Pricing of Airport Operations

Abstract

It is demonstrated how an analysis of airports’ cost structures and the calculation of long-run marginal costs (MCs) of serving passengers and airplanes can be used as a basis for setting airport charges according to the principles of welfare economics. Based on Norwegian data, the MC for an extra passenger (PAX) and extra air traffic movement (ATM) are used to set airport charges under the assumption that the charges should be equal for all airports in the country. When adjusting the estimates to meet revenue restrictions and comparing the estimates to current charges, we observe that PAX should be charged more and ATM less. This finding is in line with recommendations from the International Air Transport Association (IATA). When allowing charges to vary between airports, we demonstrate how a Ramsey pricing approach can be applied to set differentiated PAX and ATM charges, considering both the supply side (the competitive conditions between the airlines operating at the airports) and the demand side (the passengers’ price elasticity of demand).

Citation

Solvoll, G. and Mathisen, T.A. (2017), "Pricing of Airport Operations", The Economics of Airport Operations (Advances in Airline Economics, Vol. 6), Emerald Publishing Limited, Leeds, pp. 153-180. https://doi.org/10.1108/S2212-160920170000006007