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The economic regulation of the UK airport industry

By Noriko Ito


The UK airport industry faced regulatory reform following the 1986\ud Airports Act. The regulatory reform not only included privatisation of\ud the then nationalised British Airports Authority, but also changed\ud the airports that used to be directly owned and managed by local\ud authorities into autonomous pics. As a result, the industry includes\ud four categories of institutional arrangement for the airports in the\ud UK, i. e., (1) privatised airports with price regulation, (2) privatised\ud airports without price regulation, (3) a local authority airport plc with\ud price regulation, and (4) local authority airports plc without price\ud regulation. The regulatory reform involves the imposition of price\ud cap regulation on 'designated' airports' average airport charge\ud levels. In this thesis focus is placed upon the predictions of\ud outcome changes in this industry by the regulatory reform. The\ud framework of the analyses is based on applied microeconomics,\ud particularly on the theory of regulation. The predictions regarding\ud the airport charges rebalancing effect and productive efficiency are\ud accompanied by empirical analyses as to finding any performance\ud changes. Predictions and empirical analyses were carried out\ud mainly with regard to (1) allocative efficiency in price rebalancing\ud and (2) technical efficiency in production. The price regulation's\ud constraint form is the 'Average Revenue Approach' and some\ud economists suggest this leads to efficiency distortion. 'Designated'\ud airports' price cap constraint uses only the passenger numbers to\ud 'average' the level of total airport charge revenue. The thesis\ud shows that this approach would produce a different outcome from\ud the general outcome predicted through a typical 'Average Revenue\ud Approach' using both a simple model and interdependency demand\ud model, followed by an empirical analysis using price ratio data. As\ud to productive efficiency, after predictions of the outcome I used\ud Data Envelopment Analysis to test efficiency scores in (A) the then\ud nationalised British Airports Authority/privatised BAA as time series,\ud and (B) private airports and local authority airports after the reform\ud as a panel comparison

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