Understanding an Outlier: The U.S. System of Airport Governance and Economic Regulation
Unlike airports in many other countries which have been corporatized or privatized, nearly all U.S. airports continue to be operated by the public sector. They are subject to a system of economic regulation that provides little incentive to control costs or allocate capital efficiently. Yet, despite its apparent shortcomings, the current system has persisted over several decades. This Article explains the persistence of the current U.S. system of airport economic regulation based on price theory, regulatory economics, and public choice principles. It offers supporting empirical evidence for this equilibrium and identifies factors that might lead to a different outcome.
Elected officials benefit from the current system because it permits them to bolster public employment, influence large contract awards, and provide financial support for local causes without relying on tax dollars. Airlines tolerate the current system, despite its inefficiencies, because airport costs are not a significant part of the airlines’ cost structure. Also, while airlines have only a limited influence on airport spending decisions at most airports, they have a greater influence on those decisions at airports that are most important to their competitive position. Airlines have more influence at airports with a high proportion of connecting passengers that the airlines can credibly threaten to re-route via other hub airports. Finally, airline executives are risk-averse and fear that the alternative they wind up with could be worse than the status quo. However, they have been willing to support alternatives when the benefits are clearly demonstrated and minimize the risks.
Robert A. Hazel, Understanding an Outlier: The U.S. System of Airport Governance and Economic Regulation,
J. Air L. & Com.