The Effect of Airport Access on Airline Competition - Coursework Example

Name Instructor’s name Course Date The Effect of Airport Access on Airline Competition Contents Contents 1 Executive summary 2 Introduction 3 Objectives 4 Take-off and landing slots 4 Dominating hubs and spokes 5 Concession of exclusive rights 7 Regional aid 7 Conclusion 10 Executive summary The major objective of this report is to deliver information on the analysis airport competitiveness. An understanding of the dynamics of airline competition is important for stakeholders to stay ahead of the competition. To successfully achieve this, there should be constant monitoring of performance and learning from other organisations. The effect of airline infrastructure on airline competitiveness has emerged as a major issue in most airline hubs. This study is focused on providing a systematic approach for comprehensive assessment of airport competitiveness. It will also provide insights to the airport management to facilitate performance improvements. In assessing competiveness a set of factors that are influential to airports airline relations are identified. One such factor is the access granted to the airport facilities. If an innovative competitive index is used to gauge the airports comparability with model airports that operate in similar environment. Since the experience of improvement of airport performance is relevant to the successful application of this models, the chances of a successful implementation of a fair competition level will be higher. With development of uniform regulations there will be a level playing ground for all airlines access the airport hub. This will address the concerns raised by airlines on the level of airport charges, fiscal policy and funding which are at the moment unpredictable. The inconsistency becomes a disadvantage to airlines that cannot access the airline hub. The airport charges are supposed to be published in the public domain in accordance to the recommendations of ICAO. The services for which the charges are incurred may differ from one airport to the other. The level of charges vary from one airport to another because of economic regulations that are imposed on the different levels. Several concerns have been raised over the discounts granted to specific airlines. Though the effect of such discounts is negligible on high cost markets, they are of significant effect on the competiveness of low cost markets. Most airports do not have competing airlines. Some airports and airlines compete only with the nearest neighbour. International hubs will compete on their own level while remote airports will also compete with other remote airports. The airlines will contend for the shared market that they wish to dominate. The competitiveness is demonstrated by comparing the airport hub attributes such as access and charges. There are concerns by airlines of unfair competition that result from differential taxation and charges. These differences are viewed as a major threat to fairness in competition. Introduction The different environment created by airport managers in attempt to improve airport efficiency and provide a fair environment for competition has greatly modified the airport industry. Airports are not just infrastructure providers, they have assumed a new role of regulating the competition of airlines. The amount of rivalry may differ between airports and may involve dissimilar procedures of competition. Some airlines are noted to receive unwarranted levels of subsidisation while other receive nothing. The commission’s position on the aid the state give to airlines is clearly set out in the guidelines of state aid in the aviation sector. The increased competition has however challenged the traditional view to aid provision. This guidelines have an apparently oblivious view towards airline completion; competition is not considered an important aspect of the aviation sector. In the current economic and competitive situation, competition is of great importance and the guidelines may need updating. Competition is increasing in complexity particularly considering the different models of ownership structure of airports and airlines. There is also the aspect of minimising costs to passengers and cargo and the transparency of accounting. It is because of the increased diversity in the airline industry that an examination of the current state of airport industry was necessitated. This is a report of the factors that influence airline competitiveness and how they are related to airport operators. Objectives This report will be aimed at: Analysing the evolution of the airport industry with focus on the competitive aspect that airports have created for airlines. Examining the different resource granted to airports and the extent to which they are in compliance with the Article 87 of the legal structure. This report will provide an understanding of the economics of airport competition. Airlines and airport competition The relation between the opportunities provided at the airport and the exclusionary privileges arise from the valuing and regulation of airport structure. Dominating passenger throughput in airport will give airlines a competitive advantage to access the facilities at the airport. If an airline entrant has control of slots and ticketing counters it will be said to be a dominating entrant. A dominating entrant to an airport will pose a barrier to entry particularly when considering the price offset by service quality attributes. Mitigation of slot volume limitations will diminish the exclusionary privileges. One avenue to accomplish this is through infrastructure investments (Oum, and Yu 551). Take-off and landing slots The sizes and number of runways are determinants of capacity of airports. In relation to this, airlines with dominant control of take-off and landing slots will have a competitive edge over rivals. They may prevent new entrants from offering routes and schedules during peak times. The control of slot times will make the incumbent airlines effectively exclude rivals from the market (Dresner and Windle 319). Another aspect that accords incumbent airlines exclusivity and competiveness is the control of enplaning and deplaning gates. When airlines are not constrained in take-off and landing, there may be cramming as the demand for gates goes high. If an incumbent airline owns gates it may create a barrier to rivals by raising the gate prices while at same time maximising its own income (Bailey and Panzar 125). Dominating hubs and spokes Airlines create value for customers by using the hubs that they dominate. Hubs are however expensive but all the same permit the companies to enjoy economies of scale. On the demand side, there is high frequency and more destinations thereby