest that airports under mixed public–private ownership with private majority achieve lower levels of efficiency when located in more corrupt countries. They even operate less efficiently than fully and/or majority government owned airports in high corruption environment. We control for economic regulation, competition level and other airports’ characteristics. Our empirical results survive several robustness checks including different control variables, three alternative corruption measures: International Country Risk Guide (ICRG) corruption index, Corruption Perception Index (CPI) and Control of Corruption Index (CCI). The empirical findings have important policy implications for management and ownership structuring of airports operating in countries that suffer from higher levels of corruption.     

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).     

Determination and Applications of Environmental Costs at Different Sized Airports – Aircraft Noise and Engine Emissions

With the increasing trend of charging for externalities and the aim of encouraging the sustainable development of the air transport industry, there is a need to evaluate the social costs of these undesirable side effects, mainly aircraft noise and engine emissions, for different airports. The aircraft noise and engine emissions social costs are calculated in monetary terms for five different sized airports, ranging from hub airports to small regional airports. The number of residences within different levels of airport noise contours and the aircraft noise classifications are the main determinants for accessing aircraft noise social costs. The environmental impacts of aircraft engine emissions include both aircraft landing and take-off and 30-minute cruise. The social costs of aircraft emissions vary by engine type and aircraft category, depending on the damage caused by different engine pollutants on the human health, vegetation, materials, aquatic ecosystem and climate. The results indicate that the relationship appears to be curvilinear between environmental costs and the traffic volume of an airport. The results and methodology of environmental cost calculation could be applied to the proposed European wide harmonised noise charges as well as the social cost benefit analysis of airports.     

Competition and deregulation: Do air passengers get the benefits?

It is well established that increased airline competition can produce benefits to passengers, and it is generally assumed that airport deregulation, as part of the same process of liberalisation, will produce similar benefits. But this paper shows that this may not be the case. The potential benefits to passengers from increased airline competition will in general be partially absorbed by increased airport charges at unregulated airports, and in some circumstances this may even result in increases in overall charges, not reductions. This problem is sometimes tackled by putting regulated price caps on aeronautical services, but if these are not extended to the complementary commercial services (such as retailing) which airports also provide then the adverse effects may still occur. Similarly, unilateral deregulation leading to increased airport competition in one country may just lead to the majority of the gains going abroad. Overall, the conclusion is that claims of big passenger gains from deregulation and competition may be exaggerated, and achieving these gains in reality may need subtle and quite far-reaching government intervention.     

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.     

How to mix per-flight and per-passenger based airport charges

This paper investigates the questions of why carriers advocate for higher per-passenger airport charges and lower per-flight charges, and whether and when this proposal is welfare-enhancing. Specifically, the paper compares the optimal mix of per-flight and per-passenger based airport charges from both a monopoly carriers’ and the social viewpoints conditional on airport cost recovery. It focuses on the trade-off between price and frequency (i.e., schedule delays) when time valuations are uniform, or differ, between business and leisure passengers. We identify an easy test for the evaluation of the mix of per-passenger and per-flight based airport charges by policy makers, which is simply to check whether the carrier’s preferred per-flight charge is zero. Our analysis suggests that there is no need for immediate regulatory corrections of the current trend towards the strong use of per-passenger based airport charges.     

A multi-criteria evaluation of solutions and alternatives for matching capacity to demand in an airport system: the case of London

This paper applies multi-criteria decision-making (MCDM) methods to the evaluation of solutions and alternatives for matching airport system airside (runway) capacity to demand. For such a purpose, ‘building a new runway’ is considered as the solution and candidate airports of the system as alternatives for implementing the solution. The alternative airports are characterized by their physical/spatial, operational, economic, environmental, and social performance represented by corresponding indicator systems which, after being defined and estimated under given operating scenarios, are used as evaluation attributes/criteria by the selected MCDM methods. Two MCDM methods – Simple Additive Weighting and Technique for Order of Preference by Similarity to Ideal Solution – are applied to the case of the London airport system to rank and select the preferred alternative from three candidate airports – Heathrow, Gatwick, and Stansted – for where a new runway could be built.     

Optimal transport strategies for European cities

A new procedure for generating optimal transport strategies has been applied in nine European cities. A public sector objective function which reflects concerns over efficiency, environmental impact, finance and sustainability is specified and a set of policy measures with acceptable ranges on each, identified. Optimal strategies based on combinations of these policy measures which generate the optimal value of the objective function, are identified, and compared between cities. Resulting policy recommendations are presented. The results demonstrate the importance of an integrated approach to transport strategy formulation. They emphasise the role of changes in public transport service levels and of fares, and of charges for car use. By contrast, new infrastructure projects are less frequently justified. In the majority of cities the revenues from car use charges are sufficient to finance other elements in the strategy. However, private sector involvement either in initial financing or in operation may be desirable. Revised objective functions to reflect private sector involvement are specified, and optimal strategies with private sector operation of public transport are also identified. The requirement to meet private sector rates of return for public transport operation typically results in lower frequencies and higher fares; charges for car use then need to be raised to satisfy public policy objectives, but system performance is reduced. This revised version was published online in June 2006 with corrections to the Cover Date.     

