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Location rents and the experience of US airports—lessons learned from off-airport entities
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Journal of Air Transport Management 10 (2004) 61–69
Location rents and the experience of US airports—lessons learned from off-airport entities Richard Golaszewski GRA, Incorporated, 115 West Avenue, Suite 201, Jenkintown, PA 19046, USA
Abstract This paper explores whether airports can capture location rents from off-airport businesses that serve airport customers. It examines two types of off-airport enterprises: services that typically gather customers by transporting them to and from the airport and through-the-fence activities, which access the airside of the airport via taxiways or other means. It examines the differential in fees paid by comparable on- and off-airport service providers. It also discusses how the distribution of rents may be affected by laws and policies affecting the fees charged by airports, and by the structure of the market for airport services. r 2003 Elsevier Ltd. All rights reserved. Keywords: Airports; On- and off-airport concessions; Location rents
1. Background Do location rents exist at US airports? Can airports capture rents from off-airport businesses? These are two important questions in both transportation policy and transportation economics. In simple terms, an economic rent is a price for a good or service that is above the resource cost of production including a normal profit. Generally, rents are due to unique features of the good or service such as scarcity of supply, limited access, or other factors that cause prices to reflect the value of the scarce resources.1 Some practical examples of where location rents may exist include the following:
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New York City confers distinct location advantages for both individual and commercial access. In particular, Manhattan is an island and access is controlled either by bridges, ferries, tunnels or other means. These generally had been under the control of
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E-mail address: [email protected] (R. Golaszewski). Such enterprises can operate within the public sector or the private sector. In addition, if the public sector controls the underlying property rights, they can effectively sell or lease the capitalized value of the location rent to a private operator or choose to operate the facility themselves. In this case, the relative bargaining power between the public sector owner and the private sector operator determines how the rent will be distributed. 1
0969-6997/$ - see front matter r 2003 Elsevier Ltd. All rights reserved. doi:10.1016/j.jairtraman.2003.10.007
the Port Authority of New York and New Jersey and some assert that the above market returns from bridges and similar access facilities were transferred to support large-scale economic development in New York City.2 Sports teams are often controlled by leagues that franchise operations of a limited number of teams in a limited number of cities. The league sells new franchises for considerable sums of money and existing franchises change hands for substantial sums. This assures that there is a relative scarcity of supply.3 The league basically controls the supply of professional sporting events in order to maintain the value of the franchises.4 Airport slots also can be a form of location rent when capacity is scarce. Who captures these rents is a question of laws and regulations governing airport
2 Much of this is captured in an excellent story about how Robert Moses used these public authorities and the rights that they controlled to generate billions for the development of public infrastructure in New York City (Caro, 1974). 3 It is often difficult to distinguish between monopoly power and location rents due to scarcity in professional sports franchises. In the US, major league baseball has an exemption from the antitrust laws, while other professional sports teams do not. 4 When the leagues expand, communities and potential team owners combine to bid aggressively for new opportunities. Again, the relative bargaining power of existing owners (‘the league’), potential new owners and communities determines the distribution of the rent.
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charges and property rights. For example, airport slots in the US have historically been awarded at no cost to incumbent operators. There have been limited buy-sell programs for airport slots in the US. In this case the scarcity rent is likely to accrue to airlines that hold slots. The supply of beachfront real estate is also limited in many developed countries. Scarcity rents tend to be capitalized into land values. Placement on the screens of computer reservation systems (CRS) and priority listing also has been a form of economic rent that has been sold to those willing to pay the most. In essence, the CRS operator is able to charge a premium to place flights on the first display screen. Development rights over mass transit subway stations have been the subject of competitive bids that embody location values. They guarantee that offices and shops will be located close to many commuters and visitors. In particular, the Hong Kong metro is a good example of the exploitation of location rents by government.
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We have mentioned airport slots as a source of rents in the aviation arena. In the US, some believe that the large incumbent air carriers control the market for airport slots and that buy–sell has become ineffective. The European Union is examining whether there should be a market for airport slots in Europe. The landside of airports, including airport terminals, on-airport parking, rental car locations, and such, often command premium prices in relation to those charged for similar goods and services in a broader community.5 The question of whether location rent can extend beyond the airport boundary is the principal issue addressed in this paper. This paper examines how offairport businesses interact with airports in the US today. There is a peculiar institutional and legal environment that governs airport charges in the US and affects much of what we observe. In this case, the US is very different from other jurisdictions. In turn, this may impact who can capture rents, and the incentives faced by various parties to obtain such rents. The subject of airport rates and charges policy in the US is a complex issue that is well beyond what is covered in this paper. A good definition of location rents and how they differ from monopoly profits is contained in a recent report (Australian Productivity Commission, 2002). The report states monopoly profits are profits that exceed the rate of return required to maintain the supply of the goods or services. It states that location rents are those 5
Many airports are shifting to market pricing for concession goods and services because they have found the market to be quite price elastic. In part, this may be due to the availability of substitutes for goods and services sold by airport concessions. Many airports believe it is more profitable to sell more goods at a lower price.
that accrue to a scarce factor of production. The report notes that location rents do not involve the efficiency loss of monopoly that results from distorted supply and demand. The location rents reflect the value placed on scarce resources by consumers and provide signals for their efficient use. An unstated corollary is that it does not matter who prices the scarcity in terms of economic efficiency. As long as a rent exists some party will capture it. In the present analysis, this could be either the airport or the service provider located on or off the airport. This paper examines selected examples of off-airport service providers in the US and how fees charged for access to airport-based customers might relate to production costs and whether location rents exist due to scarcity. Off-airport service providers access customers by using shuttle buses and vans that carry customers to and from the airport. As these businesses grew, airports sought to charge for the costs they imposed on the airport or levy fees to level the playing field with the on-airport concessions. We examine both off-airport service providers as well as ‘through the fence’ activities—i.e., those activities which, while they reside off-airport, have direct access to the airside facilities of the airport. We will discuss the basis for airport charges for these types of enterprises and provide some preliminary thoughts on the existence and distribution of any potential location rents.
2. Analysis If rents exist, they result from spatial monopoly or exclusive access to a customer pool. In the case of airports, location rents can apply to both on-airport activities and to areas adjacent to the airport or offairport activities. The structure of the market for the services in question, and the relative size and market position of the parties involved, determines whether rents exist and how they are distributed. Rents can arise from either structural or behavioral conditions. The distribution of rents is determined by who ends up controlling the market—which is often a question of law or property rights. The ability of the airport to levy differential fees on suppliers of on and off airport services also can affect competition (UK Competition Commission, 1997). Most US airports are owned and controlled by local governments with strict Federal rules on the usage of airport revenues.6 This provides mixed incentives to 6
US commercial service airports are typically operated either as public authorities or as departments of state or municipal governments. This is enforced by US Department of Transportation/Federal Aviation Administration rates and charges policies. The leverage point is that the federal government provides grants for airport development.
