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