Economic Regulation of Urban and Regional Airports: Incentives, Efficiency and Benchmarking

Description

This book offers new insights into the theory and practice of economic airport regulation. In light of recent developments in aviation markets and policy, and the debate on airport regulation and benchmarking, it offers case studies on various aspects of economic regulation of city and regional airports. Written by experts in the field, the volume features contributions on the theory of regulation and benchmarking, as well as case studies on recent experiences in Europe and Latin America. This book is divided into three parts: Part I provides the theoretical background for the study of airport regulation and regulatory systems. Competition at airports is discussed, as are common forms of regulation and potential pitfalls. Part II addresses benchmarking, as benchmarking is often applied as an input to the regulatory process. Although benchmarking is necessary, reviews of how benchmarking is applied in the literature and in practice show that improvements can be made. Part III provides case studies on real-world examples. Addressing the question of whether and how European airport regulators set incentives for efficiency, and how benchmarking is used in the regulatory process, this book is an important contribution to the development of the transport industry in Europe and Latin America. It will appeal to scholars and students in transport economics, regional economics and related fields, as well as to practitioners and policy makers in the transport industry. Contents Chapter 1: Introduction 1.1 Background 1.2 Part I: The Need for Economic Regulation 1.3 Part I: Systems of Regulation 1.4 Part II: Benchmarking 1.5 Part III: Regulation in Practice: Facts and Systems of Regulation References Part I: Theoretical Background: Market Power and Regulation Chapter 2: How Strong Is Airport Competition: Is There a Case for Regulation? 2.1 Introduction 2.2 Competition and the Case for Regulation 2.2.1 Market Power and the Classic Case for Regulation 2.2.2 The Allocative Efficiency Argument 2.2.3 Regulation, Competition and Public Airports 2.2.4 Alternative Arguments for Regulation: Transaction Costs and Opportunistic Behaviour 2.2.5 Distribution, Regulation and Competition 2.3 Airport Competition: A Brief Overview 2.3.1 Privatization and Incentives for Profit 2.3.2 Types of Airports and Sources of Competition 2.4 Substitutability of Airports 2.4.1 Demand Side and Supply Side Substitution 2.4.2 Provision of Infrastructure for O&D and Transfer Passengers and for Cargo: The Definition of Catchment Areas 2.4.3 High-Speed Rail Competition 2.4.4 Bundling: Aviation-Related Services and Market Power 2.5 Countervailing Power 2.5.1 Are There Alternative Airports Available? 2.5.2 Are Airline Markets Competitive, Contestable or Concentrated? 2.5.3 Countervailing Power and Subsidies 2.5.4 Countervailing Power and Passenger Interests 2.5.5 Competition and Countervailing Power: A Summary 2.6 Some Evidence of the Use of Market Power 2.6.1 Airport Charging Behaviour 2.6.2 The Presence of Price Discrimination 2.7 Studies of Competition and Market Power: A Brief Review 2.7.1 Airport Competition in the UK Market 2.7.2 The Productivity Commission Inquiries 2.7.3 Assessing Market Power at Amsterdam Airport 2.7.4 The Two ACI Studies by Copenhagen Economics Studies and OXERA 2.8 Conclusions References Chapter 3: European Hub Airport Competition: An Assessment of Market Concentration in the Local Catchment and in the Transfer ... 3.1 Introduction 3.2 European Hub Airport Market Development 3.3 Review of Hub Airport Competition 3.4 Competition in the Local Catchment 3.5 Competition in the Transfer Market 3.6 Discussion and Implications for Economic Regulation Appendix References Chapter 4: The Transactions Costs Foundation for Public Utility Regulation and Its Application to the Regulation of Airports 4.1 Introduction 4.2 Transaction Cost Economics and Competition Policy 4.2.1 Relationship-Specific Investment and Hold-Up 4.2.2 Transaction Cost Economics and Competition Policy 4.2.2.1 Ownership Solutions to the Monopoly Problem 4.2.2.2 Contractual Solutions to the Monopoly Problem 4.2.3 Public Policies Towards Natural Monopoly 4.3 Transaction Cost Economics and Airport Regulation 4.3.1 Protecting Sunk-Specific Investment in the Air Transport Sector 4.3.1.1 Ownership Solutions to the Airport Monopoly Problem 4.3.1.2 Contractual Solutions to the Airport Monopoly Problem 4.3.2 Implications of the Transaction Cost Approach to Airport Regulation 4.4 Comments and Discussion 4.4.1 The Public Interest Is Broader than the Interests of Airports and Airlines 4.4.2 Airports and Airlines May Exercise Market Power in Other Ways 4.4.3 Why Do We Observe Arms-Length Regulation of a Government-Owned Facility? 