Airport charge, terminal capacity, and suggested airport arrival time: Considering non-aeronautical business

Abstract

This study investigates the optimal decisions of airports regarding charges, capacity, and passengers’ suggested arrival time at the airport (before flight departures) under different objectives (maximizing airport profit or social welfare). Our model incorporates an airport, airlines with market power, and passengers, and examines the impact on concession revenue of dwell time in (terminal) retail zones and queuing time in check-in zones. We find that whether a profit-maximizing airport charges or subsidizes airlines for using its aeronautical service depends critically on whether the trip demand is elastic with respect to airport charge and whether trip demand increases the concession surplus. In particular, when this is elastic and the trip demand also raises concession revenue, the airport will subsidize airlines. For welfare-maximizing airports, when trip demand decreases the concession surplus (due to shopping time shrinkage), airports would set the charge that the ticket price paid by passengers is higher than the social marginal cost incurred. Further, the airport’s decisions regarding terminal capacity are influenced by the trade-off between the revenue gained from increased traffic and the revenue lost from the reduced dwell time. By comparison with a welfare-maximizing airport, a profit-maximizing airport tends to invest more in terminal capacity under lower traffic, but less under higher traffic: basically, the effect of expanding terminal capacity on increasing shopping time (dwell time in the retail zone) is more pronounced for lower traffic, and the effect diminishes for higher traffic. The study also shows that a profit-maximizing airport would suggest travelers arrive at the airport earlier than a welfare-maximizing airport, so as to increase the non-aeronautical revenue.