Airport–Airline interaction: some food for thought

Abstract

We provide an interpretive analysis of vertical relations between airports and carriers, while assessing the way in which deregulation of the airline market and the privatization of airports have created incentives for airport–airline interaction. In particular, if the vertical structure approach has become the standard approach in air transport research, we add to the literature by discussing three issues that we believe need further understanding. The three issues that we think should be the focus of future research on airport–airline interaction are (i) incomplete contracts and asymmetric information structure; (ii) upstream horizontal complementarities; and (iii) airports as two-sided platforms.

Keywords:

• airports
• airlines
• vertical structure
• incomplete contracts
• horizontal complementarities
• two-sided platforms

Acknowledgments

We thank the editor and three anonymous referees for their constructive comments on previous drafts of this paper. We thank Prof. Anming Zhang, Prof. Pierfrancesco Reverberi, and Prof. Cristina Barbot for useful discussions through years over the issue of airport–airline interaction.

Notes

1. These are the existence of high economies of density, slot allocation mechanism based on grandfathering rules, strategic alliances and code-sharing agreements, frequent flyer programs, global distribution systems, and access to comprehensive real-time information on competitors' activity (Starkie, 1999).

2. Some examples of consolidation in the airline industry include the alliance between Air France and KLM (in 2004), America West Airlines and bankrupt US Airways (in 2005), American Airlines and US Airways (in 2013, forming the American Airlines Group), Continental Airlines and United Airlines (in 2012), and Delta Air Lines and Northwest Airlines (in 2010). The same trend appeared among low-cost carriers (the Southwest Airlines-AirTran alliance in 2010 provides an example). The reader may refer to Jiang, Wan, and D'Alfonso (2014) for a game theoretic model to analyze the partnership formation for competing local airlines and global airline alliances.

3. As airports have been changing from being public to private, price regulations may be needed to contain market power of an airport. The exact form of regulation varies across countries. The reader may refer to Gillen (2007) for a comprehensive summary of regulatory experience worldwide, or Mueller, Konig, and Mueller (2010) for a study on Germany. Price-cap regulation sets a cap on the operator's prices according to the rate of inflation and the expected efficiency gains of the operator. Cost-based regulation combines elements from rate of return regulation (ROR) and Full Direct Costing. For each service, total revenues equal total costs, which are allocated directly or via allocation formula. Under ROR, the airport can set prices at whatever levels they wish provided that the profits do not result in a return on capital that exceeds a specified allowed return. The United States Federal Aviation Administration has the power to regulate prices but has not exercised this power: thus public ownership makes them not-for-profit entities.

4. Some early contributions on contractual relationships that influenced performance in deregulated markets are Williams (1979) and Phillips (1991).

5. Different forms of vertical agreements between airports and airlines often overlap in a specific contract negotiated between the partners, which need to be analyzed case by case (Malina, Albers, & Kroll, 2012; Starkie, 2012).

6. For instance, US Airways has leased 37 gates at the Charlotte Airport until 2016. At Cincinnati, 50 gates are leased to Delta while at Minneapolis, 54 gates are leased to Northwest, with 22 of these leases due to expire in 2015 and 32 having been converted into preferential use leases since 1999.

7. Delta Airlines is the signatory airline at Atlanta Hartsfield Airport; in 2002, Melbourne airport and Virgin Blue, the signatory carrier, reached a 10-year agreement for the airline to operate from the Ansett Domestic Terminal.

8. Aviation services refer to activities associated with runways, aircraft parking, and terminals. Non-aviation services refer to activities occurring within terminals and on airport land, including terminal concessions — such as duty free, restaurants, and shops — or car parking and car rental. In what follows, we shall refer indiscriminately to non-aviation or non-aeronautical operations (revenues) as commercial operations (revenues).

9. Tampa International Airport, as of 2005, shared 20% of its net revenue with the signatory airline, i.e. Continental Airlines Inc. that continued to operate at the facility under an amended lease that expired in 2009.

10. Terminal 2 of Munich airport is a joint investment by FMG (60%) and Lufthansa (40%) (Albers et al., 2005). Lufthansa has also invested in Frankfurt airport and holds a 29% share of Shanghai Airport Cargo Terminal. JetBlue invested 80 million USD in Terminal 5 of the New York JFK Airport to be used by the airline under a 30-year lease agreement. Latvia's Riga Airport has offered a contract to the national airline Air Baltic to build and operate a 92 million Euro terminal for 7 million passengers per annum by 2014.