Freighter operators' choice of airport: a three‐stage process

With increasing levels of congestion at the major cargo hubs and further restrictions on noise and night‐time flying, freighter operators' airport choice is a complex and important issue. The aim is to identify the factors that affect the airport choice of freighter operators through a review of the published literature. The literature reviewed includes work relating to passenger hub location, airport quality and airline network configuration, and other works relating to airport choice to paint a full picture of the current research in this area. The literature shows that freighter operators initially choose a shortlist of possible airports based on geography and then investigate any restrictions in place, such as capacity caps or noise limits that might block operations from that airport. Only when these hurdles have been cleared do freighter operators consider attributes of airport quality such as charges and terminal facilities, as well as other influences such as freight forwarder presence and airport marketing. Of particular prominence is the impact of legislation on airport choice.     

Mathematical programming models for airport site selection

Three mathematical programming models are developed in this paper, using different criteria, for the airport site selection problem in developing countries. Estimation of parameters, based on Turkish data, and the sensitivity analyses are presented. The first is a typical set covering model used to determine the minimum number of airports required for a given population of passengers. The other two are location-allocation type models used to find the optimal airport location patterns, the number of passengers to be bussed to cities having airports, and the optimal frequencies of transportation modes between the city pairs.     

Efficient use of airport capacity

The capacity of 35 Brazilian domestic airports was analyzed with a view to determining which of them were efficient in terms of the number of passengers processed. Data Envelopment Analysis (DEA) methodology was employed to construct the efficient frontier for the sample, to reflect which of the airports used airport resources efficiently and which offered surplus in these same facilities, and in what proportion. On the basis of passenger demand forecasts, it was possible to determine, for each airport, the periods when capacity expansions would become necessary to maintain services at standards currently perceived by passengers.     

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.     

The influence of the operational environment on efficiency of international airports

Heterogeneity must be considered in the efficiency analysis of decision‐making units; otherwise, the results will be strongly biased. This is also valid for airport management where the operational environment heavily influences efficiency. In this paper, conditional efficiency measures are applied to airports to incorporate heterogeneity in non‐parametric frontier models which are robust for outlying observations. In particular, the influence of the operational environment on airport efficiency is examined in a sample of 141 international airports. The conclusions show that the operational environment indeed matters and that privatisation, regulation, traffic transfer and the dominant carrier have a positive effect on efficiency, whereas aeronautical revenues influence it negatively. Copyright © 2014 John Wiley & Sons, Ltd.     

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.     

Investigation of environmental justice analysis in airport planning practice from 2000 to 2010

Municipal airport owners and the Federal Aviation Administration (FAA) regularly evaluate capacity and demand to decide if and when airports need more infrastructure. New infrastructure can alter the profile of noise, emissions, and land use, which may affect the quality of life for airport-adjacent communities. When the FAA and airport owners initiate infrastructure expansion, they must conduct environmental justice analysis to measure the distribution of negative externalities on nearby communities. This research investigates the environmental justice methodologies and narratives reported in planning documents for nineteen airport capacity expansions planned or deployed from 2000 to 2010 in the United States. The mixed-methods approach analyzes airport operations data, spatial demographic data, and planning artifacts to determine whether the environmental justice analyses were robust. This research proposes alternative metrics, the ‘Risk of disproportionate impact’ and ‘Capacity strain’, to further contextualize the presence of protected population groups alongside capacity needs. The main finding of the study is that the planning documents did not consistently detect environmental justice impacts, nor did they consistently confer importance to those impacts when high proportions of protected populations were detected. As a result, the social costs of collective airport expansion are unclear and likely underestimated. This study identifies two limitations that undermined the environmental justice analysis throughout the airport sample: (1) inconsistent methodological choices impeded the detection of impacts and, (2) narrative interpretations tended to ‘null’ the finding even when impacts were detected.     

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.     

Determinants of airports’ environmental effects

Aviation is a fast growing sector with increasing environmental concerns linked to aircraft emissions at airports and noise nuisance. This paper investigates the factors affecting the annual environmental effects produced by a national aviation system. The environmental effects are computed using certification data for each aircraft-engine combination. Moreover, we also take into account for the amount of environmental effects that is internalized at the airport, mainly through noise regulation. We study a dataset covering information on Italian airports during the period 1999–2008. We show that a 1% increase in airport’s yearly movements yields a 1.05% increase in environmental effects, a 1% in aircraft size (measured in MTOW) gives rise to a 1.8% increase and a 1% increase in aircraft age generates a 0.69% increase in environmental effects. Similar results but with smaller magnitudes are observed if airport internalization is considered. Our policy implications are that the tariff internalizing the total amount of externality is about euro 180 per flight, while the tariff limiting only pollution is about euro 60 and the one reducing noise is about euro 110. Moreover, our airport examples show that managers should prefer to address additional capacity by increasing frequency rather than aircraft size, since the former strategy is more environmental friendly.