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December 10, 2007
Series Editor: Ian Parry
Managing Editor: Felicia Day
Assistant Editors: John Anderson and Adrienne Foerster

Welcome to the RFF Weekly Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.

Flight delays are becoming more and more common as growth in demand for air travel outpaces our ability to expand airport capacity. How should policymakers respond to the problem of airport congestion? Is there a case for policy intervention at all for hub airports, where one carrier operates most of the flights, and therefore should mostly take into account the risk that running one extra flight will cause other flights to be held up? These are some of the important, and intriguing, issues discussed in this week's commentary by Jan Brueckner and Kurt Van Dender, two prominent economists in the field of transportation and urban policy.

Next week Robert Mendelsohn and Nicholas Muller will discuss how economists go about quantifying the damages from local air pollution, and how large these damages are relative to the overall size of the US economy.

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Using the Price System to Reduce Airport Congestion

Jan K. Brueckner and Kurt Van Dender

Driven by the growth in demand for air transportation, flight volumes at many major U.S. airports have increased sharply in recent years. Since the flight capacity of airports has hardly changed, the increase in traffic volume has led to more and longer delays, a trend well documented in newspaper stories and the evening news. In 2007, 24 percent of flights arrived late, up from 15 percent in 2003.

What measures are appropriate for handling airport congestion? Building more capacity is one option, and some capacity expansion will surely be needed despite its high cost as traffic expands. Another response is to cut flight volumes through direct government intervention in airline scheduling decisions, as the Federal Aviation Administration did at Chicago's O'Hare Airport. A more systematic approach relies on a "slot" system, where airlines cannot schedule flights as they please but must instead acquire landing or take-off slots, issued by the airport, in order to operate. Such a system of "slot constraints" has been used at four major U.S. airports and is de rigueur in Europe.

A problem with such quantity controls is that, while they may relieve congestion, they do not guarantee that the available slots are used for the best purposes. For example, airlines may use peak-hour slots to operate smaller aircraft than would desirable. While slot trading among airlines helps to achieve the highest and best use of slots, frictions in the trading process may still leave room for inefficiencies.

A better way to ensure efficient use of scarce runway capacity is to rely on the most basic economic pricing principle: make airlines pay the marginal cost of using a congested airport. If an airline decides to land under congested conditions, it incurs extra operating costs while subjecting its passengers to additional time costs, and it will take both of these costs into account. But the presence of congestion means the extra flight also increases operating and time costs for all other flights using the airport, and these impacts are also part of marginal cost. A condition for efficient use of congested runway capacity is that the full marginal cost, including the cost imposed on other airlines, must be internalized (taken into account) by the carriers.

But would an airline in fact internalize these costs in deciding whether to operate an extra flight? This question has been much debated among airline economists, leading to the usual answer: "it depends." If each airline serving the airport has a relatively large presence, operating a substantial number of flights, then each carrier will understand that its scheduling decisions affect the overall level of congestion. Moreover, carriers will play a scheduling game with one another, with each airline setting its flight volumes to maximize profit, taking account of airport congestion as well as scheduling choices of the other carriers. In this situation, each airline will partially internalize congestion, taking into account the congestion it imposes on itself (additional delays for all its other flights) in deciding whether to schedule an extra flight. However, since the airline will ignore the congestion imposed on other carriers, marginal costs are only partially internalized.

The answer to the internalization question is even less favorable when the big players at the congested airport coexist with a competitive fringe, a collection of airlines that individually operate only a few flights. These airlines could be carriers that are large overall but only have a small presence at the congested airport. Rather than being equal players, the fringe carriers follow the lead of the big airlines, adjusting to their behavior while having no individual impact on the overall level of congestion.



Jan K. Brueckner
Professor of Economics, University of California, Irvine

Brueckner holds a Ph.D. from Stanford University. His research focuses on urban and public economics, industrial organization, and housing finance.



Kurt Van Dender
Associate Professor of Economics, University of California, Irvine

Van Dender holds a Ph.D. from Katholieke Universiteit Leuven. His research focuses on transportation economics, urban economics, and public finance.

In the presence of a competitive fringe, partial internalization of congestion is eliminated. If large carriers restrict their flight volumes to limit self-imposed congestion, the fringe carriers would simply fill the gap, leaving overall congestion unchanged. Therefore, each big carrier's incentive to take account of self-imposed congestion is neutralized, and partial internalization disappears. The FAA observed exactly this kind of "gap-filling" behavior after convincing United and American Airlines to cut their flight volumes at O'Hare airport.

Since internalization of congestion is either partial or nonexistent in these two cases, policy intervention is required. Congestion pricing, which makes airlines pay for the congestion they fail to internalize, is an attractive option. Daniel (1995) calculated congestion charges for the Minneapolis-St. Paul airport, assuming that the competitive-fringe model (and the absence of internalization) is realistic. He found that the congestion charge for each flight should equal about $1,000 (in 2007 dollars) on average during the day. But once the charges have had their intended effect of reducing congestion by shifting flights to off-peak hours, the average charge would fall to approximately $360. With partial internalization, congestion charges would have somewhat smaller magnitudes. But regardless of which case applies, some level of congestion pricing would be required at most large airports.

Unlike pouring concrete for more runways, congestion pricing is virtually costless to implement, and by reducing peak traffic volumes, it will make our airports seem magically larger. While airlines strongly oppose congestion pricing, the industry seems not to recognize that congestion charges can replace the current weight-based system of landing fees. With fees dropping to zero in off-peak hours, reflecting the absence of congestion, the carriers' overall costs need not rise by much. In any case, peak-hour congestion charges are likely to be passed on to passengers, widening the current differential between peak and off-peak fares and generating the traffic shift toward less-congested hours.

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Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.


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Further Readings:

Jan K. Brueckner and Kurt Van Dender, 2007. "Atomistic Congestion Tolls at Concentrated airports? Seeking a Unified View in the Internalization Debate," CESifo Working Paper No. 2033.

Jan K. Brueckner, 2002. "Airport Congestion When Carriers Have Market Power," American Economic Review 92, 1357-1375.

Joseph I. Daniel, 1995. "Congestion Pricing and Capacity of Large Hub Airports: A Bottleneck Model with Stochastic Queues," Econometrica 63, 327-370.

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