Congestion Pricing for Airports April 27, 2007

1. Congestion Pricing for Airports April 27, 2007 Frank Berardino GRA, Incorporated 115 West Avenue • Jenkintown, PA 19046 • USA ' 215-884-7500 •7 215-884-1385 * frankb@gra-inc.com

2. Traditional Way of Setting Landing Fees "When the carriages which pass over a highway or bridge...pay toll in proportion to their weight or tonnage, they pay for the maintenance of those public works exactly in proportion to the wear and tear which they occasion of them. It seems scarcely possible to determine a more equitable way of maintaining such works." -Adam Smith “The Wealth of Nations” (1776)

3. Economics of Airport Fees and Congestion • Adam Smith was (remains) right so long as demand does not exceed capacity: • Weight based landing fees are a good way to recover actual airfield costs • But, when demand exceeds capacity: one operation precludes another: • All users should pay the same fee • Runs afoul of use agreements and user opposition • Fee should reflect delay costs imposed on others • Slots were substituted instead

4. Slots or No Slots? Auction or Pricing? • Auction: Set total permitted operations per time period (slots) and auction them off • If number of slots set to balance capacity, then congestion is managed without much risk • Will slots have some finite life (5 years?) • Carrier must rely on secondary market to acquire added slots in interim • Lots of experience • Congestion Pricing: Set the price (to reach a target number of operations) but let any user fly at a given time for the posted price • Risk that congestion not as easily managed or prices set too high • But, if there are no slots, airlines can treat airport like any other except landing fees are higher • Seasonal variations • Experiment with changes in gauge and frequency • No incentive to hoard slots since they don’t exist

5. The Textbook Argument for Congestion Pricing • Instead of slots use price to ration access • No permanent allocations • Frequent access for more efficient users • Today demand exceeds capacity, users don’t pay for the delay costs imposed on others • Charge users for the costs they impose, and delays will fall and social welfare will improve • There is an optimal congestion price that can be charged that maximizes social welfare Social MC $ Private MC PT Optimal Congestion Fee  PP MB QO QT QP Passenger Trips

6. 5 SUCCESSFUL CONGESTION PRICING

7. Successful Congestion Pricing: SR 91 So CAL Free Flowing Toll Lanes at 08:30 >3516-34<16mph

8. SR 91: Key Toll Setting Process • Set a trigger point for raising tolls on express lanes: • Objective: free flowing traffic at 65 mph • Trigger = 92% of objective = 3,400 vech/hour/lane x 92% • Measured on a rolling 12 week basis • Hourly • Day of Week • Direction • Exemptions: 3 or more occupants; disabled veterans

9. SR 91 Weekday Toll Schedule

10. What Can We Learn from SR 91 • Congestion pricing works: “target level of activity” reached • Tolls vary directly with demand and evidence substantial peaks and troughs: $0 to $7.00 per trip • Known objective: free flowing express lanes • Known process for establishing tolls • No statutory limit on tolls (although ROR regulation) • Substitutability is important: drivers able to use non-tolled (congestible) lanes • Formerly “free good” that consumers are willing to pay for

11. Why Airports Different v. SR91 • Tens of thousands of drivers vs. hundreds of flights • Drivers not competing in business with one another • Airlines aware of one another • Frequency matters more than seat size • Action of one airline affects others • Substitutes for toll roads vs. poor or partial substitutes for airports • Interaction between tolled and un-tolled roads and lanes

12. 11 IMPLEMENTING CONGESTION PRICING AT AIRPORTS

13. Lessons From Road Pricing • Set a target level of delay or operations at the airport • An optimal level (which varies with mix of aircraft), or • A physical target • Establish a market mechanism that facilitates moving toward the target • Be prepared to have prices vary across small units of time—e.g., 15 minutes • Everyone pays the same price in the same time period • Establish a way to reset prices as demand changes • As often as necessary to stay close to target • Keep users informed • Key difference: Account for carrier’s strategic business interests

14. Four Steps to Full Congestion Pricing • #1: Establish Trigger Point: When pricing implemented • #2: Establish Pricing Board: Independent authority whose only objective is to keep delay within prescribed bounds • #3: Revenue Neutral Flat Fees: Same fee for all users; total revenues collected equal airfield costs • #4: Congestion Surcharges: Designed to keep delays within bounds

