Optimizing Multiple Airport Charges with Endogenous Airline Quality Considering the Marginal Cost of Public Funds

Airport operation costs are financed by charge revenues from airport users and funds transferred from general government funds. This study quantitatively optimizes the rates of three types of airport-related charges: per-passenger charges (e.g., passenger service facility charges), per-flight charges (e.g., landing fees), and aviation fuel tax, explicitly considering the marginal cost of public funds of the general funds. This study uses a route-level empirical structural model in which airlines with market power set both airfares and service quality (i.e., flight frequency). Our results show that it is optimal to increase the transfer from the general funds from the current amount and that the optimization increases social welfare by 19 percent. Even if the amount of the transfer is fixed at the current level, the social welfare can be increased by 10 percent only by adjusting the current rates of the airport-related charges. In particular, we show that charges should be adjusted so as to increase flight frequency on routes where small aircraft are used.