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109 develop their demand management plan with confidence after 1988, the Massachusetts Port Authority implemented higher their previous attempt, PACE, was struck down. landing fees for small aircraft at BOS as part of the PACE. With PACE, Massport experienced a significant drop in small regional aircraft. Although PACE was successful in promot- 5.7 Flexibility ing up-gauging, it was also found to be in violation of Title In Section 5.6, the research team described an example of 49, U.S. Code, because the airport was not available to all aero- how a framework might be developed for implementing nautical users on "reasonable terms without unjust discrim- demand management. In such a scenario, it would be impor- ination." Those fees were also discontinued after a court tant that airports have flexibility in how they could perform order cited the lack of reasonable airport alternatives in that demand management. This section discusses that flexibility region. Although the PACE program was ultimately found to by examining the actions that an airport could take to meet be in violation of U.S. Code, it provides a good example of their delay goal. Airports could have many options to man- two crucial components of charging policies: nondiscrimina- age congestion in a way that fits the unique needs of each air- tion and revenue neutrality. port. Some of these involve loosening current restrictions on Changing the way aircraft operations are charged allows how airports can charge for airport usage, while others entail for demand management. Air carriers would have an incen- active cooperation of interested parties. tive to use scarce runway capacity more efficiently, through Three potential categories of actions an airport could take up-gauging or rescheduling flights to less congested periods. to manage their delays are introduced: capacity allocation, Furthermore, signals (in the form of prices) that capacity setting operational limits, and traffic flow management. Insti- expansion is needed would be sent. tutional changes that could help an airport employ these A fee for use of the airfield could be levied in several ways. strategies are also discussed. The most common approach is a peak-period surcharge that applies to all flights regardless of size. The permissibility of this option is explicitly mentioned in the Airport Noise and Capac- 5.7.1 Capacity Allocation ity Act as well as the most recent FAA guidance on airport rates Pricing and charges. It is also the centerpiece of the Massport plan for BOS. Such a charge encourages aircraft operators to reduce The idea that peak-period pricing could be used to help flights in peak periods. Moreover, because the charge is size- manage the demand/capacity balance for transportation ser- independent, flights carrying smaller numbers of passengers vices was first proposed formally in 1959 by William Vickrey, are likely to be the most strongly affected. Depending on the a Columbia University economist. That concept was advanced circumstance, flights would be shifted to off-peak periods, in 1989 in a text produced by a team at the Brookings Institu- combined through up-gauging, or eliminated altogether. tion and has since been widely promoted in the economics and Although such a surcharge seems to be the most logical transportation literature as well as in public policy forums (10). price-based solution, it might not always be feasible. For Testimony to the U.S. Congress JEC provided in 2003 by the example, airports that have long-term agreements on airfield GAO concludes that, "Congestion pricing--although only one charges might be unable to obtain approval to amend the of several approaches that can be used to reduce congestion on agreement. Other pricing changes could be considered in our nation's roads, airways, and waterways--shows promise in such cases. One example is a peak-period PFC surcharge on reducing congestion and better ensuring that our existing passengers. PFCs are automatically added to the price of a transportation systems are used efficiently" (11). The first passenger ticket, based on the airports included in the itiner- roadway area pricing project was implemented in Singapore in ary. There is no obvious reason why the same system could 1975, and there have since been numerous projects in which not be employed to vary the PFC based on the flight arrival peak pricing has been used for U.S. roadways. The FHWA's and departure times. As compared with a peak-period flight Value Pricing Pilot Program has funded numerous studies and surcharge, a disadvantage of the PFC approach is that it does implementations of congestion pricing approaches for road- not reward up-gauging. This problem could be addressed by way projects. differentiating the PFC by the size of the aircraft on which the The use of congestion pricing for managing airport capac- passenger is flying. ity in the United States has been more limited. The PANYNJ Parking and ground transportation charges could also be implemented the first runway congestion pricing scheme in adjusted to encourage air travelers to fly in off-peak times. At 1968, charging higher landing fees for peak-hour use by small OD airports, periods of high landside congestion are associ- aircraft at EWR, JFK, and LGA. As a result, general aviation ated with periods of high airside congestion. Peak surcharges activity during peak periods decreased by 30%. The peak- on landside access and egress can address both the landside hour fees were discontinued after airline deregulation. In problem and the airside problem. An additional advantage of

