location rents and the experience of us airports—lessons learned from off-airport entities

Journal of Air Transport Management 10 (2004) 61–69

ARTICLE IN PRESS

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property rights,

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facility themselv

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doi:10.1016/j.jai

Location rents and the experience of US airports—lessons learnedfrom off-airport entities

Richard Golaszewski

GRA, Incorporated, 115 West Avenue, Suite 201, Jenkintown, PA 19046, USA

Abstract

This paper explores whether airports can capture location rents from off-airport businesses that serve airport customers. It

examines two types of off-airport enterprises: services that typically gather customers by transporting them to and from the airport

and through-the-fence activities, which access the airside of the airport via taxiways or other means. It examines the differential in

fees paid by comparable on- and off-airport service providers. It also discusses how the distribution of rents may be affected by laws

and policies affecting the fees charged by airports, and by the structure of the market for airport services.

r 2003 Elsevier Ltd. All rights reserved.

Keywords: Airports; On- and off-airport concessions; Location rents

1. Background

Do location rents exist at US airports? Can airportscapture rents from off-airport businesses? These are twoimportant questions in both transportation policy andtransportation economics. In simple terms, an economicrent is a price for a good or service that is above theresource cost of production including a normal profit.Generally, rents are due to unique features of the goodor service such as scarcity of supply, limited access, orother factors that cause prices to reflect the value of thescarce resources.1

Some practical examples of where location rents mayexist include the following:

2Much of this is captured in an excellent story about how Robert

Moses used these public authorities and the rights that they controlled

to generate billions for the development of public infrastructure in

* New York City confers distinct location advantagesfor both individual and commercial access. Inparticular, Manhattan is an island and access iscontrolled either by bridges, ferries, tunnels or othermeans. These generally had been under the control of

ss: [email protected] (R. Golaszewski).

ises can operate within the public sector or the private

tion, if the public sector controls the underlying

they can effectively sell or lease the capitalized value

rent to a private operator or choose to operate the

es. In this case, the relative bargaining power between

owner and the private sector operator determines how

distributed.

front matter r 2003 Elsevier Ltd. All rights reserved.

rtraman.2003.10.007

the Port Authority of New York and New Jersey andsome assert that the above market returns frombridges and similar access facilities were transferredto support large-scale economic development in NewYork City.2

* Sports teams are often controlled by leagues thatfranchise operations of a limited number of teams ina limited number of cities. The league sells newfranchises for considerable sums of money andexisting franchises change hands for substantial sums.This assures that there is a relative scarcity of supply.3

The league basically controls the supply of profes-sional sporting events in order to maintain the valueof the franchises.4

* Airport slots also can be a form of location rent whencapacity is scarce. Who captures these rents is aquestion of laws and regulations governing airport

New York City (Caro, 1974).3 It is often difficult to distinguish between monopoly power and

location rents due to scarcity in professional sports franchises. In the

US, major league baseball has an exemption from the antitrust laws,

while other professional sports teams do not.4When the leagues expand, communities and potential team owners

combine to bid aggressively for new opportunities. Again, the relative

bargaining power of existing owners (‘the league’), potential new

owners and communities determines the distribution of the rent.

ARTICLE IN PRESSR. Golaszewski / Journal of Air Transport Management 10 (2004) 61–6962

charges and property rights. For example, airportslots in the US have historically been awarded at nocost to incumbent operators. There have been limitedbuy-sell programs for airport slots in the US. In thiscase the scarcity rent is likely to accrue to airlines thathold slots.

* The supply of beachfront real estate is also limited inmany developed countries. Scarcity rents tend to becapitalized into land values.

* Placement on the screens of computer reservationsystems (CRS) and priority listing also has been aform of economic rent that has been sold to thosewilling to pay the most. In essence, the CRS operatoris able to charge a premium to place flights on thefirst display screen.

* Development rights over mass transit subway sta-tions have been the subject of competitive bids thatembody location values. They guarantee that officesand shops will be located close to many commutersand visitors. In particular, the Hong Kong metro is agood example of the exploitation of location rents bygovernment.

