assessment of airline-airport cooperation under liberalization

209 Pages·2014·2.25 MB·English

Doctoral Dissertation of Transport Studies Unit, Tokyo Institute of Technology, TSU-DC2014-008

ASSESSMENT OF AIRLINE-AIRPORT COOPERATION UNDER
LIBERALIZATION: A NETWORK MODEL APPROACH AND
PERSPECTIVES FROM SOUTHEAST ASIA

BATARI SARASWATI

DOCTORAL DISSERTATION
TSU-DC2014-008

Transport Studies Unit, Tokyo Institute of Technology

March 2014
ASSESSMENT OF AIRLINE-AIRPORT COOPERATION UNDER
LIBERALIZATION: A NETWORK MODEL APPROACH AND
PERSPECTIVES FROM SOUTHEAST ASIA

A Dissertation
Submitted to the Department of International Development Engineering
Graduate School of Science and Engineering of Tokyo Institute of Technology
in Partial Fulfillment of the Requirements for the Degree of
Doctor of Philosophy

Batari Saraswati
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ACKNOWLEDGEMENTS

I am deeply indebted to my supervisor Prof. Shinya Hanaoka for his fundamental role in my
doctoral work. Prof. Hanaoka has given me the freedom to pursue my research interest. He also
provided guidance, expertise, and opportunities through conferences and seminars that I needed
during the course of research.
I would like to express appreciation to the thesis committee, Prof. Tetsuo Yai, Prof. Jun-ichi
Takada, Prof. Yasunori Muromachi and Prof. Daisuke Fukuda for their thoughtful and valuable
comments and suggestions on the thesis. I would like to extend appreciation to all professors of
the Transport Study Unit and the Department of International Development Engineering for their
constructing feedback during the doctoral seminars and departmental presentations.
I would like to acknowledge researchers in ERIA (Economic Research Institute for ASEAN
and East Asia) and officials in INACA (Indonesia National Air Carriers Association) for
supporting this research.
I am thankful to the members of the Hanaoka Research Group for their help during my study
in Tokyo Institute of Technology. I am thankful to friends in Japan, Indonesia, and elsewhere for
their support and encouragement throughout.
Above all, I would like to thank my family for their love and support. Without them, this
thesis would not have been written. I dedicate this thesis to the memory of my father, who has
been supporting me from the very beginning, whose role in my life was, and remains, immense.

In loving memory of my father, Satriyo bin Soekarno (1955–2012)

Tokyo
February 18, 2014

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ASSESSMENT OF AIRLINE-AIRPORT COOPERATION UNDER LIBERALIZATION:
A NETWORK MODEL APPROACH AND PERSPECTIVES FROM SOUTHEAST ASIA

Batari Saraswati
Tokyo Institute of Technology 2014

ABSTRACT

This study discussed the issue of airline-airport cooperation. The study modeled airline-
airport cooperation utilizing multi-airport multi-airline game theory model. Through the model,
the effects of cooperation on the level of competition and social welfare can be systematically
assessed based on the extent of network liberalization. Cooperation parties are determined
endogenously. Cooperation between airline and airport was found to favor airline dominance that
may have negative effect on airline competition. Further, air transport liberalization policy in
ASEAN (Association of Southeast Asia Nations) was reviewed and was found that the policy is
still limited both in concept and implementation. Finally, real practices of airline-airport
cooperation in Southeast Asia were reviewed. It was found that cooperation most likely occurs
within country. Airport is cooperating with its dominant local airline in practice, either in form of
bilateral incentive scheme for route and traffic development, facility investment, or transit
incentive program. The study provides contributions on the development of airline-airport
cooperation model and on the overall researches of airline-airport cooperation – providing
perspectives from the developing countries.

