Regulation of Airports by KC Law 20041117

Regulation of Airports:
Options and International Experience
Law, Ka Chung
Aviation Policy and Research Centre

Chinese University of Hong Kong
This draft: November 2004

First draft: October 2004
Abstract
As the Airport Authority Hong Kong (AA) will be privatised soon, this
paper reviews the options available for airport regulation supplemented by
abundant international experience.
Keywords: Airport regulation, Hong Kong.
E-mail address: lawkc@cuhk.edu.hk Phone number: (852) 2609 6014 Fax number: (852) 3163 4293
Correspondence: Room 250, Sino Building, Chinese University of Hong Kong.
Regulation of Airports: Options and International Experience
1. Introduction
Airport regulation will be the most important issue in the post-privatisation period.
This is mainly because airport is a natural monopoly where no substitutes are available.1
According to economic theories, a monopoly firm would maximise its profit which is optimal
for itself but not optimal for the society. As a result, the monopoly price is higher than the
competitive price as long as the monopoly firm is unregulated. Such deviation from the social
optimality is called deadweight loss in Economics. This is a net loss to the society which is a
Pareto suboptimal (i.e., lose-lose) status. Through regulation, deadweight loss and hence
Pareto suboptimality can be reduced or even completely eliminated.
For whatever kind of regulation, the ultimate aim is to mimic the competitive outcome,
which is Pareto optimal according to the Welfare Theorem of Economics. According to
EDLB (2004, Paragraph 22) just released recently, the followings have been proposed:
(1) The regulatory framework should subscribe to the user pays principle; allow the new
Company a reasonable return on its investment; and provide incentives for enhancing
efficiency and increasing capacity to cater for demand.
(2) Only airport charges (i.e. currently landing, parking and terminal building charges) paid
by airlines should be regulated. … We consider the currently proposed arrangement a
better alternative because excluding commercial revenues from the regulatory framework
should offer more incentive for the new Company to explore commercial opportunities.
Making the aeronautical operations a commercially viable business on its own would also
better encourage the new Company to maintain its aeronautical services at high standards.
(3) The level of the new Company’s target return for aeronautical activities should
commensurate with the risk of the aeronautical business, which may not necessarily be
the same as the average cost of capital of the new Company as a whole.
(4) The new Company should be allowed to negotiate on a commercial basis with airlines’
representatives on the level of airport charges every three years or as a need arises, within
a set of broad parameters set out in the Ordinance.
(5) It is for consideration whether the Government or a Government appointed independent
panel should be empowered to adjudicate on the reasonable level of airport charges.
(6) The new Company should be required to draw up a set of service standards, and on the
1
The airports in the Greater China do provide certain degree of competition; but the domestic airport is still the
monopolised airport within the political boundary.
1
basis of which a financial reward and penalty system should be devised to link the actual
service standards to the level of airport charges.
Some remarks appear as follows. For point (1), the most important concern would be
the definition of “reasonable”. There should be little disagreement that “reasonable” should
be defined from the social viewpoint. It would be dangerous if it were defined merely from
the political perspective (as a political tool). Details must be specified in how much incentive
and capacity should be provided in striking a balance between private and public interests.
For point (2), the proposed regulated domain is clearly small. First, its success relies
heavily on the self-discipline of operator. Second, since aeronautical and non-aeronautical
activities are not completely unrelated, regulating only one activity may create another kind
of distortion (inefficiency) despite investment incentive may be preserved. Third, as is a
common problem in any industry, service standards are less easily observable and involve
certain subjective judgement, moral hazard behaviour cannot be eliminated.
For point (3), the key issue would be whether it is appropriate to incorporate risk into
the regulation formula. The best persons to do the cost-benefit analysis are the investors
themselves; this should not be the regulator’s concern. Without knowing the risk structure,
there would be no solid ground to prescribe the risk premium. For instance, macroeconomic
risk like 911-event affects all economic sectors. There is no point to help particular sectors.
Points (4) – (6) are less debatable. In the rest of this chapter, various options are
discussed in Section 2, overall international experience is given in Section 3, international
experience on price cap is in Section 4, case studies of UK, Australia and New Zealand are in
Sections 5 – 7, and Section 8 concludes with the performance of various options.
2. Regulation Options
There are various options for regulating the airport charge. According to Tretheway
(2001), there are four main groups of airport regulation: 1) traditional regulation, 2) incentive
regulation, 3) trigger regulation and 4) self regulation. Traditional regulation includes rate of
return (ROR) and cost of service regulations. Incentive regulation is subdivided into price cap,
2
yardstick competition and automatic rate adjustment mechanism. In this section the rationales
as well as pros and cons of each option will be discussed one by one.
2.1 Option 1: Rate of Return (ROR) Regulation

Rationale. This option has been widely used in many kinds of natural monopoly. In
this option the airport is allowed to set prices as long as the overall corporate rate of return on
the shareholder’s capital does not exceed a “fair” rate of return. The original version of this
option is due to Averch and Johnson (1962). They found that firms tend to invest too much in
capital relative to other inputs – so called the Averch-Johnson effect. The essence of this
option is to cap the rate of return on capital, which is the net return on capital (gross return
less non-capital costs) per capital. Under this option, this rate cannot exceed the allowed rate
set by the regulatory body. The rationale for doing so is to ensure the efficient use of capital.
In order to mimic the competitive outcome, the allowed rate of return on capital should be set
equal to the cost of capital so that the airport will earn zero economic profits in equilibrium.
Pros. There are a number of advantages of this option. First, it gives a guaranteed
reward for investment because the regulation is cost based rather than revenue based. This
provides incentive for long-term investment. Second, it provides clarity and certainty for all
of the parties about pricing outcomes. Third, it reduces delays and costs associated with
negotiation or arbitration. Fourth, it reduces the possibility of rent-sharing between the airport
and the regulator.
Cons. Despite its advantages, there are considerable disadvantages of this option. First,
different parties may not be so easy to reach the agreement of how “fair” the rate of return
should be. If the allowed rate is set where the airport earns zero economic profits, this will be
socially desirable but may not be desirable to the airport, because the fixed cost of operation
may be so high that a loss will be incurred if operated at the socially desirable level.
Second, there may be difficulties in measuring capital. In many occasions, it is not

even easy to define it. One common difficulty is to identify whether capital investment
should be measured as replacement costs or historical costs. Third, the most important
argument against this option is that the regulator will usually have imperfect information on
the cost structure of the airport operation. This is the usual problem in a monopoly, which has
private information over its cost structure. It follows that the regulator may not be able to set
3
the allowed rate of return at the optimal level. As a result, the fourth problem associated with
this option is the high transaction costs incurred in obtaining such private information. Finally,
as the pricing decision is cost based, it may not be responsive to market changes.
2.2 Option 2: Cost of Service Regulation