We have mentioned airport slots as a source of rentsin the aviation arena. In the US, some believe that thelarge incumbent air carriers control the market forairport slots and that buy–sell has become ineffective.The European Union is examining whether there shouldbe a market for airport slots in Europe. The landside ofairports, including airport terminals, on-airport park-ing, rental car locations, and such, often commandpremium prices in relation to those charged for similargoods and services in a broader community.5

The question of whether location rent can extendbeyond the airport boundary is the principal issueaddressed in this paper. This paper examines how off-airport businesses interact with airports in the US today.There is a peculiar institutional and legal environmentthat governs airport charges in the US and affects muchof what we observe. In this case, the US is very differentfrom other jurisdictions. In turn, this may impact whocan capture rents, and the incentives faced by variousparties to obtain such rents. The subject of airport ratesand charges policy in the US is a complex issue that iswell beyond what is covered in this paper.

A good definition of location rents and how theydiffer from monopoly profits is contained in a recentreport (Australian Productivity Commission, 2002). Thereport states monopoly profits are profits that exceedthe rate of return required to maintain the supply of thegoods or services. It states that location rents are those

5Many airports are shifting to market pricing for concession goods

and services because they have found the market to be quite price

elastic. In part, this may be due to the availability of substitutes for

goods and services sold by airport concessions. Many airports believe

it is more profitable to sell more goods at a lower price.

that accrue to a scarce factor of production. The reportnotes that location rents do not involve the efficiencyloss of monopoly that results from distorted supply anddemand. The location rents reflect the value placed onscarce resources by consumers and provide signals fortheir efficient use. An unstated corollary is that it doesnot matter who prices the scarcity in terms of economicefficiency. As long as a rent exists some party willcapture it. In the present analysis, this could be eitherthe airport or the service provider located on or off theairport.

This paper examines selected examples of off-airportservice providers in the US and how fees charged foraccess to airport-based customers might relate toproduction costs and whether location rents exist dueto scarcity. Off-airport service providers access custo-mers by using shuttle buses and vans that carrycustomers to and from the airport. As these businessesgrew, airports sought to charge for the costs theyimposed on the airport or levy fees to level the playingfield with the on-airport concessions. We examine bothoff-airport service providers as well as ‘through thefence’ activities—i.e., those activities which, while theyreside off-airport, have direct access to the airsidefacilities of the airport. We will discuss the basis forairport charges for these types of enterprises andprovide some preliminary thoughts on the existenceand distribution of any potential location rents.

2. Analysis

If rents exist, they result from spatial monopoly orexclusive access to a customer pool. In the case ofairports, location rents can apply to both on-airportactivities and to areas adjacent to the airport or off-airport activities. The structure of the market for theservices in question, and the relative size and marketposition of the parties involved, determines whetherrents exist and how they are distributed. Rents can arisefrom either structural or behavioral conditions. Thedistribution of rents is determined by who ends upcontrolling the market—which is often a question of lawor property rights. The ability of the airport to levydifferential fees on suppliers of on and off airportservices also can affect competition (UK CompetitionCommission, 1997).

Most US airports are owned and controlled by localgovernments with strict Federal rules on the usage ofairport revenues.6 This provides mixed incentives to

6US commercial service airports are typically operated either as

public authorities or as departments of state or municipal govern-

ments. This is enforced by US Department of Transportation/Federal

Aviation Administration rates and charges policies. The leverage point

is that the federal government provides grants for airport development.

ARTICLE IN PRESSR. Golaszewski / Journal of Air Transport Management 10 (2004) 61–69 63

airport operators in that, in general, money generatedon an airport must be spent on the airport foroperations or investment. This limits the ability of USairport operators to take the money downtown andcross-subsidize other city services.7 Other countries alsoexamine whether fees for certain airport services, wherethey compete with services supplied elsewhere in thecommunity, must be counted as airport revenue indetermining charges for air carriers (UK CompetitionCommission, 1997). In addition to airport charges, somelocal governments also benefit from the ability to levyspecial taxes on off-airport activities.

The regulatory framework for airports in the US,particularly airport rates and charges policies, mayaffect the incentives of airports to exploit rents to themaximum amount. Airports cannot take money off theairport so they may choose to use the rents to ‘goldplate’ existing facilities. In the case of airport slots,institutional mechanisms generally have meant thatairlines capture any scarcity rent.

