From The Guardian:
Heathrow airport has been told to introduce a real-terms cut in the fees it charges airlines in order to curb its "substantial market power" (1) – a move that could put the brakes on spiralling air fare increases...(2)
But the airport, which is controlled by Spanish infrastructure group Ferrovial, warned that the proposals put at risk a long-term capital improvement programme designed to improve facilities for passengers.(3)
Heathrow's profits rose by 12% to £1.3bn in 2012, driven largely by an increase in the fees it charges airlines – by far its largest source of revenue.(4) Although the charges are paid by airlines they are passed on to passengers through higher air fares...(5)...
Publishing its proposals the CAA said: "At Heathrow, the CAA found clear evidence of substantial market power and is proposing a traditional price control mechanism.(6) After a decade when prices have risen – largely to enable major capital investments including new terminals to enhance passenger experience – the CAA is looking to encourage further investment whilst improving value for passengers in other ways."(7)
But Willie Walsh, the chief executive of British Airways parent IAG, warned that the proposals did not go far enough. The head of the largest airline operating from Heathrow said: "Heathrow airport is over-priced, over-rewarded and inefficient, and these proposals, which will result in an increase in prices, fail to address this situation."(8)
1) Airports clearly they do have enormous monopoly power and a large proportion of their landing/take-off charges are location rent, pure and simple. And that monopoly power arises because - for whatever reasons - the number of airports is strictly limited so airports near London are all running at 99.9% of capacity, thus the price which airports can charge is far above their actual costs. Actual spending on running costs is a small fraction of that, and this is the last thing they will cut or else their whole income stream dries up. And even if there were no limit on the number of runways and aircraft movements, I suppose their is a natural upper limit to the number of aircraft movements, the sky is only so big.
2) Similarly, the prices which airlines can charge for tickets is far above their actual running costs. Between them the airports and airlines are running a cartel-monopoly and the passenger pays. If demand increases and supply stays the same, what happens to prices?
3) They would say that, wouldn't they? What facilities, pray tell? Above and beyond the basics like baggage handling and passport control, passengers (and people who come to pick them up) are paying through the nose for parking and refreshments. They pay for themselves.
4) Hardly surprising is it, that an airport's charges, a large part of which is rent, see (1), are its largest source of revenue? And all their other revenues are just rents as well, like the money they get from parking charges or the rent they collect from all the shops and restaurants.
5) No they aren't. The availability of passenger places is just as limited as the landing slots, it's the same thing. Airlines base their tickets on "what the market will bear" and as long as that is above their actual costs, they will put on flights. We know that for most commonly flown routes there is a huge monopoly profit element, as evidenced by the fact that the landing/take-off slots themselves can sell for millions of dollars, all depending on where they are to and from and what time of the day. The slot for the eleven am flight to New York is worth ten times as much as the eleven pm flight to Siberia etc.
6) Control of which prices? Ticket prices or airport charges? If you restrict ticket prices to below market clearing level then admittedly that would put a downward pressure on airport charges as well, but that is just an opportunity for ticket touts, who would end up collecting the rent instead of the airports. And if you restrict airport charges, then the monopoly profits just get collected by the airlines instead, ticket prices wouldn't drop by one penny.
7) Like how? There's no reason to expect airlines and airports to run their operations at nothing less than absolute revenue-maximising prices? If you "enhance passenger experience" then those revenues will increase.
8) He would say that. wouldn't he? See (5).
Blow that whistle
1 hour ago
11 comments:
So it all goes back to your (mine ausi) theory that the world GDP is 20% production and 80% rent?
L, it's not quite as bad as that, maybe it's about 50/50.
Of course, rent is not a constituent of GDP in the first place, it is a measure of how it is distributed.
Compare a country made up purely of smallholder/freeholder farmers with a country where one baron "owns" all the land and collects all the rent rent. Total GDP is much the same in both countries.
Fair enough, I was just being grumpy...
Have you explained how rent cannot be a component of GDP to the gummint?
L, there is no dispute over this.
From Wiki, GDP can be calculated as
- value of total outputs
- adding up incomes
- adding up expenditure
They should all come to the same thing. So "rent" is an income category included in the second method (and possibly the third) because is a type od redistribution/income, but it's not in the first.
For example, the value of a potato is whatever it is, the fact that some of this goes to the farm worker and some to the land owner makes no difference to the value of the potato.
MW: what would be the practical way of taxing heathrow landing slots though, considering it's in "private" operation?
Kj, auction off the rights for a plane to land and take off (a "slot") to the highest bidder on an annual basis.
It doesn't matter who wins the bid, airport, airline or speculator. If you calculate your bid just right, it will be exactly the same as the unearned inome element, i.e.
plus ticket sales, minus running costs of aeroplane, minus running costs of airport (and the two overlap anyway).
It's like LVT for airspace, it's like the mobile phone licence auctions, only preferably more regular. Or its like the UK government auctioning off the railway operator licences.
MW: Sounds about right, but what about the airport's fees towards the slot-owner (if it's not the airport), wouldn't you have to limit those, to limit the rent collected by the airport?
Kj, if a speculator buys it, then the three parties have each other over a barrel.
The airline gets £100,000 in ticket sales per plane and has running costs of £60,000 for each flight, so the most it will pay to the speculator is £40,000.
The airport has costs of a further £20,000 per flight, so the speculator then has to pay the airport at least £20,000 for permission to land.
So the speculator can bid up to £20,000 to the government, it pays another £20,000 to the airport and collects £40,000 from the airline.
If any party gets too greedy, then absolutely nothing happens and nobody earns any money at all, so it is in their interest to agree a price equivalent to their actual costs plus profit margin.
Real life example. British Airways paid $271 million for 56 daily slots a couple of years ago.
Techincally, BA bought an airline company, but what it was paying for was the slots, not the actual planes and stuff.
MW: Ok, both the slot-owner and airport has the hold-out power, but these cancel each other out, sort of, makes sense.
OSL, my local airport is raking in £ 110m in profits out of 330m in revenue. It's kind of georgist in that it's state owned, and use the profits from this one airport so subsidise some 40 airports around the country. Around a hundred quid net profits per resident in the catchment area is quite a lot of rents actually.
Kj, agreed, if the state owns the land directly and collects the rent, that is best all round in economic terms.
In day-to-day terms, a private profit making enterprise will be better at actually running the business, so it's a question of getting the best of both worlds.
As to my auction system, the chances are that the airport will outbid the airlines and speculators anyway, so that is then simplest for all concerned.
MW: agreed, largely. When it comes to these big, capital intensive corporations, like airports, it sometimes seem to me as long as the state set these up as regular, wholly owned Ltd's, not giving out civil servant privileges, the result seems to be pretty much the same as with privately owned PLCs, excessive top-level wages, reasonable profits, fancy brochures and annual reports, only slightly less leverage with the former than the latter...
Post a Comment