Evaluating the potential impact of alternative airport pricing approaches on social welfare

Abstract

Some countries (e.g. the UK, Ireland, Australia and New Zealand) have recently reviewed how they regulate the pricing of aeronautical services (landing charges, aircraft parking charges, terminal facility charges etc.) at their principal airports. One major issue that has emerged from each of these reviews is whether it is preferable to adopt a single-till or dual-till approach to pricing aeronautical services. This thesis aims to analyse the potential loss of social welfare as a result of adopting the single-till approach and the dual-till approach under three airport pricing scenarios. A review of international experience of economic regulation of airports, as well as a qualitative discussion on the difference between the two approaches, has been undertaken. A mathematical model and a number of economic graphs have been constructed. The equations derived from the model show that the dual-till approach is desirable when aeronautical capacity is fully utilised or already over-utilised, while the single-till approach is preferable where there is excess capacity. London Heathrow Airport is taken as the subject of the case study. The results illustrate that the dual-till price was higher than the single-till price by 12% in 2001102, while the market-clearing price was higher than the single-till price by 75%. The differences between the two approaches are: (i) the potential loss of social welfare is less under the dual till than under the single till by 1.64% of aeronautical social welfare for the summer season, and 1.34% for the winter season; (ii) the excess demand is less by 3.0% of capacity; (iii) the average number of passengers per flight is increased by three; (iv) the profits for Heathrow Airport increase from £5.38 to £6.05 per passenger; and (v) the airlines' cost is higher by £0.67 per passenger, and airfares will be increased by up to £0.67. These estimates can be significantly affected by the level of average cost of aeronautical services (which is the dual-till price) and the airlines' valuation on slots (which influences the slope of the demand curve for aeronautical services) .