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Airport Economics

Airport Economic Regulation: Achieving Sustainable Equilibrium

Oct 4, 2024

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In this series of five blog articles, we delve into the complex world of airport economics, examining the key economic policy areas that shape the airport industry. From balancing competition and oversight in economic regulation to exploring ownership models and governance practices, each article offers a detailed exploration of the challenges and opportunities faced by modern airports. We also discuss building collaborative relationships with airlines, diversifying income through non-aeronautical revenues, and expanding connectivity through air transport market access. Join us as we uncover the dynamic forces driving the airport sector, ensuring sustainable growth and enhanced service quality for all stakeholders.

Economic regulation, which emerged in the early 20th century to ensure fair pricing and competition, plays a crucial role in the airport industry. However, as the airport business evolves and pursues ambitious sustainability goals, there is a need to reassess existing frameworks for more flexible and light-handed approaches. This article explores the importance of proportional economic oversight and competition policy, highlighting how governments and policymakers can balance regulatory interventions to foster a thriving and sustainable aviation ecosystem.

Airport competition and proportionality in economic oversight

Competitive forces shape many aspects of the airport business, influencing both aeronautical operations and commercial activities. Airports compete on numerous fronts, creating a dynamic market that demands effective economic oversight. Given the variety of airport structures and ownership models, including concession agreements with states, it is essential to focus on competition policy and monitoring rather than prescriptive ex-ante regulation. Economic oversight must be proportional to the competitive factors affecting relationships between aircraft operators and airports. Regulatory interventions should be minimal, considered only when the benefits to regulated pricing, investment, or service quality outweigh the associated costs. This approach ensures that airports can operate efficiently while delivering positive outcomes for consumers.

Airports as businesses in their own right

Airports have transitioned from public infrastructure entities to autonomous businesses. Governments must support this shift by allowing greater flexibility in developing diverse revenue portfolios as it reduces the financial burden on the public sector and encourages private investment. Light-handed, consistent, and transparent economic oversight creates fertile grounds for investment in airport infrastructure and revenue diversification. Airports primarily generate revenues from aeronautical and non-aeronautical activities. Aeronautical charges are the largest part of airport revenues, accounting for 54%, and are levied on passengers and aircraft operators for using airport facilities, crucial for infrastructure development and ongoing operations. Airport charges have been designed in a way that supports passengers – consumers – requirements for quality airport infrastructure, central to the aviation ecosystem. Commercial revenues represent as much as 40% of total airport revenues and are derived from non-aeronautical activities and rents charged to concessionaires, offering a wide range of services to passengers, including car parks, retail, advertising, and car rental facilities.

Airport charges, pricing flexibility, and freedom

Airports levy various charges on users and passengers to fund their operations and development. Aircraft operators typically pay charges for using airside infrastructure, while passengers pay for passenger-processing facilities, including terminals, ground access, and security services. Globally, revenues generated by aircraft-related charges account for 33% of total airport aeronautical revenues, passenger-related revenues stand at 53%, and terminal rentals contribute 14%. These charges are vital for the economic sustainability of airport operations, enabling operators to manage infrastructure to meet current and future demand. This year, the global aviation sector is expected to recover and exceed 2019 levels, reaching approximately 9.7 billion passengers. By 2042, passenger traffic is projected to double from the 2024 level, reaching around 19.5 billion. This has immense socioeconomic benefits for economies across the globe in terms of increased tourism, commerce and cultural connections. To meet this long-term air transport demand and ensure that the carbon footprint is minimized, global airport capital investments (CAPEX) need to reach $2.4 trillion by 2040.

Pre-funding of airport projects through user charges is essential for financing long-term, large-scale investments. Investments funded through these charges, aimed at expanding airport capacity, ensure better access to air travel and foster competition, benefiting consumers by enhancing service quality. Additionally, these funds are crucial for achieving environmental goals and decarbonizing the industry, supporting initiatives that reduce the environmental impact of aviation. 

Given the critical role airport charges play, airports must have the freedom to develop and customize their charge structures and pricing strategies based on their specific circumstances. Market-responsive pricing mechanisms and incentive schemes can more effectively fund capital investments and manage capacity.

Global best practices in airport economic regulation

Australia and New Zealand are examples of effective economic regulation with light-handed approaches that allow flexibility while ensuring fair pricing and investment. Australia’s framework monitors airport performance, enabling airports to set charges and negotiate with airlines within competitive constraints. Over AUD 8 billion was invested in infrastructure between 2002 and 2019, with Sydney Airport’s passengers increasing from 28 million to over 44 million. New Zealand’s approach emphasizes transparency and accountability, leading to significant infrastructure investments and improved service quality. Auckland Airport’s passenger numbers rose from 14 million in 2012 to over 21 million in 2019, with NZD 1.2 billion invested in capital projects over five years.

In Japan, the Civil Aviation Bureau of the Ministry of Land, Infrastructure, Transport, and Tourism regulates airport charges to ensure high service standards and operational efficiency. Yet, Osaka’s Kansai International Airport (KIX) and Itami Airport (ITM) operate under a light-handed regulatory approach with a dual-till regime, balancing aeronautical and commercial revenues to enhance service quality and efficiency.

Itami Airport, Japan

In Latin America, airport regulation focuses on balancing service quality with financial sustainability. In Brazil, major airports operate under a dual-till regime, managed by private groups and regulated by the National Civil Aviation Agency (ANAC). Similarly, in Mexico, airports are regulated under a dual-till regime by the Federal Civil Aviation Agency (AFAC), with private groups ensuring high service levels and operational efficiency.

In Europe, successful examples of light-touch regulatory regimes exist for many airports and have produced positive outcomes for consumers. However, airports that remain in stricter regulatory frameworks where a price regulator oversees and approves operating costs and investments often produce the most contentious price-setting engagements. Appeals and challenges of price determinations happen most frequently at the most regulated airports.  

Canada’s decentralized regulatory framework allows airports to operate as not-for-profit entities, reinvesting surplus revenues into infrastructure and service improvements. This approach encourages efficiency and customer-focused investments, maintaining competitiveness without heavy-handed regulation.

By balancing flexibility with oversight, these global examples demonstrate how light-handed regulatory frameworks can stimulate innovation, enhance service quality, and ensure fair pricing and investment in the airport industry.

Conclusion and the way forward in economic regulation

Looking ahead, airport economic regulation should be transparent, flexible, and proportional to competitive forces, based on the following principles:

  • Ensure the best outcomes for consumers: The goal of economic regulation should be to ensure positive outcomes for consumers of air travel first and foremost, both today and in the future.
  • Proportional economic oversight: By adopting proportional economic oversight, regulatory interventions can be minimal and only applied when the benefits on pricing, investment, or service quality clearly outweigh the associated costs.
  • Focus on competition policy: Emphasizing competition policy and monitoring rather than prescriptive ex-ante regulation ensures positive outcomes for consumers and efficient airport operations.
  • Flexible and transparent approaches: Implementing flexible, light-handed, and transparent economic regulatory frameworks creates fertile grounds for investment in airport infrastructure and the diversification of revenues.
  • Adapting to future challenges: As the industry evolves, adopting flexible and forward-thinking regulatory strategies that incentivizes investment in sustainable infrastructure will be crucial for addressing emerging challenges and opportunities for the airport industry and the whole aviation system.

My acknowledgments to Patrick Lucas, Philippe Villard, Michael Stanton-Geddes, Rafael Echevarne, and Filipe Reis.

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