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TABLE OF CONTENTS

TABLE OF CONTENTS ......................................................................................................................... iv
LIST OF FIGURES ................................................................................................................................ vii
LIST OF TABLES ................................................................................................................................... ix
LIST OF ABBREVIATIONS ................................................................................................................. xi
Chapter 1 Introduction .................................................................................................................. 1
1.1 Background .................................................................................................................. 1
1.2 Research Objectives ..................................................................................................... 3
1.3 Scope and Limitation of the Study ............................................................................... 3
1.4 Outlines and Approach of the Study ............................................................................ 4
1.5 Contributions of the Study ........................................................................................... 6
Chapter 2 Review on Airline-Airport Cooperation ...................................................................... 7
2.1 Liberalization and Airline-Airport Cooperation .......................................................... 7
2.1.1 Concept of Liberalization (Air Service Agreements) .................................................. 7
2.1.2 Impacts of Liberalization ............................................................................................. 9
2.1.3 Liberalization Triggers Airline-Airport Cooperation ................................................ 12
2.2 Definition and Several Forms of Airline-Airport Cooperation .................................. 14
2.3 Existing Studies on The Effects of Airline-Airport Cooperation .............................. 20
Chapter 3 Airline-Airport Cooperation Model under Commercial Revenue Sharing ................ 25
3.1 Introduction ................................................................................................................ 25
3.2 Commercial Revenue Sharing ................................................................................... 25
3.3 Methodology: Modeling Airline-Airport Cooperation in Commercial Revenue
Sharing ....................................................................................................................... 28
3.3.1 Airline Network Set-Up ............................................................................................. 32
3.3.2 Model Assumptions ................................................................................................... 33
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3.3.3 Airline Market Share .................................................................................................. 33
3.3.4 Airline Profit Maximization ....................................................................................... 35
3.3.5 Airport Profit Maximization ...................................................................................... 37
3.3.6 Solving Procedure ...................................................................................................... 41
3.4 Model and Analysis ................................................................................................... 46
3.4.1 Model ......................................................................................................................... 46
3.4.2 Analysis of the Results ............................................................................................... 47
3.5 Conclusions and Findings .......................................................................................... 60
Chapter 4 Air Transport Liberalization Policy in Southeast Asia .............................................. 63
4.1 Introduction ................................................................................................................ 63
4.2 ASEAN Open Skies: Liberalization of Air Transport Services in ASEAN .............. 64
4.2.1 History and Agreements............................................................................................. 63
4.2.2 Concept of Market Access Relaxation ....................................................................... 67
4.2.3 Concept of Ownership and Control Relaxation ......................................................... 70
4.2.4 Adoption of Common Policy ..................................................................................... 71
4.3 ASEAN Open Skies: Current Liberalization Status .................................................. 72
4.3.1 Market Access: Ratification Status of Implementing Protocols ................................ 73
4.3.2 Ownership and Effective Control: Current Status ..................................................... 80
4.3.3 Limitations of ASEAN Open Skies Policy: in Concept and Practice ........................ 82
4.4 Aviation Policiy in Indonesia and Its Relation to ASEAN Open Skies ..................... 84
4.4.1 Air Transport Regulatory in Indonesia ...................................................................... 85
4.4.2 Airport and Airline Industry in Indonesia .................................................................. 88
4.4.3 Indonesia‘s Stance towards Open Skies ..................................................................... 92
4.4.4 Challenges and Opportunities for Indonesia .............................................................. 95
4.5 Conclusions and Findings ........................................................................................ 101
Chapter 5 Airline-Airport Cooperation in Southeast Asia: Practices and Policy Implications 105
5.1 Introduction .............................................................................................................. 105
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5.2 Characteristics of Airports in Southeast Asia .......................................................... 106
5.3 Airline-airport Cooperation Practices in Southeast Asia ......................................... 112
5.3.1 Airport Incentive Scheme on Route and Traffic Development ............................... 112
5.3.2 Airline Investment on Airport Facilities .................................................................. 128
5.3.3 Transit Incentive Scheme ......................................................................................... 132
5.3.4 Airline-Airport Cooperation and Airline Dominancy .............................................. 133
5.4 Policy Implications .................................................................................................. 137
5.4.1 Anti-Competitive Practices and Cooperation within Country ................................. 138
5.4.2 Competition Laws in ASEAN.................................................................................. 140
5.5 Conclusions and Findings ........................................................................................ 146
Chapter 6 Summary and Conclusions: Airline-Airport Cooperation in Perspective ................ 150
6.1 Summary and Conclusions....................................................................................... 150
6.2 Recommendations for Airline-Airport Cooperation Assessment ............................ 155
REFERENCES ........................................................................................................................... 158
APPENDICES ............................................................................................................................ 166

