The economic oversight of an airport should strengthen in line with its market power

Airport charges must be kept in check if aviation is to continue providing economic and social benefits across the world.

Yet airport unit costs, a driver for charges, are on the up. Data combined from aviation sources show they have risen since 2001 even as airline unit costs—excluding fuel—have come down.

This divergence in cost structure cannot be eradicated without tighter economic oversight of airports.

A new European association, Airlines for Europe (A4E)—comprising Air France KLM, easyJet, International Airlines Group, Lufthansa Group, and Ryanair—noted at its launch that stronger economic regulation on monopoly airports was necessary. It cited a new Aviation Economics study that shows airport charges at the largest 21 European airports have increased 80% since 2005.

The five CEOs—Alexandre de Juniac, Carolyn McCall, Willie Walsh, Carsten Spohr and Michael O’Leary respectively—commented: “Airport charges have risen by more than three quarters over the last ten years. This is in direct contrast to the lower air fares being delivered by European airlines which have decreased 20% over the same period. We want to create growth and new jobs across Europe, both within aviation and beyond.”

Olivier Jankovec, Director General of airport association, ACI Europe, said the call for more regulation was “tired” and complained that airlines, “aren’t paying the full costs of the infrastructure they use.”

Better guidelines
The argument was highlighted by the release of the proposed Aviation Package for Europe in late 2015, which airlines say should be used to strengthen the existing Airport Charges Directive (ACD). Although this has worked well in some cases, a number of European airports are still not compliant with the entirety of its stipulations. IATA argues the ACD needs better guidelines for its implementation and—more importantly—must be far more robust in dealing with those airports that are virtual monopolies.

“We suggest that the economic oversight should strengthen in line with an airport’s market power,” says Hemant Mistry, IATA’s Director for Airports and Fuel. “For those airports that do experience an element of competition or do not have significant market power, then the established ICAO principles of cost-relatedness, consultation, and transparency should be sufficient to guard against excessive charges. But those airports that are virtual monopolies—and they tend to be the larger ones—need a stronger regulatory framework that mimics the effects of a competitive environment.”

“It’s about ensuring the best deal for passengers,” he continues. “Effective regulation would encourage airports to be more efficient, raise service levels, and drive connectivity.”

The question becomes how to define the extent of airport competition. Airlines argue that airports’ claim of a competitive market is a bit of a stretch. Passengers invariably use their local gateway and are in any case guided by price, schedules, and loyalty programmes. So airports do not really compete for passengers. Airlines, meanwhile, do not come and go as much as airports suggest.

Airlines invest in staff, maintenance, and operational requirements. They will not easily abandon such a considerable investment. And switching airports means switching routes. Any new route is the subject of extensive analysis that includes the local economy, tourism and so forth. The decision is driven by the destination, not the airport. So airports do not really compete for airlines.

“The point is that an airline does not change airports because of the charges,” says Mistry. “But, that doesn’t mean charges are not a significant concern. Rather, because airlines and passengers cannot swap airports easily, it is important that economic oversight is established that ensures an airport does not abuse its market position.”

Market power
IATA supports the idea of an improved ACD, including the introduction of Market Power Assessments (MPA).

One potential way of assessing the level of competition in the airport sector is through using the well-known, “five forces,” model developed by Harvard Professor, Michael Porter. This approach looks at rivalry among existing competitors; the threat of new entrants; the threat of substitute products; the bargaining power of customers; and the bargaining power of suppliers.

“Applying this framework to the airport sector reveals weak competitive pressures at major airports, pointing to the need for effective regulation to drive efficiency improvements that can be passed on to users,” says Mistry.

IATA will be developing guidelines on the MPA in the near future.

And just as important as having a good methodology is who carries out such an analysis. IATA is calling for MPAs to be carried out by independent, experienced authorities. AN MPA could be very complex and the implications are significant for consumers. It is vital that the European Commission, via the relevant channels, at least oversees MPAs to ensure consistency.

It is also important that the MPA is used only as a means of excluding an airport from regulatory oversight if the analysis reveals effective competition. It should not have to prove a virtual monopoly.

Constructive engagement
When all is said done, a partnership between airlines and airports will provide the surest way forward. This partnership exists in such areas as safety, security, and the environment and has proved extremely fruitful.

And there are examples of excellent constructive engagement when it comes to infrastructure development and related charges. Developments at London Heathrow, Amsterdam, and Dublin have all been collaborative projects.

“In business, it is essential for partners to discuss and share their goals and objectives,” says Mistry. “So why can’t airlines and airports work together to agree on sustainable airport charges under the auspices of the correct regulatory framework?”

IATA’s Director General and Chief Executive Officer, Tony Tyler is calling for, “urgent action” to strengthen the regulation of airport charges. “As virtual monopolies, airports have significantly greater bargaining power than airlines and without effective regulation, airports will have insufficient incentive to reduce charges and promote efficiency,” he concludes. “This ultimately impacts on passenger connectivity options and on the cost everyone has to pay.”

Single till / dual till
A single till model uses all airport revenue streams to determine aeronautical charges. A dual till model ring fences aeronautical costs and works out charges accordingly.

The number of dual till airports is on the increase as airports believe the single till in effect subsidizes airline operations. Spain’s airport operator, AENA, will move from single to dual till by 2018 while Portugal and India’s New Delhi International Airport are in the process of moving from the single till to a hybrid model, which takes into account a portion of non-aeronautical revenues.

Airlines argue that dual till is unfair as it neglects to mention that airports then take the profit from other areas, such as commercial activity, which only exist because of airline customers.

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