Organization of Multiple Airports in a Metropolitan Area

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1 Organization of Multiple Airports in a Metropolitan Area Se-il Mun and Yusuke Teraji Kyoto University Full paper is downloadable at 1

2 Multiple airports in the same area in Osaka, Tokyo, New York, London, In most cases, each airport provides different types of service. 2

3 Example: Osaka 3 Kobe: (D) Itami: (D) 2 11km 26km CBD 36km 1 Kansai: (I, D) 3

4 Allocation of services In Osaka Kansai: International and Domestic Itami: Domestic Alternative allocation Kansai: Domestic Itami: International and Domestic 4

5 Example: New York City LaGuardia: (D) Newark: (I, D) 25km CBD 15km 24km JFK: (I, D) 5

6 Example: London 55km 3 Stansted: (I, D) Heathrow: (I, D) CBD 1 24km 45km 2 Gatwick: (I, D) 6

7 Locations of airports In New York and Osaka Airport closer to the CBD provides only domestic flights Airport located at periphery provides int l and domestic flights In London All airports provide int l and domestic flights Is there any relationship b/w allocation of services and the airport location? 7

8 Types of airport operation In New York All airports are operated by a single public authority. In Osaka Each airport is operated by an independent authority. In London All airports are operated by a single private authority. Is there any relationship b/w allocation of services and the airport operation? 8

9 This paper The model - Two airports in the same area, - Two types of service (International and domestic) - Users, carriers, airport operators Compare the alternative types of operation - Separate operation (PP): Two private firms operate two airports separately - Integrated operation (M); A single private firm operates two airports - Public operation (G): Government operates two airports 9

10 Literature - Pricing and investment for an airport Oum et al (1990), Brueckner (2002), Focusing on a single airport - Multiple airports Pels, et al (2000), De Borger and Van Dender (2006) Basso and Zhang (2006) Focusing on a single type of service No studies on the allocation of services 10

11 The Model Setting A linear economy consisted from two regions: City and Hinterland Within each region, the population is uniformly distributed. Density:ρ C Density: ρ H Hinterland b b The City Hinterland 11

12 Location of airports Hinterland The City Hinterland x b x 1 Airport 1 b=x 2 Airport 2 Each airport may provide international (I), domestic (D), or both (ID) flights. Only airport 1 is congestible 12

13 The allocation of services between two airports a j: the service provided at airport j ( a, a ): the allocation of services 1 2 Rules of Notations: (ID, ID) (D, ID) (I, ID) Airport 1 Int l & Domestic Domestic Int l Airport 2 Int l & Domestic Int l & Domestic Int l & Domestic (N, ID) Int l & Domestic 13

14 Agents Users choosing - whether or not using the service - which airport to use Carriers determining - the number of flights (=frequency) at airports Airport operators setting - airport charges, the service at its airport, or both 14

15 The sequence of the decisions 1. Type of service (Airport Operators) N, I, D, or ID 2. Airport charges (Airport Operators) 3. Number of flights (Carriers) 4. Trip demand (Users) 15

16 User cost If an individual located at x uses the service S provided at airport j S vh C ( x) = t x x + + P S 4F S j j j j Fare Access Cost t :Traveling cost per a distance x j:location of airport j Scheduling Cost v :Value of waiting time F : Frequency of S at airport j S j h :Operating hours of the airport 16

17 Demand Number of trips for service S/ person: inelastic and constant, d S An individual uses service S at airport j if: S S i) C ( x) C ( x) for j = 1,2, i j, j S S ii) C ( x) C for j = 1,2. ASSUMPTIONS j i Reservation price of service S i) D I C < C D I ii) d > d 17

18 Carriers Two carriers in each service market (k=1, 2) The competition of carriers: Cournot type Profit of carrier k providing service S from airport j π ( σ ) = P m r f Sk S S S Sk j j j j j # of Flights Revenue per a flight S P j :Fare σ :# of seats Marginal cost Airport charge 18

19 Marginal cost S m j differs in two airports: m = + c f S ω S S 1 S = I, D 1 m S 2 S = ω Congestion Cost Operating Cost 19

