congestion pricing for airports april 27, 2007 frank berardino gra, incorporated 115 west avenue...

Congestion Pricing for Airports

April 27, 2007

Frank BerardinoGRA, Incorporated

115 West Avenue • Jenkintown, PA 19046 • USA 215-884-7500 • 215-884-1385

[email protected]

2April 27, 2007GRA, Incorporated

Traditional Way of Setting Landing Fees

"When the carriages which pass over a highway or bridge...pay toll in proportion to their weight or tonnage, they pay for the maintenance of those public works exactly in proportion to the wear and tear which they occasion of them. It seems scarcely possible to determine a more equitable way of maintaining such works."

-Adam Smith “The Wealth of Nations” (1776)


Economics of Airport Fees and Congestion

Adam Smith was (remains) right so long as demand does not exceed capacity: Weight based landing fees are a good way to recover actual airfield

costs

But, when demand exceeds capacity: one operation precludes another: All users should pay the same fee

Runs afoul of use agreements and user opposition Fee should reflect delay costs imposed on others

Slots were substituted instead


Slots or No Slots? Auction or Pricing?

Auction: Set total permitted operations per time period (slots) and auction them off

If number of slots set to balance capacity, then congestion is managed without much risk

Will slots have some finite life (5 years?) Carrier must rely on secondary market to acquire added slots in interim Lots of experience

Congestion Pricing: Set the price (to reach a target number of operations) but let any user fly at a given time for the posted price

Risk that congestion not as easily managed or prices set too high But, if there are no slots, airlines can treat airport like any other except

landing fees are higher Seasonal variations Experiment with changes in gauge and frequency No incentive to hoard slots since they don’t exist


The Textbook Argument for Congestion Pricing

Instead of slots use price to ration access No permanent allocations Frequent access for more efficient users

Today demand exceeds capacity, users don’t pay for the delay costs imposed on others

Charge users for the costs they impose, and delays will fall and social welfare will improve

There is an optimal congestion price that can be charged that maximizes social welfare

Optimal Congestion Fee PT

PP

QTQO QP

MB

Private MC

Social MC

Passenger Trips

$

SUCCESSFUL CONGESTION PRICING

6


Successful Congestion Pricing: SR 91 So CAL Free Flowing Toll Lanes at 08:30

>35>35 16-3416-34 <16mph<16mph


SR 91: Key Toll Setting Process

Set a trigger point for raising tolls on express lanes: Objective: free flowing traffic at 65 mph Trigger = 92% of objective = 3,400 vech/hour/lane x 92%

Measured on a rolling 12 week basis Hourly Day of Week Direction

Exemptions: 3 or more occupants; disabled veterans


SR 91 Weekday Toll Schedule

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April 27, 2007GRA, Incorporated

What Can We Learn from SR 91

Congestion pricing works: “target level of activity” reached

Tolls vary directly with demand and evidence substantial peaks and troughs: $0 to $7.00 per trip

Known objective: free flowing express lanes Known process for establishing tolls No statutory limit on tolls (although ROR regulation)

Substitutability is important: drivers able to use non-tolled (congestible) lanes

Formerly “free good” that consumers are willing to pay for

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Why Airports Different v. SR91

Tens of thousands of drivers vs. hundreds of flights Drivers not competing in business with one another Airlines aware of one another

Frequency matters more than seat size Action of one airline affects others

Substitutes for toll roads vs. poor or partial substitutes for airports

Interaction between tolled and un-tolled roads and lanes

IMPLEMENTING CONGESTION PRICING AT AIRPORTS

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Lessons From Road Pricing

Set a target level of delay or operations at the airport An optimal level (which varies with mix of aircraft), or A physical target

Establish a market mechanism that facilitates moving toward the target

Be prepared to have prices vary across small units of time—e.g., 15 minutes

Everyone pays the same price in the same time period

Establish a way to reset prices as demand changes As often as necessary to stay close to target Keep users informed

Key difference: Account for carrier’s strategic business interests

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Four Steps to Full Congestion Pricing

#1: Establish Trigger Point: When pricing implemented

#2: Establish Pricing Board: Independent authority whose only objective is to keep delay within prescribed bounds

#3: Revenue Neutral Flat Fees: Same fee for all users; total revenues collected equal airfield costs