Rationale. This has been the traditional option used in various kinds of transportation.
The regulation is more intrusive in the sense that the regulator has to approve every price
change and even service decisions in some cases. Essentially the approval of price increase is
based on cost increase, where documentations are required by the regulator.
Pros. One of the main advantages is that the airport is prevented from earning
abnormal profits due to the strict monitoring process. Moreover, given the heavy role played
by the regulator, objectives other than efficiency, whether political or social, can be balanced.
Cons. However, there is considerable number of disadvantages for this option. First,
the regulator may not know the true cost structure of the airport. This brings another problem
where if the cost is underestimated by the regulator, it will result in overinvestment. As a
result, operations are inefficient or high in costs. Moreover, the bureaucratic approval
procedure may result in unresponsiveness to any market changes. Given all these, the service
quality is likely to be poorly monitored.
2.3 Option 3: Price Cap Regulation

Rationale. This option is the most well-known and most widely adopted regulation
option nowadays. In this option the airport is allowed to increase prices by no more than the
increase in costs, which is proxied by inflation rate (percentage increase in aggregate price
level). Allowing for efficiency gains, the allowed rate of return is usually set at the inflation
rate less an efficiency factor: commonly called “CPI – X”. The underlying rationale is to
mimic the perfect competition scenario. According to standard economic theory, firm earns
zero economic profits under perfect competition so that total revenue equals total cost.2 It
follows that increase in total revenue equals increase in total cost. The total revenue consists
of two components: airport charge and airport output. Similarly, the total cost consists of two
2
Obviously firms cannot sustain negative profits for long; but positive profits will attract entry and so that
profits are driven down to zero.
4
components: airport cost and airport input. As a result, the increase in airport charge is
nothing but the increase in airport cost less efficiency gains, which is defined by the rise in
the output-input ratio. This gives the “CPI – X” formula.
Pros. There are number of advantages of this option. First, it provides incentive for
efficiency and innovation, a so-called incentive regulation. As the price is capped, the only
way to earn larger profits is to minimise cost. Yet to maximise profits, such cost minimisation
should not reduce the output proportionally, which means an increase in efficiency. And a
common way to increase efficiency is to be innovative. Second, the cost of regulation is
reduced to the minimum as what the regulator needs to do is simply to set a price cap and
refine it regularly. The transaction cost associated with the airport is also low because it does
not have to communicate (tackle) with the regulator frequently. Third, this option allows
responsive pricing without the need for the regulator’s approval so that the airport can
respond to any market change timely and efficiently.
Cons. Despite its popularity, this option has certain disadvantages. First, cost
minimisation is usually associated with decline in service quality, which is not easily
observable. In principle output comprises of both quantity and quality, but to measure quality
may incur high cost like having survey on the users. Second, an associated problem is that the
off-the-book items will deserve less care, and so will be the service or other unobservable
qualities. Third, along this vein, airport may lack incentive to make new investment,
particularly the quality enhancing ones.
Other disadvantages arise from the regulator side. Fourth, as the regulator is free to set
charge, it may have the incentive to practice opportunism by abusing its regulatory power for
other purposes, whether fiscal, social or political. But the issue of regulating the regulator is
rather complicated. Fifth, the regulator may also assume the old cost structure for the airport
after the price cap has been set. It follows that the optimal outcome may not be achieved.
2.4 Option 4: Yardstick Competition

Rationale. In this option the airport prices are allowed to change in line with the
“market prices” generated in a competitive market. The underlying rationale is to mimic the
competitive outcome, but the presumption is that a competitive market exists.
5
Pros. This option is simple and easy to implement as the market prices are readily
available at low cost. Through requiring the airport to follow such benchmark, this provides
insights and directions for improvement on different aspects.
Cons. The greatest problem for this option is its practical difficulty in implementation.
Very often the rationale for regulation is due to the monopolistic nature of the industry, yet
this option requires the existence of a competitive market which is paradoxical. Even though
there is a competitive market for comparison, the performance measures are not guaranteed to
be reliable. Specifically, the benchmark provides information about prices but has no say on
anything about the performance. It follows that the quality may not be guaranteed.
2.5 Option 5: Automatic Rate Adjustment

Rationale. Contrast to the yardstick competition, in this option the airport prices are
also allowed to change with costs, but automatically. If the original status is a competitive
equilibrium, then it will also be in any future with price and cost changes.
Pros. This option allows prices to increase instantaneously to cover costs so that any
cash flow problem would be reduced to the minimum. Also, this option guarantees the airport
is not operating at a loss.
Cons. Because the increase in costs will be transferred to the end users anyway, the
airport may have the incentive to over-invest, as in the case of ROR regulation.
2.6 Option 6: Trigger Regulation

Rationale. This option relies on the threat of regulatory intervention to constrain the
airports from increasing prices unfairly. The regulator has the power to intervene and set
prices, but only when a complaint is received and determined to require a response. In game
theoretic terms, the regulator uses a credible threat to achieve an optimal outcome without
any concrete action. That is, any unfair pricing strategy will result in a worse-off outcome.
Notice that this option is in line with the laissez-faire principle.
Pros. The very obvious advantage of this option is that neither airport nor regulator
incurs costs unless the regulatory procedures are triggered. Moreover, airport would have
considerable degree of freedom to set and change prices in response to any market change.
6
Finally, cost minimisation means efficiency (loosely); and airport’s freedom to set and change
prices means its ability to retain most of the efficiency gains instead of going to a third party.
This provides an incentive for the airport to perform better.
Cons. On the other hand, the obvious disadvantage of this option is that the triggering
mechanism may be abused by, say, the ungrounded complaints. Without such prevention, the
mechanism may become a means to achieve particular political purposes. Another difficulty
is the definition of “fair prices”. The essence of this option is its discretion-based nature. This
means there is no explicit rule about any details, such as prices. It follows that whether prices
are fairly set have to be judged case by case, and disputes and other problems may arise.
2.7 Option 7: Self Regulation

Rationale. In this option the airport adopts a set of standards or code of conduct which
is acceptable to customers. While the regulator plays an active role in the trigger regulation, it
plays only a passive role in this option.
Pros. This is the most flexible and least costly option as the regulator has its hands off
almost completely in this option.
Cons. All the deficiencies of monopoly can arise if the codes are not well designed.
2.8 Option 8: Contractual Regulation

Rationale. In this option the airport has a small number of customers (airlines), who
are able to enter into a long term contract. The contract would normally consist of pricing
provisions (including cost adjustments) which would prevail for the duration of the contract.
Pros. This option provides contractual certainty and thereby reducing operational risk.
Cons. There are some disadvantages of this option. First, the ability to limit the abuse
of any market power held by airports has been questioned. This is true particularly when the
number of users (airlines) is large. Second, contractual costs are usually high. Third,
conflicting contractual requirements may arise, particularly when airlines have entered
contracts with different airports.
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Table 1: Airport Regulation Options – A General Comparison
Option Mechanism Pros Cons Examples