20 Airports Two types of airport operators: Private firm and Government Airport operator determines the service provided at its airport, airport charges, or both. 20

21 Private operation: maximizing the revenue from airport charge (1) Separate Operation: (PP) (2) Integrate Operation: (M) Public operation: (G) maximizing the social surplus. 21

22 Variable Airport Charges and Service Choices Operator chooses - The service provided at each airport, S - Airport charges, r j a j Alternative Regimes: Regime PP Regime M Regime G Airport 1 Airport 2 Private Private Private Public 22

23 Simulation Parameters based on data in Osaka, Japan City Size: b=50 (km) Population 16.4 million => 2 ρ C = 164 thousand / km S Reservation prices C so that passengers computed by model best fit the observed data in Osaka, Kansai Airports: Model Passengers in 2004 International Airport 1 (Osaka) - - Airport 2 (Kansai) Domestic Airport 1 Airport 2 (Osaka) (Kansai)

24 Regime PP Each airport is operated by a private firm. Airport 1 Airport 2 Private Private The objective of airport j: ( ) S Sk r,r;, ( r,r;, ) R a a = r f a a j j i j i j j 1 2 Sk,

25 Regime PP - Airport charges ( ) ( *, = max ;, ) j i R a a R a a j j i j j i r - Service choice j r,r for j = 1,2, i j. The Equilibrium Allocation: * ( ) * ( ) ( *( ) *( )) *,, ( ) j j i j j i ( a ) 1 PP, a2 PP ( ) R a PP a PP R a a PP for j = 1,2, i j. 25

26 Regime PP (ID, ID) Airport x 1 1 Payoff Matrix (unit: billion Yen) 2 I D ID I 65, , , 320 D 243, , 89 84, 278 ID 301, , ,

27 Regime PP (ID, ID) Airport x 1 1 Payoff Matrix (unit: billion Yen) 2 I D ID I 64, , , 306 D 243, , 53 67, 252 ID 306, , , 88 27

28 Regime M Two airports are operated by a private firm. - Airport charges Airport 1 Airport 2 Private R a, a max r f r,r; a, a. = ( ) S Sk( ) 1 2 j j r,r 1 2 S= I, D j= 1,2k= 1,2 - Service choice ( *( ) * a ( )) ( ) 1 M a2 M = R a1 a2, arg max,. a, a

29 Regime M The Allocation with Variable Airport Charges: * aj ( ) M : Service provided at Airport j ( ), ( ) ( a * * ) 1 M a2 M (ID, ID) (D, ID) (N, ID) Airport x 1 29

30 Regime M (ID, ID) (D, ID) (N, ID) Airport x 1 1 Payoff Matrix (unit: billion Yen) 2 I D ID I D ID

31 Regime M (ID, ID) (D, ID) (N, ID) Airport x 1 1 Payoff Matrix (unit: billion Yen) 2 I D ID I D ID

32 Regime G Two airports are operated by the government. Social Surplus: SW Airport 1 Airport 2 Public ( r,r; a, a ) Profit of carriers 2 S 2 Sk 2 S CS 1 j π R j= k= 1 j= 1 j S= I, D S= I, D S= I, D = + + ( ) j CS j = q x C C x dx S S S S Consumer Surplus: ( ) ( ) Airport charge revenue

33 Regime G - Airport charges SW a, a = max SW r,r; a, a. ( ) ( ) - Service choice r,r 1 2 ( *( ) * a ( )) ( ) 1 G a2 G = SW a1 a2, arg max,. a, a

34 Regime G The Allocation with Variable Airport Charges: * aj ( ) G : Service provided at Airport j ( ), ( ) ( a * * ) 1 G a2 G (ID, ID) (D, ID) (N, ID) Airport x 1 34

35 Regime G (ID, ID) (D, ID) (N, ID) Airport x 1 Comparison of Social Surplus: (UNIT: billion yen) Social Benefit Access Cost Scheduling Cost Congestion Cost TOTAL (ID, ID) (D, ID) (ID, D) (N, ID)

36 Regime G (ID, ID) (D, ID) (N, ID) Airport x 1 Comparison of Social Surplus: (UNIT: billion yen) Social Benefit Access Cost Scheduling Cost Congestion Cost TOTAL (ID, ID) (D, ID) (ID, D) (N, ID)

