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UBC Theses and Dissertations

An investigation of operating cost of airports : focus on the effects of output scale Jeong, Jinha

Abstract

In the air transport industry, airports play a key and active role as infrastructural providers, business partners, and economic enablers. With the projected robust growth in passenger and cargo traffic in the future, airports must expand to accommodate the increasing demand in traffic, which will invariably lead to increased operating and capital costs for airport operators. Some have argued that with expansion, airports will benefit from economies of scale, whereas others have suggested the opposite. Thus, the effect of increased airport output on costs remains controversial and not fully known. To date, there has been a paucity of studies that have directly assessed the potential impact of economies of scale in the airport industry. The few studies that have addressed this issue have had significant limitations in modeling cost functions with capital inputs. Additionally, these studies used different functional forms and airport sampling procedures, which may have contributed to the large discrepancy in the results. Moreover, these studies evaluated economies of scale by using partial view of passengers or Work Load Unit (WLU) rather than as an aggregated output index. Many of these previous studies also lacked sufficient statistical power to properly address this issue. The main objectives of this thesis are to: 1) determine whether economies of output scale are indeed present in the airport industry; 2) quantify the magnitude of the economies; and 3) determine the threshold size of airport at which the.economies change. To address these objectives, this analysis used data from 94 U.S. airports and employed translog cost functions and Variable Factor Productivity (VFP) in terms of passenger, WLU and output index. This study found that economies of output scale in the airport industry were present to a threshold output index of 0.7, which is equivalent to 2.5 million passengers or 3 million WLU. Beyond this threshold, the economies disappeared. The volume of international passengers had a significant positive impact on operating costs. Delays, cargo volume, contract-out costs, snowbelt, and financial management approaches, on the other hand, did not materially affect economies of airports.

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