Principal investigator: Angelo Cruz do Nascimento Varella
Article title: Econometric Modeling of Demand in Privatized Airports: A Case Study of Confins International Airport, Belo Horizonte
Article authors: William Eduardo Bendinelli and Alessandro VM Oliveira
Location of the intervention: Minas Gerais, Brazil
Sample size: Monthly socioeconomic and passenger traffic data between the years 2000 and 2012.
Sector: Other (Transportation)
Type of Intervention: Effects of the privatization of the airline sector.
Main Variable of Interest: Number of passengers on domestic flights
Evaluation method: Others
Policy Problem
Air transport is of great importance to a country's economic development, directly impacting trade and the well-being of its population. Therefore, having an efficient air transport sector generates benefits and is considered a significant challenge by scientists and various governments around the world.
As a result, good airport management is considered a point of interest for businesspeople, government officials, and researchers, who globally debate the best ways to manage these important logistical hubs. In turn, airport privatization is widely discussed, since the control of these air transport centers is complex and affects society as a whole, including in Brazil.
Assessment Context
Generally speaking, it can be stated that the control, management, and operation of airports is a function of the State, with the first privatization of these instruments occurring in 1987 in the United Kingdom. Since then, airport privatization has progressively become a global trend, contrasting with government control.
It is important to emphasize, however, that the privatization of airports is not a consensus. Several members of the European Union, such as Spain, Sweden, and Finland, as well as the United States, are examples of publicly managed airports, which have proven to be viable options for the international air transport sector.
Policy Details
In Brazil, the decision to grant concessions was based on the need to attract investment and improve operational efficiency, so that, among other privatizations, Confins Airport was auctioned off in November 2013.
It is important to emphasize that the privatization of airports requires a balance between private and public interests, so that both the profit of the operators and social well-being must be preserved. In order to estimate the potential success of the Confins Airport concession and the assumptions for achieving such objectives, the authors evaluate the behavior of national demand for domestic flights based on variations in the Brazilian economy and airport operating conditions.
Methodology Details
To investigate the behavior of national demand, this study considered data relating to economic aspects, such as GDP and exchange rates, and logistical aspects of airport operations, such as international oil barrel prices and average domestic revenue per passenger-kilometer transported.
The econometric model chosen by the authors is called the Generalized Method of Moments (GMM) and uses historical data to analyze the impact of the chosen variables on the demand for domestic flights, in order to ascertain how each of these factors affects the decision of companies and citizens to buy airline tickets.
Results
The analysis demonstrates that economic growth is fundamental to the success of airport privatizations, since the model indicates that a 1% increase in the average passenger income generates a 2,05% increase in demand for domestic flights. The authors interpret this phenomenon as a consequence of the economic rise of the C class over the last few decades, which has considerably increased the demand for domestic flights.
Another relevant finding highlighted by the authors refers to the effect that price increases have on the demand for airline tickets, a phenomenon also known as the price elasticity of demand. In the study, for every 1% increase in ticket prices, there was a 0,13% reduction in the purchase of domestic flights. According to the authors, this occurs due to the strong participation of companies in the demand for airline tickets, which are less concerned about prices than other consumers.
It is important to emphasize that this phenomenon is relevant because airport management companies may seek to reduce financial losses by excessively increasing prices, since the demand for tickets decreases little in relation to these prices. However, this behavior would prevent many citizens from traveling by plane, resulting in a loss of social welfare that governments and regulators should avoid.
Lessons in Public Policy
Good airport management is fundamental to the success of the aviation sector, and this is a responsibility of the Brazilian government. Privatizing airports is a viable alternative, provided that the process is well-planned and well-regulated, with clearly defined guidelines and determinants that serve as the basis for the rules and regulations of the concession agreement. In this way, it is possible to ensure the financial viability of the operation and guarantee the rights of citizens, improving society as a whole.
The prospect of successful privatization of Confins Airport is based on Brazilian economic development and the stability of the international market, so the Brazilian government must prioritize a balance between public and private interests in exceptional cases, such as financial crises and volatility in international markets. Thus, such public policies must ensure the benefits of a viable and efficient aviation sector.
Reference
BENDINELLI, William Eduardo; OLIVEIRA, Alessandro VM. Econometric modeling of demand in privatized airports: a case study of Confins International Airport, Belo Horizonte. Journal of Transport Literature, v. 9, p. 20-24, 2015.
