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The relationship between airports and airlines is very interesting from an economics perspective, and analysis of this relationship is wide open for new research endeavors. For instance, airport and airline interactions can be viewed as a zero-sum game of deciding, say, airport landing charges, while at the same time both entities have an incentive making a joint effort to enhance their ability to generate passenger demand and to contribute to growing regional economies. Within this theoretical framework, their relationship consists of not only a binary choice of conflict or cooperation, but also suggests the possibility of complex mixtures of conflict and cooperation. While understanding the interdependence of airports and airlines is an important issue in transportation economics, research examining the complexity of airport and airline relationships is relatively new to the field. This chapter contributes to this research area, in part, by introducing one very interesting example of an airport and airline relationship that considers an element of conflict and cooperation. Specifically, this chapter examines the economic consequences of a risk sharing contract. Analysis of the risk sharing contract recognizes the relevance of microeconomic theories, such as contract theory and principal–agent theory and reveals how these concepts can be applied to traditional transport economics. Predictions of risk sharing between airlines and airports using these theories are derived using numerical examples. Findings reveal that the risk-sharing agreement based on the Noto Airport Load Factor Guarantee Mechanism (LFGM) contract enables the airport side and the airline side not only to share the monetary consequences of demand fluctuation, but also to secure air flights from a local airport to Tokyo, to jointly enhance their various demand-inducing efforts, and to increase their utilities in order to meet the common target they set in the contract. With the LFGM contract, both sides have consistently maintained the air transport network in a relatively low demand area for more than 10 years without significant outside financial assistance. The findings from this chapter also contribute to better understanding the complex relationships among aviation entities, to the recognition of importance and potential to design properly the airport and airline contract, and to the advancement of economic and public policy analysis of this sector.

In the last decades, low-cost carriers (LCCs) have generated several changes in the air market for both passengers and airports. Mainly for regional airports, LCCs have represented an important opportunity to improve their connectivity levels and passenger traffic. Furthermore, many regional airports have become key factors to regenerate the local economy by improving accessibility and stimulating several markets, such as tourism. However, the relationship between LCCs and airports is rather complex and the outcomes not always predictable. In order to analyze and understand better such relationship and its outcomes, this chapter discusses the main underlying factors identified in: relation with the regional air market (secondary/primary airports), balance of power (dominated/non-dominated airports), and industrial organization (bases/non-bases). Starting from the proposed Relative Closeness Index, which combines yearly airport passengers and distance between airport pairs, a large sample of European airports is analyzed. Then, a smaller sub-sample – which includes selected, significant case studies referring to mid-sized airports – is discussed in detail. Among the main findings, airports sharing their catchment area with others are in a very risky position, due to the potential mobility of LCCs, while geographically isolated airports in good catchment areas can better counterbalance the power of carriers.

The relationship between airline and airport is complex, fascinating, and wide open for new research endeavors. In Volume 6 of the series, we conducted the analyses of risk-sharing contract between airline and airport from numerical risk balance assessment and incomplete contract theory perspectives based on an interesting real example of risk-sharing contracts, the Noto Airport Load Factor Guarantee Mechanism (LFGM) contract in Japan.

In this chapter, we further advance the analyses of risk-sharing contracts, based on the real example of Noto LFGM contract, from the perspectives of game theory and principal-agent theory. The risk-sharing arrangements, such as LFGM contract, are relevant to the rapidly changing business environment in Asia’s aviation industries.

We conduct a two-stage game analysis. The first phase is the contract negotiation phase and the second phase is the effort-making phase after signing the contract. We show that the two parties can attain a Pareto optimal utility level by bargaining a simple linear risk-sharing contract in the contract negotiation phase based on the equilibrium effort levels in the effort-making phase.

With significant changes in the aviation industry, various airport–airline arrangements have been formed to achieve alternative objectives. However, no consensus has been reached on such arrangements’ economic effects and the associated optimal public policy. This chapter aims to provide an interpretive review of the common types of airport–airline arrangements, the different modeling approaches used and key conclusions reached by recent studies. Our review suggests that airport–airline arrangements can take diverse forms and have been widely used in the industry. They may allow the airport and its airlines to internalize demand externality, increase traffic volume, reduce airport investment risks and costs, promote capacity investment, enhance service quality, or simply are a response to the competition from other airport–airline chains. On the other hand, such vertical arrangements, especially for those exclusively between airports and selected airlines, could lead to collusive outcomes at the expenses of non-participating organizations. The effects of such arrangements are also significantly influenced by the contract type, market structure and bargaining power between the airport and airline sectors. While case by case investigations are often needed for important economic decisions, we recommend policy-makers to promote competition in the airline and airport segments whenever possible, and demand more transparency or regulatory reporting of such arrangements. Policy debates and economic studies should be carried out first, before intrusive regulations are introduced.