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airport operators in that, in general, money generated on an airport must be spent on the airport for operations or investment. This limits the ability of US airport operators to take the money downtown and cross-subsidize other city services.7 Other countries also examine whether fees for certain airport services, where they compete with services supplied elsewhere in the community, must be counted as airport revenue in determining charges for air carriers (UK Competition Commission, 1997). In addition to airport charges, some local governments also benefit from the ability to levy special taxes on off-airport activities. The regulatory framework for airports in the US, particularly airport rates and charges policies, may affect the incentives of airports to exploit rents to the maximum amount. Airports cannot take money off the airport so they may choose to use the rents to ‘gold plate’ existing facilities. In the case of airport slots, institutional mechanisms generally have meant that airlines capture any scarcity rent.
3. Examples of rent capture The two principal examples that may illustrate the existence of location rents are charging off-airport companies to access the airport and/or airport customers. The first category involves fees paid by companies located off the airport that provide rental cars, parking, hotels and ground transportation. This can be done either through establishing fees for the shuttles that take air passengers to these off-airport businesses or by levying special fees or taxes on the off-airport businesses that are in proximity to the airport.8 The key linkage here is that these off-airport firms benefit from the access to airport customers and may enjoy some location rent if off-airport facilities are scarce. The question then becomes one of rivalry for rents between the on-airport and off-airport firm, unless the airport is able to capture them. The other example of airport location rents may be in the area of ‘through the fence operations.’ These allow companies off the airport to have access to the airside part of the airport in return for paying special fees. These companies can include firms involved in aircraft hangars, manufacturing enterprises, cargo facilities, and many other types of activities. There are even examples of residential communities that have access to
7 Some US airports have grandfathered exceptions to some rates and charges policies. 8 A somewhat dated but thorough discussion on gross receipts fees charged by airports to off-airport companies is contained in a report by FAA’s Office of Chief Counsel (Federal Aviation Administration, Office of Chief Counsel, 1984). Anderson (1990) also covers some of the relevant case history on off-airport fees.
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airport runways where owners and operators can taxi their airplane right up to the front door of their residence. In this paper, we utilize data from the largest US hub airports.9 (Data are also available for other size airports.) There is a long history of litigation and case law in the US regarding charging off-airport businesses. FAA policies on airports rates and charges are founded in efforts to raise airport revenues and not to discriminate among airport users. FAA promotes charging off-airport firms because they compete with on-airport providers of the same services. In essence, this protects airport concessionaires from lower cost competition and also is a means of charging off-airport providers for the airport services and facilities they use in accessing their customers. Miami International Airport, for example, developed a curbside charging system to recover the costs of constructing, maintaining, and operating vehicle curbside to access airport customers. These charges applied to both on- and off-airport businesses that operated shuttle vehicles on the airport. In the examples below, the data show that there is a need to have some way of tying the off-airport business to the airport. It limits who can be charged for providing off-airport services to airport customers. The off-airport businesses that get charged fees include off-airport rental cars, ground transportation services, and courtesy vehicles to access hotels and off-airport parking. The fees can apply to the shuttle vehicles that transport passengers to and from the airport, or in the ability of the airport to levy fees directly on the activities of offairport businesses. In some cases, special taxes are levied on off-airport businesses. For example, one community levies a tax on hotel and motel rooms with some of the proceeds dedicated to airport development (Munford, 2002).
4. How fees are assessed In general, fees for off-airport car rentals involve either a fixed fee for a car rental contract, or a percent of revenue based on the value of the total rental contract. (Some jurisdictions also have special car rental taxes that apply to geographic areas around airports.) In the case of ground transportation services, generally these are based on the service provider paying a fee per passenger, a fee for airport trips by the vehicle, or an annual license fee. Off-airport courtesy vehicles for hotels, rental cars and parking also may be levied a perpassenger fee, a per-trip fee, or an annual license fee. With modern technology, one can use auditing and sampling to monitor compliance. Some airports track the usage of the airport by courtesy and shuttle buses 9
Data are from American Association of Airport Executives (2000).
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with electronic transponders mounted to the roof of vehicles that pass through gateways at airport entry and exit points. The transponders track the number of trips made through the airport road system and the length of time the vehicle was on the airport. Vehicle operators are allowed a certain number of trips for a fixed fee and are charged for trips over and above the base amount.10 *
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Rental cars: Table 1 presents selected data on rental car fees charged at 23 large hub airports reporting data in the 1999–2000 AAAE Rates and Charges Survey. The data are for 23 airports that reported fees charged to on-airport and off-airport car rental companies. The data indicate that on-airport car rental concessions pay a fee of from 9% to 12.5% of gross revenues while off-airport fees range from 4% to 10% of gross revenues.11 The annual revenue reported from car rental fees at the 23 airports ranges from $7.1 million to $30.5 million per year for onairport car rental companies, while for off-airport companies, the annual fees raised range from $55,000 to $17.5 million. Some off- and on-airport rental cars also pay per vehicle and per trip fees for courtesy buses. Scheduled buses: Table 2 reports fees from 15 large hub airports regarding scheduled bus operations. These are by definition all off-airport enterprises. While public transit often is viewed as a positive way of reducing airport and access roadway congestion, airports do levy fees on their operation. The fee bases range from a percent of gross revenue (5–10%), a per trip fee ($0.40 to $5.00) and per vehicle fees (insufficient data reported). The annual revenues raised per airport from fees on scheduled buses range from less than $10,000 per year to $2.2 million per year. Taxis: Many airports levy fees on taxis operating at the airport. Table 3 shows the data for 18 large hub airports that reported the fees levied on taxi operations. In one case, the fee was 18% of gross revenues. This was a unique case at Dulles Airport where only specific types of taxis are allowed to operate. The pertrip fees at the other airports range from $0.40 to $2.75 and there were per-vehicle charges that range from $30 to $12,500 annually. The annual revenues raised per airport were from less than $84,000 to $3.1 million per year. Limousine service: Data for fees levied on limousine service are shown in Table 4. For the 14 large hub airports reporting, the fee bases included 10% of
Table 1 Rental cars 23 Airports reporting
On-airport
Off-airport
Percent of gross revenue Annual revenue range
9–12.5% $7.1–30.5 Million
4–10% $55,000–17.5 Million
Source: American Association of Airport Executives (2000).
Table 2 Scheduled buses 15 large hub airports reporting Fee base Percent of gross Per trip Per vehicle
5–10% $0.40–5.00 N/A
Annual revenue per airport Range
o$10,000–2.2 million
Source: American Association of Airport Executives (2000).
Table 3 Taxis 18 large hub airports reporting Fee base Percent of gross Per trip Per vehicle
18%a $0.40–2.75 $30–1250 annually
Annual revenue per airport Range
o$84,000–3.1 million
Source: American Association of Airport Executives (2000). a One airport reporting (Washington Dulles).
Table 4 Limousines 14 large hub airports reporting Fee base Percent of gross Per trip Per vehicle
10% $0.55–4.90 $30–100 annually
Annual revenue per airport Range
o$30,000–2.4 million
Source: American Association of Airport Executives (2000).
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See Australian Productivity Commission (2002) for a discussion of airport landside fees for parking and airport access, and how these relate to the supply of competitive on- and off-airport services. 11 See also the discussion of fees for on-airport and off-airport rental cars at Charlotte Airport (Charlotte, NC, City Council, 1999).
