Regulation, Privatization, and Airport Charges: Panel Data Evidence from European Airports forthcoming in Journal of Regulatory Economics Volodymyr Bilotkach, Northumbria University; Joseph Cloughterty, U of Illinois; Anming Zhang, U of British Columbia; Juergen Mueller, HWR-Berlin Introduction Big issue - role of airports as part of transportation infrastructure This issue is subject to debate Are airports infrastructure or firms? If they are firms, how do we contain potential market power? Who should manage airports private entities or public enterprise? 1
Literature - directions Theoretical work on airport-airline relationships Theoretical work on airport regulation Descriptive studies of evolution of airport regulation Airport efficiency studies Very little is done on analysis of relationship between ownership, regulation, and prices Airport charges literature Van Dender (2007) 55 US passenger oriented airports. Specifies simultaneous equations model of charges, concession revenue, fares, departures, pax volume, delays US airports are publicly owned, and forced to do costbased charges via Airport Improvement Program (AIP) grants. Our study differs from Van Dender s, as we look at airports subject to various regulation regimes. 2
Airport charges literature Bel and Fageda (2010) study of charges at 100 European airports Cross-section Charge defined as total cost to land A-320 with 70% load factor Unregulated private airports charge more Little evidence that airline concentration at airport affects charges. This study Use data from GAP project an airport efficiency study Unbalanced panel, 61 airports, up to 18 years deep; annual observations. First study looking at relationship between ownership, regulation, and charges in the panel data setting. 3
Hypotheses Privatization and charges: Private airport = market power Private airport = more efficient Complex relationship Regulation and charges We have airports with ex post regulation, with ROR regulation, and incentive regulation (price cap) Ex post regulation no regulation Higher charges due to less monitoring Lower charges: cannot bargain as you do when regulated Single till lower aeronautical charges Methodology Airport fixed effects Have to worry about: Endogeneity (regression of price on quantity measures) Autocorrelation Effects on charges may not be immediate: Lag all independent variables by one year Dynamic panel data model (i.e., include lagged dependent into regression) to control for autocorrelation 4
Methodology Dynamic panel data model Include lagged dependent variable on the right-hand side Biased and inconsistent estimates with fixed effects Remedy GMM Arellano-Bover (1995) estimator Further lags of the dependent variable instrument for lagged dependent. Dependent variable Airport charge Defined as aeronautical revenue per aircraft movement In year 2000 prices Same as used by van Dender Shortcomings: Lumps together pax and cargo flights Some airports differentiate between O&D and transfer passengers 5
Quantity measures Ratio of passengers to aircraft movements Cargo volume (metric tons) Potentially endogenous, as measures of quantity Instrument with twice lagged same (note we include lagged measures into regressions) Control variables Hub dummy (some airports experienced dehubbing, so we have variation within) Non-aeronautical revenue per passenger Real GDP per capita Population Number of nearby airports with over 100K passengers Significant within variation, as LCCs used nearby airports to develop their networks 6
Results Charges are higher at hub airports Privatization leads to lower charges Efficiency wins over market power Ten percent increase in private ownership share saves airlines up to EUR 1.6 million annually in charges at a median airport Single till lower charges As expected Ex post regulation lower charges No difference between ROR and price cap regulation Ex-post regulation note We rely on within variation for identification Ex post regulation result is driven by three airports Thus, our result should be taken with caution More analysis is needed, with more data 7
Comparison to previous studies Ex-post regulation and privatization leading to lower charges contradicts Bel and Fageda. Different methodologies and samples? Single till charges relationship same as in Bel and Fageda Equivalence of ROR and incentive regulation was expected (Starkie, 2004); and observed by Bel/Fageda Hub airports charges relationship; not really studied before Conclusions We studied determinants of aeronautical charges in a panel of 61 diverse European airports We find the following: Ex post regulation is associated with lower charges (not the last word) Single till yields lower charges (expected) Privatization saves airlines money Incentive regulation does not produce lower charges Not the last word, but a contribution to the debate 8