Presentation

Different Airport Pricing Regimes and
Their Implications for Overall Welfare
Master Thesis
Annika Reinhold
STREEM

Structure
• Weight Based Pricing
• Airport Congestion Pricing
• Analytical Model
• Numerical Model
• Conclusions

Weight Based Pricing
• Mostly applied pricing regime
• Complex charging structure at many airports
• Economic rationale
– Adequate capacity, cover costs, rate of return
– Ramsey pricing
• Criticism
– Application to congested airports
– Under-pricing of facilities
– Over-investment in capacity

(Airport) Congestion Pricing
• Bottleneck situation
– Rationing scarce resources
– Users pay for caused congestion
– Incentives for investment in capacity
• Difficult to calculate marginal costs
• Opposition to congestion tolls

Airport Congestion Pricing
• Theoretical Models
– Queuing bottleneck model
– Internalization of congestion costs
– Effect of market power
– Hub and spoke networks

Airport Congestion Pricing
• Application
– Boston Logan Airport (BOS)
– New York Airports (JFK, LGA, EWR, TEB)
– London (LHR)

Analytical Model
• Assumptions
– 2 airlines
– 1 airport
• Inverse demand function
D
• Average cost function
ci fi
vi
q
1
q
1
q
q
2
2

Analytical Model
First best toll
• Airline profit maximisation
– Fully symmetric setting
– Nash equilibrium output (closed form)
q N
i
• Airport welfare maximisation
max
• Optimal toll
q
i
*
0
q
1
3
1
q
2
(
*
i
v
i
f
x)
dx
q
i
v
q
i
q
f
i
i
v
i
q
1
q
2

Analytical Model
Second best toll
• Maximise welfare subject to constraint
w
• Lagrangian multiplier
i
• Weight based toll
i
0
q
1
q
2
(
2
q
qi
v i q
( 2 vi
v i )
w
i
x)
dx
i
q
i
q
i
f
w
i
f
i
2
v
(
(
v
2
i
v
i
q
1
q
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q2
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1
2 v
1
1
q
v
2
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2
2
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q
i
v
(
(
1
w
q1
2 v
1
2 v
2
2
q
v
v
2
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)

Numerical Model
Parameters
Demand characteristics Airline cost function parameters
α 200000 f 15000
β 1 v 5000
Ratio: average cost/ marginal cost 0,70
Ratio: mr/mc 1,00
Ratio: equilibrium fare/ average cost 1,86
Ratio: equilibrium fare/ marginal cost 1,30
Ratio: profits/ turnover 0,23
Ratio: profits/ total costs 0,43
Ratio: cong costs/ average costs 0,05
Ratio: cong costs/ marginal costs 0,03
Ratio: cong costs/ total costs 0,05
Demand elasticity in equilibrium - 1,4

Numerical Model
Base case
• A319 and CRJ900
• Calculating aircraft weights
• Outcome
First best Weight based
Output airline 1 9.25 7.59
Output airline 2 9.25 12.00
Total 18.50 19.59
Toll airline 1 46,236.1 49,994.1
Toll airline 2 46,236.1 26,923.9
Welfare level 1,711,078.9 1,704,991.0

Numerical Model
Asymmetry in cost parameters
1 2 3 4 5
f_1 13000 f_1 13000 f_1 10000 f_1 10000 f_1 9000
f_2 15000 f_2 18000 f_2 20000 f_2 20000 f_2 22000
v_1 5000 v_1 5000 v_1 4500 v_1 4500 v_1 4000
v_2 6000 v_2 6000 v_2 6500 v_2 6500 v_2 6500
• Increasing asymmetry in cost parameters (1,2,3)
• Increasing difference in aircraft weight (4,5)
• In the end, only airline 1 stays in the market

Numerical Model
Asymmetry in cost parameters
welfare level
3.000.000,00
2.500.000,00
2.000.000,00
1.500.000,00
1.000.000,00
500.000,00
-
1 2 3 4 5
scenarios
τ*_2
ω*
ω_w
τ_w2
τ*_1
τ_w1
120.000,00
100.000,00
80.000,00
60.000,00
40.000,00
20.000,00
-
-20.000,00
-40.000,00
toll level

Numerical Model
Increasing congestion
1 2 3 4
f_1 15000 f_1 15000 f_1 10000 f_1 10000
f_2 15000 f_2 15000 f_2 20000 f_2 20000
v_1 5000 v_1 6000 v_1 6000 v_1 7000
v_2 5000 v_2 6000 v_2 10000 v_2 12000
• Identical parameters (1,2)
• Introducing asymmetry (3,4)

Numerical Model
Increasing congestion
welfare level
1.800.000,00
1.600.000,00
1.400.000,00
1.200.000,00
1.000.000,00
800.000,00
600.000,00
400.000,00
200.000,00
-
1 2 3 4
scenarios
ω_w
τ_w1
τ_w2
τ*_2
ω*
τ*_1
120.000,00
100.000,00
80.000,00
60.000,00
40.000,00
20.000,00
-
-20.000,00
toll level

Conclusion
• Weight based pricing assumed to be
inefficient
• Theoretical congestion pricing models take
into account different characteristics
apparent at airports
• Derivation of simple analytical model
• Test results in numerical model

Conclusion
• Tolls under the different pricing regimes
move in opposite direction
• Under weight based pricing efficient airline
1 pays more than inefficient airline 2
• Weight based pricing leads to lower
welfare level than first best pricing
• Weight based tolls do not help in allocating
scarce capacity

Thank you!