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Why ICAO’s pricing guidelines should be ignored

ICAO’s pricing guidelines are considered by some to be the final word in airport charges. Discussions of airport charges between airports and airlines (and regulators) often focus on whether they are consistent with ICAO’s pricing guidelines document. However, a reliance on these guidelines may actually be detrimental to both airports and airlines. To understand why, we first need to understand the concept of two-sided markets. This concept – for which its proponent, Jean Tirole, won the Nobel prize for economics in 2014 – captures that that an airports’ existence is dependent on attracting two distinct groups of customers: passengers and airlines. Demand for airport services by one group is dependent on existing demand from the other. Passengers get value from having a choice of airlines, destinations and flight times. Meanwhile, airlines prefer to operate at airports with a large passenger base. This means that the price charged to one side of the market can affect demand by the other. It may be profitable – and economically efficient – for an airport to charge below cost to one of its customer groups. By reducing its charges and increasing demand from one customer group (such as airlines), the airport may become more attractive to the other customer group (in this case, passengers) who are willing to pay more to use its facilities. The exact balance of charges will depend on how sensitive the two different groups are to prices. To illustrate this idea further, take the example of video game consoles, such as those produced by Nintendo and Sony. These are a two-sided market as they appeal to both games and game developers and their attractiveness to one group of customers is determined to a large extent by the level of demand from the other group. The gamer’s choice of console is driven, in part, by the games available on it although they are also sensitive to prices. Meanwhile, developers want to sell their games on consoles that have a large number of users, and are willing to pay a high royalty to console producers for this privilege. Consequently, console producers often sell their consoles at a loss in order to attract gamers and to maximise their profits. The ICAO pricing guidelines’ focus on cost-reflective prices threaten an airport’s ability to set economically efficient prices and could stifle any innovations in airport pricing. The overriding message of the ICAO pricing guidelines is that users should pay their full and fair share of the cost of the services the airport provides to them every single time. There is no discussion of whether prices should reflect the benefits brought to other parties. Consequently, the guidelines read more like a set of accountancy rules rather than guidance on how to achieve the best economic outcomes. The guidelines are a good starting point for discussions about an airport’s charges, particularly in cases where an airport has significant market power. However, the guidelines should be seen just as this: a starting point, rather than the final word.

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