Airport valuation: Using passenger generalised cost to measure competitive advantage and pricing power

Abstract

The standard method of valuing airports through cash flows does not necessarily measure the competitive advantage of an airport as aeronautical charges are often subject to economic regulation. Still, understanding the potential valuation of an airport arising from its competitive advantage is important because it gives an indication of the pricing power of the airport and of the sustainability and riskiness of its cash-flows. In addition, it is a necessary ingredient when calculating the value of an airport to society at large. This paper shows how the potential financial value of an airport granted by its competitive advantage can be gauged through the passenger generalised cost, a measure commonly used in cost-benefit analysis in the transport sector. The paper focuses on valuing the competitive advantage granted by the location of an airport. It is shown that the potential financial value of an airport can be much higher than its actual financial value. When that is the case, an airport has greater financial room to face unexpected demand shocks, over-building and changes in government policy. The approach can also be used to estimate how a new competing transport facility affects the potential value of an airport. The paper concludes with suggestions of how the method illustrated can be expanded and refined.