The Paper challenges the common supposition that (scarcity) rents at Heathrow airport accrue from airlines charging efficient clearing prices and instead suggests that because of oligopolistic practices, much of the rent at Heathrow is quasi-monopoly rent. It also suggests remedies that could be implemented in the short term before more runway capacity is added and that if Heathrow airlines matched the average load-factors of those at London’s other major airport, Gatwick, average fares might be as much as 5 per cent lower.
The extent to which firms face price-elastic demands for their products is important in the application of competition law and in judgments made as to whether they have significant market power. In the context of the airport industry1, assessing price-elasticities is complicated by the fact that one major type of consumer of airport services, the air passenger, is not charged directly for use of terminals and airside infrastructure2. Instead, the airport derives its revenues from charges to airlines and from the supply of non-aeronautical services. The charges to airlines then become one of many input costs that the airlines recoup from passenger fares, and this intermediation has significant implications for the demand analysis.
The last two decades have witnessed remarkable changes in European aviation, the consequence of a series of inter-related, largely symbiotic developments. These include: airline de-regulation; the use of information technology and the internet; new managerial approaches (product unbundling and differentiation) and the commercialisation of the airport industry. The developments were symbiotic not least because de-regulation encouraged competition and entrepreneurial activity, which in turn stimulated new technology and managerial innovation; substantial increases in productivity leading to a marked fall in the real cost of air travel across a hugely expanded network of services, has been the outcome.
Market definition and market power in the airport sector: competition from outside the relevant market
The purpose of this note is to draw attention to a generally neglected aspect of assessing market power in the supply of airport services. It develops a point made en passant in a paper written by the current author and George Yarrow for the UK CAA in 20101. The paper stressed that, although it was the standard practice in competition assessments to define substitution possibilities from within a defined market, sources of constraint on market power also arose from substitutable products defined to lie outside the relevant market and that it was the cumulative effect of all the substitution possibilities that determined the own-price elasticity of demand for a product or service.