Cross-subsidization and U.S. airports

Abstract

Airports serve as a two-sided market where aeronautical and non-aeronautical operations are complementary. This interdependence means that an increase in aeronautical operations output results in a corresponding increase in non-aeronautical revenues. To retain existing airlines and attract new airline clients, airports should offer reasonable aeronautical fees, which can be subsidized by lucrative non-aeronautical revenues. This raises questions about whether cross-subsidization pricing strategies are used in the U.S. airport industry. To examine this issue, we analyzed data from 59 large and medium hub airports between 2009 and 2019, focusing on the relationship between marginal costs and fees of aeronautical and non-aeronautical operations. The marginal cost was estimated from a translog variable cost function by utilizing a seemingly unrelated regression model. Our study highlights the importance of considering the complex interplay between aeronautical and non-aeronautical operations at airports and the potential for cross-subsidization. We also examined the factors influencing cross-subsidization at airports. The results reveal that large airports are less likely to engage in cross-subsidization compared to their counterpart airports. On the other hand, given that the FAA's airport classification diverges from that in the hub-spoke system, we incorporated airports that serve as hubs for legacy airlines (American, United, and Delta) into our model to account for the influence of hub status. Our findings indicate that hub status does not influence cross-subsidization decisions. In addition, airports governed by local authorities place less emphasis on cross-subsidization whereas the presence of airport competition often incentivizes a more pronounced adoption of cross-subsidization practices. Airports in densely populated areas have diminished focus on cross-subsidization while there is a positive correlation between local GDP and cross-subsidization. Finally, cross-subsidization practices do not differ between airports dominated by LCCs and those without such dominance. Future research should focus on exploring the implications of these findings for the welfare of passengers and other stakeholders in the aviation industry.