IDEAS home Printed from https://ideas.repec.org/a/eee/trapol/v145y2024icp150-160.html
   My bibliography  Save this article

Cross-subsidization and U.S. airports

Author

Listed:
  • Karanki, Fecri

Abstract

Airports serve as a two-sided market where aeronautical and non-aeronautical operations are complementary. This interdependence means that an increase in aeronautical operations output results in a corresponding increase in non-aeronautical revenues. To retain existing airlines and attract new airline clients, airports should offer reasonable aeronautical fees, which can be subsidized by lucrative non-aeronautical revenues. This raises questions about whether cross-subsidization pricing strategies are used in the U.S. airport industry. To examine this issue, we analyzed data from 59 large and medium hub airports between 2009 and 2019, focusing on the relationship between marginal costs and fees of aeronautical and non-aeronautical operations. The marginal cost was estimated from a translog variable cost function by utilizing a seemingly unrelated regression model. Our study highlights the importance of considering the complex interplay between aeronautical and non-aeronautical operations at airports and the potential for cross-subsidization. We also examined the factors influencing cross-subsidization at airports. The results reveal that large airports are less likely to engage in cross-subsidization compared to their counterpart airports. On the other hand, given that the FAA's airport classification diverges from that in the hub-spoke system, we incorporated airports that serve as hubs for legacy airlines (American, United, and Delta) into our model to account for the influence of hub status. Our findings indicate that hub status does not influence cross-subsidization decisions. In addition, airports governed by local authorities place less emphasis on cross-subsidization whereas the presence of airport competition often incentivizes a more pronounced adoption of cross-subsidization practices. Airports in densely populated areas have diminished focus on cross-subsidization while there is a positive correlation between local GDP and cross-subsidization. Finally, cross-subsidization practices do not differ between airports dominated by LCCs and those without such dominance. Future research should focus on exploring the implications of these findings for the welfare of passengers and other stakeholders in the aviation industry.

