Happy Friday!
For this Friday’s Substack, I wanted to continue the aviation theme and share some thoughts on a piece I wrote a few years ago, for a course in public choice.
I’ve subtitled this Airports as Creative Systems, Part 1, because I’d like to continue this as a sort of “mini-series” on airport operations, as that is what a majority of my research in the PhD program is related to.
Understanding the Airport as a System
Airports are highly complex creative systems. In simplest form, an airport is a public entity operated as if it was a business or market firm; its conductor is that of the Airport Executive.
However, due to the public nature of airports, intervention on part of both local and Federal government makes the valuation of any given airport a method of subject rather than one of object. The transfer of information, particularly information that gauges the notion of the success of the airport, from Airport Executives to various airline carriers is circumscribed by a number of different kinds of institutional arrangements. In particular, the forced use of landing fees by Federal regulation prohibits accurate use of the pricing mechanism by means of congestion tolls and causes a distortion in the transferability of information from the Airport Executive to their contracted airline carriers.
In order to understand airport systems, it is essential to first comprehend the scope of the institutional arrangements that govern them. This requires better explanation of the hierarchal structure of airport management and further definition and differentiation between levels of airport policymakers, airport owners, and airport management and staff. Primarily, it is important to contrast the stark differences between ownership and control.
The term “owner” is interchangeable with operator or sponsor and is defined as “the legal entity responsible for the operation of the airport” (FAA). This entity does not often take the shape of an individual, and is usually formally represented by a municipality, such as a city or county, an Airport Authority, State, or Port Authority system . The related policymaking board may be an extension of the municipality (such as the case of the Board of County Commissioners, City Council, etc.) and in most cases, the director or manager of the airport will report to the policymaking board or to a County Administrator/Executive, City Manager, or a Division or Department head within the municipal structure.
The Role of the Airport Executive
Airport executives are hired to act within the airport system. They must balance the orders and desires of the airport sponsor with the preferences of key stakeholders such as airport business operators (airlines, concessionaires, service providers, etc.). They must also take into consideration airport users such as passengers, the surrounding environment (i.e. nearby communities) and Federal regulatory agencies such as the FAA and TSA. While the governing body or policymakers responsible for any given airport set goals, identify strategies and approves planes and programs aimed at research and development, the Airport Executive does research and makes recommendations to the board. Once policy directives are approved and issued, the Airport Executive implements said policies, manages the day-to-day operations and reports back to the governing body. In some cases, Airport Executives are assisted by trade associations (i.e. AAAE), but may also be challenged by advocacy groups that represent their contracted airliners and service providers such as the Aircraft Owners and Pilots Associations that represent concessionaires, airlines, service providers, etc.
While the primary task of an airport system is to facilitate efficient transportation of passengers, they also play a vital role in the outside economies they infiltrate. Airports add to economic development, employment, environmental concerns like noise and air pollution and may also serve federal roles during national disasters as they are often evacuation centers including but not limited to temporary centers of state government, U.S. military, and other aid agencies.
An airport is an agent of public service, a business, a community resource and an essential stakeholder to commerce. While broad and seemingly unanimous in their goal of facilitating efficient passenger transportation, airports are not homogenous in their structure. They serve different purposes, model various layouts, differentiate in capacity, and represent different political infrastructures depending on ownership.
In addition, differences in commercial structure, government regulation provides standards that each Airport Executive must abide by, however the means by which the airport meets those standards are up to the Executive and related Airport Operators.
Airport Executives and policymakers alike must understand the careful balance between the dual make-up of airports:
The airport as a public entity that must be managed as such;
The airport as a business enterprise that must also be managed as such.
The simplest understanding of an airport is that it is a public entity run like a business or market firm. While public airports are generally owned by government entities and do not exist to create a profit, self-sufficiency may be their financial goal. With the growth of airport privatization and potential ownership as an acceptable means of operations the distinction of airports as a public entity becomes far less clear.
The very basic transferability of ownership of airports from public enterprises to private firms would provide clues for airport performance, and potentially establish a level of accountability. Currently, it is unclear on the proper methodology to gauge the precise success of an airport. Airports do have a commercial value, but this is distorted when airports are subjected to government regulation; this essay focuses on a particular case of such distortion, those of landing fees.
Price Mechanisms
In certain cases, the price mechanism, which is a way of distributing information into a society, is not allowed to function as so. In particular, landing fees paid by airliners to the airport have standards rooted in FAA regulation. As prices contain information and are a method of distributing it to those who do not have it, allowing individual, privately owned airports to set their own landing fees based on congestion costs imposed by airline delays and dependent on the various circumstances in size and scope of the airport would better signal to airliners the profitability of choosing to partner with said airport.
This is highlighted further by the problem that every airport is vastly different, and yet required to price landing fees as determined by the FAA, dependent on the weight of any particular aircraft. This pays no notice to the amount of revenue generated by any particular airport, nor does it take into account the various congestion costs imposed by each airport- or airliner, for that matter. The airport executive cannot signal the cost of congestion and subsequent inefficiencies to the airliners it serves. Using landing fees alone, there is no way for airliners- or even the Airport Executive themselves- to determine the performance of an airport.
Further, congestion costs would aid in distinguishing between costs already internalized by the airliner and costs imposed by that usage of any airport specifically. The airliner could perhaps have a better understanding if they are oversaturated, or to the exact degree to which they are over-saturated, in a specific airport if congestion tolls were allowed to signal the costs of congestion. Optimal congestion tolls, as opposed to atomistic congestion tolls, vary per airline as they are a function of the congestion caused by that airliner specifically. Use of this ulterior would allow for airports to signal to airliners their potential congestion costs and subsequent revenue loss, and while some of these costs are internalized, some are a result of other inefficiencies within the airport or even federal programs like TSA.
An Airport Executive facing the problem of high congestion in their airport can bring this information to the FAA or the local authority, however, the price signal (landing fees) will remain unchanged and typically airport executives instead seek expansion (R&D) when it may not be profitable or efficient to do so. If an Airport Executive simply notices a rise in their airport’s runway congestion, they may take this as a misguided signal that the airport is outgrowing its physical capacity. In reality, it is quite possible that the Airport Executive and other managers failed to coordinate effectively with a given airline carrier notorious for creating delays, and instead need to reduce the number of flights by said carrier. The lack of a price mechanism may lead to increased construction of additional gates and terminals when it is not profitable to do so, resulting in an even greater inefficiency where the airport moves past its possible production capacity and is unable to complete projects or produces little to no return.
Thinking Rationally
The degree to which the price mechanism is distorted is unclear. It is a simple fact that airliners are responsible for a majority of runway delays, however a topic that warrants further explanation not sought in this essay is the lack of coordination between Airport Executives and the managers of other government agencies such as TSA. Regardless, the fact that airports are public enterprises sponsored by government concludes that this issue is not one that can be solved by the Airport Executive; even if they understand this conundrum, split property rights indicate that control of landing fees resides with the Federal government.
In sum, given a government endowed, limited set of property rights, Airport Executives are unable to precisely signal “success” of the public organizations that they govern to commercial operations such as the airline carriers they contract with. A limited use of the price mechanism distorts political enterprises and creates a barrier in coordination between the Airport Executive and airline carriers.
Mahalos for this. Do you mind sharing some thoughts on an independent airport authority over state management?
In Hawaii, our airports are shabbily operated by the state Dept of Transportation. There's been several pushes over the years to establish an independent airport authority instead since it would (or should) have a better set of incentives to run the airports better for all stakeholders. Thoughts on this? Are there pitfalls or common ways thus could go sideways?