Airport-airline coordination for the decarbonization of the aviation sector

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Abstract

In this paper, we examine the effect of various agreements between a socially concerned airport and an environmentally conscious airline regarding their profitability and channel coordination to decarbonize the aviation sector under two distinct settings. First, we consider no government interventions, and second, we explore government-imposed taxation to curb emissions. Our analysis shows that the revenue sharing and linear two-part tariff agreements coordinate the decentralized airport-airline channel. Our findings also reveal that under government interventions, taxation does help improve the greening level of the channel in both coordinating and non-coordinating agreements. However, coordinating agreements can achieve a higher greening level than simply imposing government taxation. Finally, we extended the model to include a duopoly airline market with pricing and greening competition. We analyze the effect of airline competition on airport utility, airline profit, ticket fare, and greening level.

Introduction

Airports generate revenue from two sources: (i) aeronautical activities.1 and (ii) commercial activities2. The former is proportional to flight frequency and passenger traffic, while the latter depends only on passenger traffic (Chang et al., 2016). Therefore, increasing air traffic has led to a twofold rise in the airport business, as its revenue has increased from both sources (Graham, 2023). However, despite growing demand, airlines struggle to maintain their profit margins with rising input costs and market competition. For example, airlines in the United States faced 5 % to 6 % margin reductions in 2018, marking the third straight year of margin contraction. Unfortunately, the operating margins are expected to narrow further in the upcoming years (Stalnaker, 2019).

Moreover, disruptions, such as the COVID-19 pandemic, also lead to significant financial losses for the airlines (Wang & Jiang, 2022). Add to that the ever-increasing global warming concerns that mandated policymakers to introduce additional charges, such as emission taxes, which have forced airlines to increase investments in efficient and green technologies to reduce carbon emissions (Masiol and Harrison, 2014, Jiang and Yang, 2021). These investments have burdened the cost structure of the airlines, affecting their margins thereof. This study explores how coordination between airports and airlines can help decarbonize the aviation sector.

Notably, even though the air transportation industry today does recognize the significance of social and environmental aspects (as captured in the Munich-Lufthansa agreement and Norway’s Oslo Airport and its signatory airline agreement discussed below), increasing operating costs leaves less room for airlines to engage in social and ecological activities concurrently. Due to this, very few can achieve sustainable growth, including economic, environmental, and social elements altogether. One major hindrance to sustainable growth is the lack of a coherent coordination strategy between industry agents (Ryder, 2014). For instance, in the aviation industry, an airline’s performance determines the airport’s demand, while the airport needs to facilitate the airline by providing the necessary infrastructure. This inter-dependency has to be well coordinated, failure of which would lead to limited economic growth, environmental protection, and social development.

Nevertheless, airline-airport coordination has recently picked up under a few cases. For instance, the first glimpse of a partnership incorporating the environmental aspect has been seen in the Munich-Lufthansa agreement. In addition to revenue sharing, terminal 2 of the airport has been exclusively devoted to handling Lufthansa’s operations, which in turn has pledged to continue investing in a modern fleet with fuel-efficient aircraft, aiming to bring its emission levels down by 25 % (Noëth, 2019). Another example of partnership is Norway's Oslo Airport and its signatory airline; the former encourages the airline to use sustainable aviation fuels for its operations by providing incentives. The use of biofuels by the airline has resulted in significant environmental benefits (Baxter, 2020).

However, incorporating all aspects of sustainable growth to achieve all-round development by using agreements has altogether remained an unexplored area in the aviation sector. Based on the examples cited above, there has not been sufficient literature that has focused on exploring the importance of ‘coordination’ for profitability, planet (environmental), and people (social) in the airline industry. To fill this gap, we undertake the following research inquiry.

This paper examines a dyadic model with one airline-one airport market structure with a single origin–destination route and explores four different agreement types. We also consider the role of government under these four different agreements. Our motivation is to explore how airline-airport can support each other with the help of different agreements to achieve sustainable growth in the aviation sector. Primarily, we seek answers to the following questions:

  • (i)

    Under which agreement can airport-airline coordination achieve better economic, environmental, and social results?