3. Examples of rent capture

The two principal examples that may illustrate theexistence of location rents are charging off-airportcompanies to access the airport and/or airport custo-mers. The first category involves fees paid by companieslocated off the airport that provide rental cars, parking,hotels and ground transportation. This can be doneeither through establishing fees for the shuttles that takeair passengers to these off-airport businesses or bylevying special fees or taxes on the off-airport businessesthat are in proximity to the airport.8 The key linkagehere is that these off-airport firms benefit from theaccess to airport customers and may enjoy somelocation rent if off-airport facilities are scarce. Thequestion then becomes one of rivalry for rents betweenthe on-airport and off-airport firm, unless the airport isable to capture them.

The other example of airport location rents may be inthe area of ‘through the fence operations.’ These allowcompanies off the airport to have access to the airsidepart of the airport in return for paying special fees.These companies can include firms involved in aircrafthangars, manufacturing enterprises, cargo facilities,and many other types of activities. There are evenexamples of residential communities that have access to

7Some US airports have grandfathered exceptions to some rates and

charges policies.8A somewhat dated but thorough discussion on gross receipts fees

charged by airports to off-airport companies is contained in a report

by FAA’s Office of Chief Counsel (Federal Aviation Administration,

Office of Chief Counsel, 1984). Anderson (1990) also covers some of

the relevant case history on off-airport fees.

airport runways where owners and operators can taxitheir airplane right up to the front door of theirresidence.

In this paper, we utilize data from the largest US hubairports.9 (Data are also available for other sizeairports.) There is a long history of litigation and caselaw in the US regarding charging off-airport businesses.FAA policies on airports rates and charges are foundedin efforts to raise airport revenues and not todiscriminate among airport users. FAA promotescharging off-airport firms because they compete withon-airport providers of the same services. In essence,this protects airport concessionaires from lower costcompetition and also is a means of charging off-airportproviders for the airport services and facilities they usein accessing their customers. Miami International Air-port, for example, developed a curbside charging systemto recover the costs of constructing, maintaining, andoperating vehicle curbside to access airport customers.These charges applied to both on- and off-airportbusinesses that operated shuttle vehicles on the airport.

In the examples below, the data show that there is aneed to have some way of tying the off-airport businessto the airport. It limits who can be charged for providingoff-airport services to airport customers. The off-airportbusinesses that get charged fees include off-airportrental cars, ground transportation services, and courtesyvehicles to access hotels and off-airport parking. Thefees can apply to the shuttle vehicles that transportpassengers to and from the airport, or in the ability ofthe airport to levy fees directly on the activities of off-airport businesses. In some cases, special taxes are leviedon off-airport businesses. For example, one communitylevies a tax on hotel and motel rooms with some of theproceeds dedicated to airport development (Munford,2002).

4. How fees are assessed

In general, fees for off-airport car rentals involveeither a fixed fee for a car rental contract, or a percent ofrevenue based on the value of the total rental contract.(Some jurisdictions also have special car rental taxesthat apply to geographic areas around airports.) In thecase of ground transportation services, generally theseare based on the service provider paying a fee perpassenger, a fee for airport trips by the vehicle, or anannual license fee. Off-airport courtesy vehicles forhotels, rental cars and parking also may be levied a per-passenger fee, a per-trip fee, or an annual license fee.With modern technology, one can use auditing andsampling to monitor compliance. Some airports trackthe usage of the airport by courtesy and shuttle buses

9Data are from American Association of Airport Executives (2000).

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Table 1

Rental cars

23 Airports reporting On-airport Off-airport

Percent of gross revenue 9–12.5% 4–10%

Annual revenue range $7.1–30.5 Million $55,000–17.5 Million

Source: American Association of Airport Executives (2000).

Table 2

Scheduled buses

15 large hub airports reporting

Fee base

Percent of gross 5–10%

Per trip $0.40–5.00

Per vehicle N/A

Annual revenue per airport

Range o$10,000–2.2 million


Table 3

Taxis


Fee base

Percent of gross 18%a

Per trip $0.40–2.75

Per vehicle $30–1250 annually



Source: American Association of Airport Executives (2000).aOne airport reporting (Washington Dulles).