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LIST OF FIGURES

Figure 1.1 Flowchart of chapters ................................................................................................. 5
Figure 2.1 Point-to-point vs. hub-and-spoke network ............................................................... 10
Figure 2.2 Relationship between liberalization and airline-airport cooperation ....................... 12
Figure 3.1 Airport-airline relationships ..................................................................................... 26
Figure 3.2 Average contribution of commercial to total revenue, 2006 – 2010 ...................... 27
Figure 3.3 Interaction between airports, airlines, and passengers ............................................. 30
Figure 3.4 Airlines network based on bilateral air service agreements ..................................... 32
Figure 3.5 Interconnection between variables ........................................................................... 41
Figure 3.6 Solution algorithm for every airport ........................................................................ 45
Figure 3.7 An increase in r and h increases the profit (π‘) of the cooperating airline .............. 49
Figure 3.8 Profit of all airlines when KUL shares revenue with MH ....................................... 50
Figure 3.9 Components that comprise airport KUL profit ........................................................ 50
Figure 3.10 Profit of KUL with respect to revenue share r ......................................................... 51
Figure 3.11 Industry profit and consumer surplus when KUL cooperates with MH .................. 56
Figure 3.12 Industry profit and consumer surplus when CGK cooperates with GA .................. 56
Figure 4.1 Blueprint of ASEAN Economic Community 2015.................................................. 65
Figure 4.2 Agreements that govern the implementation of open skies policy .......................... 66
Figure 4.3 Air traffic Kuala Lumpur – Singapore route, 2004 – 2010 ...................................... 76
Figure 4.4 Air transport bodies in Indonesia ............................................................................. 88
Figure 4.5 Domestic and international air traffic in Indonesia (2003 – 2012) .......................... 90
Figure 4.6 Market positioning of major scheduled airlines in Indonesia .................................. 91
Figure 4.7 Comparison of quality of air transport infrastructure and ASK ............................... 96
Figure 4.8 Weekly seats between Singapore and cities in Indonesia (March 2013) ................. 98
Figure 4.9 Liberalization and airline-airport cooperation in ASEAN: A premise .................. 103
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Figure 5.1 Location of Senai, Changi, Yogyakarta, Semarang, and Solo airports .................. 108
Figure 5.2 Share of commercial revenue in selected airports in Southeast Asia .................... 109
Figure 5.3 Share of aeronautical revenue in selected airports in Southeast Asia .................... 109
Figure 5.4 Low-cost carrier capacity share on domestic routes .............................................. 110
Figure 5.5 Low-cost carrier capacity share on international routes ........................................ 111
Figure 5.6 Singapore low-cost carrier capacity share by group .............................................. 126
Figure 5.7 Airport incentive program to induce traffic ........................................................... 129
Figure 5.8 Lion Air as the largest airline at Batam Airport..................................................... 129
Figure 5.9 Thai Airways as the largest airline at Suvarnabhumi Airport ................................ 130
Figure 5.10 Singapore Airlines as the largest airline at Changi Airport ................................... 132
Figure 5.11 Liberalization and airline-airport cooperation in ASEAN ..................................... 135

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LIST OF TABLES

Table 2.1 Example of incentive scheme on route/traffic development: Vienna Airport ........... 17
Table 2.2 Summary of analytical studies on the effects of airline-airport cooperation ............. 23
Table 3.1 Comparison between proposed and existing models ................................................. 28
Table 3.2 Aeronautical charges for international flights in airports CGK, KUL, BKK ............ 46
Table 3.3 Airlines initial airfares and flight frequencies............................................................ 47
Table 3.4 Airfare and total passenger of MH when KUL shares revenue with MH .................. 49
Table 3.5 Revenue share allocation (r *) KUL – BKK – CGK ............................................... 53
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Table 3.6 Revenue share allocation (r *) CGK – KUL – BKK ............................................... 53
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Table 3.7 Variation in the commercial revenue share allocation ............................................... 53
Table 3.8 Social welfare when KUL shares revenue with one or more airlines ........................ 57
Table 3.9 Comparison of profit and actual travel volume in hub-and-spoke (H-S) and fully-
connected (F-C) networks (no cooperation) .............................................................. 58
Table 3.10 The effects of airport‘s capacity on the benefit of revenue sharing (KUL-MH) ....... 59
Table 3.11 The effects of higher potential demand and demand sensitivity ................................ 59
Table 4.1 Implementing protocols of MAAS and MAFLPAS agreements ............................... 67
Table 4.2 Sub-regional agreements related to air passenger service ......................................... 68
Table 4.3 Designated points in MAAS Protocols 1 to 4 ............................................................ 69
Table 4.4 Ratification status of MAAS as of July 2013 ............................................................ 73
Table 4.5 Ratification status of MAFLPAS as of July 2013...................................................... 74
Table 4.6 Several airline services in BIMP-EAGA ................................................................... 75
Table 4.7 Selected key indicators for ASEAN member states................................................... 77
Table 4.8 Selected airports performance .................................................................................... 79
Table 4.9 Intra-ASEAN international weekly scheduled flight frequencies (2003) and 2011 .. 79
Table 4.10 Foreign ownership and tariff regulation in ASEAN member states .......................... 80
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