creating an element of economy of scope (Bailey and Panzar 125). The hub is a means by which airlines survive so that they can discriminate other airlines. Airport hub competition Airports main services in relation to aeronautical infrastructure is principally directed at commercial airlines. The airlines will then sell services to passengers or shippers. At the airports, confectionaries sell goods and services directly to passengers. In the case of privatised airports, there has been discussion on the airport services and the ways in which they affect competition. Airports that are naturally monopolistic in their provision of services need to be regulated. In this way, customers would be protected from the monopolistic behaviour by the introduction of competition from other providers of services parallel to the airports in question (Morrison and Winston 61). The Australian government admitted to the existence of market powered of these airports. The government, however, only directed that the competitive advantage was on the aspects of location or spatiality with which airports existed. It was argued out that no major competition would come up in the same city but some considerable competition may be noted from neighbouring towns. This characteristic of competition can only be assessed by considering the locations of airports and how this affects the demand for their services. In assessing airport competition it is imperative to outline the applicable market. The market for airport facilities are the organisations that demand the services of airlines. Airline competition is conclusively related to the quality and cost of services offered at the airport. A change in quality by one airport will have a significant effect on the airline activities at another airport (Borenstein 344). To exemplify this, a reduction in charges at the airport will result in fare reduction by airlines. Consequently, this will result in reduction of traffic to another airport on which the airlines depended. The relevant markets for airports is therefore determined by the degree to which demand slots at one airport are affected by changes in airport charges. Subsidies given to one airport by the government will result in lower airport charges. A migration of operation from other airports that charge higher will then follow as airlines will want to take advantage of the reduced charges. Airlines at the airport with lower charges will therefore have increased passenger traffic compared to airport with high charges. This scenario would happen if the two airports have an overlapping catchment area of operation. Low cost airlines are found to use underutilised airports with lower charges that result from low marginal costs. Even though the charges may not affect the choice of airport as a destination, they have a significant impact on the choice of operating base. Cargo operators need a base which would provide fully their needs for feeding from trucks to airline and vice versa (Button and Stough 124). Airports and airlines will therefore compete for these operators especially if they do not have environmental constraints to operations. Resources granted to airport There exists a relation between these resources and the competitiveness of airlines that use the airports. This has warranted the consideration of grants to airports in examining the competitiveness of airlines. This is so especially considering that there has notably been an acute need to update the guidelines governing the grants. Concession of exclusive rights The concession of exclusive rights gives the airlines the privileged to operate duty free. This is done to deal with the possibility of an airline receiving considerable financial advantages. It is common when the entrant is working on behalf of the state or is a representative of the state. The exclusivity of concession may be granted where the airline pays rent at lower rates or pays no rent at all. The other rates enjoyed by airlines under concession are usually lower than commercial rates (Van Dender 336). Regional aid In accordance with article 87(3) (a), airlines may receive grants for operating in disadvantaged grounds. The aid is specifically directed at construction hangar in such regions. It however cannot be used to operating aids. In exceptional cases such as in the event that the operations are taking place in such disadvantaged regions then the grant may be given to such airlines. Airport finance and economics The major source of finances for airports is the fees levied on runway usage. There are variations on the fee applicable depending on whether the flight using the runway is domestic or international. International flights are charged at higher rates compared to domestic flights. In the case of EU destinations or flights, most airports charge the same rate for all flights. Other finances are derived from Passenger Facility Charge which has been used to meet costs of processing passenger’s documents through the terminal. Passenger facility charge also applies depending on the destination of the flight. Lower passenger charges are an incentive to airline operators to establish hubs and spoke operations at the airport. This is useful when passengers have a range of international gateways to choose from. The fee of security is obtained through isolated charges to the passenger. While some airports have the security charge as a separate, most airports have incorporated it into the passenger facility charges. Other cases exist where the charges are provided by the government. Other charges to the airline operators are the environmental charges. These have become very common in European countries only. In most cases the environmental charges are incorporated in landing and take-off charges because of the noise and emission that are produced. The environmental charges are levied by both the airport operators and the government department of environmental issues. Even though the levies are published as set out tariffs, some instances are found where airline operators negotiate for reduction of the charges. This is in a separate aeronautical charge agreement with the airport operators. The prevalence of this strategy is in low cost airline sector which generally have lower profit margins. The airline operators are allowed to pay per departing passenger and not the according to the published tariffs. There is an economic regulation that governs the levying of tariffs which are imposed at either the national or regional level. The extent of application of these regulations vary within the member states of the EU. However, in countries such as Finland and Italy there is no regulatory institution with respect to the tariffs imposed at airports (Pels, Nijkamp and Rietveld 183) According to Edlin and