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gross revenues, or $0.55 to $4.90 per trip, or per vehicle fees of $30 to $100 per year. The revenues raised per airport for limousine fees range from less than $30,000 to $2.4 million at the 14 large hub airports reporting. Courtesy vehicles: Courtesy vehicles for off-airport hotels, car rentals and parking also pay fees to
ARTICLE IN PRESS R. Golaszewski / Journal of Air Transport Management 10 (2004) 61–69 Table 5 Courtesy vehicles 12 large hub airports reporting Fee base Percent of revenue Per trip Per vehicle
None reported $0.40–4.00 $75–400 annually
Annual revenue per airport Range
o$23,000–2.5 million
Source: American Association of Airport Executives (2000).
airports (Table 5). For the 12 large hub airports that reported courtesy vehicle fees, these include per trip fees of from $0.40 to $4.00 and per vehicle fees of from $75 to $400 annually. At the 12 airports, annual revenues ranged from less than $23,000 to $2.5 million. There is one school of thought that suggests that fees on transportation providers and their shuttle operations are a recovery of airport costs and not necessarily a rent capture by the airport. Off-airport vehicles do consume roadway and curbside space which have associated capital, operating and maintenance costs. Modern transponder technology permits the measurement of curbside usage including on-airport time, off-airport time, and loiter time calculations. It also allows for cost recovery that can be based on a per-trip, per unit time, or some other service bundle (pay a flat fee per vehicle with a surcharge for trips in excess of a threshold number). Of course, others would suggest that airports are exploiting the scarcity to extract location rents by charging commercial firms to access airport passengers as part of their customer base.
5. Through the fence activities The other major source of potential locational rent for off-airport enterprises is what is termed ‘through the fence activities.’12 These are activities which take place on off-airport property but which have access to the airfield via the taxiway system. For example, a facility can have direct taxiway access to the airfield for hangars, cargo facilities, manufacturing or maintenance facilities, and other uses. The biggest single user of through the fence facilities is UPS, the package express operator. It has reached through the fence agreements in Columbia, SC, Ontario, CA, Louisville, KY, and 12 A good discussion of through the fence operations is contained in Soderquist (undated).
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Philadelphia, PA. (Hodges, undated). The latter three locations are major UPS hubs. These facilities were presented to the communities as employment and economic development activities. UPS had a degree of bargaining power in terms of the cities it chose to locate these jobs. By locating off-airport, UPS was able to negotiate special fees and avoid discrimination issues related to other air cargo operators on the airport. Some airports have been developed with through the fence operations in mind. The airport with the greatest use of through the fence agreements is Alliance Airport in Dallas, which was developed around a runway, part of which was paid for in Federal funds. A developer controlled all the land surrounding the airport and encouraged firms to locate next to the airport. The companies are located in an ‘off-airport’ industrial park adjacent to the runway taxiway system. The airport in Scottsdale also has a long history of through the fence operations. The typical fees charged by the airport for through the fence operations are based on per square foot developed, per square foot of the total site, per vehicle movement on and off the airport, or a fuel flowage fee if fueling is permitted. It turns out that fueling in through the fence operations is a big issue because it competes directly with on-airport fueling companies that pay concession fees to the airport. The US Federal Aviation Administration has raised a number of issues with through the fence operations.13 The FAA provides grant funds to airports for development and, in turn, requires airport sponsors to enter into certain agreements. The FAA wants no competitive advantage over airport tenants for through the fence activities. They want controls over developments, minimum service standards, non-discriminatory fees, and a fair return paid for by these operators for use of the landing area. FAA prefers incidental usage rather than day-to-day business activity. FAA wants to avoid circumvention of the public benefits that airports provide. For example, in return for public money, the airport has been developed for public benefit. Through the fence operations can erode the financial base of airport tenants. In addition, through the fence activities may cause additional costs that on-airport tenants should not bear. Communities, of course, look at the other side of the coin. They look to economic development and taxable land. As airport land becomes scarce, through the fence is a way of expanding the scope of the airport. In some locations, it may be one of the only means of obtaining developable sites for major facilities on or near an airport. For example, the Lester B. Pearson 13 Soderquist (undated) discusses the FAA position on fees for through the fence operations.
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International Airport in Toronto has a number of through the fence operations by major air cargo facilities (GRA, Incorporated, John F. Brown Canada and David Gillen, 2001).
6. The basis for charges Charges for off-airport concessions can be either costbased, or revenue (as value of service) based. Cost-based charging systems recognize that airport access by offairport enterprises imposes additional curbside and roadway congestion costs on the airport. Measuring the cost of this in terms of curb length and number of vehicle lanes required provides a rational basis for developing cost-based fees. Revenue or tax-based fees recognize that the area around an airport can be a special service area, which allows the airport or a political jurisdiction to capture some of the value created by an airport. It provides access to a customer base and may require additional public services. Such fees are generally not cost-based. Recovering the costs of through the fence operations requires charging schemes to recover the incremental costs of the taxiway and apron network that the through the fence operation requires. In addition, these operations place additional wear and tear on airside infrastructure, and the airport’s aircraft movement fees can recover these costs.
7. New developments The airport rental car business model is changing and the differences between off- and on-airport rental car activities are being reduced. Many airports are developing centralized car rental facilities with common transportation to and from the terminals. These facilities are often located at remote parts of the airport or, in some cases, on land that the airport leases. This is being done to reduce vehicle congestion on the roadways adjacent to the airport terminals and also to allow more car rental companies to locate on the airport. Also, by moving rental car facilities further from the terminal, it allows the airport to recapture additional space for parking. It turns out that airports generate more revenue per space from parking activities than they do from rental cars. For airports with fixed land areas, it allows them to accommodate more car rental companies ‘on airport.’ It also reduces differences between on- and off-airport car rental companies because these remote facilities are further from the terminal, and often require the use of a shuttle bus to access them. San Francisco has established one of the largest such facilities in the US. All rental car customers, both on-
and off-airport, go to the centralized car rental facility via an airport-operated bus. The on-airport companies are located at this facility, while shuttle buses to the off-airport rental car companies arrive and depart at this remote facility. This reduces the competitive advantage that an off-airport car rental may have at San Francisco if it were allowed to pick up passengers at the terminal. The trends in through the fence agreements are to expand airports without additional land acquisition. In many cases, airports have developed most of the available land and it is not necessarily in the governmental body’s interest to allow the airport to acquire additional land. Commercial real estate may produce more money for the governmental body’s treasury than allowing the airport to develop the land subject to FAA regulation on rates and charges. Thus, we may expect to see more development of aviation-related facilities adjacent to airports with through the fence agreements for those parties that require airside access such as air cargo, and aircraft manufacturing and maintenance.