1. Rate of return  Airport is allowed to set prices so long as the  Give a guaranteed reward for investment  Difficult to judge what level of rate is “fair” - Electricity
(ROR) overall corporate rate of return on the  Clear and certain for all of the parties about  Difficult to define and measure “capital” - Telecommunication
(Traditional shareholder’s capital investment does not pricing outcomes  Regulator has imperfect information on the cost - Pipelines
regulation) exceed a “fair” rate of return  Reduce delays and costs associated with structure
negotiation or arbitration  Unresponsive to market change
 Reduce the possibility of rent sharing outcomes  Regulator may be brain-washed
2. Cost of service  Regulator must approve every price change  Prevent airport from earning abnormal profits  Regulator may not know the cost structure of the - Airline
(Traditional and (in some cases) service decisions  Objectives other than efficiency can be balanced airport - Rail
regulation)  Documentation proof of cost increases is  Result in overinvestment - Transportation
required by the regulator  Inefficient (high cost) operations carrier
 Unresponsive to changes - Gas
 Poor service quality
3. Price cap  Airport is allowed to increase price whenever  Provide incentive for efficiency and innovation  Cost cutting may be associated with decline in - Telecommunication
(Incentive there is inflation or an increase in costs  Low cost for both airport and regulator service quality
regulation)  Increase in prices may be up to the cap  Flexible to change prices within a product or  Non-price terms and conditions are usually ignored
(usually inflation) less efficiency gains service line without the need for regulatory  Lack incentive to make new investment
 Components of prices may exceed or below approval  Regulator must be credibly to pre-commit to refrain
the cap, as long as the average is no higher from opportunistic behaviour towards airport
than the cap  Regulator may falsely refer to airport’s old cost
 Usually the cap is audited and reviewed every structure after the adoption of price cap
5 years
4. Yardstick  Prices are allowed if they are consistent with  Simple to implement  Similar airports for benchmark comparison may not - Electricity
competition prices adopted by the other airports in a  Provide insights and directions for improvement exist - Health
(Incentive competitive market  Performance measures may not be reliable
regulation)
5. Automatic rate  All prices automatically increase when costs  Reduce cash flow problem  Airport has incentive to over-invest -
adjustment increase  Avoid operating at a loss
(Incentive
regulation)
6. Trigger  Government does not intervene and set prices  Neither airport nor regulator incurs costs unless  Triggering mechanism may be abused -
(Trigger until a complaint is received and determined to the regulatory procedures are triggered  Difficult to define fair prices
regulation) require a response  Airport has considerable freedom to set and
change prices
 Airport has incentive to be efficient as it can
retain all the efficiency gains
7. Self (Self  Airport adopts a set of standards or code of  Most flexible  Regulator has to know the cost structure of the - ICAO pricing
regulation) conduct which is acceptable to customers  Least costly airport very well guideline
- ACI pricing
guideline
8. Contractual  Airport has a small number of customers  Provide contractual certainty and thereby  Ability to limit the abuse of any market power held - Airport
(Self regulation) (airlines) entered into a long term contract reducing operational risks by airports has been questioned
 The contract consists of pricing provisions  Contractual costs are high
 Conflicting contractual requirements may arise
8
The discussion so far has been summarised in Table 1 above.
2.9 Single Till versus Dual Till

Theoretically all the above options can be applied to different degrees of charging
scope. They are single till versus dual till. In single till, operating profits from all airport
activities, including both aeronautical operation and concession (non-aeronautical) operations,
are included in determination on aeronautical charges. In effect, any profits from concession
operations are transferred to aeronautical users of the airport. In dual till, the aeronautical
charges are determined based solely on aeronautical operations and concession operations
may be either unregulated or under a separate regulation.
Essentially aeronautical costs are those associated with providing runway (landing fee)
and terminal services (terminal fee) for ticketing and boarding passengers. Concession costs
are those associated with other terminal services, commercial land development, security
charge, emergency response fee and airport improvement fee, etc. Not surprisingly, under the
dual till the airport will gain at the expense of airlines and passengers relative to the single till.
It follows that airports argue for a dual till and airlines argue for a single till. More of this can
be found in Forsyth (2002) and Starkie and Yarrow (2000).
Table 2: Airport Regulation Options – A General Comparison
Single Till Advantages

 Provide strong incentives to develop retail and commercial revenues, thus minimising airport charges
 Reduce airline operating costs in the short term through lowering airport charges
 Shift financial risk to aeronautical user so that the airport company bears little risk
 Provide strong incentives to expand capacity as this is the only way of ensuring long term revenue growth
Single Till Disadvantages
 Reduce short term costs at the expense of longer term investment as commercial revenues are used to
finance capital investment instead of paying back to airlines through lowering charges
 Reduce ability to develop new commercial facilities as commercial revenues are paid back to airlines
 Lack of incentives to increase aeronautical capacity and thereby lead to greater congestion
 Creation additional congestion and environmental pressure as airport traffic increases due to lower charges
Dual Till Advantages
 Provide incentives for investment into new resources and develop commercial activities
 Less severe under-investment problem due to a less restrictive price-cap under a dual-till system
 More efficient slot allocation and consistent with economic principles in congested condition
 Efficient use of services by pricing to aeronautical services especially in congested airports
Dual Till Disadvantages
 Generally result in higher aeronautical charges and marginal investment incentives
 Potential high profits from commercial activities reduce incentives to relieve congestion
 High congestion charges reduces airport’s incentives to invest in aeronautical capacity as it is a monopoly
 Contract design could be complicated, thus distracting attention from more serious concerns
9
The pros and cons of the single-till and dual-till have been discussed in Table 2 above.
In short, the single till allows aeronautical and non-aeronautical businesses to “subsidise”
each other so that the airport charges are likely to be lower than the dual till. But this means
the airport is bearing a higher financial risk. Moreover, the short term cost reduction would
likely associate with the sacrificing of the long term investment: a kind of intertemporal
substitution.
On the other hand, if dual till is practiced then airport charges can vary with demand
elasticity, and thereby enhancing pricing flexibility to solve congestion problems. This would
yield a more efficient outcome than using quota system according to standard economic
theory. However, the corresponding airport charges are likely to be higher than that under the
single till. Moreover, since the two accounts are separated, the contractual costs incurred
would also likely to be higher.
In general, because of the cross subsidy of the two businesses under the single till, the
monopoly power of the aeronautical business is “diversified” by the non-aeronautical one.
The traditional literature therefore prescribes that the single till would tend more to lead to a
competitive outcome than the dual till. However, if a natural monopoly were to operate at a
competitive scenario, investment incentive would be distorted which is not good for the long
term development of airport. Such incentive is provided by the dual till, but which involves
higher administrative costs because there are two accounts instead of one. Whichever should
be adopted depends on the domestic context. The single till’s competitive outcome yields
allocative efficiency but the imbalance of short term and long term costing sacrifice dynamic
efficiency. And the opposite is true for the dual till.
3. International Experience
Following the very recent comprehensive study by Oum, Zhang and Zhang (2004),
they classify a sample of 60 major international airports into three categories: 1) single till
price cap, 2) dual till price cap and 3) single till ROR.3 Airports in the US are categorised
into “residual cost plus” and “compensatory cost plus”, which belong to single till and dual
till price cap respectively.
3
They have not included in their database the dual-till ROR cases.
10
Table 3: Airport Regulation Options – International Experience
Regulation Ownership Name of Airport Region

