Economic Regulation - IATA

• Does the existence of competition, or the
potential for it, provide a sufficient constraint
on the market power of an airport?
This stage takes into account the influence of location,
ownership and the nature of major airline customers on
the ability of an airport or ANSP to exploit its market
power. For example, an airport focused on “footloose”,
point-to-point, no-frills airlines is likely to face greater
competition from other airports for airline traffic than
a major hub airport at the centre of an airline’s route
network.
• If not, is the potential negative impact on
economic efficiency sizeable and greater than
the costs of imposing a regulatory framework?
This stage assesses whether the size of the market
failure is sufficiently large to justify regulation. For
example, an isolated regional airport may not face
substantial competition but, due to its small size, may
not have a material effect on efficiency to justify the
costs of regulation.
Therefore, economic regulation should exist for all
airports unless (i) they fall below a threshold level based
on their size relevant to the market, or (ii) in exceptional
cases they are above the threshold level, but a market
contestability test demonstrates that they face sufficient
competitive constraints to prevent them from exploiting
any market power.
However, in the case of (ii) above, it is also important to
ensure that a clear process is established for the test to
be reviewed, especially after a change of ownership, and
for economic regulation to be re-imposed if conditions
have changed. For example, an airport may not currently
hold sufficient market power by itself and therefore be
exempted from detailed regulation. But if that airport is
then taken over by the owner of a nearby airport, a test
must once more be undertaken to see if joint ownership
means that economic regulation should be re-imposed.
PUBLIC OR PRIVATE OWNERSHIP
The case for independent regulation is tied to the issue
of market power of an airport or ANSP, not its ownership
structure. Indeed, where market power exists, public
sector ownership does not provide a sufficient constraint
on the ability to exploit this power. Independent economic
regulation has been introduced for public sector
companies (e.g. Dublin Airport Authority) as well as
private sector companies (e.g. BAA).
The assumption has often been that publicly or locally
owned airports have the incentive to keep prices close
to costs and to provide the range of services that users
want. Local public sector owners are seen as having a
strong interest in the performance of the airport, since it
can stimulate local development and many of its users will
be local residents. However, this assumption has often
been far removed from reality. Public sector owners are
often not as rigorous in improving cost efficiency and can
be prone to empire building (i.e. constructing excessive
new investments that are not needed by airline users).
Empirical evidence does point to airports with public
sector ownership being less efficient than airports in the
private sector 3 .
Privatisation offers the potential to improve efficiency,
bringing in commercial management incentivised
by profits. Partial privatisation can also introduce
commercial motivations, while retaining a public sector
influence. However, privatisation without the constraint
of competition or regulation creates the potential to
exploit pricing power and to maximise profits without also
maximising efficiency. Even retaining a degree of public
sector interest or control through a partial privatisation
is often too weak to constrain market power. Indeed,
research has shown that partial privatisation where
the public sector still has majority control can lead to
conflicting prioirties that create more inefficiency than
under public sector ownership 4 .
Therefore, economic regulation is justified for airports
and ANSPs where constraints on market power (in
terms of both pricing and service quality) are insufficient,
regardless of whether it is publicly or privately owned.
Indeed, as shown by the examples in Box 2, independent
regulation is particularly needed in advance of any
transition from public to private ownership. In several
cases, governments have raised charges and allowed
returns in advance of privatisation in order to boost
investor interest and their receipts from the sale. This
exploitation of economic rents through market power
comes directly at the expense of airlines and their users.
3
See Oum, Adler and Yu, (2006) “Privatisation, corporatisation, ownership forms and their effects on the performance of the world’s major
airports”, Journal of Air Transport Management 12.
4
See Oum, Adler, Yu, ibid.