8. Who gets the rents? The presence and distribution of the location rents at airports raises interesting questions. How large are these rents and how might various parties from the airport, concessionaires, airlines and other parties, capture them? One needs to look at how markets function to understand this issue. First of all, there is overall competition in the air transportation market and, for certain services there are many available substitutes. This applies to connecting services for airline passengers as well as many of the concessions operated inside the terminal. An airport that serves solely as a connecting hub likely does not have a large degree of market power. The key to the potential of an airport to capture rents from off-airport businesses is likely the size of the local passenger and cargo markets. The second issue is the substitutability of off-airport and on-airport services. Many services are available both on and off the airport including car rental, parking, food and beverage, and shopping. One would expect the market to equalize prices subject to the access time and hassle advantages of an on-airport location. Thus, we can expect to see on-airport parking be more expensive than most off-airport parking and on-airport rental cars to command a premium over off-airport rental cars. For example, Hertz wants to be on the airport because its business model is to provide a high level of service to its Number 1 Club members. This focus on business travelers is similar to the legacy hub and spoke carriers who also want to serve their business customers. There also is competition among service suppliers. For
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litigation related to airports levying fees on off-airport businesses. While not universal, it seems that airports generally have been successful in levying modest fees that are arguably cost-related for access to the airport by off-airport firms. There are also the cost characteristics of airport service providers. Rental car companies compete both on level of service and price. There are premium car rental companies that offer enhanced customer service and those that specialize in very low rates for long-term rentals pointed at leisure travelers. Optimum pricing of services would have prices to consumers reflect the scarcity of the resources being used. Whether the airport, airline or concessionaire ends up with the rents depends on the institutional arrangements. However, because airports are limited to cost recovery, they may not be able to retain the rent. They may have the incentives to incur additional costs to capture the rent within their rate base.
airports with a large number of rental car companies, while the airport may be able to extract some location rent related to being on the airport, competition among the rental car providers will tend to keep costs down. The size of the local market also matters. An airport with a large originating base of traffic (versus connections) provides more of an essential service to its community than an airport that serves mostly as a connecting hub. As such, one would expect such an airport to enjoy a larger degree of economic power. There are also perceived economic development and job creation benefits that accrue to some off-airport businesses. For some services such as cargo facilities, there is an ability to generate competition among communities for the economic development benefits of the facility. The large integrated carriers such as FedEx and UPS offer a large number of relatively well paying jobs to those communities that become hub-sorting facilities. Many communities sought to locate an air cargo hub at their airport as a form of economic development. In the late 1980s and 1990s, passenger airlines sought to create additional hubs and communities competed for these among themselves. There is also the structure of the service production process that comes into play. Is it necessary that all components or most components are on the airport? In the case of selling food and beverages to passengers on connecting flights, the airport is likely the only game in town. However, this is not the case of originating and terminating passengers. Viable options exist off-airport. Airports have discovered that they can centralize car rental locations in remote parts of the airport or on other land so that existing real estate can move to higher and better uses. In the US, there are also legal and regulatory constraints for charging on-airport and off-airport service providers. There has been a long history of
8.1. Rent distribution and capture Table 6 illustrates a hypothetical analysis of airport rents based on company or industry characteristics and airport characteristics including a large capacity constrained hub airport, a large unconstrained hub airport, and medium and small airports. The company/industry characteristics that are considered include: * * *
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On-airport services with competitive providers. Off-airport substitutes for these services. Services that can be disaggregated into components that can be located elsewhere such as air cargo sorting facilities. Services where a company can create significant employment with a specialized facility with economic development incentives, and Company brands are important to a consumer as with high-end car rental companies.
Table 6 Illustrative airport rent matrix Company-industry characteristics
Typical on-airport service (competitive providers) Off-airport substitute Service can be disaggregated into components located elsewhere; small station for FedEx, UPS, etc. Company can create significant number of jobs with specialized facility (competition from other airports/sites); large FedEx or UPS facility Company brand important to consumer (e.g., Hertz) Note: A=Airport; C=Concession, S=Share.
Airport characteristic Large constrained
Large unconstrained
Medium
Small
A A S
A/S A/S S
S S C
S S C
C
C
C
C
A/S
S
S
S
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The entries in the matrix indicate who is likely to get the rent where: * * *
A indicates Airport. C indicates Concessionaire. S indicates that the airport and the concessionaire are likely to share the rent.
Airports are likely to capture or share rents at the largest airports for on-airport services, off-airport services and branded services provided on the airport. Medium and small airports generally can expect to share the rent or have the rent accrue to a concessionaire because the low level of activity generally means that there will be few providers on the airport. Companies that can create significant economic development within an area can likely capture any location advantage or at least prevent the airport from extracting rents from them. If the airport captures the rent, it may be identified in above-average returns from specific concession activities. However, if the concessionaire is able to capture the rents, it may be difficult to identify their presence and measure the level of economic rents.
the owners of these large facilities are successfully able to compete one community against another. In fact, locational rents to the community may be negative in these instances. Airport pricing in the US is generally analogous to that of public utilities. Cost-based fees are the norm and include a recovery of capital investment. The public nature of most airports in the US means they have notfor-profit status. With these constraints, it may be difficult for airports to set prices that reflect the value of services received by customers (and classes of customers), considering the scarcity of resources used in production. As a result, prices may be too low. One manifestation of this is that US airports typically do not charge the full scarcity value of runway capacity. As such, either rent accrues to the carriers, or prices that are too low lead to excessive use of the runway resulting in a sub-optimal level of delays. The other potential inefficiency is what is referred to as the Averch–Johnson effect, where utilities over-invest to get more costs into the rate base for customer charges.
Acknowledgements 9. Closing thoughts There is a long history in the US of airports charging off-airport firms to access the airport. This includes transportation providers such as buses, limousines, and taxis, and courtesy vans for off-airport hotels and parking and off-airport car rentals. The question of whether the airport is simply recovering the costs imposed on it by these service providers or whether it is able to extract rents is an open question that begs for more empirical research. One would need to develop an econometric analysis that explained price and cost differences for various on- and off-airport services and allowed estimation of the likely economic rents and to whom they accrue. Another option would be to analyze cost accounting data from the airport or concessionaires, if it were made available. Finally, through the fence arrangements often depend on the relative bargaining power between the airport and the entity seeking access. Here, it is likely that the promise of local economic development benefits that companies proffer when locating large production facilities also comes into play. In the US, we have witnessed the competition among states for automotive assembly plants by foreign car producers. The competition for these facilities is intense and many economic concessions are granted to the company locating the facility. These companies are often highly subsidized by local jurisdictions that want the job creation benefits. Of course, at the national level, this is simply a distributional issue of which location will get the benefits, but
The author acknowledges David Gillen and Hans Martin Niemeier for the invitation to participate in the Hamburg Airport Conference and the encouragement to develop this paper as a result of it. They also recommended changes to earlier drafts of this paper. Frank Berardino, David Ballard and William Spitz of GRA also provided helpful comments on a draft version of this paper.
References American Association of Airport Executives, 2000. 1999–2000 Airport Rates and Charges. AAAE, Alexandria, VA. Anderson, T.W., 1990. Ground transportation and off-airport fees. Paper to the Airport Law and Airline Lease Negotiating Seminar, AAAE, Minneapolis, MN. Australian Productivity Commission. 2002. Price Regulation of Airport Services; Inquiry Report. Canberra, Ausinfo. Report No. 19. ohttp://www.pc.gov.au/inquiry/airports/finalreport/> Caro, R.A., 1974. The Power Broker: Robert Moses and the Fall of New York. Knopf, New York. Charlotte, NC, City Council. 1999. Airport rental car concessions and off-airport rental car fees. Business Meeting, Minutes Book 14, October 11. ohttp://www.charmeck.org/NR/rdonlyres/e6lcwbpvx 4ugsh3btb4mj3r7m4dkkxzyjucpp7pc2magnltlwsm67wuijyvtqfeodg 6oqgkvrjilwsz2n3z2icdpwgf/10 11 99min.pdf>. Federal Aviation Administration, Office of Chief Counsel. 1984. Analysis of Aviation Statutes Relating to the Imposition of Gross Receipts Fees. Washington, DC. GRA, Incorporated, John F. Brown Canada and David Gillen, 2001. The Evaluation of Economic Output and Potential Optimization of Air Cargo Activities. Prepared for Greater Toronto Airports Authority.