37 Comparison Airport x 1 PP (ID, ID) M (ID, ID) (D, ID) (N, ID) G (ID, ID) (D, ID) (N, ID) 37

38 Comparison Difference in Domain of (ID, ID): PP > M > G Excess use of airport 1 under the private operations The integrated operation (M) allocates the services more efficiently than the separate operation (PP) 38

39 Regime PP v. s. M PP M (ID, ID) (ID, ID) (D, ID) (N, ID) Airport 2 x

40 Regime PP v. s. M PP M (ID, ID) (ID, ID) (D, ID) (N, ID) Airport 2 x Regime PP: Payoff Matrix (unit: billion Yen) 2 I D ID I 64, , , 306 D 243, , 53 67, 252 ID 306, , , 88 40

41 Regime PP v. s. M PP M (ID, ID) (ID, ID) (D, ID) (N, ID) Airport 2 x Regime M: Payoff Matrix (unit: billion Yen) 2 I D ID I D ID

42 Regime PP v. s. M (ID, ID) (D, ID) S R j : Change in the revenue from service S at airport j Regime PP I D R D, ID R ID, ID = R + R < 0 ( ) ( ) Regime M 2 2 ( ) ( ) j j= 1 j= 1 ( ) ( + ) R D, ID R ID, ID = R + R + R + R > 0 - Airport 1 loses its service I market. - Airport 2 receives the gain. j I D I D ( ) ( + ) PP: The operator of airport 1 neglects. 42

43 Regime M v. s. G M G (ID, ID) (D, ID) (N, ID) (ID, ID) (D, ID) (N, ID) Airport 2 x

44 Regime M v. s. G (ID, ID) Regime M (D, ID) 2 2 ( ) ( ) I D I D j j j= 1 j= 1 R D, ID R ID, ID = R + R + R + R < 0 ( ) ( + ) Regime G ( ) ( ) SW D, ID SW ID, ID = CS + PS + R > 0 ( + ) ( ) Increase in Access Cost Decrease in Social Benefit < Decrease in Scheduling Cost Decrease in Congestion Cost 44

45 PP M G Comparison (ID, ID) (ID, ID) (D, ID) (N, ID) (ID, ID) (D, ID) (N, ID) Airport x 1 Comparison of Airport Charges (unit: thousand Yen) Service I Service D Airport 1 Airport 2 Airport 1 Airport 2 PP (ID, ID) M (D, ID) G (D, ID)

46 PP M G Comparison (ID, ID) (ID, ID) (D, ID) (N, ID) (ID, ID) (D, ID) (N, ID) Airport x 1 Comparison of Social Surplus (unit: billion Yen) Social Surplus PP (ID, ID) 797 M (D, ID) 744 G (D, ID)

47 Comparison The integrated operation (M) allocates the services more efficiently than the separate operation (PP). BUT the integrated operation (M) charges the services more than the separate operation (PP). Welfare Ranking: PP M Efficiency losses of pricing: more significant 47

48 Surplus-Maximizing Allocation - The service provided at each airport, set to maximize the social surplus a j - Airport charges, S r j determined by the operator The Surplus-Maximizing Allocation under Regime T: O O a T, a T = arg max SW a, a ; T ( ( ) ( )) ( ) a, a

49 Surplus-Maximizing Allocation Airport x 1 PP (ID, ID) M (ID, ID) (D, ID) (N, ID) G (ID, ID) (D, ID) (N, ID) 49

50 Comparison: Variable Airport x 1 PP (ID, ID) M (ID, ID) (D, ID) (N, ID) G (ID, ID) (D, ID) (N, ID) 50

51 Surplus-Maximizing Allocation By comparing with the case of variable airport charges: 1) The allocation - Regime PP: the same as the variable case -Regime M: the difference is quite small 2) Airport charges: determined by the operator Welfare Ranking: the same as the case of variable airport charges 51

52 Allocation under Parametric Airport Charges Assume that airport charges are exogenously given. (by regulation or by other reasons) Airport charges are set as (Kansai Airport): I I r1 = r2 = (thousand yen), D D r1 = r2 = (thousand yen). Operators set the type of services at its airport. 52

