Assessing airports’ bargaining power: Evidence from U.S. airports using a two-tier stochastic frontier analysis

In recent years, there has been a growing expectation for U.S. airports to achieve financial self-sufficiency, prompting increased reliance on lucrative non-aeronautical revenue sources. These revenues depend on the demand for aeronautical services, as they are intricately tied to passenger traffic. Consequently, airports have intensified efforts to boost air traffic, a challenging task given the mobility of footloose airlines. This competitive environment compels airports to adopt strategic measures with competitive pricing emerging as a critical approach in the capital-intensive airport industry. This study examines the dynamic relationships between airlines and airports, focusing on their respective bargaining positions and financial gains they extract. Using a two-tier stochastic frontier (2TSF) analysis on data for 59 U.S. airports during the 2009–2019 period, this study quantifies the gap between optimal and actual aeronautical charges while identifying determinants of bargaining power such as low-cost carrier (LCC) dominance, legacy airline hub status, proximity to competing airports, airline concentration, percentage of local passengers, and rate setting methods. Results indicate that airlines hold stronger bargaining positions with financial gains 8.4% higher than those of airports, which leads to aeronautical charges being set below optimal levels. Medium-sized airports achieve relatively higher gains compared to large airports, and airports within multi-airport systems (MAS) enjoy a greater bargaining advantage. In contrast, rival airports within a 100-mile radius reduce an individual airport's bargaining leverage, highlighting the competitive pressures faced by U.S. airports despite their public ownership. Socio-economic factors, such as tourism and foreign direct investment (FDI), significantly increase airport fees by enhancing the value of their services to airlines.