Financial Perspective

Financial Perspective In an argument for privatization, a former FAA economist analyzes current airport business practices By H. Giovanni Carnaroli, Manager, Consulting Services, BACK Aviation Solutions July 2000 The sale of...

Aeronautical Return Price Cap Approach
In trying to reduce the weaknesses of the ’single till' approach, the aeronautical price cap approach was created. The ’single till' approach limited only aeronautical charges, although it considered all activities of the airport in setting the value of ’X'. The setting of ’X' by regulators in the ’dual till' approach is done through a review that segregates aeronautical revenues and costs from total airport revenues and costs.

The dual-till approach treats the aeronautical area of each airport as a distinct business. The system encourages commercial development of non-aeronautical areas because they are not regulated.

Another important modification to the ’single till' approach is a mechanism whereby the airport will be able to seek approval for increases in charges for the purpose of specific, major new infrastructure investments. An airport applying for such an increase would need to gain the support of airport users. It also separates for the purposes of economic regulation the financial issues arising from major capital investments from those encountered in the normal operation of the airports.

Limited Government Oversight Approach
This approach is developed from the concept of countervailing power — the ability of an airport's customers to influence final pricing.

Air carriers have an implicit power over airports because of their ability to create administrative or cash flow problems by withholding or delaying payment of airport charges or taking a hostile or non-cooperative attitude in day-to-day matters. Therefore, airlines are seen as having as much market leverage as the airport operator, so rates are set on a free-market basis with disputes settled in the superseding court.

There are two basic airport costing and rate-setting methods used with this kind of regulation: the compensatory method and the residual method. Under the compensatory method, an airport establishes cost centers (airlines, concessionaires, etc.) to which airport costs are allocated. A schedule of rates and charges (landing fees, rental space, etc.) is then set to recover the costs from each center. Under the residual method, the airport first determines its overall costs and assigns a set of rates and charges, typically to the non-carrier vendors, which maximize total revenues. The airlines then are required to remit the difference between total revenues and total costs (i.e., the residual cost of airport operations).

About the Author
Giovanni Carnaroli serves as manager of consulting services for BACK Aviation Solutions, an aviation consulting firm specializing in strategic planning, management, and analysis services. He is a former senior economist with the Federal Aviation Administration, where he helped develop legislative proposals and rulemaking actions, and was involved in airport economic and funding analyses. He is an economics major from North Carolina State University, and received his MBA from the University of Maryland. He can be reached at (703) 330-0461.

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