ARTICLE IN PRESS R. Golaszewski / Journal of Air Transport Management 10 (2004) 61–69 Hodges, M.A. undated. Through-the-Fence Development: Evil or Opportunity? Munford, J., 2002. Airport authority offers hotel-motel tax payment to PTC council for shortfall. The Citizen News, November 15. owww. thecitizennews.com/main/archive-021115/news/ptc-02.html>.
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Soderquist, P.R., undated. Thru the Fence Operations. UK Competition Commission. 1997. Manchester Airport Plc: A Report on the Economic Regulation of Manchester Airport Plc. ohttp://www.competition-commission.org.uk/rep pub/reports/1997/ 405manchester.htm#full>.
Journal of Air Transport Management 10 (2004) 61–69
Location rents and the experience of US airports—lessons learned from off-airport entities Richard Golaszewski GRA, Incorporated, 115 West Avenue, Suite 201, Jenkintown, PA 19046, USA
Abstract This paper explores whether airports can capture location rents from off-airport businesses that serve airport customers. It examines two types of off-airport enterprises: services that typically gather customers by transporting them to and from the airport and through-the-fence activities, which access the airside of the airport via taxiways or other means. It examines the differential in fees paid by comparable on- and off-airport service providers. It also discusses how the distribution of rents may be affected by laws and policies affecting the fees charged by airports, and by the structure of the market for airport services. r 2003 Elsevier Ltd. All rights reserved. Keywords: Airports; On- and off-airport concessions; Location rents
1. Background Do location rents exist at US airports? Can airports capture rents from off-airport businesses? These are two important questions in both transportation policy and transportation economics. In simple terms, an economic rent is a price for a good or service that is above the resource cost of production including a normal profit. Generally, rents are due to unique features of the good or service such as scarcity of supply, limited access, or other factors that cause prices to reflect the value of the scarce resources.1 Some practical examples of where location rents may exist include the following:
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New York City confers distinct location advantages for both individual and commercial access. In particular, Manhattan is an island and access is controlled either by bridges, ferries, tunnels or other means. These generally had been under the control of
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E-mail address: [email protected] (R. Golaszewski). Such enterprises can operate within the public sector or the private sector. In addition, if the public sector controls the underlying property rights, they can effectively sell or lease the capitalized value of the location rent to a private operator or choose to operate the facility themselves. In this case, the relative bargaining power between the public sector owner and the private sector operator determines how the rent will be distributed. 1
0969-6997/$ - see front matter r 2003 Elsevier Ltd. All rights reserved. doi:10.1016/j.jairtraman.2003.10.007
the Port Authority of New York and New Jersey and some assert that the above market returns from bridges and similar access facilities were transferred to support large-scale economic development in New York City.2 Sports teams are often controlled by leagues that franchise operations of a limited number of teams in a limited number of cities. The league sells new franchises for considerable sums of money and existing franchises change hands for substantial sums. This assures that there is a relative scarcity of supply.3 The league basically controls the supply of professional sporting events in order to maintain the value of the franchises.4 Airport slots also can be a form of location rent when capacity is scarce. Who captures these rents is a question of laws and regulations governing airport
2 Much of this is captured in an excellent story about how Robert Moses used these public authorities and the rights that they controlled to generate billions for the development of public infrastructure in New York City (Caro, 1974). 3 It is often difficult to distinguish between monopoly power and location rents due to scarcity in professional sports franchises. In the US, major league baseball has an exemption from the antitrust laws, while other professional sports teams do not. 4 When the leagues expand, communities and potential team owners combine to bid aggressively for new opportunities. Again, the relative bargaining power of existing owners (‘the league’), potential new owners and communities determines the distribution of the rent.
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charges and property rights. For example, airport slots in the US have historically been awarded at no cost to incumbent operators. There have been limited buy-sell programs for airport slots in the US. In this case the scarcity rent is likely to accrue to airlines that hold slots. The supply of beachfront real estate is also limited in many developed countries. Scarcity rents tend to be capitalized into land values. Placement on the screens of computer reservation systems (CRS) and priority listing also has been a form of economic rent that has been sold to those willing to pay the most. In essence, the CRS operator is able to charge a premium to place flights on the first display screen. Development rights over mass transit subway stations have been the subject of competitive bids that embody location values. They guarantee that offices and shops will be located close to many commuters and visitors. In particular, the Hong Kong metro is a good example of the exploitation of location rents by government.
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*
*
We have mentioned airport slots as a source of rents in the aviation arena. In the US, some believe that the large incumbent air carriers control the market for airport slots and that buy–sell has become ineffective. The European Union is examining whether there should be a market for airport slots in Europe. The landside of airports, including airport terminals, on-airport parking, rental car locations, and such, often command premium prices in relation to those charged for similar goods and services in a broader community.5 The question of whether location rent can extend beyond the airport boundary is the principal issue addressed in this paper. This paper examines how offairport businesses interact with airports in the US today. There is a peculiar institutional and legal environment that governs airport charges in the US and affects much of what we observe. In this case, the US is very different from other jurisdictions. In turn, this may impact who can capture rents, and the incentives faced by various parties to obtain such rents. The subject of airport rates and charges policy in the US is a complex issue that is well beyond what is covered in this paper. A good definition of location rents and how they differ from monopoly profits is contained in a recent report (Australian Productivity Commission, 2002). The report states monopoly profits are profits that exceed the rate of return required to maintain the supply of the goods or services. It states that location rents are those 5
Many airports are shifting to market pricing for concession goods and services because they have found the market to be quite price elastic. In part, this may be due to the availability of substitutes for goods and services sold by airport concessions. Many airports believe it is more profitable to sell more goods at a lower price.
that accrue to a scarce factor of production. The report notes that location rents do not involve the efficiency loss of monopoly that results from distorted supply and demand. The location rents reflect the value placed on scarce resources by consumers and provide signals for their efficient use. An unstated corollary is that it does not matter who prices the scarcity in terms of economic efficiency. As long as a rent exists some party will capture it. In the present analysis, this could be either the airport or the service provider located on or off the airport. This paper examines selected examples of off-airport service providers in the US and how fees charged for access to airport-based customers might relate to production costs and whether location rents exist due to scarcity. Off-airport service providers access customers by using shuttle buses and vans that carry customers to and from the airport. As these businesses grew, airports sought to charge for the costs they imposed on the airport or levy fees to level the playing field with the on-airport concessions. We examine both off-airport service providers as well as ‘through the fence’ activities—i.e., those activities which, while they reside off-airport, have direct access to the airside facilities of the airport. We will discuss the basis for airport charges for these types of enterprises and provide some preliminary thoughts on the existence and distribution of any potential location rents.
