Scarcity rents and capacity expansion

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Client British Airways (BA)
Dates 2015
Service(s)Policy & Economics, Regulation & Competition, Review & Evaluation

CEPA were appointed by British Airways (‘BA’) to provide support with their submission to the Airports Commission for expansion of airport capacity in the South East of England. The support covered the impact of capacity constraints on air fares and scarcity rents.

This project considered the scarcity rents derived from capacity constraints and where in the value chain these benefits were realised.

CEPA’s assignment included reviewing submissions by other parties on this topic and critiquing the econometric approach used in making estimations of the scarcity rents at London airports at present and how these might change moving forward, based on available capacity and changes to demand.

The work involved analysis of econometric reports from Frontier Economics and the International Transport Forum, who sought to estimate scarcity rents at both Gatwick and Heathrow airports. The analysis was conducted with respect to different sub-segments of business and economy flights, and then looking at the overall impact – however noting Simpson’s paradox in the combination of these sub-segments.

These sub-segments included a separation between long haul and short haul flights, and also looking at the reason for travel as key drivers of demand and price sensitivity. The impact and elasticity of demand was considered for hub airports and non-hub airports alike, and effects modelled out to 2030 based on assumptions regarding changes in economic growth feeding through into levels of passenger demand.

The approaches sought to understand the complex commercial constraints and interactions, and whether individual airlines would be able to realise scarcity rent gains where this capacity constraint applies. This involved looking at other providers in the value chain, such as the airport itself and the baggage handling, transportation and catering companies at the airport.

CEPA analysed the methodology in full, looking at the data gathered, the approach to econometric analysis in calculating unconstrained demand levels, and the use of price elasticities to calculate implied increases in ticket prices to 2030. We also conducted robustness checks and the setting of assumptions within the two reports.