Economic Regulation - IATA

01 - Economic Regulation 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 Economic Regulation Needed?
Economic 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.
Regulation 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.