Abstract

This paper examines revenue structure, regulation, and market power of airports, and how they affect airport's services to airlines and influence the form of vertical relationship between airport and airlines, and thus, eventually on competition in airline markets. In addition, we also examine the competitive consequences of common ownership, coordination or alliance among multiple airports in a region. The key findings are: Concession revenues are of increasing importance to airports. The positive externality of air traffic on the demand for non-aeronautical services, along with competition among both airlines and airports, induces a vertical cooperation between airports and the dominant carrier at the airport. Airports have substantial market power due to the low price elasticity of their aeronautical services. However, such airports' market power is moderated by competition in both the airline and airport markets. There are benefits for both airports and airlines from entering into long term relationships. Airports can obtain financial support and secure business volume, which are important for daily operation as well as for long term expansion. Airlines can secure key airport facilities on favorable terms, essential for making long term commitments/investment at an airport. This along with the positive externality of the demand for airport's aeronautical services on commercial services provides incentives for the airport and the dominant carrier to strike exclusive deals, harming competition in the downstream airline market if unchecked. Such airport dominance allows an airline to obtain a substantial hub premium. On the other hand, cooperation between a hub airport and the dominant carrier may enhance the competition between airline networks formed by different airport-dominant carrier combinations. In other words, airport-airline coordination or alliance is a doubleedged sword for downstream airline competition, there is a need for careful further examination on the issue in order to design an effective regulatory oversight. The issue of cooperation or alliance between two or more hub airports in a region needs more careful analysis because, while cooperation and coordination may improve customer service and efficiency, it is also likely to reduce competition not only between airports in the region but also between carriers in the downstream airline market.