The future airline-airport relationship and the question of market power

Abstract

Airlines and airports want an efficient regulatory framework that facilitates the growth of the European aviation industry. Greater cooperation could be foreseen on issues such as sustainability. European Union rules on airport infrastructure will be a source of disagreement. Competition between airlines has improved the affordability of and access to air travel in the past decades. Those gains, however, may be offset when airports with significant market power (SMP) exert this power to charge excessively and earn returns above the cost of capital. This paper summarises proposals devised to assist the European Commission in developing a streamlined approach to identify SMP and regulate airports with market power only. Adopting screening tests could provide an accurate indication of whether an individual airport is likely to have SMP. An airport that fails these tests would be considered as likely to have SMP and suitable regulations would be imposed. Regulators would retain discretion to assess market power through an ordinary review in special circumstances, even when the tests are passed. Using these tests would avoid the need to perform full market power assessments and to impose the related burden on all stakeholders, while keeping market power under suitable scrutiny. They are designed to provide a practical way of identifying airports with SMP based on data that can often be readily obtained. Such tests would require assessing (i) the proximity of an independently owned airport, (ii) the existence of spare capacity, and (iii) the consistency of the airport’s pricing behaviour with effective competition.