Single-till price-cap Major Private Auckland International Airport (AKL) Asia Pacific
Single-till price-cap Private Christchurch International Airport (CHC) Asia Pacific
Single-till price-cap Private London Gatwick International Airport (LGW)* Europe
Single-till price-cap Private London Heathrow International Airport (LHR)* Europe
Single-till price-cap Public Manchester International Airport (MAN) Europe
Single-till price-cap Public Stockhold Arlanda International Airport (ARN) Europe
Residual cost-plus Public Chicago O’Hare International Airport (ORD)* North America
Cincinnati/Northern Kentucky International
Residual cost-plus Public North America
Airport (CVG)*
Detroit Metropolitan International Airport
Residual cost-plus Public North America
(DTW)*
Residual cost-plus Public Miami International Airport (MIA) North America
Residual cost-plus Public Orlando International Airport (MCO) North America
Residual cost-plus Public San Francisco International Airport (SFO) North America
Copenhagen Kastrup International Airport
Dual-till price-cap Major Private Europe
(CPH)
Dual-till price-cap Private Melbourne International Airport (MEL) Asia Pacific
Atlanta William B. Hartsfield International
Compensatory cost-plus Public North America
Airport (ATL)
Compensatory cost-plus Public Boston Logan International Airport (BOS)* North America
Compensatory cost-plus Public Houston-Bush International Airport (IAH) North America
Compensatory cost-plus Public LaGuardia International Airport (LGA)* North America
Compensatory cost-plus Public Los Angeles International Airport (LAX) North America
New York-John F. Kennedy International
Compensatory cost-plus Public North America
Airport (JFK)*
Compensatory cost-plus Public Newark International Airport (EWR)* North America
Compensatory cost-plus Public Salt Lake City International Airport (SLC) North America
11
Table 3 Continued: Airport Regulation Options – International Experience

Flughafen Dusseldorf International Airport
ROR Major Private Europe
(DUS)
Baltimore Washington International Airport
ROR Public North America
(BWI)
ROR Public Barcelona El Prat International Airport (BCN) Europe
ROR Public Calgary International Airport (YYC) North America
ROR Public Charlotte Douglas International Airport (CLT) North America
ROR Public Dallas/Ft. Worth International Airport (DFW) North America
ROR Public Denver-Stapleton International Airport (DEN) North America
ROR Public Edmonton International Airport (YEG) North America
ROR Public Frankfurt Main International Airport (FRA) Europe
ROR Public Honolulu International Airport (HNL) North America
Las Vegas McCarran International Airport
(LAS)
ROR Public Madrid Barajas International Airport (MAD) Europe
Minneapolis/St. Paul International Airport
(MSP)*
ROR Public Montreal-Dorval International Airport (YUL) North America
ROR Public Munich International Airport (MUC) Europe
ROR Public Philadelphia International Airport (PHL) North America
Phoenix-Sky Harbour International Airport
(PHX)*
ROR Public Portland International Airport (PDX) North America
Ronald Reagan Washington National Airport
(DCA)
Sydney Kingsford Smith International Airport
ROR Public Asia Pacific
(SYD)*
Toronto-Lester B. Pearson International Airport
(YYZ)
ROR Public Vancouver International Airport (YVR) North America
ROR Public Washington Dulles International Airport (IAD) North America
12
Table 3 Continued: Airport Regulation Options – International Experience

Others Major Private Vienna International Airport (VIE) Europe
Amsterdam International Airport Chisholm
Others Major Public Europe
(AMS)
Others Major Public Beijing Capital International Airport (PEK) Asia Pacific
Others Major Public Kansai International Airport (KIX) Asia Pacific
Others Major Public Milan Malpensa International Airport (MXP) Europe
Others Major Public Zurich International Airport (ZRH) Europe
Rome Leonard DaVinci/Fiumicino International
Others Private Europe
Airport (FCO)
Others Public Bangkok International Airport (BKK) Asia Pacific
Others Public Dublin International Airport (DUB) Europe
Others Public Geneva Cointrin International Airport (GVA) Europe
Others Public Hong Kong International Airport (HKG) Asia Pacific
Paris Charles De Gaulle International Airport
Others Public Europe
(CDG)
Others Public Seoul Kimpo International Airport (SEL)* Asia Pacific
Others Public Singapore Changi International Airport (SIN) Asia Pacific
Others Public Tokyo Narita International Airport (NRT)* Asia Pacific
* Congested airport
Based on the data from 1999 to 2000, Oum, Zhang and Zhang (2004) study the
performance of the above 60 airports econometrically, conclude with two key results
concerning productivities below:4
1. The capital input productivity would be highest under the single till price cap, followed
by the dual till price cap and the single till ROR; and
2. The total factor productivity (TFP) would be greater under the dual till price cap than
under either the single till price cap or the single till ROR.
Conclusion. In a word, the international experience shows that price cap regulation
generally outperforms the ROR one. This is consistent with the traditional economic
reasoning where the latter tends to result in overinvestment. Nevertheless, whether single till
or dual till is better is still left open. In terms of capital productivity the single till is better,
while in terms of TFP the dual till is better. This is also consistent with the traditional
argument where single till distorts investment incentive such that capital productivity is
forced to be higher.
4
The methodology of calculating productivities are given in Adler et al (2002).
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4. International Experience on Price Cap

Given the popularity of the price cap regulation as well as its outstanding performance,
the international experience of its usage deserves in-depth discussion.5 Drawing from various
resources including TRL (2003) and many others, the price cap formulae used in the major
international airports as at 2003 are listed in Table 4 below.
Table 4: International Experience on Price Cap
Country Principles of Airport Charges Increase (p)