11. Terminal E at Houston Airport was built for Continental Airlines. The airport issued a 323.5 million USD SFRB in 2001 and the rent paid by Continental secured the bonds. A similar agreement was signed between Dallas Love Field Airport and Southwest Airline, and Sydney Airport and QANTAS Airlines.

12. This is a common practice in Europe. See Section 2.2 for some examples.

13. D'Alfonso and Nastasi (2012) extend the result of Barbot (2011) to the context of two competing facilities and multiple airlines.

14. Limited variations of airport fees may be allowed if they are temporary, available to all qualifying airlines on a non-discriminatory basis, for new airline services, not paid for (through offsetting increases in other fees) by the other airlines serving the market and not participating in the air service incentive program (FAA, 2010).

15. For instance, in Australia a maximum of 5% of the shares of an airport may be bought by an airline (Biggar, 2012). In some other cases, like Argentina, the regulatory framework does not establish any limit to vertical relations between the airport operator and the airlines (Serebrisky, 2003).

16. Some examples are Ryanair against the Walloon Region, owner of the Charleroi Airport, or Air France against Geneva airport's plan to build a low-cost terminal (Charlton, 2009). See also Section 2.2. Barbot and D'Alfonso (2014) investigate why contracts between airlines and airports may fail; with a theoretical model that accommodates changes to the contracts’ clauses or environments in a two period game.

17. AirTran will be fully integrated into Southwest Airlines by 28 December 2014.

18. The agreement between Ryanair and Brussels (Charleroi) airport and the airport's owner, the government of the Walloon Region of Belgium, enabled the carrier to launch new routes and base up to four aircraft at Brussels (Charleroi). In February 2004, the EC found that a portion of the arrangements between Ryanair, the airport, and the region constituted illegal state aid, and therefore ordered Ryanair to repay the amount of the benefit received in connection with those arrangements. In December 2008, the European Court of First Instance annulled the EU's decision and Ryanair was repaid the €4 million that the EC had claimed was illegal state aid. Additionally, the Walloon Region withdrew a separate action for €2.3 million against Ryanair (2009).

19. See AirScoop (2009) for a good list of examples.

20. See also UK CAA (1997a), which surveys passengers at the five London airports, as well as at Manchester and Birmingham in 1996, and UK CAA (1997b) which studies airport use in Scotland.

21. Macquarie Airports, which owns an 84% hold in Sidney Airport, now holds share of airports in Belgium, Denmark, and the UK. In some cases, airports formed strategic alliances, such as Pantares Alliance between Schiphol and Frankfurt formed in 2001.

22. For instance, Ryanair reduced services from Leeds when the airport refused to lower their charges in 2004. In 2006, Ryanair immediately switched its daily Dublin service to Bristol, when the discounts offered to Ryanair at Cardiff expired and were not renewed.

23. As noted by an anonymous referee, the local market conditions (population, employment, and propensity to fly) and competition from other modes are very important in determining passenger demand. For instance, direct competition between air transport and HSR usually takes place on distances in the range 300–1000 km (Rothengatter, 2011). On routes of less than 300 km, evidence shows that the introduction of HSR services almost leads to a withdrawal of aircraft services (e.g. between Brussels and Paris). Different emotional associations may also play a role, e.g. the fear of fly, as well as cultural/personal mode preferences. Habits may also form a significant barrier to mode shift, as past mode choices are a strong predictor of current mode choice (D'Alfonso, Jiang, & Bracaglia, 2014).

24. The distinction between single till and dual till concerns the way in which an airport generates revenue. Under single-till regulation, revenues and costs from both the aeronautical and commercial operations are considered in the determination of the regulated aeronautical charges. By contrast, under the dual-till approach the aeronautical charges are determined based solely on aeronautical activities.

25. Torres, Dominguez, Valdes, and Aza (2005) show that, once the decision to make a purchase has been made, the expenditure increases as the waiting time increases. D'Alfonso, Jiang, and Wan (2013) catch the positive externality of waiting time on concessions, through the impact of congestion on the dwell time, while incorporating the effect of passenger types.

26. Barbot, D'Alfonso, Malighetti, and Redondi (2013) developed a test to verify whether airports and airlines maximized joint profits, or if they had entered into a merger/joint-venture type of cooperation. Ha, Wan, Yoshida, and Zhang (2013) investigate whether and how downstream airlines' market structure at an airport explains the differences, if any, in efficiency performance of the airports. Yang, Fu, and Zhang (2014) analyze airport revenue sharing in a bargaining game. Preliminary empirical tests confirm that public airports are more likely to form vertical arrangements, but other analytical results do not appear to be directly supported.