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Airfares rising due to taxes, charges and fees, says IATA

In the airline industry, competition is seen as a driving proponent of innovation and cost reduction, offering air travellers the benefit of choice and triggering major efficiency rewards with increasing blending and hybridization of business models.

But a recent analysis from the International Air Transport Association (IATA) indicates that effective competition remains limited, with major airports continuing their strong stance.

An economics briefing paper entitled “Airport Competition: Myth or Reality” says there is inadequate evidence of airports being subject to robust incentives to stir up the type of efficiency gains that are norm in the airline sector. A stout example is between 2006 and 2016 in Europe, the paper stressed that airport passenger charges more than doubled as a share of the typical passenger airfare, while airline revenue per passenger plunged by 11% over that same stretch.

IATA contends that the steady rise of private ownership of airports in Europe has not come with the right regulatory oversight that sets off airports to increase cost efficiency and guarantees that airports are receptive to consumer demands. Its study indicates that between 2006 and 2016, the average all-in cost of an air ticket bought to fly from a EU28 airport remained broadly flat, increasing by just 2% in nominal terms from EUR216 in 2006 to EUR220 in 2016.

However, the sharing of revenues between airlines, airports and governments changed in a huge way with average airline revenue per passenger dropping from EUR194 in 2006 to EUR173 in 2016 and dwindling from representing 90% to less than 80% of the all-in ticket price. Additionally, airport passenger charges and taxes have more than doubled, with average charges skyrocketing from EUR16 to EUR33 and average taxes from EUR6 to EUR14.

IATA claims that if, instead of more than doubling, airport passenger charges had stood pat at EUR16 per passenger, the cost of an average one-way ticket in 2016 would have been EUR203 instead of EUR220, equivalent to savings of almost 10% of the cost of travel.

The airports usually reason that rising airport passenger charges have been offset by equal drops in charges levied on a per aircraft basis. However, IATA emphasized that while airport revenue from passenger charges has indeed risen faster than income from charges levied on a per aircraft basis, both have increased sharply than passenger numbers in the last 10 years.

The latest research by Oxera also revealed that both the nature and intensity of competition between airports for airline routes have drastically changed since 2010, sparked by the accumulated impact of disruptive market developments – including the non-stop expansion of both Low Cost Carriers (LCCs) and Gulf airlines and the merging of airlines’ business models.

In its report called ‘The Continuing Development of Airport Competition, ”Oxera stipulates that the dynamics within the European market has altered the nature of airport competition – giving it a truly Pan-European dimension.

“The result is that today for any airport in Europe – whatever its size and location – LCCs are now the ones calling the tune.”

IATA holds a contrasting perspective and reports that the spirited environment is not equal in all markets and for all airports, which has critical implications for policy-makers and regulators. On routes serving smaller airports and markets, and where both consumers and airlines benefit from a wide range of choices, IATA states “effective airline competition will be sufficient” to ensure the “best outcomes for consumers”.

However, it argues that this is not the case for larger airports, and for airports serving major population hubs or serving a specific niche. Given airlines’ challenge in attaining sustainable profitability, airlines face “strong incentives not to switch away from airports where they are able to generate satisfactory levels of load and yield,” according to IATA.

Moreover, its own evidence shows that airlines face “significant switching costs” in transferring capacity between airports. “The result is airport competition remains limited at best and most airports retain a degree of market power, at least at the local level,” IATA says.

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