Australia p =  – x, see Table 7 for x values.
Austria p =  – 0.35q, where q = passenger growth
Hamburg, p = p-1y, where y = y-1[1 + -1 – 0.02 – 0.5max{p-1 – 0.03, 0}]
Germany and the subscript –1 refers to 1 year ago
p =  – x, where before 2004 x = 4.4% for Dublin and x = 3.4% for all airports;
Ireland
after 2004 x = 7.8% for Dublin and x = 6.2% for all airports
1   rr (  qc   qr )q   qc
p  (1   )  1 , where q = passenger growth,
1 q
Portugal qc = corr(passenger, airport costs),
qr = corr(passenger, non-aeronautical revenues), and
rr = corr(aeronautical revenues, non-aeronautical revenues).
These values in mid-1990s were qc = 0.75, qr = 0.53 and rr = 0.214
UK See Section 5.
Overall speaking, all price cap formulae are based on the “CPI – X” principle with
some having certain variations. Some countries tend to vary the X value of directly (e.g.,
Australia) while some tend to vary the functional form of the formula (e.g., UK). From Table
4 and Section 5 below, the factors that affect airport charges are summarised in Table 5.
Table 5: Factors That Affect the Price Cap
Variable Effect Suggested Rationale

Inflation + To capture and proxy overall costs increase
Security cost + To capture a particular cost item increase
Interest rate + To capture interest costs of invsetment
Traffic movement + To capture congestion cost increase
Airport capacity + To capture congestion cost increase
Past price + To provide inertia effect for stability
Passenger - To capture revenue increase due to volume increase
Revenue - To capture overall revenue increase
Triggering - To serve as punishment mechanism
5
Other pricing mechanisms such as ROR are less complicated which usually do not involve explicit formulae.
14
Generally speaking, airport charges are allowed to increase with cost increase but
decrease with revenue increase. Inflation, security and interest are obviously cost items; while
traffic movement and airport capacity reflect the costs due to congestion. These factors go
hand in hand with airport charges. On the other hand, number of passengers and revenues are
obviously revenue items which fall with airport charges. Finally, the current charges depend
on the previous charges so that price changes would not be discrete or odds, and sometimes
triggering variables are also included to facilitate regulator’s practice of discretionary power.
5. Case Study: UK Airports Regulation

In this section the focus will be on the price cap formulae of the four UK airports –
Heathrow, Gatwick, Stansted and Manchester. As will be seen, these formulae are the finest
ones among the other airports worldwide, thereby giving the highest value for reference.
The formulae. Define the following variables:

Y = Average revenue yield per passenger using the airport
Ymax = Maximum average revenue yield per passenger using the airport
M = Adjusted air traffic movement
Mv = Air traffic movement
K = Correction per passenger to be made (can be negative)
S = Allowable security cost per passenger using the airport to be applied (can be negative)
Q = Number of passengers using the airport
C = Average declared hourly capacity in peak periods, measured in terms of both arrivals and
departures, where the peak period is defined in 0700 – 1159 and 1600 – 2059 local time.
T = Total revenue from airport charges in respect of relevant air services levied at the airport
G = A “trigger” variable consists of various factors
R = Total revenue from airport charges in respect of relevant air services levied at the airport
 = Net percentage change in RPI (a proxy for inflation)
x = Efficiency gains (x factor)
i = Net nominal interest rate
[.]t (subscript) = Time, in year
15
According to CAA (2003a, b), the maximum average revenue yield per passenger
using the airport (Ymax) for the three airports are governed by the followings:
Yt max  (1   t 1  x)Yt 1  d1 M t
4/2004 – 3/2005:
Yt 1  Y2003
max
 S t 1
Yt max  (1   t 1  x  d 2Gt )Yt 1  d1M t  K t
Yt 1  Yt 2 (1   t 2 )  S t 1
4/2005 onwards: Yt 2  Y2003
max
 S t 2
 R  Qt 2Yt 2 
K t   t 2 1  i 2
 Qt 2 
 C Y 
M t  M tv max  t 1 ,0
 Qt  2 
Auxiliary equations: M tv  M tv1 (1   t 1 ) (for Heathrow airport only where d1 = 1)
 4  730000
v
M 2003
Y  83.1
The currently used parameters in above are given in Table 6 below.
Table 6: Parameter Values for the UK Airports Price Cap Formulae: 2003 – Now
max
UK Airport x Y2003 (£) d1 d2
Heathrow 6.5% 6.480 1 1
Gatwick 0% 4.320 0 1
Stansted 0% 4.890 0 0
Manchester 5% 6.500 0 0
Rationale. In the above formulae the current average revenue yield6 is capped by an
upper limit (Ymax), and so is the airport charge. The capped yield is based recursively on the
average revenue yield in the previous year (Yt-1), scaled by the “RPI – X” factor (t-1 – x).
Intuitively, this allows the airport charges to increase less than inflation by the amount of
efficiency gained. The average revenue yield in the previous year is simply the capped yield
max
in a base year ( Y2003 ) adjusted by the allowable security cost in the previous year (St-1).7 Here
the base year acts as a reference point. For Heathrow airport, the cap depends also on the air
traffic movement (Mt). These constitute the price cap formulae before 4/2005.
6
It is understood that these are on a “per passenger” basis unless otherwise specified.
7
The allowable security cost for the Manchester airport depends on some other variables, see CAA (2003b)
16
Starting from 4/2005, the caps for both Heathrow and Gatwick airports depend on an
additional trigger variable (Gt) negatively, which is a punishment mechanism to reduce the
maximum allowable charges if the airport has not achieved particular capital investment
project milestones on time.8 Apart from this, the capped yield is further corrected by a factor
(Kt) which is the deviation of the air services revenue from the airport revenue in two years
ago (Rt-2/Qt-2 – Yt-2), forward discounted to the present value via nominal interest rate (i).
Saying in plain words, the airport charges would be reduced whenever the revenue from air
services exceed that of the airport.
As the Heathrow airport is large in capacity, the capped yield can increase with the
investment in infrastructure, i.e., it also includes the adjusted air traffic movement (Mt)
whenever the peak hour capacity in the previous year exceeds a certain level ( Dt 1  M  0 ).
Current status. The last price cap formula review was conducted in 2003; it is also the
base year for reference. From Table 6, the capped yield (per passenger) in the base year was
the largest for Manchester airport (£6.5), then came Heathrow (£6.48), then came Stansted
(£4.89) and Gatwick (£4.32). The x value is the most concerned parameter. The current
values for Heathrow and Manchester are 6.5% and 5% respectively, while those of Gatwick
and Stansted are both 0%. The historical values of x value are given in Table 7 below.
Table 7: UK Airports x Values and Inflation Rate (%): 1986 – 2008
UK Airport 86 – 91 92 – 94 95 96 – 97 98 99 – 02 03 – 08
Heathrow 1 8 4 1 3 3 6.5
Gatwick 1 8 4 1 3 3 0
Stansted 1 8 4 1 -1 -1 0
Manchester 1 8 4 1 6.6 5 5
Inflation 5.9 2.5 3.3 2.9 3.1 2.0 2.8*
Note: All the years refer to fiscal year.
* The inflation rate is averaged up to 9/2004.
Lesson for Hong Kong. From the above UK cases, it is pretty obvious that the “RPI –
X” factor (t-1 – x) would have to be included were the price cap adopted. The allowable
security cost is also a mandatory item. There seems also a trend to incorporate the
correctional factor (Kt, which reflects the deviation between air services and airport revenues).
8
Details of these variables are rather technical and can be found in CAA (2003a, b).
17
Yet, the air traffic movement (Mt) and the punishment for delayed investment (Gt) are
optional variables. Intuitively, these two variables are relevant only for infrastructural
expansion, which seems less relevant for the case of Hong Kong.
From Table 7, the “RPI – X” may be positive or negative; there seems no particular
pattern on this. Since the privatisation of the airports, the x values ranged from 3% to 6.6%,
with respect to an inflation of about 2% – 3%. That is, “RPI – X” is on average negative.
Note in the case of UK that, it is the formulae rather than the x values that have changed
recently. The x values vary only across airports. These may serve as a reference for us.
6. Case Study: Australia Airports Regulation

