ACCHANGE: Building economic models for understanding ATC performance

The aim of this paper is to develop a simple economic model that allows us to understand current deficiencies in Air Traffic Control performance. Our model fits within the traditional theory of regulation (surveyed in Laffont & Tirole (1993)), often applied to public utilities in a monopoly position. The model helps to study the implications of the incentive mechanisms that have been implemented in the SES II regulation. We find that a change from cost-plus regulation towards pricecap regulation can lead to efficiency improvement. This is the case if the price-cap is effective and the ANSPs act as private profit-maximizing firms, rather than as government controlled entities which maximize a weighted sum of national interests. When ANSPs are able to invest in capacity and are exposed to traffic risk, they will increase their capacity with stronger demand elasticity and if there is more congestion/delay. We further find that capacity is increasing with the degree of traffic risk, with the airline demand and with the ANSP profit margin. Our model also predicts that a regulator with a national perspective has a preference towards a cost-plus regulatory regime, whereas a regulator with a European scope has a stronger drive to push for a price-cap regulation. We complement our theoretical derivations with a numerical illustration.