2. Analysis If rents exist, they result from spatial monopoly or exclusive access to a customer pool. In the case of airports, location rents can apply to both on-airport activities and to areas adjacent to the airport or offairport activities. The structure of the market for the services in question, and the relative size and market position of the parties involved, determines whether rents exist and how they are distributed. Rents can arise from either structural or behavioral conditions. The distribution of rents is determined by who ends up controlling the market—which is often a question of law or property rights. The ability of the airport to levy differential fees on suppliers of on and off airport services also can affect competition (UK Competition Commission, 1997). Most US airports are owned and controlled by local governments with strict Federal rules on the usage of airport revenues.6 This provides mixed incentives to 6
US commercial service airports are typically operated either as public authorities or as departments of state or municipal governments. This is enforced by US Department of Transportation/Federal Aviation Administration rates and charges policies. The leverage point is that the federal government provides grants for airport development.
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airport operators in that, in general, money generated on an airport must be spent on the airport for operations or investment. This limits the ability of US airport operators to take the money downtown and cross-subsidize other city services.7 Other countries also examine whether fees for certain airport services, where they compete with services supplied elsewhere in the community, must be counted as airport revenue in determining charges for air carriers (UK Competition Commission, 1997). In addition to airport charges, some local governments also benefit from the ability to levy special taxes on off-airport activities. The regulatory framework for airports in the US, particularly airport rates and charges policies, may affect the incentives of airports to exploit rents to the maximum amount. Airports cannot take money off the airport so they may choose to use the rents to ‘gold plate’ existing facilities. In the case of airport slots, institutional mechanisms generally have meant that airlines capture any scarcity rent.
3. Examples of rent capture The two principal examples that may illustrate the existence of location rents are charging off-airport companies to access the airport and/or airport customers. The first category involves fees paid by companies located off the airport that provide rental cars, parking, hotels and ground transportation. This can be done either through establishing fees for the shuttles that take air passengers to these off-airport businesses or by levying special fees or taxes on the off-airport businesses that are in proximity to the airport.8 The key linkage here is that these off-airport firms benefit from the access to airport customers and may enjoy some location rent if off-airport facilities are scarce. The question then becomes one of rivalry for rents between the on-airport and off-airport firm, unless the airport is able to capture them. The other example of airport location rents may be in the area of ‘through the fence operations.’ These allow companies off the airport to have access to the airside part of the airport in return for paying special fees. These companies can include firms involved in aircraft hangars, manufacturing enterprises, cargo facilities, and many other types of activities. There are even examples of residential communities that have access to
7 Some US airports have grandfathered exceptions to some rates and charges policies. 8 A somewhat dated but thorough discussion on gross receipts fees charged by airports to off-airport companies is contained in a report by FAA’s Office of Chief Counsel (Federal Aviation Administration, Office of Chief Counsel, 1984). Anderson (1990) also covers some of the relevant case history on off-airport fees.
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airport runways where owners and operators can taxi their airplane right up to the front door of their residence. In this paper, we utilize data from the largest US hub airports.9 (Data are also available for other size airports.) There is a long history of litigation and case law in the US regarding charging off-airport businesses. FAA policies on airports rates and charges are founded in efforts to raise airport revenues and not to discriminate among airport users. FAA promotes charging off-airport firms because they compete with on-airport providers of the same services. In essence, this protects airport concessionaires from lower cost competition and also is a means of charging off-airport providers for the airport services and facilities they use in accessing their customers. Miami International Airport, for example, developed a curbside charging system to recover the costs of constructing, maintaining, and operating vehicle curbside to access airport customers. These charges applied to both on- and off-airport businesses that operated shuttle vehicles on the airport. In the examples below, the data show that there is a need to have some way of tying the off-airport business to the airport. It limits who can be charged for providing off-airport services to airport customers. The off-airport businesses that get charged fees include off-airport rental cars, ground transportation services, and courtesy vehicles to access hotels and off-airport parking. The fees can apply to the shuttle vehicles that transport passengers to and from the airport, or in the ability of the airport to levy fees directly on the activities of offairport businesses. In some cases, special taxes are levied on off-airport businesses. For example, one community levies a tax on hotel and motel rooms with some of the proceeds dedicated to airport development (Munford, 2002).
4. How fees are assessed In general, fees for off-airport car rentals involve either a fixed fee for a car rental contract, or a percent of revenue based on the value of the total rental contract. (Some jurisdictions also have special car rental taxes that apply to geographic areas around airports.) In the case of ground transportation services, generally these are based on the service provider paying a fee per passenger, a fee for airport trips by the vehicle, or an annual license fee. Off-airport courtesy vehicles for hotels, rental cars and parking also may be levied a perpassenger fee, a per-trip fee, or an annual license fee. With modern technology, one can use auditing and sampling to monitor compliance. Some airports track the usage of the airport by courtesy and shuttle buses 9
Data are from American Association of Airport Executives (2000).
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with electronic transponders mounted to the roof of vehicles that pass through gateways at airport entry and exit points. The transponders track the number of trips made through the airport road system and the length of time the vehicle was on the airport. Vehicle operators are allowed a certain number of trips for a fixed fee and are charged for trips over and above the base amount.10 *
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Rental cars: Table 1 presents selected data on rental car fees charged at 23 large hub airports reporting data in the 1999–2000 AAAE Rates and Charges Survey. The data are for 23 airports that reported fees charged to on-airport and off-airport car rental companies. The data indicate that on-airport car rental concessions pay a fee of from 9% to 12.5% of gross revenues while off-airport fees range from 4% to 10% of gross revenues.11 The annual revenue reported from car rental fees at the 23 airports ranges from $7.1 million to $30.5 million per year for onairport car rental companies, while for off-airport companies, the annual fees raised range from $55,000 to $17.5 million. Some off- and on-airport rental cars also pay per vehicle and per trip fees for courtesy buses. Scheduled buses: Table 2 reports fees from 15 large hub airports regarding scheduled bus operations. These are by definition all off-airport enterprises. While public transit often is viewed as a positive way of reducing airport and access roadway congestion, airports do levy fees on their operation. The fee bases range from a percent of gross revenue (5–10%), a per trip fee ($0.40 to $5.00) and per vehicle fees (insufficient data reported). The annual revenues raised per airport from fees on scheduled buses range from less than $10,000 per year to $2.2 million per year. Taxis: Many airports levy fees on taxis operating at the airport. Table 3 shows the data for 18 large hub airports that reported the fees levied on taxi operations. In one case, the fee was 18% of gross revenues. This was a unique case at Dulles Airport where only specific types of taxis are allowed to operate. The pertrip fees at the other airports range from $0.40 to $2.75 and there were per-vehicle charges that range from $30 to $12,500 annually. The annual revenues raised per airport were from less than $84,000 to $3.1 million per year. Limousine service: Data for fees levied on limousine service are shown in Table 4. For the 14 large hub airports reporting, the fee bases included 10% of
Table 1 Rental cars 23 Airports reporting
On-airport
Off-airport
Percent of gross revenue Annual revenue range
9–12.5% $7.1–30.5 Million
4–10% $55,000–17.5 Million
Source: American Association of Airport Executives (2000).
Table 2 Scheduled buses 15 large hub airports reporting Fee base Percent of gross Per trip Per vehicle
5–10% $0.40–5.00 N/A
Annual revenue per airport Range
o$10,000–2.2 million
Source: American Association of Airport Executives (2000).