Since the first round airports privatisation in 1997, aeronautical services have been
subject to a simple CPI-X price cap formula at all airports in Australia except Sydney Airport,
for a five-year period till 2001. “CPI” refers the usual inflation measured by the CPI. Each
airport’s x value was set by the Commonwealth Government, on advice from the Australian
Competition and Consumer Commission (ACCC).
The formulae. Following Direction No. 20 issued by the ACCC, the explicit price cap
formulae are not publicly announced, but the main variables that included are as follows:
1. Revenue shares of component j’s share of total aeronautical revenue;

2. Average price of j over the relevant time period;
3. Percentage change in the price of component j; and
4. Revenue derived from component j.
Rationale. The case of Australia seems to provide a simpler framework for reference.
As is seen, there are only four main variables in the price cap formulae. Having examined the
above carefully, one can easily find that (2) and (3) essentially refer to the same variable –
price level and its percentage change. Moreover, (1) and (4) are similar in nature – both are
revenue. Of course, there may be many other “less important variables” which are included
but not listed above. Without knowing the explicit formulae, one cannot say too much on this.
18
The rationale for including the above variables is along the same vein as that of the
case of the UK. The price and its percentage change in (2) and (3) can be interpreted as
corresponding to  in the UK case, while the revenue corresponds to Y (and its variants) in
the UK case. In economic principles, the maximum airport changes should depend positively
on both variables.
In Table 8 below, the x values varied substantially between airports, ranging from 1%
for Canberra and Townsville airports to 5.5% for Perth Airport. The starting prices for the
price cap were the Federal Airports Corporation (FAC) prices at the time of privatisation –
shortly before privatisation (in January 1997).
Table 8: Australia Airports x Values and Inflation Rate (%): 1997 – Now
Australia Airport 1997 – 2001 2001 – Now

Adelaide 4.0 Replaced by price monitoring
Alice Springs 3.0 Regulation removed
Brisbane 4.5 6.7
Canberra 1.0 Replaced by price monitoring
Coolangatta 4.5 Regulation removed
Darwin 3.0 Replaced by price monitoring
Hobart 3.0 Regulation removed
Launceston 2.5 Regulation removed
Melbourne 4.0 6.2
Perth 5.5 7.2
Townsville 1.0 Regulation removed
Inflation rate 2.2 2.8
Note: The Sydney airport has not been privatised.
Current status. Table 8 also summarises the regulation mode after 2001. As noted in
Hockey (2001), some airports have indicated that they are facing financial pressures as a
result of the suspension of Ansett’s operations and reduced global demand for aviation
services … The Government accepts that it would be difficult for airports to adjust
aeronautical prices to compensate for reduced traffic flows, and still comply with the current
price oversight arrangements administered by the ACCC.
From Table 8, in 2001 the regulation modes have been loosened in many airports –
either completely removed or switched to “price monitoring” which consists of a loose set of
pricing principles. According to Productivity Commission (2002, Section 3.2), the following
concrete changes have been made:
19
 Melbourne, Brisbane and Perth airports were allowed a once-only price increase, as a
pass-through in the price cap, of up to 6.2%, 6.7% and 7.2% of starting point prices at
privatisation respectively. The basis of calculation underlying these price increases has not
been made public. In all other respects, price regulation at these airports remained
unchanged; aeronautical services continued to be subject to prices notification with price
caps. Airport prices notification arrangements, the basket of aeronautical services and
price-cap arrangements, including the x values and necessary new investment provisions,
remained unchanged.
 Price caps on aeronautical services at Adelaide, Canberra and Darwin airports were
replaced by price monitoring.
 Coolangatta, Alice Springs, Hobart, Launceston and Townsville airports are no longer
subject to any price regulation, i.e., both the price caps and price monitoring have been
removed. No changes were made to price regulation at Sydney Airport.
Lesson for Hong Kong. Evidently the case of Australia does not provide too much
reference value in terms the setting of price cap formulae. Yet, an important lesson conveyed
is the switching away from the price cap. The main reason, as stated above, was of the
financial one. By saying “difficult for airports to adjust aeronautical prices to compensate for
reduced traffic flows”, this means that the revenue generated by the rise in prices cannot
cover the revenue loss due to the fall in quantity demanded. Economic theory tells us that this
is the case where actual production exceeds the monopoly (or oligopoly) output. In other
words, there is a certain degree of competitiveness in the market. Hence, a light-hand
approach may seem appropriate given the survival difficulty and the number of existing
privatised airports that may be competing with each other.
For the case of Hong Kong, the airport is not undergoing any financial difficulty.
Although there are certain degrees of competition from the neighbouring airports, such
competition may not be perfect due to the practice of product differentiation.
20
7. Case Study: New Zealand Airports Regulation9

Rationale. The pricing rationales applied to the New Zealand airports, according to
Commerce Commission, include three dimensions of efficiency: 1) allocative efficiency, 2)
productive efficiency and 3) dynamic efficiency.
Allocative efficiency. Allocative efficiency is achieved when the price paid by any
user reflects the costs incurred in meeting their demand. “First best” efficient pricing requires
that users be charged a price equal to the marginal cost of supply. The allocative efficiency is
affected by both the level and the structure of prices. The level of prices depends on three
factors in turn: 1) normal returns, 2) service quality and 3) level of costs and assets. And the
structure of prices depends on two factors in turn: 1) degree of differentiation and 2) degree
of cross subsidisation.
Productive efficiency. Productive efficiency means meeting demand at the lowest

possible costs, including minimising transaction costs resulting from exchange of products. In
the short-run, this involves choosing and making best use of the appropriate level of variable
inputs. Over time, it involves continuous investments to ensure costs can be minimised.
Dynamic efficiency. Dynamic efficiency means maintaining allocative and productive