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110 this approach is that it could be done under current federal constrained airports in Europe. There is a considerable base of policy, which affords airport operators wide latitude to set experience with this process, and most airlines are comfort- landside charges. A disadvantage is that it would not be pos- able with it. Many argue that this comfort derives from the fact sible to differentiate landside charges by aircraft size. Addi- that the process favors incumbent airlines. If, therefore, an air- tionally, it could be more difficult to make travelers aware of line decides to adopt an IATA-like slot allocation procedure, it the price differentials when they make their travel decisions. could be encouraged, or perhaps required, to take steps to cre- ate an active secondary market in which airlines can buy and sell slots. The market, if working properly, reduces barriers to Capping entry without forcing incumbent airlines to give up their slots. The alternatives to peak surcharges involve setting opera- Secondary markets have existed for high-density airports tional caps, as has been done in various fashions by the in the United States for more than 20 years. They have not FAA--in cooperation with incumbent airlines--at severely operated effectively for several reasons. On the one hand, slot capacity-constrained airports since the late 1960s. Airports holders have been reluctant to sell slots to would-be competi- could have discretion to manage demand through such slot tors. On the other, buyers have been reluctant to pay for slots controls. They may choose to do so for two main reasons. because it has been less expensive to secure access to the air- First, such controls are the most direct and reliable way to port through other means, such as making certain types of reach a desired level of demand and therefore operational operations exempt from the slot limits. Under the concept performance. Responses to pricing solutions are difficult to presented here, airports could play an active role in lubricat- predict, and the process of finding the right peak surcharge-- ing the secondary market, by always having control of an however it is applied--would involve trial-and-error and, as inventory of slots, which it could lease or sell to airlines. The demand conditions are ever-changing, continual adjustment. airport could acquire these slots through purchase and could The slot-based solution "cuts to the quick," in this respect. include the acquisition cost in its cost base. Second, slot control is the most obvious--if not the only-- It is much easier to employ slot controls to limit growth in practicable method of controlling demand for airports that flight schedules than to reduce schedules already in place. do not wish to employ market-based solutions. This again points to the importance of performing demand The primary disadvantages of slot limits are twofold. First, management pro-actively, rather than waiting for high delays it is difficult for an airport to determine the appropriate num- to occur before intervening. ber of slots. The decision depends not only on capacity, but also on the optimum level of congestion. A price-based solu- 5.7.2 Flexibility in Capacity Allocation tion will allow users to express, through their willingness to pay surcharges during peak times, what level of congestion is Airports undertaking demand management could be able ideal. This is not possible with caps. Second, a means for allo- to experiment with any or all of the capacity allocation poli- cating the slots must be found. There is considerable experi- cies. Implementing such an approach, however, would require ence in this area, but the methods employed to date all give a changes and clarifications in policy. Three policies are of par- considerable advantage to incumbent airlines, resulting in ticular note: nondiscrimination among aeronautical users, the entry barriers. definition of cost centers for purposes of setting airport aero- The FAA has recently studied, and attempted to implement, nautical fees, and airport profitability. auctions as a means of allocating slots at the New York air- ports. The idea proved unpopular with airlines and the Nondiscrimination Across PANYNJ, and it appears unlikely that it will go further as a fed- Aeronautical Users eral initiative. Airports, however, could be given considerable latitude to experiment with slot auctions. A key problem with In the PACE proceedings, among others, it was argued that the previous initiative is that the use of a runway slot entails a flat fee "discriminates" against small aircraft. A clear policy the use of a host of other facilities (e.g., gates, baggage facilities, would have to be articulated that under no circumstances can ticket counters, and ground access) that are the province of the a flat (undifferentiated by aircraft size) fee for use of aeronau- airport. Designing auctions that take this into account, so that tical facilities be considered discriminatory. Although the transfers of all of these resources from one airline to another accountability discussion centered on the passenger perspec- can be successfully coordinated, is a challenging task in any tive related to nondiscrimination, the flexibility section would case, but one that the local airport is best equipped to handle. focus on aeronautical users. A less adventurous alternative than auctions is an IATA-like Aside from the pragmatic consideration of allowing air- slot procedure for negotiating slot allocation, combined with ports to include flat fees as part of their demand management a secondary market. The IATA process is used at capacity- programs, there are several ways that this change might be jus-