Table 3 Taxis 18 large hub airports reporting Fee base Percent of gross Per trip Per vehicle
18%a $0.40–2.75 $30–1250 annually
Annual revenue per airport Range
o$84,000–3.1 million
Source: American Association of Airport Executives (2000). a One airport reporting (Washington Dulles).
Table 4 Limousines 14 large hub airports reporting Fee base Percent of gross Per trip Per vehicle
10% $0.55–4.90 $30–100 annually
Annual revenue per airport Range
o$30,000–2.4 million
Source: American Association of Airport Executives (2000).
10
See Australian Productivity Commission (2002) for a discussion of airport landside fees for parking and airport access, and how these relate to the supply of competitive on- and off-airport services. 11 See also the discussion of fees for on-airport and off-airport rental cars at Charlotte Airport (Charlotte, NC, City Council, 1999).
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gross revenues, or $0.55 to $4.90 per trip, or per vehicle fees of $30 to $100 per year. The revenues raised per airport for limousine fees range from less than $30,000 to $2.4 million at the 14 large hub airports reporting. Courtesy vehicles: Courtesy vehicles for off-airport hotels, car rentals and parking also pay fees to
ARTICLE IN PRESS R. Golaszewski / Journal of Air Transport Management 10 (2004) 61–69 Table 5 Courtesy vehicles 12 large hub airports reporting Fee base Percent of revenue Per trip Per vehicle
None reported $0.40–4.00 $75–400 annually
Annual revenue per airport Range
o$23,000–2.5 million
Source: American Association of Airport Executives (2000).
airports (Table 5). For the 12 large hub airports that reported courtesy vehicle fees, these include per trip fees of from $0.40 to $4.00 and per vehicle fees of from $75 to $400 annually. At the 12 airports, annual revenues ranged from less than $23,000 to $2.5 million. There is one school of thought that suggests that fees on transportation providers and their shuttle operations are a recovery of airport costs and not necessarily a rent capture by the airport. Off-airport vehicles do consume roadway and curbside space which have associated capital, operating and maintenance costs. Modern transponder technology permits the measurement of curbside usage including on-airport time, off-airport time, and loiter time calculations. It also allows for cost recovery that can be based on a per-trip, per unit time, or some other service bundle (pay a flat fee per vehicle with a surcharge for trips in excess of a threshold number). Of course, others would suggest that airports are exploiting the scarcity to extract location rents by charging commercial firms to access airport passengers as part of their customer base.
5. Through the fence activities The other major source of potential locational rent for off-airport enterprises is what is termed ‘through the fence activities.’12 These are activities which take place on off-airport property but which have access to the airfield via the taxiway system. For example, a facility can have direct taxiway access to the airfield for hangars, cargo facilities, manufacturing or maintenance facilities, and other uses. The biggest single user of through the fence facilities is UPS, the package express operator. It has reached through the fence agreements in Columbia, SC, Ontario, CA, Louisville, KY, and 12 A good discussion of through the fence operations is contained in Soderquist (undated).
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Philadelphia, PA. (Hodges, undated). The latter three locations are major UPS hubs. These facilities were presented to the communities as employment and economic development activities. UPS had a degree of bargaining power in terms of the cities it chose to locate these jobs. By locating off-airport, UPS was able to negotiate special fees and avoid discrimination issues related to other air cargo operators on the airport. Some airports have been developed with through the fence operations in mind. The airport with the greatest use of through the fence agreements is Alliance Airport in Dallas, which was developed around a runway, part of which was paid for in Federal funds. A developer controlled all the land surrounding the airport and encouraged firms to locate next to the airport. The companies are located in an ‘off-airport’ industrial park adjacent to the runway taxiway system. The airport in Scottsdale also has a long history of through the fence operations. The typical fees charged by the airport for through the fence operations are based on per square foot developed, per square foot of the total site, per vehicle movement on and off the airport, or a fuel flowage fee if fueling is permitted. It turns out that fueling in through the fence operations is a big issue because it competes directly with on-airport fueling companies that pay concession fees to the airport. The US Federal Aviation Administration has raised a number of issues with through the fence operations.13 The FAA provides grant funds to airports for development and, in turn, requires airport sponsors to enter into certain agreements. The FAA wants no competitive advantage over airport tenants for through the fence activities. They want controls over developments, minimum service standards, non-discriminatory fees, and a fair return paid for by these operators for use of the landing area. FAA prefers incidental usage rather than day-to-day business activity. FAA wants to avoid circumvention of the public benefits that airports provide. For example, in return for public money, the airport has been developed for public benefit. Through the fence operations can erode the financial base of airport tenants. In addition, through the fence activities may cause additional costs that on-airport tenants should not bear. Communities, of course, look at the other side of the coin. They look to economic development and taxable land. As airport land becomes scarce, through the fence is a way of expanding the scope of the airport. In some locations, it may be one of the only means of obtaining developable sites for major facilities on or near an airport. For example, the Lester B. Pearson 13 Soderquist (undated) discusses the FAA position on fees for through the fence operations.
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International Airport in Toronto has a number of through the fence operations by major air cargo facilities (GRA, Incorporated, John F. Brown Canada and David Gillen, 2001).
6. The basis for charges Charges for off-airport concessions can be either costbased, or revenue (as value of service) based. Cost-based charging systems recognize that airport access by offairport enterprises imposes additional curbside and roadway congestion costs on the airport. Measuring the cost of this in terms of curb length and number of vehicle lanes required provides a rational basis for developing cost-based fees. Revenue or tax-based fees recognize that the area around an airport can be a special service area, which allows the airport or a political jurisdiction to capture some of the value created by an airport. It provides access to a customer base and may require additional public services. Such fees are generally not cost-based. Recovering the costs of through the fence operations requires charging schemes to recover the incremental costs of the taxiway and apron network that the through the fence operation requires. In addition, these operations place additional wear and tear on airside infrastructure, and the airport’s aircraft movement fees can recover these costs.
7. New developments The airport rental car business model is changing and the differences between off- and on-airport rental car activities are being reduced. Many airports are developing centralized car rental facilities with common transportation to and from the terminals. These facilities are often located at remote parts of the airport or, in some cases, on land that the airport leases. This is being done to reduce vehicle congestion on the roadways adjacent to the airport terminals and also to allow more car rental companies to locate on the airport. Also, by moving rental car facilities further from the terminal, it allows the airport to recapture additional space for parking. It turns out that airports generate more revenue per space from parking activities than they do from rental cars. For airports with fixed land areas, it allows them to accommodate more car rental companies ‘on airport.’ It also reduces differences between on- and off-airport car rental companies because these remote facilities are further from the terminal, and often require the use of a shuttle bus to access them. San Francisco has established one of the largest such facilities in the US. All rental car customers, both on-
and off-airport, go to the centralized car rental facility via an airport-operated bus. The on-airport companies are located at this facility, while shuttle buses to the off-airport rental car companies arrive and depart at this remote facility. This reduces the competitive advantage that an off-airport car rental may have at San Francisco if it were allowed to pick up passengers at the terminal. The trends in through the fence agreements are to expand airports without additional land acquisition. In many cases, airports have developed most of the available land and it is not necessarily in the governmental body’s interest to allow the airport to acquire additional land. Commercial real estate may produce more money for the governmental body’s treasury than allowing the airport to develop the land subject to FAA regulation on rates and charges. Thus, we may expect to see more development of aviation-related facilities adjacent to airports with through the fence agreements for those parties that require airside access such as air cargo, and aircraft manufacturing and maintenance.
