Economic Regulation - IATA

03 - Economic Regulation 17
In many industries, an effective competition law is
sufficient to prevent the emergence and abuse of a
monopoly position. However, infrastructure industries –
including airports and ANSPs – often contain firms with
natural monopoly characteristics where, due to large
fixed capital requirements, provision of the service by
more than one firm can be less efficient. In these cases,
basic competition law may not be sufficient to protect
customers and the wider economy from any potential
abuse of a natural monopoly position and additional
economic regulation is required. Market power allows
a firm to raise prices in order to receive excessive and
unjustified profits or to cover for inefficient delivery of
services or both.
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.
MARKET POWER
The issue of market power and the degree to which
this can be (and is) exploited is central to the case for
regulation. Market power is most clearly demonstrated
by an ability to determine prices with little or no reference
to other suppliers or to customer demand. However, for
airports and ANSPs, market power can also arise on
the service quality side, where several dimensions of
the quality provided by the infrastructure provider (e.g.
terminal services, system delays) have a direct impact on
the quality of service an airline is able to provide to its
customers. As such, consideration of market power must
cover both price and service quality aspects.
The existence of market power among airports and
ANSPs and the potential negative impacts of this for
wider economic efficiency are demonstrated by:
Natural monopoly characteristics.
The capital intensive nature of airport and ANSP
infrastructure means that it is inefficient, with an
unnecessary duplication of resources, to have more than
one firm providing the services at a particular location.
Though natural monopolies are more productively efficient
than duplication by another firm, they are still monopolies
and will act as such. In the absence of regulation or
competition, monopolies tend towards higher prices and
lower quantity and quality of service provision than in a
competitive market.
Limited competition.
Most airports face only limited competition from other
airports in their city or regional market, especially in
terms of competition for airline customers and routes.
Even where more than one airport exists within a city or
region, they are often serving different types of airline
and passenger markets. In some cases, the potential for
competition is further constrained by a common ownership
structure for all major airports within a city or region (e.g.
BAA, Aeroports de Paris, Port Authority of New York).
There is a degree of competition between major hub
airports within a region for connecting passengers (for
example, between Singapore, Hong Kong, Kuala Lumpur
and Bangkok on Asia Pacific to Europe routes), but this
primarily reflects competition between the fares, service
and routes provided by different airlines rather than
between the airports themselves.
Limited countervailing power for airlines.
In addition to limited competition from other providers,
airports and ANSPs also face limited countervailing
power from airline customers to constrain changes in
prices or service quality. In most cases, there is no viable
alternative airport or ANSP for an airline to use if it wishes
to continue to serve the same market, limiting their ability
to restrain the pricing power of the airport or ANSP.
Even if an alternative did exist, the cost of relocating
an airline’s investment in its facilities and network from
an existing base is likely to be very high and generally
prohibitive to any change. As such, a large proportion
of the airline traffic for an airport or ANSP is captive to
it. Users are neither homogeneous nor united, and one
airline may support an investment that another would not
be prepared to pay for but nonetheless will make use of
it if it is provided.