Residual Vs. Compensatory Airline Agreement

In the 33 years since the deregulation of the aviation industry, many airports have moved from the residual rate adjustment methodology to the compensatory or hybrid method. In the case of the residual method, all non-aeronautical revenues at the airport are charged to the costs and the balance is charged to the airlines (or, in the case of excess non-aeronautical revenues, a credit). Under the offsetting method, the airport sets the airlines` tariffs and charges on the basis of the percentage of costs corresponding to the use of the facilities by the airlines, without taking into account the amount of revenue. Excess revenue is usually withheld by the airport. Hybrid methods are generally compensatory for terminal facilities and residual methods for aerodromes. However, there are many possible hybrid variants, including methods involving compensatory calculations, combined with a distribution of non-airline revenues with airlines. The choice of an interest rate-setting method is seen as a trade-off between risk and return. In the case of a purely residual method, airports are practically not exposed to financial risk. Airlines jointly assume the full risk by ensuring payment of all airport costs not covered by non-air revenues. However, the airport is limited or unable to generate or maintain excess revenue.

Airlines` tariffs and charges are set in such a way that they are just enough to cover operating costs and debt service costs. In addition, operating and leasing contracts concluded by airlines based on the residual method generally contain a MAJORITY OWNERSHIP PROVISION (MII) obliging the airport to obtain the agreement of a majority of airlines operating at the airport, the majority being defined on the basis of the share of the weight of the Angelalande or the aircraft or both, before continuing with capital expenditures. Under the offsetting method, airports have the option to withhold excess revenues from airlines and have greater control over investment decisions made by airports, but their financial situation also becomes more dependent on revenues outside airlines and therefore more vulnerable to traffic fluctuations. However, most netting arrangements have risk-reducing features, such as a mechanism to resolve deficits over time through annual interest rate adjustments and an exceptional hedging provision allowing settlement at the end of the year if net revenues do not match the performance of an interest rate obligation. In summary, airports that switch to a clearing method are taking a higher risk in the short term, in exchange for the ability to realize and maintain excess revenue outside of airlines and exercise greater control over capital expenditures. In this context, the proposed research project examines whether differences in fare-setting methods between airports lead to systematic differences between airports in terms of financial operating performance. the method of fixing the residual compensatory rates; Relations between airports and airlines Related work The scientific literature on the impact of pricing methodology on airport performance and social welfare is rather thin and inconclusive. The study most relevant to the proposed research project is Oum, Zhang and Zhang (2004). This study concludes that airports using a compensation method (also known as the alternating cash method) appear to be more efficient (in terms of overall factor productivity) than airports operating under the residual regime. At the same time, Czerny (2006) argues that the residual interest rate-setting method will be associated with a higher overall market at unsaturated regulated airports, with most U.S. airports falling into this category. Yang and Zhang (2011) show that Czerny`s result might not apply to congested airports.

Literature on the determinants of airport revenues, including the potential effects of the fare-setting method, is also scarce. . . .