8. Who gets the rents? The presence and distribution of the location rents at airports raises interesting questions. How large are these rents and how might various parties from the airport, concessionaires, airlines and other parties, capture them? One needs to look at how markets function to understand this issue. First of all, there is overall competition in the air transportation market and, for certain services there are many available substitutes. This applies to connecting services for airline passengers as well as many of the concessions operated inside the terminal. An airport that serves solely as a connecting hub likely does not have a large degree of market power. The key to the potential of an airport to capture rents from off-airport businesses is likely the size of the local passenger and cargo markets. The second issue is the substitutability of off-airport and on-airport services. Many services are available both on and off the airport including car rental, parking, food and beverage, and shopping. One would expect the market to equalize prices subject to the access time and hassle advantages of an on-airport location. Thus, we can expect to see on-airport parking be more expensive than most off-airport parking and on-airport rental cars to command a premium over off-airport rental cars. For example, Hertz wants to be on the airport because its business model is to provide a high level of service to its Number 1 Club members. This focus on business travelers is similar to the legacy hub and spoke carriers who also want to serve their business customers. There also is competition among service suppliers. For
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litigation related to airports levying fees on off-airport businesses. While not universal, it seems that airports generally have been successful in levying modest fees that are arguably cost-related for access to the airport by off-airport firms. There are also the cost characteristics of airport service providers. Rental car companies compete both on level of service and price. There are premium car rental companies that offer enhanced customer service and those that specialize in very low rates for long-term rentals pointed at leisure travelers. Optimum pricing of services would have prices to consumers reflect the scarcity of the resources being used. Whether the airport, airline or concessionaire ends up with the rents depends on the institutional arrangements. However, because airports are limited to cost recovery, they may not be able to retain the rent. They may have the incentives to incur additional costs to capture the rent within their rate base.
airports with a large number of rental car companies, while the airport may be able to extract some location rent related to being on the airport, competition among the rental car providers will tend to keep costs down. The size of the local market also matters. An airport with a large originating base of traffic (versus connections) provides more of an essential service to its community than an airport that serves mostly as a connecting hub. As such, one would expect such an airport to enjoy a larger degree of economic power. There are also perceived economic development and job creation benefits that accrue to some off-airport businesses. For some services such as cargo facilities, there is an ability to generate competition among communities for the economic development benefits of the facility. The large integrated carriers such as FedEx and UPS offer a large number of relatively well paying jobs to those communities that become hub-sorting facilities. Many communities sought to locate an air cargo hub at their airport as a form of economic development. In the late 1980s and 1990s, passenger airlines sought to create additional hubs and communities competed for these among themselves. There is also the structure of the service production process that comes into play. Is it necessary that all components or most components are on the airport? In the case of selling food and beverages to passengers on connecting flights, the airport is likely the only game in town. However, this is not the case of originating and terminating passengers. Viable options exist off-airport. Airports have discovered that they can centralize car rental locations in remote parts of the airport or on other land so that existing real estate can move to higher and better uses. In the US, there are also legal and regulatory constraints for charging on-airport and off-airport service providers. There has been a long history of
8.1. Rent distribution and capture Table 6 illustrates a hypothetical analysis of airport rents based on company or industry characteristics and airport characteristics including a large capacity constrained hub airport, a large unconstrained hub airport, and medium and small airports. The company/industry characteristics that are considered include: * * *
*
*
On-airport services with competitive providers. Off-airport substitutes for these services. Services that can be disaggregated into components that can be located elsewhere such as air cargo sorting facilities. Services where a company can create significant employment with a specialized facility with economic development incentives, and Company brands are important to a consumer as with high-end car rental companies.
Table 6 Illustrative airport rent matrix Company-industry characteristics
Typical on-airport service (competitive providers) Off-airport substitute Service can be disaggregated into components located elsewhere; small station for FedEx, UPS, etc. Company can create significant number of jobs with specialized facility (competition from other airports/sites); large FedEx or UPS facility Company brand important to consumer (e.g., Hertz) Note: A=Airport; C=Concession, S=Share.
Airport characteristic Large constrained
Large unconstrained
Medium
Small
A A S
A/S A/S S
S S C
S S C
C
C
C
C
A/S
S
S
S
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The entries in the matrix indicate who is likely to get the rent where: * * *
A indicates Airport. C indicates Concessionaire. S indicates that the airport and the concessionaire are likely to share the rent.
Airports are likely to capture or share rents at the largest airports for on-airport services, off-airport services and branded services provided on the airport. Medium and small airports generally can expect to share the rent or have the rent accrue to a concessionaire because the low level of activity generally means that there will be few providers on the airport. Companies that can create significant economic development within an area can likely capture any location advantage or at least prevent the airport from extracting rents from them. If the airport captures the rent, it may be identified in above-average returns from specific concession activities. However, if the concessionaire is able to capture the rents, it may be difficult to identify their presence and measure the level of economic rents.
the owners of these large facilities are successfully able to compete one community against another. In fact, locational rents to the community may be negative in these instances. Airport pricing in the US is generally analogous to that of public utilities. Cost-based fees are the norm and include a recovery of capital investment. The public nature of most airports in the US means they have notfor-profit status. With these constraints, it may be difficult for airports to set prices that reflect the value of services received by customers (and classes of customers), considering the scarcity of resources used in production. As a result, prices may be too low. One manifestation of this is that US airports typically do not charge the full scarcity value of runway capacity. As such, either rent accrues to the carriers, or prices that are too low lead to excessive use of the runway resulting in a sub-optimal level of delays. The other potential inefficiency is what is referred to as the Averch–Johnson effect, where utilities over-invest to get more costs into the rate base for customer charges.
Acknowledgements 9. Closing thoughts There is a long history in the US of airports charging off-airport firms to access the airport. This includes transportation providers such as buses, limousines, and taxis, and courtesy vans for off-airport hotels and parking and off-airport car rentals. The question of whether the airport is simply recovering the costs imposed on it by these service providers or whether it is able to extract rents is an open question that begs for more empirical research. One would need to develop an econometric analysis that explained price and cost differences for various on- and off-airport services and allowed estimation of the likely economic rents and to whom they accrue. Another option would be to analyze cost accounting data from the airport or concessionaires, if it were made available. Finally, through the fence arrangements often depend on the relative bargaining power between the airport and the entity seeking access. Here, it is likely that the promise of local economic development benefits that companies proffer when locating large production facilities also comes into play. In the US, we have witnessed the competition among states for automotive assembly plants by foreign car producers. The competition for these facilities is intense and many economic concessions are granted to the company locating the facility. These companies are often highly subsidized by local jurisdictions that want the job creation benefits. Of course, at the national level, this is simply a distributional issue of which location will get the benefits, but
The author acknowledges David Gillen and Hans Martin Niemeier for the invitation to participate in the Hamburg Airport Conference and the encouragement to develop this paper as a result of it. They also recommended changes to earlier drafts of this paper. Frank Berardino, David Ballard and William Spitz of GRA also provided helpful comments on a draft version of this paper.
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