53 Allocation under Parametric Airport Charges Airport x 1 PP (ID, ID) (D, ID) (N, ID) M (ID, ID) (D, ID) (N, ID) G (ID, ID) (D, ID) (N, ID) 53

54 PP M G Allocation under Parametric Airport Charges (ID, ID) (D, ID) (N, ID) (ID, ID) (D, ID) (N, ID) (ID, ID) (D, ID) (N, ID) Airport x 1 Comparison of Social Surplus (unit: billion Yen) Social Surplus PP (ID, ID) 889 M (D, ID) 889 G (D, ID)

55 Allocation under Parametric Airport Charges Regimes PP and M: The same allocation at all locations of airport 1 The choice of carriers affects the allocation Airport charges: exogenously fixed Welfare Ranking: PP= M Difference in Social Surplus among Allocations: Relatively Small 55

56 Summary (1) The allocation of services varies with the locations of airports in a metropolitan area. (2) If the airport charges are variable, the private operation induces the excessive number of services. (3) Welfare gain from the regulation on the service choice is quantitatively small. 56

57 Topics for the Future Research - Mixes of Private and Public Airports - Capacity Choice (Number of Runways) - Three Airports in a Same Area 57

58 58

59 Parameters Parameter values: based on the observation Parameter C C d d v h σ I D I D Unit 153 (thousand yen) 41 (thousand yen) 0.17 (times/ year) 0.73 (times/ year) 3 (thousand yen/ hour) 5475 (hours/ year) 272 (seats) 59

60 Parameter I ω D ω c t ρ C ρ H b Unit (thousand yen) 2015 (thousand yen) 0.01 (thousand yen) 0.1 (thousand yen) 164 (thousand people/ km 2 ) 26 (thousand people/ km 2 ) 50 (km) 60

61 Regime PP The Allocation with Variable Airport Charges: * aj ( ) PP : Service provided at Airport j (ID, ID) ( ), ( ) ( a * * ) 1 PP a2 PP Airport x 1 61

62 Regime PP ( *( ) *( )) O( ) O a ( ) 1 PP a2 PP a1 PP a2 PP ( ) Comparison of, and, ( a * ( ) * 1 PP, a2( PP) ) O O ( a1 ( PP), a2 ( PP) ) (ID, ID) (ID, ID) Airport 2 x

63 Regime M ( *( ) *( )) O( ) O a ( ) 1 M a2 M a1 M a2 M ( ) Comparison of, and, ( a * ( ) * 1 M, a2( M) ) O O ( a1 ( M), a2 ( M) ) (ID, ID) (D, ID) (N, ID) (ID, ID) (D, ID) (N, ID) Airport 2 x

64 Sensitivity Analysis Case A: service I is charged higher than service D I I r1 = r2 = (thousand yen), D D r1 = r2 = (thousand yen). Case B: airport 1 is charged higher than airport 2 I D r1 = r1 = (thousand yen), I D r2 = r2 = (thousand yen). 64

65 Case A Airport x 1 PP (ID, ID) (D, ID) (N, ID) M (ID, ID) (D, ID) (N, ID) G (ID, ID) (D, ID) (N, ID) 65

66 Case B Airport x 1 PP (ID, ID) (D, ID) (N, ID) M (ID, D) (ID, N) G (ID, ID) (D, ID) (N, ID) 66

67 Sensitivity Analysis Regimes PP and G: Qualitatively similar to the Base case Regime M: The design of airport charges affects the allocation The design of airport charges affects Welfare Ranking b/w PP and M 67

68 Example: Seoul Gimpo: (D) 16km 52km Incheon: (I, D) CBD 68

69 Example: Paris Charles De Gaulle: (I, D) 26km 14km Orly: (D) CBD 69

70 Example: Tokyo CBD 19km 1 Haneda: (D) 66km Narita: (I, D) 2 70

The Organization of Multiple Airports in a Metropolitan Area

Working Paper 7 The Organization of Multiple Airports in a Metropolitan Area e-il Mun Graduate chool of Economics, Kyoto University Yusuke Terai Center for Advanced Policy tudies, Institue of Economic