4.4.4 Why Do We Not See Independent Dispute Resolution in Practice? 4.4.5 Potential Reform of Airport Regulation 4.5 Conclusions References Chapter 5: Cost-Based Versus Incentive Regulation for Airports 5.1 Introduction 5.2 ROR-Regulation 5.2.1 Technical Illustration of the Averch-Johnson Effect 5.2.2 Rate-of-Return Regulation Gives Improper Incentive 5.3 Incentive Regulation 5.3.1 Price Cap Regulation 5.3.1.1 Cost-Minimizing Behavior and Rents 5.3.2 Other Forms of Regulation 5.4 Airport Regulation 5.4.1 Double Marginalization 5.4.2 Policy Competition 5.4.3 Slot-Controlled Airports 5.5 Conclusion References Chapter 6: Airport Privatization and Regulation: Effects on Airport Charge, Capacity, and Social Welfare 6.1 Introduction 6.2 Basic Model 6.2.1 Consumers 6.2.2 Airlines 6.2.3 Non-Aeronautical Service Market 6.2.4 Airport´s Profit and Social Welfare 6.3 Welfare Maximization vs. Public Airport 6.4 Privatization of Aeronautical and Non-Aeronautical Services 6.4.1 No Regulation on Aeronautical Service 6.4.2 Price-Cap Regulation on Aeronautical Service 6.4.3 Cost-Based Regulation on Aeronautical Service 6.5 Numerical Results 6.5.1 Welfare Maximization vs. Public Airport 6.5.2 Privatization 6.5.3 Price-Cap vs. Cost-Based Regulation 6.5.4 Sensitivity Analysis with Respect to the Base Case 6.5.4.1 Smaller Cost Differences Between Public and Private Operations 6.5.4.2 Higher Time Cost 6.5.4.3 Higher Regulatory Waste 6.5.4.4 Higher Degrees of Airline Competition and Competition Among Non-Aeronautical Shops 6.5.4.5 Higher Internalization Rate of Profit from Non-Aeronautical Service 6.6 Concluding Remarks Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Appendix 6 Appendix 7 Appendix 8 Appendix 9 References Chapter 7: Light-Handed Regulation of Airports: The Way to Go? 7.1 Introduction 7.2 The History of and Rationale for Light-Handed Regulation 7.3 What Is Light-Handed Regulation? 7.3.1 The Ex Post Nature 7.3.2 Upward Price Flexibility 7.3.3 The Ability of Parties to Negotiate 7.3.4 The Probability of Sanction 7.3.5 Other Characteristics 7.3.5.1 Formal or Informal 7.3.5.2 Independent and Dependent Regulators 7.3.5.3 Monitoring/Benchmarking 7.3.5.4 Review Criteria 7.3.6 LHR: Content or Process? 7.4 Models of Light-Handed Regulation 7.4.1 The Review/Sanction Model 7.4.2 The Negotiate/Arbitrate Model 7.5 The Working of Light-Handed Regulation 7.6 LHR and Performance 7.6.1 Expectations 7.6.1.1 Use of Market Power 7.6.1.2 Productive Efficiency 7.6.1.3 Service Quality 7.6.1.4 Non-Aeronautical Revenue 7.6.1.5 Investment 7.6.2 LHR in Practice 7.6.2.1 Use of Market Power 7.6.2.2 Productive Efficiency 7.6.2.3 Non-Aeronautical Revenues 7.6.2.4 Investment 7.7 Light-Handed Regulation: A Model to Follow? 7.8 Summary and Conclusions References Chapter 8: Optimising Investment in Regulated Airports 8.1 Introduction 8.2 Regulating Airport Investment 8.2.1 Privatisation and Investments 8.2.2 Investment Dynamics 8.2.3 Conflicting Goals and Complexities 8.3 Efficiency and Distributional Objectives in Regulating Airports 8.3.1 Short-Run Optimisation: Use of Fixed Capacity 8.3.2 Regulating Quality 8.3.3 Achieving Productive Efficiency in the Short Run 8.3.4 Long-Run Optimisation: Achieving Efficient Investment in Capacity 8.3.5 Productive Efficiency in the Long Run 8.3.6 Distributional Objectives 8.4 Instruments of Regulation 8.4.1 Price Regulation 8.4.2 Cost-Based Regulation 8.4.3 Incentive Regulation 8.4.4 Light-Handed Regulation 8.4.5 Airport Slots 8.4.6 Conditional Triggers 8.5 Regulating Airport Investments: Assessing the Options 8.6 Improving Regulation Via More Sophisticated Approaches 8.6.1 Introducing Quality Incentives 8.6.2 Introducing Slots 8.6.3 Introducing Conditional Triggers 8.6.4 Systems of Regulation: A Revised Comparison 8.6.5 Summary 8.7 Conclusions References Chapter 9: European Airport Reform: Slots and the Implicit Contract Between Airlines and Airports 9.1 Introduction 9.2 Outline of the European Airport System 9.2.1 Some Facts about the System 9.2.2 Aspects of Performance 9.2.2.1 Allocative Efficiency in the Short Run 9.2.2.2 Cost Efficiency 9.2.2.3 Provision of Capacity 9.2.2.4 Options for Commercial Activities 9.2.2.5 Connectivity and Regional Aspects 9.2.2.6 Quality 9.2.2.7 Environmental Externalities 9.2.3 Institutions 9.2.3.1 Ownership 9.2.3.2 Competition 9.2.3.3 Regulation 9.2.3.4 The Slot System 9.2.3.5 The Planning Environment 9.2.4 Interest Groups 9.2.4.1 Passengers and Shippers 9.2.4.2 Airlines 9.2.4.3 Airports 9.2.4.4 Governments and Regulators 9.2.4.5 Local Communities 9.3 How Well Are European Airports Performing? 