Aviation Infrastructure:
Operations and Ownership
Chapter 5

Air Traffic Control System
• This rudimentary system involved the use of flags, lights, and bonfires
to locate and identify airports and runways as a means to
communicate with pilots.
• In the early 1930s, this system was replaced by a more formal set up
that consisted of a series of light towers. The system was called the
Transcontinental Lighted Airway.
• Accordingly, in the mid-1930s an airline consortium established the
first three centers to pool information on specific flights so as to
provide better flight separation

• Congress passed the Civil Aeronautics Act which transferred civil
aviation responsibilities from the Department of Commerce to a
newly created agency called the Civil Aeronautics Authority.
• In 1940, President Roosevelt separated the Authority into two
agencies, the Civil Aeronautics Administration (CAA) and the Civil
Aeronautics Board (CAB).
• The newly created CAA was tasked with certification, safety, airway
development, and ATC. The CAB was split off from the CAA and
charged with the economic regulation of the transport industry.

• Throughout the 1970s the Federal Aviation Administration (FAA)
installed new radars, computers, and radio communications to
upgrade and enhance the ATC system.
• The problem with this development was the fact that it was created
under the same premise as the older systems. That is, aircraft were
expected to travel from ground-based navigation point to ground-
based navigation point along the predetermined and pre-existing
airway route structure.

• One of the principal advantages of air travel is the speed with which
an individual can arrive at his or her destination.
• The economic effects of delay can be analyzed using the supply and
demand models.
• This equilibrium is represented by PE and QE and is the market
equilibrium based on supply and demand.

• Recall from the earlier chapters that any price above the equilibrium
price will result in a surplus of air travel supplied; that is, too many
empty seats. In this situation, competition between airlines will lower
the price to fill the seats and return to the equilibrium position.
• Any price below the equilibrium will result in a shortage and
consumers will bid up the price to obtain the seating.

• Now suppose that the ATC system imposes repeated and prolonged
delays in the form of ground holds or airborne holding.
• This can result from the system not being capable of handling the
volume of traffic either because of separation standards or the
inability of the human controllers to handle the volume of traffic.
• This situation can be thought of as an externally imposed cost to both
the consumers and the producers of air travel.

• To the consumers it is an unanticipated delay that can be monetized
as the cost of the consumer’s time, or in the case of the business
travelers, as forgone opportunities. To the producer the cost is also
real and can be measured, among other costs, in terms of higher crew
wages, more fuel burn, and the loss of the ability to utilize the
airplane for extra flights.

• Therefore, the delay that is imposed on the system can be thought of
as a tax on both the consumers and suppliers of air traffic.

• these costs are shown as the straight line AB that joins the demand
and supply curves.
• We can think of the costs as a parallel shift in the supply curve so that
the new supply curve intersects the demand curve at point A
• However, since these are extra costs, the new equilibrium quantity
and price will be defined by the intersection of the new supply curve
with the old demand curve at P2 and Q2.

• On the other hand, the actual price that the producers receive is
determined from the old supply curve net of the cost introduced by
the externally imposed delay at P3. We can also see that the price
that the consumers must now pay is the new equilibrium price P2,
which is clearly higher than the original equilibrium price. Therefore,
the cost of the delay is shared between the consumers and the
producers.

• The consumers bear part of the cost in the form of a new and higher ticket price, while the
producers bear part of the cost by receiving less from the actual new ticket price. The total
amount of the cost is equal to the rectangle ABP3P2 plus the triangle ABE. And, as we can see
from the diagram, the total cost is borne by both the consumers and the producers. For
consumers, the costs are equal to the rectangle P2ACPE plus the triangle ACE. For producers, the
costs are equal to rectangle PECBP3 plus the triangle CEB.

When supply is inelastic
•

• As the supply curve becomes more and more inelastic, that is, as the
slope gets higher and higher, it becomes more and more difficult for
the producers to shift the burden of the cost to the consumers.
• In this case, the ticket price remains the same for the consumers, and
the entire cost of the delay is borne by the producers and is equal to
the rectangle PEEAP2

Long run impact of delays
• On the supply side, if the cost of delay is persistent and longer lasting,
as it appears to be for the foreseeable future, then the value of the
specialized resources presently in use in the aviation industry will be
diminished accordingly.
• These resources include, among other inputs, the production of
aircraft, the supply of spare parts, the manufacture of avionics,
airport-related concessions, air travel-related accommodations,
automobile rental concessions, income for pilots, flight attendants,
mechanics, and a host of other related factors. As these specialized
resources wear out, they will not be replaced at the same rate as
previously, and this will further reduce output in the industry.

Graphically Representation

Market Reaction to Changes in Supply

Institutional Problem in US Air traffic control
• the Aviation Safety Commission in 1988;
• the National Commission to Ensure a Strong Competitive Airline Industry in
1993
• the National Performance Review in 1993
• the Secretary of Transportation’s Executive Oversight Group in 1994; and
• the National Civil Aviation Review Commission
• A possible solution to these sorts of problems, according to some
economists, might be to move to a private, non-profit corporation, as
Canada did in 1996 with its NavCanada Corporation. However, it is
commonly believed that this is not politically feasible. There is broad
support for establishing a government corporation to address the concerns
that have stymied previous attempts at major ATC reform

Air Traffic Control
• A key feature of a government corporation is non-political funding as
user fees replace taxes and Congressional budgeting.
• The existence of an independent revenue stream allows access to
private capital markets to fund modernization.
• All of these commercialized, self-supporting Air Navigation Service
Providers (ANSPs) belong to the Civil Air Navigation Services
Organization (CANSO), which has become a key participating
international aviation policy debates

• In 2005, the Government Accountability Office (GAO) conducted a
large-scale evaluation of the performance of commercialized ANSPs.
The GAO collected extensive data from five major ANSPs—Australia,
Canada, Germany, New Zealand, and UK.
• They found that after commercialization of ATC, safety had either
been unaffected or even improved since implementation. They also
found that all five of the systems studied had taken significant steps
to invest in new technology and equipment and had taken meaningful
steps to reduce operating costs

Air Port Ownership and Management
• Reasons for privatization
• greater efficiency of operations, particularly in developing the non-
aviation side of the airport;
• capital infusion: open up non-traditional sources of capital;
• lower labor costs resulting from either lower wages or less labor
input;
• conversion of a public airport into a tax-paying corporate entity.

• In addition to being generally more efficient, private companies can readily
raise funds for needed airport projects without entanglement in the
political problems and delays that often plague government airports
looking for grants to expand or renovate
• Moreover, these companies can engage in equity financing while
government is only able to issue debt.
• government regulation, a private company may not be motivated to
properly maintain infrastructure.
• Most economists would probably argue that profit motives provide strong
incentives for proper maintenance of airport infrastructure.
• Also, private airports are more likely to be held accountable by liability laws
since it is generally easier to sue a private party for damages than to sue
the government

Opposition to privatization
• Airlines and passenger dissatisfaction with privatization most often
occurs when the service level deteriorates and airport users face sky
rocketing prices.
• Monopoly
• High landing Fees
• Bankrupt

Types of Privatization
•