  • (ii)

    How do environmental and social considerations affect factors such as airport charges, ticket fares, and demand for air travel?

  • (iii)

    What is the role of government intervention in achieving sustainable growth in the aviation sector?

Our study demonstrates that channel performance and efficiency improve when players engage in coordinating agreements instead of solely working for their individual goals under non-coordinating agreements. Interestingly, players achieve a higher greening level and their utility. Moreover, our findings show that revenue sharing and liner two-part tariff agreements perfectly coordinate the airport-airline channel. Taxation by the government does help improve the greening level; however, the more effective mechanism is the coordinating agreements between the airports and airlines. We also find that the airline profit decreases with higher taxation and higher greening investment costs. We further analyze the result of the duopoly airline market with pricing and greening competition and undertake sensitivity analysis to support our findings. We next present a brief review of agreements between airports and airlines in the aviation sector.

Section snippets

Literature review

This manuscript mainly discusses coordination between airports and airlines, environmental emissions, and welfare concerns. Therefore, this section presents their relevant literature and lists the key research questions. We also compare this study with extant literature in Table 1.

Before liberalization, both airlines and airports were owned and operated by governments in many countries across the globe. They were public entities, and the need to explore any possible coordination strategies

Basic model

We build a vertical structure with one airline and one airport. We start by describing a market with an environmentally conscious airline and CSR-oriented airport. The list of notations used in subsequent sections is provided in Table 2.

Analytical results

In this section, we provide analytical insights to illustrate the findings of our paper. We solve the model using backward induction for the abovementioned cases to obtain the optimal equilibrium values (Table 3). The detailed solution and steps are provided in the online appendix.

We find that under the centralized case, the condition for joint concavity of SWCENTp,θare: iI>ξ21-μ2β2-3μiiμ0,23. Condition (i) provides a lower limit for the greening cost (I), and signifies that the airline would

Numerical analysis

To further illustrate the theoretical results, we perform a numerical analysis in this section to gain further insights by changing certain parameter values. Notably, the values are chosen in a way to satisfy the conditions of profit and utility function concavity, along with demand functions positivity (conditions are provided in the online appendix B1). The parameter chosen are also in-line with the studies of Girvin, 2010, Brueckner and Girvin, 2008 and to satisfy the assumptions of the

Airport-airline coordination with government intervention

Economists have a growing consensus that carbon taxes can be the most efficient and cost-effective instrument to curb carbon emissions. The taxation was initially introduced by the US government in 1990 and followed by other governments around the globe (Krass et al., 2013). Moreover, environmental taxes lead to the internalization of negative externalities. The aviation industry has also started to face the heat of carbon taxes such as the European Union’s Emissions Trading Scheme (Kang et

Conclusions, implications, and future research directions

This study considered the airline-airport coordination model, with and without government intervention. The airline undertakes greening investments to provide environment-friendly service, and the airport is engaged in CSR activity. They can jointly achieve triple bottom line (TBL) growth. The government could act as an overall leader for both the airport-airline coordination model and collect taxes for emission reduction while catering to the welfare of the local community. Our results

CRediT authorship contribution statement

Aasheesh Dixit: Methodology, Investigation, Formal analysis, Writing - original draft. Patanjal Kumar: Formal analysis, Software, Validation, Supervision. Suresh Kumar Jakhar: Conceptualization, Project administration, Formal analysis, Writing - review & editing.

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgments

The authors express earnest gratitude to Editor-in-Chief Prof. Jason Xinyu Cao for his guidance and support throughout the submission and review process. The authors are grateful to the Guest Editor’s constructive feedback and insightful comments have significantly improved the quality and clarity of this work. The authors are also deeply grateful to the three anonymous reviewers for critically evaluating the manuscript. Their feedback has enabled us to refine our arguments, methodology, and

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