#4: Congestion Surcharges: Designed to keep delays within bounds

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#1: Establish Trigger Point

Trigger: time of day and day of week when delays are becoming unacceptable

Based on:Arrival ratesObserved delaysApproved FAA forecastsHistory (e.g. year 2000 delay levels)Cost benefit analysis

Prefer that trigger point be set at relatively low delay per operation so that revenue neutral fees can be implemented early

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#1: Establish Trigger Point: Example BOS

Schedule monitoring: identify “over-scheduling” six months in advance

15 minute average delays in VFR over 3 consecutive hoursEarly Warning to Carriers: give an opportunity to rescheduleTrigger: if projected 15 minute average delay in VFR, announce

that flat revenue-neutral fee put in place in the 3 hour period Impose Fee: and reduce weight based fee so that total

revenues collected in the time period is neutral

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#2: Establish Pricing Board

Sole objective of independent board: keep delays within prescribed bounds

Near trigger point

Start with revenue neutral flat fees during times experiencing delays near or at trigger point

Published procedures for setting these fees

Rules for raising or lowering fees above revenue neutral Discussed later

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#3: Revenue Neutral Flat Rate Landing Fees

Same charge regardless of weight; total revenues no higher than estimated airfield costs

When one flight precludes another, every flight should pay the same fee

Small plane causes as much delay as larger onesDepending on the current mix of operations at the airport,

may be an effective method to reduce delay Important that application by time of day and day of week

be based on observed delay or other trigger point

Airport could reopen use agreement OR follow BOS example and reduce weight based fees

Consistent with FAA user charge guidance and PACE decision

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Example: Revenue Neutral Landing Fees at LGA

Comparing Flat and Current Fees at 8am at LGA

$0

$200

$400

$600

$800

$1,000

$1,200

19 33 35 37 50 102 103 124 127 141 142 146 155 187 253

Seats

Fee p

er

Dep

art

ure

Current Departure Fees Revenue Neutral Flat FeeCount of Operations at 8am at LGA

0

5

10

15

20

25

19 33 35 37 50 102 103 124 127 141 142 146 155 187 253

Seats

Co

un

t

Count of Operations

Majority of Opsw/ small aircraftduring peak 8amhour

Breakeven:103 seats

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#4: Congestion Surcharges

Objective: target level of operations per 15 minute period Balance arrivals and departures

Authority establishes a “market” where access is offered for a price

Limit non-scheduled to X per period Pay same fee as other users; X adjusted according to use

Multiple rounds: Authority publishes prices, airlines offer schedule

Price starts low rises if demand > target; falls if demand < target Scheduled operators issue schedule of arrivals/departures

requested in each round Blind to other participants

Cash deposits required to insure requests are real

Only operators that participate in “market” may fly

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Important Barrier to Congestion Surcharges

The DOT and FAA “Policy Regarding Airport Rates and Charges” (Federal Register, June 21, 1996, page 31994) says in part:

“The Department’s policy regarding peak pricing was established in its decision in the Massport PACE fee case. In that decision, the Department concluded that a properly structured peak pricing system could be reasonable and not unjustly discriminatory….

These provisions do not exempt airport proprietors from the requirement that total airfield revenues not exceed total airfield costs.”

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User Response to Congestion Fees (Nextor Game)

Beginning of Hour

Base Schedule Round 1

Round 1 Schedule Round 2

Round 2 Schedule

0430 $275 1 $275 10530 27 $275 42 $275 420630 75 $600 67 $600 670730 93 $800 66 $800 760830 94 $800 87 $1,000 730930 90 $800 71 $1,000 671030 84 $600 97 $1,000 961130 84 $600 92 $1,000 711230 97 $800 61 $800 811330 86 $800 63 $800 801430 84 $600 85 $1,000 711530 83 $600 101 $1,000 1011630 85 $800 62 $1,200 541730 89 $800 86 $1,200 821830 92 $800 94 $1,200 811930 91 $800 73 $800 852030 81 $600 80 $600 792130 58 $600 36 $600 392230 25 $275 38 $275 382330 10 $275 8 $275 8All Other 0 $275 0 $275 0Total Operations 1428 1310 1292Fees are in-lieu of existing departure fees