Suggested Citation

  • Karanki, Fecri, 2024. "Cross-subsidization and U.S. airports," Transport Policy, Elsevier, vol. 145(C), pages 150-160.
    • Handle: RePEc:eee:trapol:v:145:y:2024:i:c:p:150-160
    DOI: 10.1016/j.tranpol.2023.10.020
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0967070X23002949
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.tranpol.2023.10.020?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Anna Bottasso & Maurizio Conti, 2017. "The Cost Structure of the Airport Industry: Methodological Issues and Empirical Evidence☆," Advances in Airline Economics, in: The Economics of Airport Operations, volume 6, pages 181-212, Emerald Group Publishing Limited.
    2. Tiziana D'alfonso & Alberto Nastasi, 2014. "Airport-Airline interaction: some food for thought," Transport Reviews, Taylor & Francis Journals, vol. 34(6), pages 730-748, November.
    3. Karanki, Fecri & Lim, Siew Hoon & Choi, Bong Jin, 2020. "The determinants of aeronautical charges of U.S. airports: A spatial analysis," Journal of Air Transport Management, Elsevier, vol. 86(C).
    4. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    5. Patrick McCarthy, 2014. "US Airport Costs and Production Technology A Translog Cost Function Analysis," Journal of Transport Economics and Policy, University of Bath, vol. 48(3), pages 427-447, September.
    6. Voltes-Dorta, Augusto & Pagliari, Romano, 2012. "The impact of recession on airports' cost efficiency," Transport Policy, Elsevier, vol. 24(C), pages 211-222.
    7. Voltes-Dorta, Augusto & Lei, Zheng, 2013. "The impact of airline differentiation on marginal cost pricing at UK airports," Transportation Research Part A: Policy and Practice, Elsevier, vol. 55(C), pages 72-88.
    8. Tiziana D'Alfonso & Changmin Jiang & Yulai Wan, 2013. "Airport Pricing, Concession Revenues and Passenger Types," Journal of Transport Economics and Policy, University of Bath, vol. 47(1), pages 71-89, January.
    9. Christopher F Baum & Teresa Linz, 2009. "Evaluating concavity for production and cost functions," Stata Journal, StataCorp LP, vol. 9(1), pages 161-165, March.
    10. Oum, Tae H. & Yan, Jia & Yu, Chunyan, 2008. "Ownership forms matter for airport efficiency: A stochastic frontier investigation of worldwide airports," Journal of Urban Economics, Elsevier, vol. 64(2), pages 422-435, September.
    11. Zhao, Qi & Choo, Yap Y. & Oum, Tae H., 2014. "The Effect of Governance Forms on North American Airport Efficiency: A Comparative Analysis of Airport Authority vs. Government Branch," Journal of the Transportation Research Forum, Transportation Research Forum, vol. 53(2).
    12. repec:eme:aiae11:s2212-160920160000005010 is not listed on IDEAS
    13. Nicholas G. Rupp & Kerry M. Tan, 2019. "Mergers And Product Quality: A Silver Lining From De‐Hubbing In The U.S. Airline Industry," Contemporary Economic Policy, Western Economic Association International, vol. 37(4), pages 652-672, October.
    14. D’Alfonso, Tiziana & Nastasi, Alberto, 2012. "Vertical relations in the air transport industry: A facility-rivalry game," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(5), pages 993-1008.
    15. Caves, Douglas W & Christensen, Laurits R & Swanson, Joseph A, 1981. "Productivity Growth, Scale Economies, and Capacity Utilization in U.S. Railroads, 1955-74," American Economic Review, American Economic Association, vol. 71(5), pages 994-1002, December.
    16. Cristina Barbot, 2011. "Vertical Contracts between Airports and Airlines Is there a Trade-off between Welfare and Competitiveness?," Journal of Transport Economics and Policy, University of Bath, vol. 45(2), pages 277-302, May.
    17. Patrick McCarthy, 2016. "Multi-Product Cost Analysis of US Airports," Advances in Airline Economics, in: Airline Efficiency, volume 5, pages 243-281, Emerald Group Publishing Limited.
    18. Zhang, Anming & Zhang, Yimin, 2010. "Airport capacity and congestion pricing with both aeronautical and commercial operations," Transportation Research Part B: Methodological, Elsevier, vol. 44(3), pages 404-413, March.
    19. Azadian, Farshid & Vasigh, Bijan, 2019. "The blurring lines between full-service network carriers and low-cost carriers: A financial perspective on business model convergence," Transport Policy, Elsevier, vol. 75(C), pages 19-26.
    20. Bailey, Elizabeth E & Friedlaender, Ann F, 1982. "Market Structure and Multiproduct Industries," Journal of Economic Literature, American Economic Association, vol. 20(3), pages 1024-1048, September.
    21. Gillen, David & Lall, Ashish, 1997. "Developing measures of airport productivity and performance: an application of data envelopment analysis," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 33(4), pages 261-273, December.
    22. Volodymyr Bilotkach & Joseph Clougherty & Juergen Mueller & Anming Zhang, 2012. "Regulation, privatization, and airport charges: panel data evidence from European airports," Journal of Regulatory Economics, Springer, vol. 42(1), pages 73-94, August.
    23. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
    24. Kidokoro, Yukihiro & Lin, Ming Hsin & Zhang, Anming, 2016. "A general-equilibrium analysis of airport pricing, capacity, and regulation," Journal of Urban Economics, Elsevier, vol. 96(C), pages 142-155.
    25. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-977, December.
    26. Barros, Carlos Pestana, 2011. "Cost efficiency of African airports using a finite mixture model," Transport Policy, Elsevier, vol. 18(6), pages 807-813, November.
    27. Juan Martín & Concepción Román & Augusto Voltes-Dorta, 2009. "A stochastic frontier analysis to estimate the relative efficiency of Spanish airports," Journal of Productivity Analysis, Springer, vol. 31(3), pages 163-176, June.
    28. Wei, Fangwu & Grubesic, Tony H., 2015. "The dehubbing Cincinnati/Northern Kentucky International Airport (CVG): A spatiotemporal panorama," Journal of Transport Geography, Elsevier, vol. 49(C), pages 85-98.
    29. Choo, Yap Yin & Oum, Tae Hoon, 2013. "Impacts of low cost carrier services on efficiency of the major U.S. airports," Journal of Air Transport Management, Elsevier, vol. 33(C), pages 60-67.
