01 Executive Summary Independent economic regulation of airports and ANSPs acts as a powerful catalyst for improving efficiency and delivering cost-effective investment. <strong>Regulation</strong> is not costless; it will require additional resource inputs. But the benefits available from a robust regulatory framework are significantly higher, for all stakeholders in the aviation industry.
01 - <strong>Economic</strong> <strong>Regulation</strong> 09 The global aviation industry has changed significantly over the last twenty years. A key component of this change has been the growing trend for the commercialisation of airports and ANSPs – moving away from their roots as government organisations and towards a quasi or fully independent entity that operates on the basis of a commercial business. The trend encompasses many different options, from full privatisation to not-for-profit private sector entities to government owned companies. Commercialisation creates opportunities for greater financial and management discipline. However, it also provides significant market and pricing power to firms with natural monopoly characteristics that, if unchecked, can be exploited. This report looks at the need for independent economic regulation in association with the commercialisation of airports and ANSPs, in order to protect the interests of infrastructure users (i.e. airlines and their customers) and to maximise the wider social and economic benefits created by the aviation industry. It discusses: • The case for independent economic regulation of commercially-focused airports and ANSPs • The options for an independent economic regulatory framework • The experiences of independent economic regulation in some countries • Recommendations for the design of good regulatory frameworks. Why is <strong>Economic</strong> <strong>Regulation</strong> Needed? <strong>Economic</strong> regulation is both necessary and beneficial where a firm has significant market power and, in line with a commercial focus, exploits this power to raise prices and receive excessive and unjustified profits. In many industries an effective competition law is sufficient to prevent the emergence and abuse of a monopoly position. However, infrastructure and utility industries often contain natural monopoly firms where, due to large fixed capital requirements, provision of the service by more than one firm can be less efficient. In these cases, additional economic regulation is required to protect customers and the wider economy from any potential abuse of a natural monopoly position. In addition, airlines experience more dimensions of service quality than users in other industries with natural monopoly characteristics (e.g. electricity). The quality of service provided by airports and ANSPs directly impacts upon the quality of service an airline can offer to its customers and, therefore, must also be protected from any abuse of market power. <strong>Regulation</strong> is a second-best solution to free market competition, but is both necessary and desirable where such competition does not exist. Airports and ANSPs do possess market power and natural monopoly characteristics. They are relatively low-risk providers of essential facilities and services, with a reasonable assurance of continuing demand for their services. In most cases, airlines do not have any countervailing power against the market power of airports and ANSPs, with no viable alternative airport to use if they wish to continue to serve the same market. The size, location and ownership of an airport or ANSP, along with the nature of its main airline customers (e.g. network airlines or no-frills point-to-point operators), affect its ability to exploit its market power. For example, competition, or at least the threat of it, can exist between regional airports focused on leisure traffic, and this competition can be sufficient to constrain the airport’s market power in setting charges. By contrast, a major hub airport can exploit its significant market power over airlines that, due to the markets they serve and their investment in a route network, are captive customers for the airport. This market power is increased where the same parent company operates more than one airport in a city or region (e.g. BAA, Aeroports de Paris). Therefore, economic regulation is justified for airports and ANSPs where constraints on market power are insufficient and where the exploitation of this market power has a greater cost, in terms of economic efficiency, than the cost of imposing a regulatory regime. In such cases, without regulation, user charges are likely to be higher and service levels poorer than is socially and economically efficient. The value of the aviation industry – both to users and from the wider economic benefits it provides – can only be optimised through an independent and credible regulatory framework providing appropriate incentives for efficient service delivery and cost-effective new investment.
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