Farrell (204), regulation of airport economics takes many forms. In some airports the scope of activities and services are regulated. The scope of regulation may focuses on aeronautical services while in other airports the scope extends to what are considered non aeronautical activities. In other cases economic regulation is restricted to few airports whose tariffs are still subjected to approval by the regulatory authority. To increase the efficiency of regulation, the regulatory institution are directing their focus on activities that have significant market power. This is a shift from the traditional focus on aeronautical services oblivious of the economic returns of these activities. Many airports offer discounts on charges to airlines seeking to operate new services. The discounts however are only found in airports where there is sufficiency of capacity. Large airports with congestion and high air traffic have no discounts. The discounts offered are in form of the reduction on published tariffs over a period of 4 years (Daniel 92). Other incentives offered in addition to discounts to charges is marketing. Marketing support or route development is the most effective mechanism compared to airport charge discounts (Daniel 230). They are fully funded promotional and marketing programmes which attract traffic on new routes. Gillen (5) notes that some airports offer unpublished discounts which are not transparently shown in the structure of tariffs. The discounts are as negotiated between airline and airport. This agreements depend on the leverage of airline and result in more competitive advantage to the airlines that enjoy these privileges. Serious concerns have risen over the issue of transparency and discrimination that such agreements depict. It is common that low cost airlines are discounted heavily on airport charges. These discounts however are not reflected anywhere on the published tariffs. This means that the scale and amount of discount is only subject to agreement between the low-cost airline and the airport operator. Airlines are therefore able to secure discount that are related to the amount of business that they contribute to the airport. Such discounts are termed volume related discounts. When the discounts are offered to new airlines or for new routes, there arises the issue of how long the discounts should last. Questions arise as to when the discount stops being an incentive and turns into a discriminatory strategy that is exploited by airlines to gain competitive advantage. The most complex part of solving this issue is that there is no transparency or legal structure governing such discounts. Secret negotiations between the airlines and airports always result in a discriminatory competitive advantage as the pricing for the airline on the receiving end will be reduced. Discounted charges and particularly those directed at low cost airlines cannot be affected by the state aid rules. They may create an exploitation of the principal locus of an airport. The element of discriminatory pricing is addressed in article 82 of the EC Treaty. In this way the treaty protects against the effect abused discount privileges but does not impede the discount itself. Conclusion Airports are not opposed to the fact that they have contributed to a competitive market for airline industry. The only issue that raises question is if the competition is fair amongst the airlines. Airline operators have raised fears on the airport charges and taxation. Also of concern are the state subsidies and funding that cause shifts of competitiveness. This is further complicated by the fact that the subsidies are inconsistent and therefore are unpredictable. Airport charges are published in transparency and in full accordance to the guidelines as put forward by ICAO. The charges may vary from one airport to another but the services for which the charges are incurred are relatively consistent. Variance in level of charges is a result of the regulatory role of the different governing bodies. In some instances the level of charges depend on the economic regulation of national airports. Other cases have regulatory structures put in place because of the natural monotony of airport. Discounted charges have raised serious concerns particularly when they are offered to specific airlines without transparency. Despite the escalating environmental concerns, charges relating to the environmental impact of airlines are still uncommon. Many airports have no natural competitor and only compete with the closest neighbour. However, there is high competition between regional airports or between international airports. This shows that competition is common when the airports are operating at the same level. Competition is mainly for a common market which the airports wish to serve and have influence on destination trends. To effectively judge the competitive nature of airports, attributes such as congestion, charges and access are considered. Works Cited Bailey, Elizabeth, and Panzar, John “The Contestability of airline markets during the transition to deregulation” Law and Contemporary Problems, 44(1), (1981) 125-145. Borenstein, Severin. “Hubs and high fares: dominance and market power in the U.S. airline industry” The RAND Journal of Economics, 20(3), (1989) 344-365. Button, Kenneth and Stough, Roger. The Economics of Being a Hub City. Edward Elgar Publishing Inc., UK 2000 print Daniel, Joseph, Peak-Load Congestion Pricing and Optimal Capacity of Large Hub Airports, Ph.D. Dissertation, University of Minnesota 1992 Daniel, Joseph, “Distributional Consequences of Airport Congestion Pricing”, Journal of Urban Economic, 50(2): (2001) 230-258 Dresner, Arthur, and Windle John “Airport Dominance and Yields in the U.S. Airline Industry”, Logistics and Transportation Review, 28, (1992) 319-20. Edlin, Aaron, and Farrell, Joseph, The American Airlines Cases: a Chance to Clarify Predation Policy. The Antitrust Revolution – Economics, Competition and Policy, Oxford: Oxford University Press. 2004 Gillen, David, “Airline Business Models and Networks: Regulation, Competition and Evolution in Aviation Markets”, Review of Network Economics, 5(4):1 2006 Morrison, Steven and Winston, Clifford., “Enhancing the Performance of the Deregulated Air Transportation System”, Brooking Papers: Macroeconomics, 1: (1989) 61-123 Oum, Tae Hoon and Yu, Chunyan. Measuring airports’ operating efficiency: a summary of the2003 ATRS global airport benchmarking report. Transportation Research Part E 40, (2004) 515-532. Pels, Eric, Nijkamp, Peter and Rietveld, Piet. Relative efficiency of European airports. Transport Policy 8, (2001)183-192. Van Dender, Kurt. “Determinants of Fares and Operating Revenues at US Airports”, Journal of Urban Economics, 62, (2007) 317-336 Read More