Thursday, February 9th, 2012
If you talk to legacy airlines they will tell you that they are the victims of the monopoly service providers. That is industry jargon for nasty airports and ANSPs. These entities, you understand, have monopolies, nay, natural monopolies that mean they can charge what they want, when they want and push the airlines around. Therefore, the only way to control this behaviour is to regulate, regulate, regulate. As someone once said, if you tell a lie often enough, it becomes the truth, and for the longest time, that seemed to be the case for the great natural monopoly lie.
It is time to debunk this myth.
Helping to do so is a new paper, European Airports and airlines: Evolving relationships and the regulatory implications by David Starkie, an economist from Case Associates in London, and universities in Bremen and Adelaide. It is published in the Journal of Air Transport Management xxx(2012) 1-10. You are unlikely to read much about it from the airlines or their associations.
Starkie contends that in fact the low cost carriers and increasingly other airlines too, by insisting on contracts with airports, and by negotiating so hard on rates, have changed any semblance of bargaining power the airports might have once had over airlines.
Airports depend on passenger throughput, so they are interested in increasing passenger numbers. Starkie spends much time looking at the details of a contract between bmi baby and Durham Tees Valley airport. This contract got into the public eye after it became a prize exhibit in a contract dispute between the airline and the airport. The discounts and other incentives are eye-watering.
Part of the competition arises from the fact that in Europe generally there are a lot of airports close to each other. In France there are 32 airports within an hour’s drive of each other. In Germany, there are 28. There are 21 in England and Wales. That means that in fact, airports compete with each other.
The next factor is the internet. That means that airlines can now enter (and of course exit) markets much more quickly than ever before and with little investment in building distribution networks etc.
All of which to say, as Starkie does, that in a competitive environment, what is the point of ex-ante regulation? What a fine question. Of course it is a fine regulator that acknowledges that its work here is done and quietly quits the field, but we can only live in hope of such an outcome one day.