The Economic Regulation of Airports

Recent Developments in Australasia, North America and Europe

Peter Forsyth, David W. Gillen, Andreas Knorr, Otto G. Mayer, David Starkie, Hans-Martin Niemeier

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9780754638162
• eBook ISBN: 9781351891165
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Business General
• Index: Technology & Engineering

This tour d'horizon book reviews airport regulation and competition in different regions of the world and contrasts different policy perspectives. Organized in four parts, the first three examine, in turn, Australasia, North America, and Europe, while the last section looks at the institutional reforms that have taken place in these regions. The book covers the regulation of airports, and competition in different regions, as well as privatization policy, the interaction between airports and airlines, and regional economic impacts. It also examines the linkages between governance structures and forms of regulation. The book's global sweep embraces all the large aviation markets, bringing together the ideas and challenges of academic economists, airlines, airport managers, consultants and government regulators. As well as looking at different methods, degrees and paradigms of regulation it also spells out the stress-points, in a way that makes essential reading for airport operators, airline operations staff, as well as academic economists concerned with transport studies. It also offers interesting reading and important lessons for those concerned with regulation of the utility industries such as, telecommunications, water and power generation and distribution - where infrastructure can be subject to natural monopoly characteristics and where firms competing in downstream markets are dependent on the investment and operational strategies of the upstream infrastructure operator.

Introduction and Overview

Over the past decade, across much of the world, there has been extensive reform of airports. In several cases, airports have been fully or partly privatised, and in other cases, they have been restructured as corporations and required to prepare accounts in a corporatised format. Ownership and incentives have been changed with a view to making airports more commercially oriented. Since some airports possess considerable market power, these changes in ownership and incentives pose the danger that they will use this market power and raise prices to increase profits and achieve excessive returns. In most cases, this danger has been recognised, and the economic power of airports has been restrained by regulation.

The ownership and regulatory problems associated with airports have only recently attracted much attention. For many years, virtually all but the smallest airports were either owned by national or regional governments, or by local communities. There was a presumption that they would not use their market power to increase charges and profits, and the modest profitability of most airports seemed to confirm this presumption. When economists turned their attention to airports they did not focus on the regulatory or incentive problems. From the late 1960s on, problems of congestion, pricing, and allocation of scarce capacity were analysed in some depth (Forsyth, 2000). Another area on which economists focused was on the evaluation of investments in airport capacity; the costs and benefits of new airports or runways and on the economic impacts of airport extensions on local economies. More recently, there has been a recognition of the environmental impacts of airports, such as their impacts on noise and air quality, and there has been interest in devising economic instruments that mitigate these efficiently.

Apart from these aspects, there was little questioning of whether airports were operating in an institutional setting, which gave them the incentive to produce and price efficiently. It was presumed that publicly and locally owned airports would keep prices close to costs, set price structures efficiently, provide the range of services that users were willing to pay for, and keep costs down to a minimum. The analysis of other publicly owned utilities and transport industries, over the past three decades, has shown that these presumptions could be far removed from reality (see chapters 10 and 14). While publicly owned firms did not charge prices well above costs (and indeed, often allowed revenues to fall short of total costs), they did not necessarily produce at minimum cost, and often did not supply what the users were willing to pay for.

The result of this has been extensive reform of the utility and transport sectors in most OECD countries. There has been privatisation or coiporatisation of public enterprises, and associated with this there has been the introduction of incentive regulation (see Armstrong et al, 1994; Newbery, 1999). In countries, such as the US, which already operated a regime of regulated private utilities, there was a move from cost plus regulation towards incentive regulation. In a number of cases, but by no means all, markets were opened up, to the extent feasible, to competition. There was an extensive attempt to alter the institutional framework in which utility and transport industries operate, such that they face stronger incentives to perform efficiently, and where they possess some market power, the use of this is constrained in a way that does minimal damage to incentives to perform efficiently. Evidence from most countries that have embarked on programmes of reform suggests that performance overall has improved significantly, though the new environment has introduced its own new problems (such as greater risk of financial failure of regulated firms).

While governments have been active in reform of telecommunications, water, energy, surface transport and airline industries, they have been slow to tackle airports. Nevertheless, there have been substantial changes, mainly in the last decade. However, the move towards private ownership has been slower than in other industries. In many cases, governments have opted for partial privatisation rather than full privatisation. In North America, even though there is a long tradition of privately owned utilities and transport industries, there has been a reluctance to move away from public or local ownership of airports. The move towards full privatisation has been strongest in the UK and, later, Australia and New Zealand - both countries which formerly relied on the UK model of public enterprise, and which followed the UK with extensive privatisation programmes. In continental Europe, there has been a preference for partial privatisation, with the public sector remaining with majority ownership.