    30. Adler, Nicole & Liebert, Vanessa, 2014. "Joint impact of competition, ownership form and economic regulation on airport performance and pricing," Transportation Research Part A: Policy and Practice, Elsevier, vol. 64(C), pages 92-109.
    31. Ivaldi, Marc & Sokullu, Senay & Toru-Delibasi, Tuba, 2015. "Airport Prices in a Two-Sided Market Setting: Major US Airports," TSE Working Papers 15-587, Toulouse School of Economics (TSE).
    32. Zhang, Anming & Zhang, Yimin, 1997. "Concession revenue and optimal airport pricing," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 33(4), pages 287-296, December.
    33. Lu, Ching-Chyuan & Pagliari, Romano I., 2004. "Evaluating the potential impact of alternative airport pricing approaches on social welfare," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 40(1), pages 1-17, January.
    34. Fu, Xiaowen & Homsombat, Winai & Oum, Tae H., 2011. "Airport–airline vertical relationships, their effects and regulatory policy implications," Journal of Air Transport Management, Elsevier, vol. 17(6), pages 347-353.
    35. Jan K. Brueckner & Yimin Zhang, 2001. "A Model of Scheduling in Airline Networks: How a Hub-and-Spoke System Affects Flight Frequency, Fares and Welfare," Journal of Transport Economics and Policy, University of Bath, vol. 35(2), pages 195-222, May.
    36. Starkie, David, 2002. "Airport regulation and competition," Journal of Air Transport Management, Elsevier, vol. 8(1), pages 63-72.
    37. Christensen, Laurits R & Greene, William H, 1976. "Economies of Scale in U.S. Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 655-676, August.
    38. Kutlu, Levent & McCarthy, Patrick, 2016. "US airport ownership, efficiency, and heterogeneity," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 89(C), pages 117-132.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Karanki, Fecri & Lim, Siew Hoon, 2021. "Airport use agreements and cost efficiency of U.S. airports," Transport Policy, Elsevier, vol. 114(C), pages 68-77.
    2. Karanki, Fecri & Lim, Siew Hoon, 2020. "The effects of use agreements on airport efficiency," Journal of Air Transport Management, Elsevier, vol. 84(C).
    3. Karanki, Fecri & Lim, Siew Hoon & Choi, Bong Jin, 2020. "The determinants of aeronautical charges of U.S. airports: A spatial analysis," Journal of Air Transport Management, Elsevier, vol. 86(C).
    4. Choo, Yap Yin & Corbo, Leonardo & Wang, Kun, 2018. "Joint impact of airline market structure and airport ownership on airport market power and profit margin," Transport Policy, Elsevier, vol. 72(C), pages 67-78.
    5. Xiao, Yibin & Fu, Xiaowen & Zhang, Anming, 2016. "Airport capacity choice under airport-airline vertical arrangements," Transportation Research Part A: Policy and Practice, Elsevier, vol. 92(C), pages 298-309.
    6. Brito, Igor R.S. & Oliveira, Alessandro V.M. & Dresner, Martin E., 2021. "An econometric study of the effects of airport privatization on airfares in Brazil," Transport Policy, Elsevier, vol. 114(C), pages 338-349.
    7. Kidokoro, Yukihiro & Lin, Ming Hsin & Zhang, Anming, 2016. "A general-equilibrium analysis of airport pricing, capacity, and regulation," Journal of Urban Economics, Elsevier, vol. 96(C), pages 142-155.
    8. Voltes-Dorta, Augusto & Lei, Zheng, 2013. "The impact of airline differentiation on marginal cost pricing at UK airports," Transportation Research Part A: Policy and Practice, Elsevier, vol. 55(C), pages 72-88.
    9. Czerny, Achim I. & Zhang, Hanxiang, 2020. "Rivalry between airport ancillary and city-center supplies," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 141(C).
    10. Bottasso, Anna & Conti, Maurizio & Vannoni, Davide, 2019. "Scale and (quasi) scope economies in airport technology. An application to UK airports," Transportation Research Part A: Policy and Practice, Elsevier, vol. 125(C), pages 150-164.
    11. Lim, Siew Hoon & Karanki, Fecri, 2020. "Airport use agreement types and input and output slacks: The case of U.S. airports," Research in Transportation Economics, Elsevier, vol. 84(C).
    12. Kutlu, Levent & McCarthy, Patrick, 2016. "US airport ownership, efficiency, and heterogeneity," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 89(C), pages 117-132.
    13. D’Alfonso, Tiziana & Daraio, Cinzia & Nastasi, Alberto, 2015. "Competition and efficiency in the Italian airport system: new insights from a conditional nonparametric frontier analysis," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 80(C), pages 20-38.
    14. Bracaglia, Valentina & D׳Alfonso, Tiziana & Nastasi, Alberto, 2014. "Competition between multiproduct airports," Economics of Transportation, Elsevier, vol. 3(4), pages 270-281.
    15. Voltes-Dorta, Augusto & Pagliari, Romano, 2012. "The impact of recession on airports' cost efficiency," Transport Policy, Elsevier, vol. 24(C), pages 211-222.
    16. Niemeier, Hans-Martin, 2021. "Is economics good for aviation policy? Some problems in bridging the gap between theory and policy," Journal of Air Transport Management, Elsevier, vol. 96(C).
    17. Kidokoro, Yukihiro & Zhang, Anming, 2023. "Single-till regulation, dual-till regulation, and regulatory capture: When does a regulatory authority favor single-till regulation over dual-till regulation?," Economics of Transportation, Elsevier, vol. 33(C).
    18. Kidokoro, Yukihiro & Zhang, Anming, 2018. "Airport congestion pricing and cost recovery with side business," Transportation Research Part A: Policy and Practice, Elsevier, vol. 114(PA), pages 222-236.
    19. Martín, Juan Carlos & Rodríguez-Déniz, Héctor & Voltes-Dorta, Augusto, 2013. "Determinants of airport cost flexibility in a context of economic recession," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 57(C), pages 70-84.
    20. Kenneth Button, 2020. "Studying the empirical implications of the liberalization of airport markets," Competition and Regulation in Network Industries, , vol. 21(3), pages 223-243, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:trapol:v:145:y:2024:i:c:p:150-160. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/30473/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.