economic essay 8 pages due in 48 hours

1

Economics 2166F-001

Lecture 6

1

Chapter 5: Aviation Infrastructure

Part 1: Air Traffic Control System

Part 2: Airport Ownership and Management

2

Part 1: Air Traffic Control System

• Navigation Canada

3

• Aircraft were expected to travel from ground-based

navigation point to ground-based navigation point along

the predetermined and pre-existing airway route structure.

• As traffic increased and technology advanced, it became

increasingly evident that the system was becoming

outdated and there was an urgent need to modernize and

update.

• One of the principal advantages of air travel is the speed

with which an individual can arrive at his or her destination.

Therefore, factors that contribute to delay in the system

reduce the quantity demanded of air traffic.

4

Figure 5.1 The Short-term

Economic Effects of Air Traffic Delay

5

Figure 5.2 The Cost of Delay

with Inelastic Supply

6

2

Figure 5.3 Costs of Delay over Time

7

Figure 5.4 Market Reaction to

Changes in Supply

8

AIR TRAFFIC CONTROL IN

A GOVERNMENT CORPORATION

• A government corporation is a state-owned entity that is

created in order to pursue commercial or industrial

activities on behalf of a national government.

1) A key feature of a government corporation is

non-political funding as user fees replace taxes and

Congressional budgeting.

2) The existence of an independent revenue stream allows

access to private capital markets to fund modernization.

3) The elimination of tax funding creates an exemption from

government procurement rules that have previously

tended to impede the acquisition of new technology.

9

• Without dramatic change in the way our airspace is

managed, congestion and resulting delays will be

overwhelming for passengers, shippers, consumers and

businesses. Failure to meet future airspace demand

could cost the US economy $40 billion annually by 2020.

– from the Airlines for America “Smart Skies” initiative

10

SOLUTIONS TO AIR TRAFFIC

CONTROL PROBLEMS

1) Regulation

– “Enhancing Airline Passenger Protections

(Three-hour Tarmac Rule), effective April 29,

2010.

– The rule requires that at large and medium

hub airports, the aircraft must depart or

passengers given the opportunity to deplane

no later than three hours after the cabin door

has been closed.

11

SOLUTIONS TO AIR TRAFFIC

CONTROL PROBLEMS

2) Air traffic control charges

– Charges levied against airlines operating at

these airports have changed from a uniform-

pricing structure (or one based on weights) to

a congestion/peak-load pricing method.

12

3

Part 2: AIRPORT OWNERSHIP

AND MANAGEMENT

• In 2010, there were 1,670 commercial airports serving

more than 900 airlines worldwide.

• At the present time, almost all of the airports in the US

are under some type of government control. One of the

byproducts of this control is typically a pricing system

(landing fees) that is fixed over the entire day.

13

Figure 5.5 Demand for Airport Services

14

Trends in airport privatization

• Many countries around the world are rethinking the

appropriate role for government in operation and

ownership structure of aviation infrastructure.

• As of early 2007, over 100 major airports worldwide have

been at least partially privatized.

15

Benefits of privatization

• Greater efficiency of operations, particularly in developing

the non-aviation side of the airport

• Capital infusion: open up non-traditional sources of capital

• Lower labor costs resulting from either lower wages or

less labor input

• Conversion of a public airport into a tax-paying corporate

entity.

16

Opposition to privatization

• A common objection to airport privatization is that

airports have monopoly power and, if private, will raise

landing fees to extremely high levels.

– Leisure travelers will likely either travel by other modes of

transportation or fly via more distant airports if prices go up

substantially at their home airport.

– Business travelers are perhaps more likely to pay higher prices

but even in their case, the monopolist airport must consider

competition from other transportation modes, secondary airports,

modern telecommunications, corporate jets, and the developing

“air taxi” competition from the very light jets that are able to

operate out of smaller airports.

17

Types of privatization

• Under the contract management approach, the

government transfers all responsibility for all airport

operations to the private sector, while retaining the

ownership and investment responsibilities.

• A long-term lease approach allows the government to

legally (and politically) retain ownership but to transfer

investment, operational, and managerial responsibilities

to a private tenant.

• Using a full divestiture/sale of shares, the government

transfers full (or partial) ownership to the private sector

either through an Initial Public Offering of shares (IPO) or

a competitive bidding process. 18