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ECONOMICS Last modified on March 20, 2016

Rhetoric, reality and reform

Stephen Van Beek, ACI World’s interim head of economics, discusses new aviation legislation on both sides of the Atlantic and the thorny issue of airport charges.

In the past few months, European and American policy leaders have introduced new proposed frameworks for the future of aviation, each of which would have considerable impact on airports and the greater aviation industry. 

In December, the European Commission (EC) released its Aviation Strategy for Europe and in February, the Chairman of the House Transportation and Infrastructure Subcommittee on Aviation introduced The Aviation Innovation, Reform and Reauthorization Act (AIRR) to revamp US aviation policy through 2022.

Policymakers proposed new strategies on important industry issues that include air traffic control and modernisation, air service, and approaches for airport regulation (Europe) and airport funding (United States). 

These all deserve airports’ attention and, on some issues such as air traffic control, there is the possibility of co-operation between airport and airline interests.

Unfortunately, in Europe, Airlines for Europe (A4E) commented that its member airlines would like the European Union to “bring down the cost of airports in the region,” claiming that ticket prices have declined since 2005, while airport charges have increased and outstripped inflation.

The flaws in A4E’s arguments are immediately apparent. First, over the last decade airlines have changed their business model with a focus on unbundled fares and ancillary charges such as fees for checked baggage, ticket changes and credit cards. This makes any fare comparison between ticket prices in 2005 and today specious, and more of a screed than a sober analysis. 

Second, the argument ignores the airport cost side of the equation. Major European airports, similar to their American counterparts, are in metropolitan areas where the costs of land, materials and labour are high; meaning new capacity on an already constrained footprint comes at a high cost. 

As the EC recognised, this capacity is key to accommodating demand as well as promoting competition by enabling the new entry of carriers and routes (assuming slot rules are sensible and permissive).

In its Aviation Strategy, the EC cited the Thessaloniki Forum on Airport Charges Regulators where they are exploring “the use of market power assessment as a means of determining the optimal regulatory approach”.

They note that there is not a need for economic regulation where airports are subject to effective competition as airports increasingly are connecting hubs and within metropolitan regions (where alternative airports compete on origin and destination traffic with other airports). 

In addition, over the past two decades, airports have put increasing focus on the generation of non-aeronautical revenues, which further incentivises airports to increase passenger traffic, not act like a monopolist and withhold or overprice access. 

Using data from the ICAO, ACI presents a more representative analysis of airport costs, by examining the trend of airport charges compared to overall airline operating expenses. 

The chart on the previous page presents 20 years of data, taking care of the analytical problem already identified. The results show that the long-term trend is marginally down – notwithstanding all of the other changes in the aviation industry and airline business models – meaning that contrary to A4E’s assertions, airports are less of a burden today on airlines than they were two decades ago.

ACI’s data also shows that worldwide passenger-related revenues constitute approximately two-thirds of total airport revenue, with aircraft-related revenues making up the remaining third. 

In recent years this proportion of passenger-related revenues – from retail, car parking, rental car concessions, food and beverage and other sources – have continued to increase, meaning: (1) Airports are demonstrating disciplined management of their costs; (2) Airlines will pay a lower share of overall airport revenues than they did in the past; and (3) Airports will continue to have every incentive to increase passenger throughput. 

 

CHART2 Airport-Chargesol

The chart above presents the data by region. There is clearly little evidence that airports are unfairly increasing aircraft-related revenues or airport charges at the expense of airlines. 

In the United States, airports arguably face a more challenging policy environment for airport charges, in part because of the FAA’s Airport Improvement Program (AIP), which provides capital development funding for airports from the series of ticket taxes and fees passengers and shippers pay. 

Indeed, airports must comply with a series of grant assurances that constrain not only airport rate-setting but severely constrain what airports can do with the revenue they raise. 

These restrictions apply even for passenger-related or non-aeronautical revenues unrelated to airline costs (i.e. even at airports with dual-till or compensatory financial structures).

Unfortunately, while the US’s AIRR will make important reforms to the provision of air traffic control and to aircraft and other certification procedures, there are no significant regulatory reforms in the key area of airport economics. 

There is no recommended increase in the ceiling set on the Passenger Facility Charge (PFC), for example. Commonly referred to as passenger service fees in other regions, and often five times (or above) the PFC limits, these charges can contribute a large share to airport infrastructure development (and consequently lower aircraft-related charges). 

However, the limit of $4.50 has not been raised in 16 years, contributing to the inability of American airports to fund important airside, terminal and landside projects.

Also, airport operators are not provided any additional authority to engage in public-private partnerships (PPPs) on the ownership and management of the airport. In fact, only one large hub airport (an airport handling 15mppa or more) today is permitted to participate in the FAA’s Privatization Pilot Program and any applicant effectively must receive approval from airlines serving the equivalent of two-thirds of the passengers (and other requirements).

For most deals this restriction is a deal-breaker, although a somewhat smaller gateway – Luis Muñoz Marín International Airport in San Juan, Puerto Rico – did successfully apply to the programme and is now under a 40-year lease managed by Aerostar Airport Holdings.

When it comes to the historic cost for airfield assets/pre-funding airport projects, under ICAO principles, in calculating charges, airports are not limited to defined formulas but rather “maximum flexibility should be maintained in the application of all charging methods to permit the introduction of improved techniques” (See ICAO Doc 9082, Policies on Charges for Airports and Air Navigation Services, ll-2). 

In addition, under certain circumstances, ICAO principles are permissive of pre-funding for large-scale capital investments, something not permitted under FAA rules (see ICAO, l-4,5). With the limits on PFCs and PPPs, pre-funding otherwise would be an alternative strategy for airport development.

The AIRR would provide a marginal increase in AIP over the life of the six-year legislation, providing important capital funding for especially smaller commercial service and general aviation airports.

Airports in Europe, the US, North America and elsewhere will continue to advocate for sensible regulation and policies that provide them with the ability to meet demand.

Policymakers in the world’s two most mature regions have offered important ideas that our colleagues at ACI Europe and ACI North America will work on fervently in 2016. 

We will watch these developments with promise given the importance of these regions and the effects their policies will have on global airports and aviation.

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