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111 tified. First, from an economics perspective, it is not flat fees reversal from current practice, where subsidies often go in the that discriminate, but the current weight-based fees. Second, opposite direction, but it might be appropriate at a capacity- it should be recognized that congestion is a cost, and one that constrained airport. As already noted, most other airport is higher for certain classes of users (e.g., large aircraft opera- charges, such as parking and facility leasing, cannot instantiate tors and scheduled carriers) than others. A congested airport the principle of charging per flight rather than per unit of pay- is therefore a discriminatory airport, and policies that mitigate load. To raise per-flight charges large enough to effectively this congestion have the effect of reducing discrimination. manage demand, it might be necessary to increase revenue Third, when there is severe delay at an airport, the airport is generated from the class of charges where this is most easily no longer available to users "on reasonable terms." Thus the made--those for airfield use. principle that an airport should set fees so that "it is available A second alternative would be to expand the class of allow- to all users on reasonable terms" could be construed to mean able costs that airfield charges can be used to recover. The that a capacity-constrained airport could set fees to manage recent changes to the Policy on Rates and Charges point demand and not to be attractive to all potential users. the way here. By allowing airfield costs at other airports to be included in the costs base, the Policy establishes the principle that allowable costs include not only those for supplying nec- Cost Recovery and Revenue Neutrality essary facilities at a given airport but also those for curtailing Federal law and policy require that airports use revenue demand at the airport. The present policy allows such curtail- generated from their operations for airport-related purposes. ment costs only when they are spent on airfield facilities at The use for other purposes is considered revenue diversion substitute airports, but the fundamental principle has much and is prohibited, with certain "grandfather" exceptions for wider application. For example, as discussed in Section 5.2, airports with long-standing policies that included certain there are instances when it might be cost-effective to shift forms of diversion. Federal policy also requires that charges short-haul traffic to other modes. Encouraging such modal to aeronautical users reflect the historical costs of the airfield diversion serves the same end as encouraging intra-modal and airport roadways and be derived from some systematic diversion to other airports. The costs of doing so--for exam- accounting method. The latter policy is elaborated in the FAA ple, by subsidizing luxury motor coach services from close-in Policy Regarding Airport Rates and Charges, first published airports--might be recoverable from aeronautical charges. in 1996. The Policy was revised to permit airports to include The idea could be stretched further to include costs for main- in the aeronautical cost base airfield projects that have yet to taining a functioning secondary market for airports opting for be completed but for which costs have been incurred and operational caps and IATA-like slot allocation. In this case, the costs for projects at other airports that may be expected to cost might be justified because the secondary market allows divert traffic from the original one. The revised policy also competition at the airport to be maintained without having explicitly authorizes the use of peak surcharges in order to to continually expand the airport to serve all comers. manage demand. These potential options do not challenge the prohibition Under these policies, airports that employ pricing or auc- on revenue diversion, which would be maintained. Theoret- tions to manage demand must ensure that their programs are ically, any constraints on how airport revenue is spent can revenue neutral, or at least do not generate revenue in excess prevent those funds from being put to their highest and best of the allowable costs. For example, a peak surcharge would use. And it is perhaps the case that applying airport revenue be accompanied by a reduction in the weight-based landing surpluses to improve urban schools or support other social fee, so that the total revenue generated remains the same. It programs would often serve society better than keeping them could, however, become impossible to maintain revenue neu- within the airport. The negative consequences of this prac- trality while setting surcharges at the level required to induce tice, however, could be severe because of airports' monopoly behavior modification. This is particularly true for airports power. In