These changes in ownership have usually been accompanied by the introduction of explicit regulation. The first example of this occurred in the UK, where the major London airports owned by the British Airports Authority were privatised in the mid 1980s and RPI-X regulation was introduced. In the mid to late 1990s, Australia followed this pattern (since changed), while New Zealand privatised its three main airports (following corporatisation) but did not subject them to an explicit form of regulation. There has been partial privatisation of major airports in several European countries, including Germany, Austria, Greece, Switzerland, Denmark and Italy. In some of these cases, explicit regulation has been introduced (e.g. in Germany). In Ireland, the airport company has been corporatised, although not privatised, and it is subject to economic regulation. In the Netherlands, the government intends to partially privatise Amsterdam airport subject to economic regulation. Canada has chosen not to privatise airports, although the major airports are now under the control of local authorities. In the US, however, there has been little change, and the publicly and locally owned airports are not subject to price regulation, although they are subject to regulation of investment and financing.

Not much of a pattern has emerged in the types of regulation implemented across the different countries. When BAA was privatised in the UK, the government chose to implement RPI-X regulation. In this respect, the approach taken was similar to that adopted in other privatisations in the UK. This regulation was designed to avoid the problems which had become associated with more cost plus forms of regulation, such as rate of return regulation. The objective was to give the firm an incentive to maximise profit but to constrain its use of market power in a way that did not weaken, to any great extent, its incentive to minimise costs. In reality, such regulation encounters practical problems; in particular, regulators find themselves under pressure to set the allowable prices with some reference to the firm's actual costs, and this weakens its incentive to minimise costs. In spite of this, it is generally accepted as a good compromise, which in its variants that include "incentive regulation" and "earnings sharing regulation" in the US, has wide application across the world. (Note that by RPI-X or CPI-X regulation we mean regulation whereby the allowable price or revenue is set for a forthcoming period during which it must fall in real terms by X per cent per annum; by price cap we mean regulation whereby the allowable price is set in advance. Not all price caps take the CPI-X form.)

In spite of the popularity of this model (full privatisation combined with RPI-X), the UK is currently the only country which implements it for its airport industry, and then only in relation to its major London airports. (Manchester airport is also subjected to price caps, although it has not been privatised.) When Australia first privatised its airports, it adopted this model, but it has since moved to a much more light-handed form of regulation or price monitoring. New Zealand did not formally regulate its airports, although it did provide for a review of airport pricing behaviour with the threat of more explicit regulation should this behaviour be unacceptable; a recent review recommended that Auckland airport be regulated. In Germany, price-caps are imposed on the partially privatised Hamburg airport, but rate of return regulation is imposed on Dusseldorf, and Frankfurt airport is required to negotiate long-term contracts with airlines. In Austria, the majority public ownership of Vienna airport is partly relied upon to prevent excessive use of market power, although it is also price capped. At Amsterdam airport, rate of return regulation is foreseen in the near future. Formal price regulation does not exist for the North American airports.

What are the objectives of these institutional and regulatory reforms? A simple answer would be to promote economic efficiency. This involves production at minimum cost, provision of services at a quality level which users are willing to pay for, efficient levels of investment, price structures that reflect cost or ration capacity efficiently where it is in short supply, or which enable cost recovery at minimum dead-weight loss. It also involves provision of adequate services to facilitate competition at the airline level, and the development of non-aeronautical services which are complementary to the main business. The institutional and regulatory framework should create incentives for the pursuit of efficiency, although it must be recognised that a balance between objectives will normally have to be sought, and that a first best is rarely attainable.

It is to be recognised that governments have other agendas beyond efficiency. Governments may wish to maintain the dominant hub position of the preferred national carrier (see also the discussion on peak charges later on), or to ensure low cost access to busy airports for commuter and regional carriers. They may be keen to reap the cash proceeds from privatisation and, at the time of privatisation, they may set regulatory parameters such that these are increased. Some governments (especially local governments) wish to use airports to foster regional development. Airlines and airport corporations may be powerful in their own right, and they may influence choice of airport policy. The environmental aspects of airport growth are now very important, and governments will wish to lessen adverse environmental impacts. Some of these objectives are consistent with overall efficiency - for example, efficiency requires that environmental externalities be taken into account. Other objectives are less consistent with efficiency goals.

By way of example, the UK government chose to privatise the nationally owned London airports as a group, and not to sell them separately; it thus missed the potential for competition between the airports. This would probably have yielded a lower sale price. The Australian government abolished formal price regulation just before it privatised Sydney airport; this would have enhanced its sale price. Environmental constraints have long held up the expansion of London and other airports. Even busy North American and Australian airports are required to make special provision for commuter traffic, which is likely to have a low willingness to pay, even though peak capacity is scarce. When new, and different price regulatory systems are introduced and, as, for example, in Hamburg, attempts are made to ensure that none of the stakeholders is affected too negatively. Regulators need to take into account the view that publicly owned corporatised airport authorities, with easy access to revenue flows, may not have strong incentives to minimise costs and avoid over-investment in facilities, as has been argued to be the case with Aer Rianta, the airport owner in Ireland.

Thus, the actual ownership and regulatory environments of airports across the world represent compromises between conflicting objectives - efficiency has been on...

Table of contents

• Cover
• Half Title
• Dedication
• Title
• Copyright
• Contents
• Acknowledgements
• Editors and Contributors
• Introduction and Overview