Airport capacity choice under airport-airline vertical arrangements

Abstract

This study investigates the effects of airport-airline vertical arrangements on airport capacity choices under demand uncertainty. A multi-stage game is analyzed, in which competing airlines contribute to capacity investments and at the same time share airport revenues. Our analytical results suggest that for a profit-maximizing airport, such a vertical arrangement leads to higher capacity although its profit may not be higher. For a welfare-maximizing airport, such an arrangement has no effect on capacity or welfare. Capital cost savings brought by airport-airline cooperation, if any, always leads to higher capacity, higher profit for a profit-maximizing airport, and higher welfare in the case of a welfare-maximizing airport. Numerical simulations reveal that win-win outcomes may be achieved for an airport and its airlines without government intervention.