The dilemma between capacity expansions and multi-airport systems: Empirical evidence from the industry's cost function

This paper explores the problematic of airport capacity expansions from the perspective of the airport financial management, using the operating costs as the variable of interest. The objective is to provide empirical evidence on the financial advantages of expanding capacity against the operation of multi-airport systems (MAS) under the presence of significant returns to scale in airport operations. This is done by comparing the actual operating costs of the MAS with the predicted costs that correspond to the aggregated level of output and input prices. Predictions are obtained from a multi-output specification of the industry's cost function, estimated with a broad database of international airports. The results indicate the presence of non-exhausted scale economies at the current levels of production. Hence, the atomization of air traffic always increases operating costs at a system level. In the last section, the degree of economic inefficiency of five European MAS is calculated. These results also provide revealing conclusions about the size of the industry's minimum efficient scale. Furthermore, the use of data on American MAS allows us to separate the inefficiency costs derived from the atomization of air traffic from those related to the individual airports inefficient behavior. (C) 2010 Elsevier Ltd. All rights reserved.