Over the past 50 years, air travel in the United States has increased from approximately 33 million passengers in 1960 to over 607 million passengers in 2007 (National Transportation Statistics, 2011, Table 1–40). This is over an 18-fold increase in air travel in the past five decades. Over that same time period, the number of airports increased modestly, from 15,161 in 1980 to 19,750 in 2009. The number of those airports serving public commercial traffic is even smaller, and has declined from 730 airports in 1980 to 559 in 2009 (National Transportation Statistics, 2011, Table 1–3). Together, these two facts point to phenomenal growth among airports (measured by the number of passenger trips).

Airline travel is composed of business and nonbusiness travelers, each with different preferences that give rise to differences in demand elasticities and substitution not only across airlines but also airports. In this study, we develop and estimate a model of airline wherein consumers choose which airports and airline to use that allows for unobserved differences between travelers (e.g., business and nonbusiness travelers). The results point to the role that airports themselves play in the ultimate selection of a flight, and that there are strong interactive effects between the airlines’ networks and the consumers’ preferences across airports.

European air transport policy, emerged through the confluence of case law and legislation, in four broad areas: liberalization, safety and security, greening, and the external policy. Following the implementation of the single market for air transport, policy shifted to liberalizing and regulating associated services and in recent years to greening, the external aviation policy, and safety and security. Inclusion of air transport in the Environmental Trading Scheme of the European Union exemplifies the European Commission’s proactive stand on bringing the industry in line with emission reduction trajectories of other industries. However, the bid to include flights to third countries in the trading scheme pushed the EU into a controversial position, causing the Commission to halt implementation and to give ICAO time to seek a global multilateral agreement. The chapter also discusses how the nationality clauses in air services agreements breached the Treaty of Rome, and a court ruling to that effect enabled the EC to extend EU liberalization policies beyond the European Union, resulting in the Common Aviation Area with EU fringe countries and the Open Aviation Area with the USA. Another important area of progress was aviation safety, where the EU region is unsurpassed in the world, yet the Commission has pushed the boundary even further, by establishing the European Safety Agency to oversee the European Aviation Safety Management System. Another important area of regulatory development was aviation security, a major focus after the woeful events in 2001, but increasingly under industry scrutiny on costs and effectiveness. The chapter concludes by arguing that in the coming decade, the EU will strive to strengthen its position as a global countervailing power, symbolized in air transport by a leadership position in environmental policy and international market liberalization, exemplified in the EU’s external aviation policy.

This chapter reviews the effects of air transport liberalization, and investigates the roles played by airport-airline vertical arrangements in liberalizing markets. Our investigation concludes that liberalization has led to substantial economic and traffic growth. Such positive outcomes are mainly due to increased competition and efficiency gains in the airline industry, and positive externalities to the overall economy. Liberalization allows airlines to optimize their networks, and thus may introduce substantial demand and financial uncertainty to airports. Vertical arrangements between airlines and airports may offer a wide range of benefits to the parties involved, yet such arrangements could also lead to airline entry barriers which reduce the effects of liberalization. Three approaches have been developed to model the effects of liberalization in complex market conditions, which include the analytical, econometric and computational network methods. These approaches should be selectively utilized in policy studies on liberalization.

A major source of external funding for US airports comes from issuing municipal bonds. Credit rating agencies evaluate the bonds using multiple factors, but the judgments behind the ratings are not well understood. This paper examines if airport rate-setting methods affect the bond ratings of US airports.

Using a set of unbalanced panel data for 58 hub airports from 2010 to 2019, we examine the effect of the rate-setting methods and other airport characteristics on Fitch’s airport bond rating.

We find that compensatory airports consistently receive a very high bond rating from Fitch. The probability of getting a very high Fitch rating increases by ∼28 percentage points for a compensatory airport. Additionally, the probability of getting a very high rating is about 33 percentage points higher for a legacy hub.

The study uses Fitch bond ratings. Future studies could examine if S&P’s and Moody’s ratings are also influenced by airport rate-setting methods and legacy hub status.

The results uncover the linkage between bond ratings and their determinants for US airports. This information is important for investors when assessing airport creditworthiness and for airport operators as they manage capital project financing.

This is the first study to evaluate the effects of rate-setting methods on airport bond rating and also the first to document a statistically significant relationship between airports’ legacy hub status and bond ratings.