15. #1: Establish Trigger Point • Trigger: time of day and day of week when delays are becoming unacceptable • Based on: • Arrival rates • Observed delays • Approved FAA forecasts • History (e.g. year 2000 delay levels) • Cost benefit analysis • Prefer that trigger point be set at relatively low delay per operation so that revenue neutral fees can be implemented early

16. #1: Establish Trigger Point: Example BOS • Schedule monitoring: identify “over-scheduling” six months in advance • 15 minute average delays in VFR over 3 consecutive hours • Early Warning to Carriers: give an opportunity to reschedule • Trigger: if projected 15 minute average delay in VFR, announce that flat revenue-neutral fee put in place in the 3 hour period • Impose Fee: and reduce weight based fee so that total revenues collected in the time period is neutral

17. #2: Establish Pricing Board • Sole objective of independent board: keep delays within prescribed bounds • Near trigger point • Start with revenue neutral flat fees during times experiencing delays near or at trigger point • Published procedures for setting these fees • Rules for raising or lowering fees above revenue neutral • Discussed later

18. #3: Revenue Neutral Flat Rate Landing Fees • Same charge regardless of weight; total revenues no higher than estimated airfield costs • When one flight precludes another, every flight should pay the same fee • Small plane causes as much delay as larger ones • Depending on the current mix of operations at the airport, may be an effective method to reduce delay • Important that application by time of day and day of week be based on observed delay or other trigger point • Airport could reopen use agreement OR follow BOS example and reduce weight based fees • Consistent with FAA user charge guidance and PACE decision

19. Example: Revenue Neutral Landing Fees at LGA Breakeven: 103 seats Majority of Ops w/ small aircraft during peak 8am hour

20. #4: Congestion Surcharges • Objective: target level of operations per 15 minute period • Balance arrivals and departures • Authority establishes a “market” where access is offered for a price • Limit non-scheduled to X per period • Pay same fee as other users; X adjusted according to use • Multiple rounds: Authority publishes prices, airlines offer schedule • Price starts low rises if demand > target; falls if demand < target • Scheduled operators issue schedule of arrivals/departures requested in each round • Blind to other participants • Cash deposits required to insure requests are real • Only operators that participate in “market” may fly

21. Important Barrier to Congestion Surcharges • The DOT and FAA “Policy Regarding Airport Rates and Charges” (Federal Register, June 21, 1996, page 31994) says in part: • “The Department’s policy regarding peak pricing was established in its decision in the Massport PACE fee case. In that decision, the Department concluded that a properly structured peak pricing system could be reasonable and not unjustly discriminatory…. • These provisions do not exempt airport proprietors from the requirement that total airfield revenues not exceed total airfield costs.”

22. User Response to Congestion Fees (Nextor Game)

23. Nextor Schedule vs. A Target Operations Level LGA Nextor Base Case Schedule and Estimated Capacity Shortfall

24. Nextor Schedule w/Pricing vs. A Target

25. Still More Work To Do To Reach A Delay Target Reason why have to start before delays get out of hand (LGA due to Air 21)

26. How Are Airlines Affected by Change in Fees • Aircraft days matter • Both arrivals and departures are affected even if only one period has a congestion surcharge • To be competitive, carrier needs both frequency and seats • Must assess impact of fees on entire market not just one arrival or departure • What competitors do will matter • “Waiting for a pull down” • Larger aircraft likely to be relatively advantages

27. How Are Airlines Affected by Change in Fees

28. Some Important Questions about Congestion Pricing • How often should prices be reset? • Every month • How do users appeal prices? • Need some basis for appeal • Arbitrary and capricious? • Evidence of rigging the market? • Who should keep the money? • Ideally, access fees should be in lieu of landing fees, ATC terminal-area share of user charges and PFC’s at the airport • Thereafter, excess fees should be used to increase regional capacity

29. Does It Make Sense to Recycle the Money Back to Users? YES

30. Some Important Questions about Congestion Pricing • How high would the fees have to be to change behavior? • At LGA: $600-$800 would have some effect, but peak fees likely to be on the order of $1,800 per operation • May be higher at hub airports where network effects are larger • Who should set the fee? • Independent entity with single objective of meeting target runs the market and sets the price • Need change in DOT/FAA policy? Legislation?? • Yes; maybe

31. New Solutions to an Old Problem "There's a simple solution to this traffic problem. We'll have airlines build the airports. And governments fly the airplanes." -Apologies to Will Rogers