Airport Ownership And Its Effects On Capacity And Price

It has been argued in the literature that privatized airports would charge more efficient congestion prices and would be more responsive to market incentives for capacity expansions. Furthermore, the privatized airports would not need to be regulated since price elasticities are low, so allocative inefficiencies would be small, and collaboration between airlines and airports, or airlines countervailing power, would solve the problem of airports’ market power. However, as important as this issue may appear, not much has been done to analytically examine what the outcomes of privatization or divestment of regulation may be. This paper uses a model of vertical relations between airports and airlines to examine, both analytically and numerically, how ownership affects airports prices and capacities. Results show a rather unattractive picture for privatization. We find that: (i) private airports would be too small in terms of both, traffic and capacity and, despite the fact that they may be less congested, they induce important deadweight losses; (ii) the arguments that airlines countervailing power or increased cooperation between airlines and airports may make regulation unnecessary seem to be overstated; and (iii) things may deteriorate further if privatization is done on an airport by airport basis rather than in a system. We also show that two features of air travel demand that have not been incorporated previously in the literature –demand differentiation and schedule delay cost– play important roles on airports’ preferences regarding the number of airlines using the airport.