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Economic analyses of airport pricing and privatization

University of British Columbia

Airport congestion has become a major public policy issue because delays impose important costs on airlines, passengers and shippers (losses have been estimated to be above US$20 billion annually). The answer economists have given to the airport runway congestion problem has been the use of the price mechanism, under which landing fees are based on a flight’s contribution to congestion. However, these schemes have not really been implemented. Airports have traditionally been owned by governments, but this has been changing: following the UK, many airports around the world have recently been, or are in the process of, being privatized. One of the leading arguments for airport privatization is that privatized airports might well shift towards peak-load or congestion pricing schemes of their runway services, thus reducing delays. Nevertheless, out of the concern that the privatized airports would exert monopoly power, most of the newly privatized airports have been subject to some form of economic regulation. Lately, however, some authors have argued that the regulation mechanisms fell short of being optimal because they would misplace capacity investment incentives. They suggested divestment of regulation or the less-stringent price monitoring. However, as important as these issues may appear, there have been only a couple of papers that have analytically examined what the outcomes of privatization or divestment of regulation may be. And, although many papers analyze optimal pricing of public airports, most of the papers that deal with privatization and deregulation are fairly descriptive. In this thesis, the effects that competition, privatization and regulation (or absence of it) would have on the performance, pricing structure and capacity investments of airports, and the consequences this will bring to the downstream market (airlines), and final users (passengers) will be examined analytically. What makes this different from previous work on airport privatization is that, here, vertical structure models of airport-airlines behavior [i.e. behaviour] will be used. That is, it will be recognized that airports provide an essential input, which is used by airlines to produce the output-travel-under oligopolistic conditions. Previous work abstracted from the airline market under the assumption that the airline market was perfectly competitive. Non-cooperative games will be analyzed, in order to extract lessons and conclusions for public policy, on a number of different issues: (i) whether previous conclusions regarding airport privatization (and airport pricing in general) hold under imperfect airline competition; (ii) whether privatized unregulated airports would use efficient peak-load pricing congestion schemes or not, and under which conditions they would; (iii) whether the arguments that have been put forward in favor [i.e. favour] of deregulation of private airports hold or not; (iv) whether competition between private airports in multi-airport regions would lead to a more efficient outcome than single ownership.

Text

2010-01-16

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http://hdl.handle.net/2429/18396

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