Economic Regulation - IATA

Republic of Ireland
Price-cap regulation was initially established for the public
sector airport operator, Aer Rianta, that operated Dublin,
Cork and Shannon airports. Following the break-up of
Aer Rianta in 2004, price-cap regulation concentrates
only on the Dublin Airport Authority. Ireland shows that
regulation can be both needed and beneficial for public
sector airports, it isn’t just a requirement for privatised
airports. In particular, it shows that a stable regulatory
framework is beneficial in advance, rather than after, any
eventual privatisation of the airports.
The Commission for Aviation Regulation currently
sets maximum levels of airport and aviation terminal
services charges at Dublin Airport. The Commission is
independent, but must comply with recommendations
made by the government (similar to the ACCC and PC in
Australia). Its statutory duties are to facilitate the efficient
and economic development of the airport, to protect the
reasonable interests of current and prospective users
and to enable the airport to operate and develop in a
sustainable and financially viable manner.
The CAR uses a CPI-X price cap and a single-till system.
It has been relatively successful in delivering efficiency
improvements and minimising charges, with strong traffic
growth and airport commercial revenues benefiting both
the airport and airlines. However, as in the UK, the focus
is now shifting towards the need for capital investment. In
2005, the CAR determined charges at Dublin Airport for
the period to 2009 with a CPI-4% price-cap. However,
the further development of a major capital investment
plan for Dublin airport since then has led the regulator to
propose an interim review. The review would allow them
to closely scrutinise the latest capital expenditure plans
for the airport, allowing them and users to challenge the
assumptions and estimates made by the airport. This
demonstrates flexibility within the system to cope with
major changes without removing underlying regulatory
principles, but it must ensure that any interim review is
seen as an exceptional case rather than an expectation
in the event of any future shocks.
Germany
The privatisation of some airports in Germany, or even
just a more commercial operating focus, has encouraged
the introduction of some form of regulation. However, it
has tended to be regional or airport specific (largely due
to legal restrictions under Germany’s federal structure),
with no national regulatory authority in place. In addition,
where local regulators are established they are typically
part of, rather than independent of, local governments
– many of whom still have an ownership stake in the
airport, creating potential conflicts of interest.
Though regulation has been introduced it has taken
different forms for different airports:
Hamburg airport (price-cap).
Hamburg airport has faced regulation since its partial
privatisation in 2000, covering both a price-cap on charges
and service quality targets. It is a dual-till CPI-X system,
with X related to the projected growth in productivity.
It prevents the airport from earning any windfall profits
through a sliding scale of further reductions in charges
based upon passenger growth beyond a trigger point. For
example, the first regulatory period saw charges fixed at
CPI-2%, but with further increases in X of 0.5% for every
percentage point of traffic growth above 3%. If traffic
growth is less than 3% there is no change to the CPI-
2% formula. However, flexibility is built in to the system
to cope with external shocks, with an agreed temporary
abandonment of the sliding scale after 9/11 to allow the
airport to recover faster from a sudden decrease in traffic.
The system does not cover major investments, with each
project subject to a separate public review.
Düsseldorf airport (rate-of-return).
The privatisation of Düsseldorf airport following a major
fire in 1996 concentrated on restoring operations quickly
rather than an appropriate regulatory structure. As such,
regulation was based on a loose cost-plus principle.
The cost-plus nature contains similar disadvantages in
terms of weak efficiency incentives and over-investment
as discussed above for US airports. It has also led to
protracted legal battles between the airport and airlines
over proposed charge increases, for example in 2000
when a 7.1% increase in charges was granted by the
local Government but was considered excessive by
airlines.