‘Most airports are effective monopolies’ and then ‘there are airports that have market power’ - two differing definitions, but which is true?

10 February, 2020

Two seemingly contradictory trains of thought emerged from last week’s CAPA Qatar Aviation Aeropolitical and Regulatory Summit in Doha when the subject of airport activity was discussed.

On the one hand, PA Nyras (part of the PA Group) commercial aviation lead David Huttner, said: "Most airports are effective monopolies", which is why "regulation acts as a proxy for competition" between airport operators.

On the other, ACI Europe head of economics and competition Michael Stanton-Geddes, said "there are airports that have market power", but opined that it is a relatively small number of airports and ultimately he disagrees that airports are effective monopolies.

Mr Stanton-Geddes cited London Heathrow Airport as an example of an airport that has "significant market power". So, who offers the more accurate viewpoint? Are there few airports that are ‘monopolies’, applying excessive market power, or more than there should be? The Blue Swan Daily shares its viewpoint when considering UK airports, given Mr Stanton-Geddes’ example.

Market/monopoly power is defined as the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition. The exercise of market power leads to reduced output and loss of economic welfare. A monopoly simply refers to when a company and its product offerings dominate a sector or industry.

A formal study of airport competition and market power took place in 2012, by Copenhagen Economics. It was sponsored by ACI Europe and concluded that there was little evidence of monopoly activities and that “much current airport regulation is likely to be inappropriate now that airline liberalisation has transformed the demand side of airport markets, has increased airline switching and passenger choice and led to inter- airport substitutability which has significantly strengthened the competitive constraints on airports.”

That is perhaps why the ACI representative was so adamant that relatively few airports have market power although he did acknowledge that London Heathrow is one of them. So, which are the others?

If we begin with Heathrow and stay with the premise that market power is defined by the excessive charges that the airport can apply beyond what would prevail in competition, then it is clear that is correct – but only just, and only in London.

The chart below compares Heathrow with two other London airports, Gatwick and Stansted (there are six in all). Heathrow is almost exclusively served by full-service carriers. Gatwick has a mixed traffic base of FSC, low-cost and charters, while Stansted is mainly low-cost. Also in the chart are Manchester and Birmingham airports, serving the country’s second and third biggest conurbations. The charges are for 2019.

CHART – How London Heathrow’s ‘market power’ compares with other leading London and regions’ airports in relation to landing chargesSource: CAPA - Centre for Aviation and Air Transport Research Society (data: 2019)

The results are perhaps a little surprising. Of the three London airports Heathrow has the highest charges, but only just, over Gatwick and not in the smallest aircraft category (50-seat CRJ-200s and similar). Stansted has the lowest charges as one might expect.

In most categories, Manchester, which also has a mixed business model base, has lower charges – it is in open competition with airports such as Liverpool, Leeds-Bradford and Doncaster-Sheffield. But how does one explain Birmingham’s very high charges? That central England airport is also in competition, with Heathrow and Stansted to the south, Manchester to the north, and locally, the East Midlands airport.

Our UK insight offers no firm conclusions. Landing charges are only one way of measuring airport charges to airlines and the compared examples vary significantly. There are surprising results though, like the Birmingham charges.

It can be observed that charges are likely to vary more where there is different ownership at airports. That is the case in the UK, where all six London airports are under separate (private or public-private) ownership, as are the other two in the sample, and only one (Heathrow) is currently regulated. But, based on our brief analysis, there is little evidence, in the UK at least, to support the conclusion that airports are monopolies.