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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.

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.