Table 4

Limousines


Fee base

Percent of gross 10%

Per trip $0.55–4.90





R. Golaszewski / Journal of Air Transport Management 10 (2004) 61–6964

with electronic transponders mounted to the roof ofvehicles that pass through gateways at airport entry andexit points. The transponders track the number of tripsmade through the airport road system and the lengthof time the vehicle was on the airport. Vehicleoperators are allowed a certain number of trips for afixed fee and are charged for trips over and above thebase amount.10

* Rental cars: Table 1 presents selected data on rentalcar fees charged at 23 large hub airports reportingdata in the 1999–2000 AAAE Rates and ChargesSurvey. The data are for 23 airports that reported feescharged to on-airport and off-airport car rentalcompanies. The data indicate that on-airport carrental concessions pay a fee of from 9% to 12.5% ofgross revenues while off-airport fees range from 4%to 10% of gross revenues.11 The annual revenuereported from car rental fees at the 23 airports rangesfrom $7.1 million to $30.5 million per year for on-airport car rental companies, while for off-airportcompanies, the annual fees raised range from $55,000to $17.5 million. Some off- and on-airport rental carsalso pay per vehicle and per trip fees for courtesybuses.

* Scheduled buses: Table 2 reports fees from 15 largehub airports regarding scheduled bus operations.These are by definition all off-airport enterprises.While public transit often is viewed as a positive wayof reducing airport and access roadway congestion,airports do levy fees on their operation. The fee basesrange from a percent of gross revenue (5–10%), a pertrip fee ($0.40 to $5.00) and per vehicle fees(insufficient data reported). The annual revenuesraised per airport from fees on scheduled buses rangefrom less than $10,000 per year to $2.2 million peryear.

* Taxis: Many airports levy fees on taxis operating atthe airport. Table 3 shows the data for 18 large hubairports that reported the fees levied on taxi opera-tions. In one case, the fee was 18% of gross revenues.This was a unique case at Dulles Airport where onlyspecific types of taxis are allowed to operate. The per-trip fees at the other airports range from $0.40 to$2.75 and there were per-vehicle charges that rangefrom $30 to $12,500 annually. The annual revenuesraised per airport were from less than $84,000 to $3.1million per year.

* Limousine service: Data for fees levied on limousineservice are shown in Table 4. For the 14 large hubairports reporting, the fee bases included 10% of

10See Australian Productivity Commission (2002) for a discussion of

airport landside fees for parking and airport access, and how these

relate to the supply of competitive on- and off-airport services.11See also the discussion of fees for on-airport and off-airport rental

cars at Charlotte Airport (Charlotte, NC, City Council, 1999).

gross revenues, or $0.55 to $4.90 per trip, or pervehicle fees of $30 to $100 per year. The revenuesraised per airport for limousine fees range from lessthan $30,000 to $2.4 million at the 14 large hubairports reporting.

* Courtesy vehicles: Courtesy vehicles for off-airporthotels, car rentals and parking also pay fees to

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Table 5

Courtesy vehicles


Fee base

Percent of revenue None reported

Per trip $0.40–4.00





R. Golaszewski / Journal of Air Transport Management 10 (2004) 61–69 65

airports (Table 5). For the 12 large hub airports thatreported courtesy vehicle fees, these include per tripfees of from $0.40 to $4.00 and per vehicle fees offrom $75 to $400 annually. At the 12 airports, annualrevenues ranged from less than $23,000 to $2.5million.

There is one school of thought that suggests that feeson transportation providers and their shuttle operationsare a recovery of airport costs and not necessarily a rentcapture by the airport. Off-airport vehicles do consumeroadway and curbside space which have associatedcapital, operating and maintenance costs. Moderntransponder technology permits the measurement ofcurbside usage including on-airport time, off-airporttime, and loiter time calculations. It also allows for costrecovery that can be based on a per-trip, per unit time,or some other service bundle (pay a flat fee per vehiclewith a surcharge for trips in excess of a thresholdnumber). Of course, others would suggest that airportsare exploiting the scarcity to extract location rents bycharging commercial firms to access airport passengersas part of their customer base.

5. Through the fence activities

The other major source of potential locational rentfor off-airport enterprises is what is termed ‘through thefence activities.’12 These are activities which take placeon off-airport property but which have access to theairfield via the taxiway system. For example, a facilitycan have direct taxiway access to the airfield forhangars, cargo facilities, manufacturing or maintenancefacilities, and other uses. The biggest single user ofthrough the fence facilities is UPS, the package expressoperator. It has reached through the fence agreements inColumbia, SC, Ontario, CA, Louisville, KY, and

12A good discussion of through the fence operations is contained in

Soderquist (undated).

