The International Civil Aviation Organization (ICAO) recognizes the key role that States and civil aviation oversight organizations have to play to support the economically sustainable recovery of airports. The Council of ICAO has encouraged regulators to take inclusive, targeted, proportionate and transparent economic measures to ensure adequate support to vulnerable segments of the aviation ecosystem.
With historic traffic and passenger losses in 2020—which are extending well into 2021 and very likely into 2022—airport operators around the world have become financially vulnerable stakeholders. Aviation oversight authorities have now a key role to play to ensure that airports can sustainably generate revenues to support the operation of their infrastructure and finance their capital needs.
Consistently, ACI World and the airport community conducted an overhaul of global policies and positions on economic oversight and the role of States on airport charges, which were introduced by the Chair of the ACI World Economics Standing Committee (WESC) in the article ACI’s new economic policies on competition and fostering market-based pricing strategies for charges.
ACI and the airport community’s key positions on economic oversight and airport charges can be retrieved in the latest edition of the ACI Word Policy Handbook.
As per ICAO’s Policies on Charges (Doc 9082), the main purpose of economic oversight is to achieve a balance between the interests of airports, and the following public policy objectives:
However, it is a misconception to assume that these objectives are achievable only through heavy-handed and intrusive economic regulation frameworks. Such assumption rarely holds true when considering data-driven evidence with respect to the actual charges, levels of investment and the extent of infrastructure development, not to mention service quality. Market forces such as airport competition, passenger choice and countervailing buyer power of airlines can deliver on these objectives without any external regulatory intervention.
The Australian case represents a powerful illustration that the removal of intrusive economic regulation and airport charges price control goes in par with strong traffic growth, airport capacity development, and increases in customer satisfaction, as shown in the ACI EUROPE Report on the 2019 Review of Australian Airport Economic Regulation.
Competition was a key driver of the airport business before the pandemic. Airports were competing on all aspects of their business. In the recovery period and beyond, the competitive dynamic of the airport industry will only intensify, as airports will face a much stronger multi-faceted competition for airline services and capacity, passengers and commercial activities.
Airports are competing for passengers: the ability of passengers to switch to alternative airports or to other modes of transport exposes individual airports to intense competitive pressures, as both point-to-point and transfer passengers have the ability to switch between airports.
Airports are also competing for airline services and capacity. Airlines are making full and extensive use of the freedom they have flying between airports and switching away from airports when they deem that economic conditions are not right. In a context of structural fleet reduction and downward resizing of airline networks, airline countervailing power is also set to further increase in the recovery period, creating a drastic constraint on airport charges.
Finally, airports are competing for commercial activities. The digitization of the economy is also changing consumer behavior and reshaping the dynamic of competition for airports’ activities.
Accordingly, ACI and the airport community are making three central policy proposals on economic oversight.
First, regulators should take stock of the ever-intensifying competitive situation of the airport industry. As such, ex-post competition policy, rather than ex-ante price regulation, should be used as the first basis for airport economic regulation, as it is the best way to deliver outcomes in the best interest of the traveling public and of the communities served by airports.
Second, where economic regulation is necessary, then economic oversight of airport operators should strive to deliver positive outcomes for consumers. Like for any market across an array of regulated industries, economic regulation mechanisms should be strictly tailored to situations where there is threat of abuse of significant market power. In most cases competition laws provide comprehensive and sufficient sets of provisions to ensure consumer protection. Consequently, regulators should strive to fulfill a consumer-focused mission rather than a price-determination function for the benefit of all aviation stakeholders and the traveling public.
Third, economic oversight frameworks should ultimately facilitate and incentivize commercial agreements between airports and individual airlines, with specific terms and conditions reflecting individual circumstances, in a flexible manner with a focus on ensuring non-discrimination in charges, protecting the interests of consumers, and assuring timely and proper investments in capacity. The direct and indirect cost of intrusive regulation focused on determining the precise level and structure of airport charges has outweighed its benefits.
Light-handed oversight models have proven to be successful in ensuring the sustainable growth of air traffic and airport activities and are the most responsive to the needs of airports in relation to States’ responsibilities of maintaining economic oversight in the recovery period and beyond.
The policies and positions taken by the global airport community on the economic oversight of airports and the role of States on airport charges should not been seen as a theoretical discussion on regulation. Traditional regulatory models for airport pricing which have been implemented in the past decades are now one of the root causes of the financial distress of airports.
The steep decline in traffic volumes caused by the COVID-19 pandemic cannot be matched by an equivalent steep decline in the airport cost base, which is largely fixed due to the asset intensiveness of the airport industry. The revenue gap engendered by the crisis is enormous: 125 billion USD in 2020 and a forecasted amount of 94 billion USD of revenue loss creates a momentous challenge for the industry (see ACI’s impact assessment of COVID-19 on the airport business). In such a dramatic context, regulators have the utmost responsibility to ensure that airport operators are able to recover their full costs, including capital costs, and are able to finance their development.
While there is no “one size fits all” approach to the economic oversight of airport charges, ACI strongly advocates that the industry needs light-handed and unintrusive economic oversight frameworks that will foster – rather than impede – the recovery of airports.