Airport pricing and capacity: Schedule versus congestion delays

Abstract

This study investigates airport pricing and capacity investment when passengers face schedule and congestion delays. Two countries' airports are served by each country's home carrier. Airports choose their charges on a per-flight and/or per-passenger basis. Given the general observation that carriers that compete on parallel international routes often form codeshare alliances to increase the schedule they are able to provide, we find the following. First, the first-best movement-related per-flight charges do not necessarily need to charge congestion delay costs if there is a positive externality that happens to compensate for the negative congestion externality. Second, when positive and negative externalities cancel out, choosing per-passenger charges alone (known as the second-best approach, in which per-flight charges are weight-related and become equivalent to per-passenger charges) can also lead to the first-best outcome. However, choosing movement-related per-flight charges alone (another second-best approach) cannot do so. Third, under the former second-best pricing approach, capacity investment could be globally efficient. However, under the latter second-best pricing approach, each airport overinvests.