Philadelphia, PA. (Hodges, undated). The latter threelocations are major UPS hubs. These facilities werepresented to the communities as employment andeconomic development activities. UPS had a degree ofbargaining power in terms of the cities it chose tolocate these jobs. By locating off-airport, UPS wasable to negotiate special fees and avoid discrimina-tion issues related to other air cargo operators on theairport.

Some airports have been developed with through thefence operations in mind. The airport with the greatestuse of through the fence agreements is Alliance Airportin Dallas, which was developed around a runway, partof which was paid for in Federal funds. A developercontrolled all the land surrounding the airport andencouraged firms to locate next to the airport. Thecompanies are located in an ‘off-airport’ industrial parkadjacent to the runway taxiway system. The airport inScottsdale also has a long history of through the fenceoperations.

The typical fees charged by the airport for through thefence operations are based on per square foot devel-oped, per square foot of the total site, per vehiclemovement on and off the airport, or a fuel flowage fee iffueling is permitted. It turns out that fueling in throughthe fence operations is a big issue because it competesdirectly with on-airport fueling companies that payconcession fees to the airport.

The US Federal Aviation Administration has raised anumber of issues with through the fence operations.13

The FAA provides grant funds to airports for develop-ment and, in turn, requires airport sponsors to enter intocertain agreements. The FAA wants no competitiveadvantage over airport tenants for through the fenceactivities. They want controls over developments,minimum service standards, non-discriminatory fees,and a fair return paid for by these operators for use ofthe landing area. FAA prefers incidental usage ratherthan day-to-day business activity. FAA wants to avoidcircumvention of the public benefits that airportsprovide. For example, in return for public money, theairport has been developed for public benefit. Throughthe fence operations can erode the financial base ofairport tenants. In addition, through the fence activitiesmay cause additional costs that on-airport tenantsshould not bear.

Communities, of course, look at the other side of thecoin. They look to economic development and taxableland. As airport land becomes scarce, through thefence is a way of expanding the scope of the airport. Insome locations, it may be one of the only means ofobtaining developable sites for major facilities on ornear an airport. For example, the Lester B. Pearson

13Soderquist (undated) discusses the FAA position on fees for

through the fence operations.


International Airport in Toronto has a number ofthrough the fence operations by major air cargofacilities (GRA, Incorporated, John F. Brown Canadaand David Gillen, 2001).

6. The basis for charges

Charges for off-airport concessions can be either cost-based, or revenue (as value of service) based. Cost-basedcharging systems recognize that airport access by off-airport enterprises imposes additional curbside androadway congestion costs on the airport. Measuringthe cost of this in terms of curb length and number ofvehicle lanes required provides a rational basis fordeveloping cost-based fees.

Revenue or tax-based fees recognize that the areaaround an airport can be a special service area, whichallows the airport or a political jurisdiction to capturesome of the value created by an airport. It providesaccess to a customer base and may require additionalpublic services. Such fees are generally not cost-based.

Recovering the costs of through the fence operationsrequires charging schemes to recover the incrementalcosts of the taxiway and apron network that the throughthe fence operation requires. In addition, these opera-tions place additional wear and tear on airside infra-structure, and the airport’s aircraft movement fees canrecover these costs.

7. New developments

The airport rental car business model is changing andthe differences between off- and on-airport rentalcar activities are being reduced. Many airports aredeveloping centralized car rental facilities with commontransportation to and from the terminals. Thesefacilities are often located at remote parts of theairport or, in some cases, on land that the airportleases. This is being done to reduce vehicle congestionon the roadways adjacent to the airport terminals andalso to allow more car rental companies to locate on theairport. Also, by moving rental car facilities furtherfrom the terminal, it allows the airport to recaptureadditional space for parking. It turns out that airportsgenerate more revenue per space from parking activitiesthan they do from rental cars. For airports with fixedland areas, it allows them to accommodate more carrental companies ‘on airport.’ It also reduces differencesbetween on- and off-airport car rental companiesbecause these remote facilities are further from theterminal, and often require the use of a shuttle bus toaccess them.