efficiency over time. In practice, this means making investments and innovating so that costs
continue to be minimised and prices over time generally reflect this. 10
Current status. According to the Final Report by the Commerce Commission (p.101),
the New Zealand airports are currently practicing “multi-till approach”. The following
generic pricing principles are considered by the Commission:
1. Prices should be as close as possible to their allocatively efficient level over the
medium-term. This requires that:
 Prices are commensurate with the level of service quality demanded (allocatively
efficient, subject to minimum legal safety standards);
 Prices are based on appropriate costs (productively, and dynamically, efficient costs);
9
This section draws largely from Commerce Commission (2002).
10
The interpretation to these three kinds of efficiency differ slightly from the economic theory context.
21
 Prices encourage efficient use of a supplier’s facilities and avoid cross subsidisation.
2. Prices should allow for a normal return to be earned by suppliers over the medium-term.
This requires that:
 Normal returns are calculated on an appropriately determined asset base and rate of
return, and cover efficient operating costs, and no more;
 Returns that are greater, or lesser, than the normal rate should reflect superior, or
inferior, performance respectively.
3. Prices should be dynamically efficient over the medium-term. This requires that over- or
under-investment be avoided, and that appropriate price signals are sent for investment
(or divestment).
4. The above principles (1 – 3) should not be seen independently, but rather as inter-related
considerations for evaluating efficiency.
5. Prices (and costs) can be susceptible to short-term fluctuations in market conditions. The
principles above are expressed over the medium-term, so that such short-term fluctuations
do not distort judgements on whether prices are efficient and suppliers have been
behaving efficiently. The Commission considers this is desirable for evaluating whether
the potential benefits (if any) of control could be realised.
Lesson for Hong Kong. New Zealand airports are following a loose set of pricing
principles. Specifically, they are considering several popular options as tabulated in Table 9
as follows:
Table 9: Regulation Options Considered by the New Zealand
Allocative Productive Regulatory burden

Dynamic efficiency
efficiency efficiency and uncertainty
Price cap Uncertain Encourages Possible congestion Medium
No incentives Possible
Cost-of-service Encourages High
created over-investment
Sliding-scale ROR Encourages Encourages Neutral Medium – High
Note: Sliding-scale ROR is a variant of ROR where a table or a formula was used to link the price charged by a
regulated company to the proportion of their net profit that it is allowed to retain. A company was free to charge
whatever price it wanted. However, the lower the price it charged, the larger the proportion of its net profits it
was allowed to retain.
As stated in its last paragraph, the document shows no clear preference on any option:
22
There is no consensus internationally on which approach to price control is

the most appropriate. The relative importance of each of the above criteria
will depend on the circumstances into which the approach may be
introduced, i.e., a comparison with the status quo is necessary.
Despite the New Zealand airports’ unregulated mode practiced currently, the airports
performance ranked quite a high position in the recent years. This may suggest that under
certain conditions, the lassiez-faire outcome may not be suboptimal to the regulated outcome.
8. Airport Ranking at 2002

The section concludes by comparing the productivity compiled by the ATRS (2004)
and the mode of regulation and ownership compiled by Oum, Zhang and Zhang (2004) for
the airports in Asia Pacific, Europe and North America, as shown in Tables 10 – 12 below.
Table 10: Airport Ranking as at 2002 – Asia Pacific
Ranking Regulation Ownership Name of Airport

1 ROR Public Sydney Kingsford Smith International Airport (SYD)*
3 Single-till Price-cap Major Private Auckland International Airport (AKL)
6 Single-till Price-cap Private Christchurch International Airport (CHC)
7 Others Public Hong Kong International Airport (HKG)
8 Others Public Singapore Changi International Airport (SIN)
11 Others Major Public Kansai International Airport (KIX)
12 Others Public Seoul Kimpo International Airport (SEL)*
13 Others Major Public Beijing Capital International Airport (PEK)
16 Others Public Tokyo Narita International Airport (NRT)*
N/A Dual-till Price-cap Private Melbourne International Airport (MEL)
N/A Others Public Bangkok International Airport (BKK)
In the Asia Pacific region, there is a successful case of ROR – Sydney. On regulation,
although there is no clear pattern of whether ROR or price cap is better, they perform better
than the other modes of regulation. Also, the single till outperforms the dual till. 11 On
ownership, there is also no clear pattern of whether public or private is better.
11
Recall that all ROR cases considered in Oum, Zhang and Zhang (2004) are of single till.
23
Table 10 Continued: Airport Ranking as at 2002 – Europe

1 Dual-till Price-cap Major Private Copenhagen Kastrup International Airport (CPH)
2 Single-till Price-cap Private London Gatwick International Airport (LGW)*
3 Single-till Price-cap Private London Heathrow International Airport (LHR)*
5 Others Public Geneva Cointrin International Airport (GVA)
6 ROR Public Madrid Barajas International Airport (MAD)
7 Others Major Public Amsterdam International Airport Chisholm (AMS)
10 Others Major Private Vienna International Airport (VIE)
11 ROR Major Private Flughafen Dusseldorf International Airport (DUS)
14 ROR Public Munich International Airport (MUC)
17 Single-till Price-cap Public Manchester International Airport (MAN)
18 Others Major Public Zurich International Airport (ZRH)
19 ROR Public Frankfurt Main International Airport (FRA)
N/A Others Major Public Milan Malpensa International Airport (MXP)
Rome Leonard DaVinci/Fiumicino International Airport
N/A Others Private
(FCO)
N/A Others Public Dublin International Airport (DUB)
N/A Others Public Paris Charles De Gaulle International Airport (CDG)
N/A ROR Public Barcelona El Prat International Airport (BCN)
N/A Single-till Price-cap Public Stockhold Arlanda International Airport (ARN)
In the European region, the price cap is better than the other modes of regulation
(including ROR) except for the Manchester International Airport. But there is no general
pattern on ownership of whether public or private is better.
Table 10 Continued: Airport Ranking as at 2002 – North America

1 Compensatory cost-plus Public Atlanta William B. Hartsfield International Airport (ATL)
2 ROR Public Vancouver International Airport (YVR)
5 Residual cost-plus Public Orlando International Airport (MCO)
7 Compensatory cost-plus Public Boston Logan International Airport (BOS)*
9 ROR Public Charlotte Douglas International Airport (CLT)
10 ROR Public Minneapolis/St. Paul International Airport (MSP)*
11 ROR Public Calgary International Airport (YYC)
12 ROR Public Portland International Airport (PDX)
13 ROR Public Las Vegas McCarran International Airport (LAS)
Cincinnati/Northern Kentucky International Airport
16 Residual cost-plus Public
(CVG)*
17 ROR Public Phoenix-Sky Harbour International Airport (PHX)*
18 ROR Public Honolulu International Airport (HNL)
19 ROR Public Toronto-Lester B. Pearson International Airport (YYZ)
20 ROR Public Baltimore Washington International Airport (BWI)
21 Residual cost-plus Public Chicago O’Hare International Airport (ORD)*
23 Compensatory cost-plus Public Los Angeles International Airport (LAX)
24 Compensatory cost-plus Public Houston-Bush International Airport (IAH)
25 Compensatory cost-plus Public Salt Lake City International Airport (SLC)
27 ROR Public Dallas/Ft. Worth International Airport (DFW)
28 ROR Public Washington Dulles International Airport (IAD)
30 Residual cost-plus Public Miami International Airport (MIA)
24
31 ROR Public Philadelphia International Airport (PHL)

