Economic Regulation - IATA

01 - Economic Regulation 13
However, the rate-of-return mechanisms and restrictive
lease contracts contain few incentives for an airport to
improve efficiency or to increase revenues from nonaeronautical
sources, with cost risk largely passed on
to airlines and their users. It has also been associated
in some cases with excessive investment bearing little
relation to potential commercial returns.
Latin America.
Many Latin American airports have been privatised
without proper independent economic regulation. In most
cases governments actually benefit from the privatisation
by extremely high concession fees required from the
concessionaire.
One exception is Mexico where most privatised airports
have a Federal economic regulation that only allows their
charges to rise with inflation minus an efficiency factor
(similar to the UK system). The major flaw in that system
however is there is no requirement for airports to consult
their customers on the level of investment for airports.
Airports are allowed to recover their investment costs
with high rates of return through the regulated charges
eventually leading to excessive pricing.
In Summary
Independent economic regulation is an important tool in
improving the efficiency of operations and investment
within the aviation industry. It is required for all cases
where competition is not sufficient to restrain the market
power of an airport or ANSP.
IATA’s preference is, where regulation is needed, it
should involve detailed cost-efficiency targets and
service quality standards. It should preferably be based
on price-cap regulation with single-till procedures. Such
a system has been successful in improving efficiency
where implemented and can be expanded and improved
to meet changing investment needs.
Nevertheless, even where an alternative regulatory
framework is chosen it must meet certain key principles
– including independence, appropriateness, transparency
and consultation – if it is to be effective in improving the
aviation industry for the benefit of all stakeholders.
No regulation.
In addition to these examples, there are several cases
where the lack of independent economic regulation
has led to excessive and unjustified user charges.
For example, in advance of its privatisation, the French
government allowed Aeroports de Paris to increase its
charges by 5% in real terms for five years without any
justification or transparency for the decision.
In Argentina, a failed concession leaves airlines with
unacceptable charges levels and full freedom for
the airport to raise more revenue through additional
charges. Instead of independent economic regulation the
government became a business partner with the airport
at the expense of airlines and passengers.
In Germany, the government’s proposals for privatising
its ANSP, DFS, include plans to increase charges by
11%-12% and allow a return on capital of 9.4%, far
too high for a low-risk, monopoly provider.
Examples like these highlight the need for an independent
regulatory structure that takes into account the interests
of customers, protecting them against artificial and
unjustified increases in charges, including where these
are used to boost the value of an airport or ANSP prior
to privatisation.