Economics of airports: what lessons from the airport economist?

Aviation is a truly global industry, with airlines competing at home and abroad on price and quality, but also subject to a complicated mixture of domestic and international regulations. A country’s airports constitute a big part of the economy, contributing to trade, tourism, education and more.

In 2008, I wrote a book about my travels as chief economist for the Australian Trade Commission (Austrade). The book was mainly about international trade and the business opportunities for Australian exporters and investors in different markets across the world (which is Austrade’s remit), and naturally I became interested in what makes countries tick.

For example, I wondered why Argentina and Australia had ended up on such different paths despite having started with similar resource endowments – a theme explored in Why Nations Fail, the 2012 book by two of the three recipients of the 2024 Nobel Prize in Economic Sciences. I also considered why Singapore produced more engineers than poets and ballet dancers (a bit like the puzzles explored in the popular economics bestseller Freakonomics); and how South Korea had gone from being one of the poorest countries in the world in the 1950s to an OECD member today.

I worked out that during my travels, I went to about 60 countries in the first five years, which meant going to each destination for about three days. A colleague quipped that ‘you must never get beyond the airport or the hotel’, so I decided to call my first book The Airport Economist.

I had heard the term before. But it was pejorative, meant as an insult. When the economics Nobel laureate Milton Friedman visited Australia in the 1970s, he talked to Gough Whitlam’s Labor government about targeting the money supply to fight inflation, and was accused of having just stepped off the plane to give advice as an ‘airport economist’ or ‘tarmac professor’. At the time, he had allegedly been advising the Pinochet dictatorship in Chile (whose economic advisers had trained with Friedman at the University of Chicago and were known as ‘the Chicago Boys’), so his visit to Australia was somewhat controversial.

Similarly, in the Asian financial crisis of 1997-99, the International Monetary Fund (IMF) economics team were accused of being airport economists for giving advice to East Asian economies in crisis (especially Indonesia) according to the economic doctrines of the Washington Consensus. But I did find a positive reference to airport economists by the great economist Martin Bronfenbrenner when he and his colleagues were flying around the offshore islands of Japan in 1945 surveying an economy ravaged by war.

The term airport economist also got me into a bit of potential trouble when a lawyer in the United States who called himself ‘the airport lawyer’ tried to sue me for copyright for using the word airport. I just replied that the airport cleaner got there before both of us and could, legally speaking, take us to the cleaners.

I never heard from him again, but it did remind me of a famous Groucho Marx story. Warner Brothers tried to sue the Marx Brothers for using ‘Casablanca’ in the name of one of their films. Groucho said: ‘I didn’t know the city of Casablanca belonged to Warner Brothers in Hollywood, I thought it belonged to the Kingdom of Morocco. And besides, we were the Marx Brothers before they were the Warner Brothers so we will sue them for using the term “Brothers” and then we will go after the Grimm Brothers, the Wright Brothers and anyone else who uses the term “Brothers”.’ Warner Brothers dropped the case, just like the airport lawyer did.

So, The Airport Economist is really a book about international trade, but the airport economist sounds better than the international trade economist. And when we made the book into a TV series, we picked up sponsorship from Qantas and later other airlines got on board like LATAM Airlines, Royal Brunei Airlines, China Airlines and so on. The rest is history.

So, I am not an airport economics specialist but I do spend a lot of time in airports. And if you delve into the subject, the economics of airports and aviation is fascinating.

What are the big issues in the economics of airports and aviation?

In terms of regulation, airports and aviation are unique. Like the world trading system, there’s a whole system of overlapping agreements between countries on which airlines can fly where, and the degree to which they can take domestic passengers.

So, for example, while United Airlines can fly from Los Angeles to Sydney, it can’t take passengers from Sydney to Perth, unless it is part of an international flight or if they have an agreement with the Australian regulator or a codeshare with an Australian airline. Similarly, Qantas can fly from Sydney to Los Angeles, but only on to Chicago or New York as part of an international flight or codeshare.

Some of the bigger Gulf airlines like Emirates and Qatar Airways can now fly passengers between Sydney and Auckland, as can the Taiwan-based China Airlines. But this is only a recent phenomenon – and they can’t fly the lucrative Sydney-Melbourne domestic route.

This makes competition very interesting as not only do airlines compete on price and quality, but the regulations are complicated, both internationally and domestically. For example, an established airline can compete by dominating landing slots at airports. In Australia, Qantas has been the master of this, booking slots at Sydney airport to keep competitors out, even if they don’t maximise their use of them.

This has implications for low-cost carriers, the emergence of which has been a trend in the past three decades or so. Established airlines keep low-cost carriers out by ensuring their slots are hard to get or inconvenient for passengers. British Airways did this famously to Richard Branson and his low-cost carrier Virgin Atlantic when it first came on the scene, before Virgin joined the established airlines club.

As a result of this competition, the political economy of aviation becomes intense. We have seen this internationally with Qatar Airways looking to expand flights to and from Australia but receiving resistance from Qantas, with the carpet around Parliament House being well trodden by airline executives lobbying for their cause.

Then there’s privatisation of airlines and airports. We noticed that during the Covid-19 pandemic. Flag carriers like Qantas and British Airways used to be publicly owned, before the privatisation push in the 1990s, while US airlines tend to be private. European and Asian flag carriers in general tend to have high concentrations of public ownership.

When it comes to airports, Australian, British and European airports are often privately run, while US airports are government owned.

Airports and aviation are big business

Airports are important economic entities. According to one study, US airports generate $1.4 trillion in economic activity each year and provide 11.5 million jobs despite having to fund all their own operations (Maharramov, 2021). This affects the revenue model: does the airport maximise the public benefit, passengers or shareholders?

For example, at Heathrow, one of the busiest airports in the world, airlines are charged $9,000 for each landing and $55 for each passenger. They are also charged fees for shops, restaurants and car parking, so it can be a lucrative business depending on whether the airport is government or privately owned. If it’s privately owned, the pressure to provide a return to shareholders may force fees up and squeeze airlines, airport retailers and passengers.

And what about climate issues, given that aviation is responsible for a large proportion of global emissions of greenhouse gases? Indeed, many environmentalists advocate not flying at all and taking the train. This is ok in Europe, but a bit harder if you live on an island at the bottom of the world like Australia. It’s no surprise that Brazil – another great southern land and a major aviation manufacturing nation – has been at the forefront of invention of greener aviation fuels, as well as looking to hydrogen.

Then there’s the future of artificial intelligence (AI) in aviation. Again, Brazil has been at the forefront, with Embraer exploring electric flying taxis to navigate the Sao Paolo traffic, as well as looking to drones and other forms of innovation.

This all matters because aviation is big business. Even in Australia, which has a relatively small population but where the vast distances make flying a necessity, the country’s airports contributed A$105 billion ($70 billion) in value added to the national economy in 2022, or about 5% of GDP, and 690,000 full-time equivalent jobs (Deloitte Access Economics, 2023).

Airports support more than one in 20 jobs in Australia, either directly or in the contribution that they make to international trade and investment, tourism, education and emergency services. They are a crucial part of the infrastructure in remote rural and regional Australia.

So, there’s a multitude of topics to think about in the economics of airports. And you can take it from me, as I am Tim Harcourt and I’m the airport economist!

Where can I find out more?

The Economics of Airports and Privatization: 2021 article by Aydin Maharramov in the Business Review at Berkeley.
Taking flight: the economic and social contribution of Australia’s airports: A 2023 report by Deloitte Access Economics for the Australian Airports Association.
The Airport Economist in Asia.
The Airport Economist in Latin America.