effect, airports could extract a profit by electing not where demand exceeds capacity for many hours of the day, to expand capacity even when it is cost-effective to do so. If such as LGA. an airport is really unable to find reasonable ways to spend To address this problem, current constraints on airport rates revenue generated through congestion surcharges, it could be and charges could be relaxed. This could be done in two differ- required to surrender that revenue into a fund that could be ent ways. The first would be to abandon the principle that aero- used for aviation projects in other locales. nautical revenues cannot exceed allowed costs. The policy against diverting revenue from the airport would be main- 5.7.3 Setting Operational Limits tained, but airports would be permitted to use aeronautical revenue to cross-subsidize other cost centers, such as terminal Most demand management schemes require that opera- facilities, ground access, and security. This would be a dramatic tional caps be established. In some instances, the cap pertains

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112 to the number of operations in an hour or some other time this zone of indifference policy could be applied prospectively unit. In others, the cap pertains to delay. Depending on the to address the case of an anticipated surge of demand at an scheme, the cap may be a hard limit or a trigger for some airport that is currently relatively uncongested. demand management action. In the case of the New York air- There are some who believe that caps could be set too low. ports, for example, there is a hard cap on the number of oper- In certain European airports, pressure from controllers results ations that can be scheduled in an hour. In the Massport plan in caps well below runway capacity being set. One possible for BOS, peak-pricing surcharges are triggered when the delay, solution would be for airports with slot controls to increase under Visual Meteorological Conditions capacity, is predicted caps slightly on an experimental basis. If the resulting delays to exceed a certain threshold (an average 15 min per flight were within pre-established limits, the increased caps would over a 2-hour period). become the baseline values; otherwise, the caps would return Airports might be given flexibility in establishing these caps. to their previous levels. There are many legitimate reasons why the caps could vary from airport to airport, even when they have identical capac- 5.7.4 Traffic Flow Management ities. These caps involve complex trade-offs between airport use and delay, and the "sweet spot" in this trade space can vary A ground-delay program (GDP) is "implemented to control from place to place. A tourist destination, for example, might air traffic volume to airports where the projected traffic place a higher premium on handling large volumes of passen- demand is expected to exceed the airport's acceptance rate for gers, and therefore flights, and be willing to accept high levels a lengthy period of time" (12). Such a program is typically put of delay in order to do so. An airport serving short-duration into place when weather reduces the airport acceptance rate. business travel might prefer a more reliable service, even if this However, the idea behind a GDP could be leveraged and used entails reduced volume. There is no justification to require a for chronically congested airports. It could be possible for a single standard that would apply to both of these cases. congested airport to request institution of a continuous GDP. Of course, there are also situations where airports could With fair-weather capacity as the baseline capacity for the GDP, abuse their discretion. On the one hand, they could use con- the GDP would impose ground delays when the demand for gestion as a reason to set caps that are really motivated by operations at the airport exceeded the fair-weather capacity. noise considerations, thereby undermining the compromise Imposition of the continuous GDP allows airlines to use established in the Airport Noise and Capacity Act. On the tools such as Flight Schedule Monitor to obtain updated other hand, they might set the caps too high, or not set them information on how their flights would be delayed. In some at all, because of the revenue that can be realized from the cases, this knowledge alone might lead to delay-reducing resulting traffic. It would therefore be necessary to determine schedule adjustments. Moreover, it would provide enough how little or much traffic and/or delay could be tolerated. Air- lead time to adjust their published schedules so that the sched- ports with delays below a certain level might not use demand uled departure time and arrival times would match the con- management to reduce flight volumes. Airports with delays trolled times imposed by the GDP. In effect, the continuous exceeding a certain level, and who fail to act to address the sit- GDP turns the process of smoothing schedules from a tactical, uation, could be subject to slot controls such as exist today at day-of-operation process to a strategic one. In principle, this the New York airports. The range between the high and low could essentially eliminate delays from over-scheduling rela- values could be a "zone of indifference" in which airport tive to fair-weather capacity, while also reducing delays under demand management is an option. As previously suggested, reduced capacity.