Is privatizing airports a good idea?

Responsible researcher: Angelo Cruz do Nascimento Varella

Article title: ECONOMETRIC MODELING OF DEMAND AT PRIVATIZED AIRPORTS: CASE STUDY OF CONFINS INTERNATIONAL AIRPORT, BELO HORIZONTE

Article authors: William Eduardo Bendinelli and Alessandro VM Oliveira

Location of intervention: Minas Gerais, Brazil

Sample size: Monthly socioeconomic and passenger movement data between 2000 and 2012.

Sector: Others (Transport)

Type of Intervention: Effects of privatization of the airline sector

Variable of Main Interest: Number of passengers on domestic flights

Assessment method: Others

Policy Problem

Air transport is of great importance for the economic development of a country, with a direct impact on trade and the well-being of its population. Therefore, having an efficient airline sector generates benefits and is seen as a relevant challenge by science and by several governments around the world.

As a consequence, good airport management is considered a point of interest by businesspeople, governments and researchers, who debate globally about the best ways to manage these relevant logistical points. In turn, the privatization of airports is widely discussed, since the control of these air transport centers is complex and affects society as a whole, including Brazil.

Assessment Context

In general, it can be said that the control, management and operation of airports is a function of the State, and the first privatization movement of these instruments occurred in 1987, in the United Kingdom. Since then, airport privatization has progressively become a global trend, contrasting government dominance.

It is important to highlight, however, that the privatization of airports is not a consensus. Several members of the European Union, such as Spain, Sweden and Finland, as well as the United States, are examples of public airport management, which are viable options for the international air transport sector.

Policy Details 

In Brazil, the choice for the concession was based on the need to attract investments and improve efficiency in operations, so that, among other privatizations, Confins Airport was auctioned in November 2013.

It is important to highlight that the privatization of airports requires a balance between private and public interests, so that both the operators' profits and social well-being must be preserved. In order to estimate the potential success of the Confins Airport concession and the premises for achieving such objectives, the authors evaluate the behavior of national demand for domestic flights based on variations in the Brazilian economy and airport operating conditions.

Methodology Details

To investigate the behavior of national demand, the present study considered data relating to economic aspects, such as GDP and exchange rate, and logistical aspects of airport operations, such as international prices for a barrel of oil and average domestic revenue per passenger-kilometer transported. .

The econometric model chosen by the authors is called the Generalized Method of Moments (GMM) and uses historical data to analyze the impact of the chosen variables on the demand for domestic flights, with the aim of investigating how each of these factors affects the decisions of companies and citizens in buy airline tickets.

Results

The analysis demonstrates that economic growth is fundamental to the success of airport privatizations, since the model indicates that a 1% increase in average passenger income generates a 2.05% increase in demand for domestic flights. This phenomenon is interpreted by the authors as a consequence of the economic rise of class C, over the last few decades, which has considerably increased the demand for domestic flights.

Another relevant result highlighted by the authors refers to the effect that rising prices have on the demand for airline tickets, a phenomenon also known as price elasticity of demand. In the study, for every 1% increase in ticket prices, there was a 0.13% reduction in the purchase of domestic flights. According to the authors, this is due to the strong participation of companies in the demand for airline tickets, which care less about prices than other consumers.

It is important to highlight that this phenomenon is relevant since airport management companies may seek to reduce financial losses by excessively increasing prices, since the demand for tickets reduces little in relation to these values. However, this behavior would prevent many citizens from traveling by plane, resulting in a loss of social well-being that governments and regulators must avoid.

Public Policy Lessons

Good airport management is fundamental to the success of the airline sector, so this is a responsibility of the Brazilian government. Privatizing airports is a viable alternative, as long as the process is well planned and well regulated, with well-defined guidelines and determinants that serve as a basis for the norms and rules of the concession agreement. In this way, it is possible to ensure the financial viability of the operation and guarantee the rights of citizens, improving society as a whole.

The prospect of success in the privatization of Confins Airport is based on Brazilian economic development and the stability of the international market, so that the Brazilian government must value the balance between public and private interests in exceptional cases, such as financial crises and volatility in international markets. Therefore, such public policies must ensure the benefits of a viable and efficient airline sector.

Reference
BENDINELLI, William Eduardo; OLIVEIRA, Alessandro VM. Econometric modeling of demand at privatized airports: case study of Confins International Airport, Belo Horizonte. Journal of Transport Literature, vol. 9, p. 20-24, 2015.