San Francisco has established one of the largest suchfacilities in the US. All rental car customers, both on-

and off-airport, go to the centralized car rentalfacility via an airport-operated bus. The on-airportcompanies are located at this facility, while shuttle busesto the off-airport rental car companies arrive and departat this remote facility. This reduces the competitiveadvantage that an off-airport car rental may have at SanFrancisco if it were allowed to pick up passengers at theterminal.

The trends in through the fence agreements are toexpand airports without additional land acquisition. Inmany cases, airports have developed most of theavailable land and it is not necessarily in the govern-mental body’s interest to allow the airport to acquireadditional land. Commercial real estate may producemore money for the governmental body’s treasury thanallowing the airport to develop the land subject to FAAregulation on rates and charges. Thus, we may expect tosee more development of aviation-related facilitiesadjacent to airports with through the fence agree-ments for those parties that require airside accesssuch as air cargo, and aircraft manufacturing andmaintenance.

8. Who gets the rents?

The presence and distribution of the location rents atairports raises interesting questions. How large are theserents and how might various parties from the airport,concessionaires, airlines and other parties, capturethem? One needs to look at how markets function tounderstand this issue. First of all, there is overallcompetition in the air transportation market and, forcertain services there are many available substitutes.This applies to connecting services for airline passengersas well as many of the concessions operated inside theterminal. An airport that serves solely as a connectinghub likely does not have a large degree of market power.The key to the potential of an airport to capture rentsfrom off-airport businesses is likely the size of the localpassenger and cargo markets.

The second issue is the substitutability of off-airportand on-airport services. Many services are availableboth on and off the airport including car rental, parking,food and beverage, and shopping. One would expect themarket to equalize prices subject to the access time andhassle advantages of an on-airport location. Thus, wecan expect to see on-airport parking be more expensivethan most off-airport parking and on-airport rental carsto command a premium over off-airport rental cars. Forexample, Hertz wants to be on the airport because itsbusiness model is to provide a high level of service to itsNumber 1 Club members. This focus on businesstravelers is similar to the legacy hub and spokecarriers who also want to serve their business customers.There also is competition among service suppliers. For


airports with a large number of rental car companies,while the airport may be able to extract some locationrent related to being on the airport, competitionamong the rental car providers will tend to keep costsdown.

The size of the local market also matters. Anairport with a large originating base of traffic(versus connections) provides more of an essentialservice to its community than an airport that servesmostly as a connecting hub. As such, one would expectsuch an airport to enjoy a larger degree of economicpower.

There are also perceived economic developmentand job creation benefits that accrue to some off-airportbusinesses. For some services such as cargo facilities,there is an ability to generate competition amongcommunities for the economic development benefitsof the facility. The large integrated carriers such asFedEx and UPS offer a large number of relativelywell paying jobs to those communities that becomehub-sorting facilities. Many communities sought tolocate an air cargo hub at their airport as a formof economic development. In the late 1980s and1990s, passenger airlines sought to create additionalhubs and communities competed for these amongthemselves.

There is also the structure of the service productionprocess that comes into play. Is it necessary that allcomponents or most components are on the airport? Inthe case of selling food and beverages to passengers onconnecting flights, the airport is likely the only game intown. However, this is not the case of originating andterminating passengers. Viable options exist off-airport.Airports have discovered that they can centralize carrental locations in remote parts of the airport or onother land so that existing real estate can move to higherand better uses.

In the US, there are also legal and regulatoryconstraints for charging on-airport and off-airportservice providers. There has been a long history of

Table 6

Illustrative airport rent matrix

Company-industry characteristics Air

La

Typical on-airport service (competitive providers) A

Off-airport substitute A

Service can be disaggregated into components located elsewhere;

small station for FedEx, UPS, etc.

S

Company can create significant number of jobs with specialized

facility (competition from other airports/sites); large FedEx or

UPS facility

C

Company brand important to consumer (e.g., Hertz) A/S

Note: A=Airport; C=Concession, S=Share.

litigation related to airports levying fees on off-airportbusinesses. While not universal, it seems that airportsgenerally have been successful in levying modestfees that are arguably cost-related for access to theairport by off-airport firms. There are also the costcharacteristics of airport service providers. Rental carcompanies compete both on level of service and price.There are premium car rental companies that offerenhanced customer service and those that specialize invery low rates for long-term rentals pointed at leisuretravelers.