9.3.1 Allocative Efficiency 9.3.2 Cost Efficiency 9.3.3 Provision of Capacity 9.3.4 Other Aspects 9.4 Implicit Airline-Airport Contracts 9.4.1 Airports with Adequate Capacity 9.4.2 Busy Airports 9.4.3 Options for Reform 9.5 Conclusions References Part II: Benchmarking Chapter 10: Efficiency Assessment of Airports and the Impact of Regulation on Performance 10.1 Introduction 10.2 Airport Efficiency Estimation 10.2.1 Total Factor Productivity 10.2.2 Stochastic Frontier Analysis 10.2.3 Data Envelopment Analysis 10.2.4 Comparing Index Number TFP, SFA and DEA 10.3 Impact of Regulation on Airport Performance 10.4 Conclusions and Future Directions References Chapter 11: Methodology Choices for Benchmarking Airports 11.1 Introduction 11.2 The Link Between the Use and Format of Benchmarking 11.2.1 Assess Managerial or Firm Performance 11.2.2 Collaborative Benchmarking 11.2.3 Price Regulation 11.2.4 National Policy 11.2.5 Supply Chain or Value Chain Efficiency 11.2.6 Summary of the Uses of Benchmarking 11.3 Issues in Benchmarking Airports 11.3.1 Availability and Quality of Data 11.3.2 Adjusting the Data to Provide Meaningful Comparisons 11.3.3 Use of Residual Benchmarking, with Reference to the ATRS Study 11.4 Conclusions 11.4.1 Is Benchmarking with Limitations Better than No Benchmarking? Annex. The General Equivalence of Real Unit Cost and TFP References Chapter 12: Practical Difficulties in Airport Benchmarking: The Case of Dublin Airport 12.1 Introduction 12.2 The Practical Challenge of Benchmarking 12.3 Price Regulation: Textbook and Practice 12.4 Types of Airport Regulatory Benchmarking Applied at Dublin Airport 12.5 Challenges Getting Benchmarking Started (Dublin, 2001) 12.6 Is `Core´ Airport Opex a Better Basis for Benchmarking? 12.7 A Later Benchmarking Investigation (2014) of Dublin Airport Opex to Apply Over the Period 2015-2019 12.7.1 The CAR´s Process for Airport Benchmarking 12.7.2 Step 1: Bottom-Up Opex Benchmarking 12.7.3 Step 2: Top-Down Opex Benchmarking 12.7.4 Step 3: Stakeholder Responses 12.7.5 Step 4: Final Regulatory Allowance 12.8 Implications of Benchmarking for the Scale of Regulatory Documentation 12.9 Conclusions References Part III: Country Studies Chapter 13: Economic Regulation of Airports in the United Kingdom 13.1 Introduction 13.2 Economic Regulation Between 1987 and 2014 13.3 The New 2014 Regulatory Framework 13.4 Looking Forward References Chapter 14: French Airports Case Study 14.1 Introduction 14.2 Some Basic Facts of French Airports 14.3 Institutional and Legal Features of the French Airports 14.4 Regulation of the Airports 14.5 The Regulation of Small Regional Airports 14.6 Summary References Chapter 15: Airport Regulation and Benchmarking: Case Study Germany 15.1 Large Airports in Germany: Ownership, Market Power, and Financial Results 15.2 Legal Framework for Airport Regulation 15.3 Theoretical and Empirical Evidence 15.4 Conclusions References Chapter 16: Airport Market Power: Schiphol 10 Years After the Assessment 16.1 Introduction 16.2 Schiphol Market Power Study, 2009 16.3 Key Developments Since 2009 16.4 Schiphol Regulatory Environment 16.5 Concluding Comments References Chapter 17: Changing Governance and Regulation of Airports: A Comparison of Austria, Denmark, Italy, Hungary, Portugal, and Sp... 17.1 Introduction 17.2 Privatization of Airports 17.3 Airport Competition 17.4 Regulation of European Airports 17.4.1 Regulatory Institutions 17.4.2 Structural Regulation 17.4.2.1 Efficiency Incentives 17.4.2.2 Regulating Commercial Revenues 17.5 Conclusion References Chapter 18: Private Participation and Economic Regulation of Airports in Latin America 18.1 Introduction 18.2 Private Participation in the LA Airport Sector 18.3 PPPs, Private Companies, Airport Systems, and Revenue-Sharing Clauses 18.4 Laws, Contracts, Regulatory Agencies and Economic Regulation 18.5 Conclusions References Chapter 19: Conclusion