Natural monopoly

Published : Oct 24, 2003 00:00 IST

IN the parlance of economists, airports are a classic case of natural monopoly. This is quite natural, given the peculiarities that govern the business of airport management. Very few cities in the world would have the traffic that would warrant the construction of two or more airports. This means there is little scope for competition among airports because the barriers to entry are high.

As the Australian Productivity Commission remarked in a study of the airports in the country last year, the lack of competition may give rise to "concerns about potential abuses of market power". This is because the capital cost of building an airport is very high. Unless airport operators can be guaranteed that traffic will be stable over a long-time horizon, it would not be possible for them to undertake the massive investments that are necessary for building airports. The fact that airports need a substantial area of land in large and heavily urbanised locations not only for building runways, aprons and other such facilities, but also because they are required to maintain large tracts of open spaces, imposes heavy costs on an airport project. Such investments ensure that the barriers to entry for a new airport operator remain high. And it is for this reason that governments have traditionally maintained and run airports across the world.

Beginning in the 1980s, particularly after the Thatcherite revolution in Britain, this has changed substantially. Consequently, though the business of managing and operating airports continues to remain a natural monopoly, publicly owned monopolies have been handed over to private monopolies. It is significant that private airports are more of a rarity in the United States. This is possibly because of the clout of the airline industry, which have become stronger after a series of mega mergers. It is also important to recognise that the interests of the airport manager is opposed to that of the airlines. Airlines, as users of airport facilities, would want lower costs for facilities. Airport managers, on the other hand, would operate the facilities in order to maximise the revenues that they gather from the airline companies and other users.

Airport revenues can basically be divided under two heads - aeronautical and non-aeronautical services. Aeronautical services are those that an airport provides for essential operations that are required for airline operations. Operators charge airlines for the use of runways and other airport facilities. In India, the Airports Authority of India (AAI), which provides air traffic control facilities, also levies charges on the airlines.

However, it is the area of non-aeronautical services that many airports around the world have found commercially attractive. In Australia, for instance, return on investment from non-aeronautical services is several times the returns from investments in aeronautical services. In Sydney, the country's biggest airport, which was privatised recently, the operating profit from non-aeronautical services amounted to Australian $123 million in 1999-2000; in contrast, the airport made a loss of almost $A 6 million from operating its aeronautical services. Non-aeronautical facilities, including the operation of restaurants, hotels, car parking facilities and a host of support facilities, offer the airport operator the ability to leverage the vast real estate for commercial gain. Non-aeronautical services, being less capital-intensive, and being of an ancillary nature in the airport management business, offer the prospect of high returns to investors.

In India, the AAI gets less than 22 per cent of its revenue from non-aeronautical facilities. Airports in advanced countries typically get more than 60 per cent from such facilities. The ability to charge for non-aeronautical facilities is obviously linked to the consumers' ability to spend. And, with a traffic of just about one crore passengers in India - about 40 per cent of whom travel Air-India and Indian Airlines - the scope for enhancing non-aeronautical revenues appears pretty much in doubt.

Proponents of the privatisation move in India have argued that the AAI's assets will not be sold to the private partner, and that the facilities are only going to be leased on a 30-year term. However, they overlook the fact that the prospective leaseholders are poised to acquire the power to make monopoly profits.

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