Impact of Landing Fee Policy on Airlines’ Service Decisions, Financial Performance and Airport Congestion

The airline industry has been changed significantly after the September 11th of 2001, while delay and congestion at airport have been consistently a problem to passengers, airlines and airports since the last decade of the 20th century. Most of previous methods to reduce airport delay and congestion mainly focus on airport capacity expansion through building new runways, which incurs billions of dollars. Due to the complexity and dynamics in the aviation system, there is little study, theoretically or practically, on applying administrative and economic polices to reduce airport congestion and delays without huge investment in building more runways. In this paper, we study how airport landing fee policy could influence airlines’ service decisions and affect airlines’ financial performance and airport congestion. This research is based on our previous studies of the cost economics of aircraft size and of market share modeling for airlines using different aircraft size and service frequency in a competitive environment. In this paper, we propose a one-shot simultaneous gametheoretic model for two airlines competing in a non-cooperative duopoly market. We assume that airlines are profit maximizers – they make their own best operation decisions in order to achieve the maximum profit. Specifically, we study how the changes of airport landing fee policy could influence airlines’ decisions on aircraft size and service frequency in their operations, and how the changes could influence airlines’ profit, as well as congestions and delays at airport. Our researches find that, due to the properties of cost function and market share model, airlines’ optimal aircraft size and service frequency depend on the landing fees charged by the airport, and higher landing fee will force airlines to use larger aircraft and less frequency for the same number of passengers in service. We find that airlines’ load factor will be increased if higher landing fee policy is employed. We also find that, very interestingly, airlines will be better off if some of the extra landing fees are returned to airlines as a bonus for airlines using larger aircraft and consequently reducing airport congestion. Since airport capacity depends on the size of aircraft in operations, using larger aircraft and less frequency to serve the same number of passengers will significantly reduce airport congestion and delays. We also propose further researches in this area by applying cost model, market share model and game-theoretic models to understand how government policy could affect airlines’ behavior and airport performance in different demand and market scenarios.