CONGESTION PRICING at LGAAll Fees Are Per Operation

SF3 $73

ER3 $110

CRJ $123

F100 $245

B717 $274

B733 $311

A319 $385

A320 $413

B757 $549

B763 $1,015

ReferenceApprox PANYNJ Dep FeePer Operation

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Nextor Schedule vs. A Target Operations Level

Sum of FLIGHTS DEPARR Avg. Wt'ed Pct of Capacity Capacity

LGAHOUR2 Arr Dep Grand Total Pct ARR Capacity Used Shortfall

0530 3 24 27 11.1% 52.5 51.4%

0630 30 45 75 40.0% 74.3 100.9% -0.7

0730 52 41 93 55.9% 65.0 143.1% -28.0

0830 41 53 94 43.6% 73.0 128.7% -21.0

0930 41 49 90 45.6% 72.2 124.7% -17.8

1030 46 38 84 54.8% 66.1 127.1% -17.9

1130 44 40 84 52.4% 68.3 123.0% -15.7

1230 43 54 97 44.3% 72.6 133.6% -24.4

1330 50 36 86 58.1% 61.7 139.3% -24.3

1430 39 45 84 46.4% 71.8 117.1% -12.2

1530 44 39 83 53.0% 67.2 123.5% -15.8

1630 44 41 85 51.8% 69.4 122.5% -15.6

1730 41 48 89 46.1% 71.8 124.0% -17.2

1830 43 49 92 46.7% 71.8 128.2% -20.2

1930 42 49 91 46.2% 71.8 126.8% -19.2

2030 45 36 81 55.6% 65.0 124.6% -16.0

2130 40 18 58 69.0% 53.9 107.7% -4.1

2230 18 7 25 72.0% 52.4 47.7%

2330 8 2 10 80.0% 47.2 21.2%

Grand Total 714 714 1428 1247.8 114.4% -270.2

Total Capacity Shortfall -21.7%

LGA Nextor Base Case Schedule and Estimated Capacity Shortfall

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Nextor Schedule w/Pricing vs. A Target

LGAHOUR Fee per Operation Arr Dep Grand Total Pct ARR Capacity Used Shortfall0430 $275 1 10530 $275 4 38 42 9.5% 51.9 81.0%0630 $600 27 40 67 40.3% 74.3 90.1%0730 $800 34 42 76 44.7% 72.6 104.7% -3.40830 $1,000 32 41 73 43.8% 73.0 99.9%0930 $1,000 31 36 67 46.3% 71.8 93.4%1030 $1,000 52 44 96 54.2% 66.1 145.2% -29.91130 $1,000 36 35 71 50.7% 70.5 100.8% -0.51230 $800 38 43 81 46.9% 71.8 112.9% -9.21330 $800 47 33 80 58.8% 61.7 129.6% -18.31430 $1,000 35 36 71 49.3% 70.5 100.8% -0.51530 $1,000 50 51 101 49.5% 70.5 143.3% -30.5

1630 $1,200 28 26 54 51.9% 69.4 77.8%1730 $1,200 40 42 82 48.8% 70.9 115.7% -11.11830 $1,200 39 42 81 48.1% 70.9 114.3% -10.11930 $800 40 45 85 47.1% 71.3 119.2% -13.72030 $600 45 34 79 57.0% 63.9 123.6% -15.12130 $600 28 11 39 71.8% 52.4 74.5%2230 $275 31 7 38 81.6% 46.5 81.6%2330 $275 8 8 100.0% 37.7 21.2%Grand Total 646 646 1292 50.0% 1238 104.4% -142.4

Total Capacity Shortfall -11.5%

LGA Operations at the End of Round 2 of Congestion Pricing vs. Average Weighted Capacity

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Still More Work To Do To Reach A Delay Target

Average Delay Minutes per Operation

0.0

50.0

100.0

150.0

200.0

250.0

Hour of the Day

Ave

rag

e M

inu

tes

of

Del

ay p

er

Op

erat

ion

Avg. Delay 1428 Ops/Day Avg. Delay 1292 Ops/Day 76 Slots/hour

Reason why have to start before delays get out of hand (LGA due to Air 21)

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How Are Airlines Affected by Change in Fees