Optimum pricing of services would have prices toconsumers reflect the scarcity of the resources beingused. Whether the airport, airline or concessionaire endsup with the rents depends on the institutional arrange-ments. However, because airports are limited to costrecovery, they may not be able to retain the rent. Theymay have the incentives to incur additional costs tocapture the rent within their rate base.

8.1. Rent distribution and capture

Table 6 illustrates a hypothetical analysis ofairport rents based on company or industry character-istics and airport characteristics including a largecapacity constrained hub airport, a large unconstrainedhub airport, and medium and small airports. Thecompany/industry characteristics that are consideredinclude:

* On-airport services with competitive providers.* Off-airport substitutes for these services.* Services that can be disaggregated into components

that can be located elsewhere such as air cargosorting facilities.

* Services where a company can create significantemployment with a specialized facility with economicdevelopment incentives, and

* Company brands are important to a consumer aswith high-end car rental companies.

port characteristic

rge constrained Large unconstrained Medium Small

A/S S S

A/S S S

S C C

C C C

S S S


The entries in the matrix indicate who is likely to getthe rent where:

* A indicates Airport.* C indicates Concessionaire.* S indicates that the airport and the concessionaire are

likely to share the rent.

Airports are likely to capture or share rents at thelargest airports for on-airport services, off-airportservices and branded services provided on the airport.Medium and small airports generally can expect to sharethe rent or have the rent accrue to a concessionairebecause the low level of activity generally means thatthere will be few providers on the airport. Companiesthat can create significant economic development withinan area can likely capture any location advantage or atleast prevent the airport from extracting rents fromthem. If the airport captures the rent, it may beidentified in above-average returns from specific con-cession activities. However, if the concessionaire isable to capture the rents, it may be difficult toidentify their presence and measure the level ofeconomic rents.

9. Closing thoughts

There is a long history in the US of airports chargingoff-airport firms to access the airport. This includestransportation providers such as buses, limousines, andtaxis, and courtesy vans for off-airport hotels andparking and off-airport car rentals. The question ofwhether the airport is simply recovering the costsimposed on it by these service providers or whether itis able to extract rents is an open question that begs formore empirical research. One would need to develop aneconometric analysis that explained price and costdifferences for various on- and off-airport services andallowed estimation of the likely economic rents and towhom they accrue. Another option would be to analyzecost accounting data from the airport or concessio-naires, if it were made available.

Finally, through the fence arrangements often dependon the relative bargaining power between the airportand the entity seeking access. Here, it is likely that thepromise of local economic development benefits thatcompanies proffer when locating large productionfacilities also comes into play. In the US, we havewitnessed the competition among states for automotiveassembly plants by foreign car producers. The competi-tion for these facilities is intense and many economicconcessions are granted to the company locating thefacility. These companies are often highly subsidized bylocal jurisdictions that want the job creation benefits. Ofcourse, at the national level, this is simply a distribu-tional issue of which location will get the benefits, but

the owners of these large facilities are successfully ableto compete one community against another. In fact,locational rents to the community may be negative inthese instances.

Airport pricing in the US is generally analogous tothat of public utilities. Cost-based fees are the norm andinclude a recovery of capital investment. The publicnature of most airports in the US means they have not-for-profit status. With these constraints, it may bedifficult for airports to set prices that reflect the value ofservices received by customers (and classes of custo-mers), considering the scarcity of resources used inproduction. As a result, prices may be too low. Onemanifestation of this is that US airports typically do notcharge the full scarcity value of runway capacity. Assuch, either rent accrues to the carriers, or prices that aretoo low lead to excessive use of the runway resulting in asub-optimal level of delays. The other potential ineffi-ciency is what is referred to as the Averch–Johnsoneffect, where utilities over-invest to get more costs intothe rate base for customer charges.

Acknowledgements

The author acknowledges David Gillen and HansMartin Niemeier for the invitation to participate in theHamburg Airport Conference and the encouragement todevelop this paper as a result of it. They alsorecommended changes to earlier drafts of this paper.Frank Berardino, David Ballard and William Spitz ofGRA also provided helpful comments on a draft versionof this paper.

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