32 Compensatory cost-plus Public LaGuardia International Airport (LGA)*
34 Residual cost-plus Public Detroit Metropolitan International Airport (DTW)*
35 ROR Public Ronald Reagan Washington National Airport (DCA)
37 Residual cost-plus Public San Francisco International Airport (SFO)
38 ROR Public Denver-Stapleton International Airport (DEN)
39 Compensatory cost-plus Public Newark International Airport (EWR)*
40 Compensatory cost-plus Public New York-John F. Kennedy International Airport (JFK)*
N/A ROR Public Edmonton International Airport (YEG)
N/A ROR Public Montreal-Dorval International Airport (YUL)
* Congested airport
In the North America region, all airports in the sample are publicly owned, and there
is no clear pattern of which mode of regulation is the best. Summarising, we have:
 Single till is better than dual till in the Asia Pacific region;
 Price cap is better than ROR and other regulation modes in the European region;
 There is no clear pattern on ownership (public versus private) in all regions.
A final remark on this is that the above comparison is based solely on the 2002
benchmark data, and it does not eliminate any spurious factors that may present. Yet the
stricter and more reliable results have to be resorted to Oum, Zhang and Zhang (2004) which
have been given in Section 3. By comparing their conclusion and the one in above, we have:
Price cap is better than the other modes of regulations.
References
Australian Competition and Consumer Commission (ACCC), Direction No. 13 and 20.
Adler, N.; Oum, T. H., Yoshida, Y and Yu C. (2002), “Airport Benchmarking: A Comparison
of Total Factor Productivity and Data Envelopment Analysis,” Paper presented at the
6th Air Transport Research Society (ATRS) Conference, Seattle, Washington, 14 – 16
July, 2002.
Air Transport Research Society (ATRS, 2004), “2004 Airport Benchmarking Report: Global
Standards for Airport Excellence, Part I: Summary Report,” ATRS, August 2004.
Averch, H. and Johnson, L. (1962), “Behavior of the Firm under Regulatory Constraint,”
American Economic Review 52 (5), 1052 – 1096.
Civil Aviation Authority (CAA), UK (2003a), “Economic Regulation of BAA London
25
Airports (Heathrow, Gatwick and Stansted): 2003 – 2008,” CAA Decision, February
2003.
Civil Aviation Authority (CAA), UK (2003b), “Economic Regulation of Manchester Airport:
1 April 2003 – 31 March 2008,” CAA Decision, March 2003.
Forsyth, Peter (2002), “Airport Price Regulation: Rationales, Issues and Directions for
Reform,” Discussion Papers No. 19/02, Department of Economics, Monash
University, Australia.
Hockey, J. (Minister for Financial Services and Regulation) (2001), “Prices Oversight
Arrangements at Airports”, Media Release No. FSR/081, 5 October 2001.
Legislative Council Panel on Economic Services (2004), “Privatization of Airport Authority,”
LC Paper No. CB(1)1017/03-04(05), 23 February 2004.
Commerce Commission, New Zealand (2002), “Final Report Part IV Inquiry into Airfield
Activities at Auckland, Wellington, and Christchurch International Airports,” 1
August 2002.
Economic Development and Labour Bureau (EDLB, 2004), “Consultation Document on
Partial Privatization of Airport Authority,” 22 November 2004.
Oum, Tae Hoon; Zhang, Anming and Zhang, Yimin (2004), “Alternative Forms of Economic
Regulation and Their Efficiency Implications for Airports,” Journal of Transport
Economics and Policy 38 (2), April 2004,217 – 246.
Productivity Commission, Australia (2002), “Price Regulation of Airport Services,” Report
No. 19, AusInfo, Canberra.
Starkie, David; Yarrow, George (2000), “The Single-till Approach to the Price Regulation of
Airports,” Draft, Regulatory Policy Institute, July 2000.
Tretheway, Michael (2001), “Airport Ownership, Management and Price Regulation,” Report
prepared for the Canada Transportation Act Review Panel, March 2001.
TRL (2003), “Review of Airport Charges.”
26

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Regulation of Airports:

Options and International Experience

Aviation Policy and Research Centre

This draft: November 2004

2.1 Option 1: Rate of Return (ROR) Regulation

Second, there may be difficulties in measuring capital. In many occasions, it is not

2.2 Option 2: Cost of Service Regulation

2.3 Option 3: Price Cap Regulation

2.4 Option 4: Yardstick Competition

2.5 Option 5: Automatic Rate Adjustment

2.6 Option 6: Trigger Regulation

2.7 Option 7: Self Regulation

2.8 Option 8: Contractual Regulation

Table 1: Airport Regulation Options – A General Comparison

Option Mechanism Pros Cons Examples

The discussion so far has been summarised in Table 1 above.

2.9 Single Till versus Dual Till

Table 2: Airport Regulation Options – A General Comparison

Single Till Advantages

Table 3: Airport Regulation Options – International Experience

Regulation Ownership Name of Airport Region

Table 3 Continued: Airport Regulation Options – International Experience

Regulation Ownership Name of Airport Region

Table 3 Continued: Airport Regulation Options – International Experience

Regulation Ownership Name of Airport Region

4. International Experience on Price Cap

Table 4: International Experience on Price Cap

Country Principles of Airport Charges Increase (p)

Table 5: Factors That Affect the Price Cap

Variable Effect Suggested Rationale

5. Case Study: UK Airports Regulation

The formulae. Define the following variables:

The currently used parameters in above are given in Table 6 below.

Table 7: UK Airports x Values and Inflation Rate (%): 1986 – 2008

6. Case Study: Australia Airports Regulation

1. Revenue shares of component j’s share of total aeronautical revenue;

Australia Airport 1997 – 2001 2001 – Now

7. Case Study: New Zealand Airports Regulation9

Productive efficiency. Productive efficiency means meeting demand at the lowest

Dynamic efficiency. Dynamic efficiency means maintaining allocative and productive

Table 9: Regulation Options Considered by the New Zealand

Allocative Productive Regulatory burden

There is no consensus internationally on which approach to price control is

8. Airport Ranking at 2002

Table 10: Airport Ranking as at 2002 – Asia Pacific

Ranking Regulation Ownership Name of Airport

Table 10 Continued: Airport Ranking as at 2002 – Europe

Ranking Regulation Ownership Name of Airport

Table 10 Continued: Airport Ranking as at 2002 – North America

Ranking Regulation Ownership Name of Airport

31 ROR Public Philadelphia International Airport (PHL)

Price cap is better than the other modes of regulations.

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