Aircraft days matter Both arrivals and departures are affected even if only one period

has a congestion surcharge

To be competitive, carrier needs both frequency and seats Must assess impact of fees on entire market not just one arrival or

departure What competitors do will matter

“Waiting for a pull down” Larger aircraft likely to be relatively advantages

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How Are Airlines Affected by Change in FeesNY time 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000

Own ScheduleArrivals 1 1 1 1 1

Departures 1 1 1 1 1 1

Arrival Seats 125 125 125 125 125 125 125 125 125 125 125 125 125 125

Departure Seats 125 125 125 125 125 125 125 125 125 125 125 125 125 125

LGA Landing Fee 600 800 1000 1000 1000 1000 800 800 1000 1000 1200 1200 1200 800 600LGA Departure Fee 600 800 1000 1000 1000 1000 800 800 1000 1000 1200 1200 1200 800 600

ops cost x landing fee 0 0 0 8,808 0 0 0 0 8,808 8,808 8,808 8,808 0 0

ops cost x landing fee 0 8,808 8,808 8,808 8,808 0 0 8,808 0 0 0 8,808 0 0Arrival QSI Weight 0 0 0 0.7 0.7 0.8 0.9 0.9 0.9 0.9 1 1.1 1.1 1.2 1.2

Departure QSI Weight 0.6 0.9 0.9 0.9 1.1 1.1 1.1 1 1 1 1 1.1 1.2 0.9 0.7

QSI ValueArrivals 0 0 0 0 87.5 0 0 0 0 112.5 125 137.5 137.5 0 0

Departures 0 0 112.5 112.5 137.5 137.5 0 0 125 0 0 0 150 0 0

QSI wt Pts Freq Share Freq FactorQSI

Value Mkt Share PDEW Avg LF AVG FareTotal Pax

Rev Oth Rev Tot Rev

Op cost/deptr x landing

fee

Total op cost x

landing fee

Total Landing

feesTotal op

costSummary 1475 46% 0.95 1394.345 40% 554 74% $100 $110,892 10% $121,981 $8,808 $105,694 $12,400 $118,094

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Some Important Questions about Congestion Pricing

How often should prices be reset? Every month

How do users appeal prices? Need some basis for appeal

Arbitrary and capricious? Evidence of rigging the market?

Who should keep the money? Ideally, access fees should be in lieu of landing fees, ATC terminal-

area share of user charges and PFC’s at the airport Thereafter, excess fees should be used to increase regional

capacity

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Does It Make Sense to Recycle the Money Back to Users? YES

Seats SeatsAssumptions 50 150

Load Factor 0.75 0.75Miles 500 500Pasengers 37.5 112.5

Fare 115 71Other Revenue 5% per Pax 5.75 3.55

Base Case: Current User and Landing FeesTotal Revenue $4,528 $8,387Operating Cost (Excluding Fees to be Exempted) -$3,384 -$6,483Fees to be ExemptedPFC at $3 -$113 -$338Landing Fee -$118 -$428Ad valorem tax: 3% of Total Revenue -$136 -$252Total Fees to be Exempted -$366 -$1,017

Operating Profit $778 $887

Operating Margin 17% 11%

Effect of Charging $1000 Congestion Fee and Exempting Carrier from PFC, Old Landing Fee and 3% of Ad Valorem Tax)

Total Revenue $4,528 $8,387Operating Cost (Excluding Congestion Fee) -$3,384 -$6,483Congestion Fee -$1,000 -$1,000

Operating Profit $144 $904

Operating Margin 3% 11%

EFFECT OF $1000 CONGESTION FEE ON RELATIVE PROFITABILITY OF 50

SEAT VS. 150 AIRCRAFT

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Some Important Questions about Congestion Pricing

How high would the fees have to be to change behavior? At LGA: $600-$800 would have some effect, but peak fees

likely to be on the order of $1,800 per operation May be higher at hub airports where network effects are larger

Who should set the fee?

Independent entity with single objective of meeting target runs the market and sets the price

Need change in DOT/FAA policy? Legislation?? Yes; maybe

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New Solutions to an Old Problem

"There's a simple solution to this traffic problem. We'll have airlines build the airports. And governments fly the airplanes."

-Apologies to Will Rogers

congestion pricing for airports april 27, 2007 frank berardino gra, incorporated 115 west avenue...

Documents

incorporated slots

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number of slots

added slots

congestion adam smith

time period slots

schedule price

users x