Airports with significant market power must be effectively regulated
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Fierce competition among airlines has delivered positive results. The average return airfare has come down 64% in real terms since 1996. Air cargo rates have fallen a similar amount in the same period. Customers are benefitting.

The relentless efficiency drive is making airlines stronger too. For the third year in a row, returns are expected to outweigh the cost of capital.

At many airports, however, charges continue to rise.

Effective competition between airports remains the exception rather than the rule

They did so even during the global financial crisis—a clear sign of market power. Airport competition, or an alternative mechanism that delivers comparable results, must therefore be encouraged.

But a new report by IATA, Airport Competition: Myth or Reality?, notes that unfortunately, “effective competition between airports remains the exception rather than the rule” and that “major airports, in particular, continue to enjoy a dominant position.”

False theory 

If airports were competing, their charges would reflect the intensity of competition. Airlines and passengers might also be expected to switch routinely, and new airports would enter the market where appropriate.

There is little evidence for any of this. Between 2006 and 2016, for example, average airline revenue per passenger in Europe fell from €194 to €173 and shrank from representing 90% of the all-in ticket price to less than 80%.

At the same time, airport passenger charges more than doubled, increasing from €16 to €33. As for switching, airlines cannot do this lightly.

Developing a profitable route takes time, particularly if it is part of a global network

“There is a lot of inertia preventing a switch at a major airport,” says Alexandre de Juniac, IATA’s Director General and CEO.

“To start, the costs are high. Developing a profitable route takes time, particularly if it is part of a global network.

"And passengers will likely not switch with you. If, for example, an airline wanted to move operations from Rome-Fiumicino to Rome-Ciampino, it would be basically starting from scratch.

"And in many cases, the discussion is only theoretical as finding a slot and terminal capacity at most European airports is itself a big challenge.”

Investments include airline specific terminal facilities, such as check-in desks and airport lounges, and perhaps even maintenance facilities. Economies of scale may also be lost if operations are split across more than one airport.

And it’s not just more cost. There may also be lower revenue. Airlines get lower yields when routes are launched until passenger familiarization develops.

While these effects are temporary, the start-up period can be longer depending on airline competition on the route.

For every 1% increase in distance to a different airport, the likelihood of passengers flying from that airport declines, on average, 4%

Leisure travelers, those visiting friends and relatives and business people rarely have a choice about the airport of origin.

Research from Frontier Economics uses a sophisticated analysis to show that for every 1% increase in distance to a different airport, the likelihood of passengers flying from that airport declines, on average, 4%. As the travel time to an alternative airport approaches 120 minutes, the probability of passengers using that airport falls close to zero.

Finally, unlike the airline sector, where new carriers enter the arket regularly, there are rarely new entrants in the airport market for obvious reasons.

Compounding the problems is the fact that entry is especially difficult in those areas experiencing excess demand and a capacity crunch, such as major cities.

Airlines also exit the market—Monarch being a recent example. That is rarely the case with airports.

Three-tier approach

If market forces do not provide competition, then regulation must be the proxy.

“The rise in airport passenger charges over the last decade cost people who flew in Europe a collective €50 billion,” says de Juniac.

“That also impacts the competitiveness of national economies. That’s why governments need to pay attention and play a much stronger role.”

IATA recommends a three-tier approach to successfully regulate airport market power. First, those airports with significant 
market power should be subject to formal economic regulation. 

Second, airports with some degree of market power should be subject to a formal and consistent set of processes, such as a strengthened Airport Charges Directive in the case of Europe. 

Living in a competitive world, we have seen the power of market forces drive cheaper and more efficient air travel

And third, the remaining airports need not be subject to ex ante regulation but should adhere to ICAO principles on setting airport charges—namely, transparency, consultation, cost-relatedness, and non-discrimination.

To determine the appropriate level of regulatory oversight needed at each airport, a market power assessment (MPA) could be carried out.

IATA cautions that it would be impractical to undertake full MPAs for every airport but points out that other indicators can suggest the appropriate level of regulatory oversight, such as the level of congestion, whether the airport uses a dual-till charging mechanism, and whether the airport is part of a network.

“Living in a competitive world, we have seen the power of market forces drive cheaper and more efficient air travel,” de Juniac concludes.

“But Europe’s largest airports are marching to their own tune. And consumers and national interests need to be protected by regulation that will act as a proxy for competition that promotes cost-efficiency.” 

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