Where academics and regulators (dis)agree – airport price regulation

Many airports now earn as much revenue from concession businesses as from infrastructure businesses

PUBLISHED : Friday, 22 July, 2016, 4:45pm
UPDATED : Friday, 22 July, 2016, 9:38pm

Airport price regulation is an interesting subject for governments, airline operators and consumers from East to West. This is also a subject which not only affects the interests of the stakeholders involved, but also the future development of the aviation business. It is where academics can help.

A recent study on airport price regulation conducted at Polytechnic University revealed important insights on this subject.

Airport markets have many exciting features that distinguish them from other markets. One has drastically changed airport businesses in the last years: The growing importance of concession businesses such as the supply of car parking spaces, food and beverages, clothing, jewellery and duty free relative to the supply of runway, terminal and other infrastructure capacity.

According to recent statistics from the Airport Council International, airports worldwide earn almost as much revenue from concession businesses as from infrastructure businesses.

For instance, retail licences and advertising revenue represent 41.4 per cent of total revenue at Hong Kong International Airport.

Atlanta Hartfield-Jackson airport is another interesting example. As the largest airport in the world in terms of passenger numbers, its car parking revenues are almost four times as high as the revenues derived from runway charges.

The regulatory question here is whether concession revenues should be used to cover aviation infrastructure costs? If concession revenues were used to cover infrastructure costs (the so called single-till approach), runway charges could be much lower than in the opposite case where infrastructure and concession businesses are considered as separate businesses (so called dual-till approach).

The discussion in Europe shows that airlines typically favour the single-till approach, while airports usually prefer the dual-till approach. Interestingly, different regulatory bodies disagree about the use of single-till and dual-till regulatory regimes.

For instance, this is true in Britain, where the Civil Aviation Authority is in favour of dual-till and the Competition Commission the single-till regime.

Many of the arguments used to support the different views are well analysed and understood by academics: Single-till reduces airline costs and most likely ticket prices, which altogether is beneficial for airlines and passengers.

On the other hand, dual-till allows charging of a higher price for the use of airport infrastructure and keeping of profits derived from concession businesses, which explains why airports may have a preference for dual-till regulation.

Passengers, however, may also benefit from dual-till because the higher infrastructure charge (relative to single-till) and the possibility of keeping concession profits may increase the airport’s incentive to invest in new capacity and improve service quality. In this scenario, passengers may, in the long run, be better off with dual-till although ticket prices are higher (because service quality is also higher).

Moreover, we show that when an airport is not able to cover its fixed costs with an efficient aeronautical charge and its concession profit, then the single-till approach dominates. On the other hand, when the efficient aeronautical charge covers the airport cost associated with aeronautical services and airport congestion is significant, then dual-till regulation performs better.

This explains why regulatory authorities may actually end up preferring different regulatory regimes although they all are supposed to serve the same public interest.

It may simply depend on whether they believe that lower ticket prices (Competition Commission) or higher service quality (Civil Aviation Authority) are more important and how best individual regimes will serve interests in the short and long run.

Many of these arguments have been analysed by academics, who have been instrumental in supporting the making of business decisions in different scenarios. As the aviation sector is quite complicated, there are still many issues left unresolved and new issues keep coming up, and hence, the research agenda is huge for those who are interested in aviation industry.

One example is the concern of the Civil Aviation Authority that single-till extends regulation beyond those areas in which the airport has substantial market power. This concern is not straightforward since neither dual-till nor single-till involves the regulation of concession prices because they are only concerned about the use of concession profits and not about how concession profits have been achieved.

OK, no good answers are available here. But, it shows that the research agenda requires continuous updating, that academics and practitioners should work more closely to exchange ideas and share insights, with a view to advancing the development of the industry and for the benefit of society as a whole.

Achim Czerny is associate professor at the Hong Kong Polytechnic University’s department of logistics and maritime studies and director of the undergraduate programme in aviation management and logistics