The welfare effects of the allocation of airlines to different terminals

Abstract

Many airports around the world have recently built, rebuilt or are in the process of constructing new terminals. Incumbent airlines and new entrants must be allocated to the new and old facilities. When spaces at airport terminals are directly allocated, the allocation should be done by taking into account the implications for airlines' competition and social welfare, given the airlines' network configuration. We use a theoretical model in which two airlines compete in prices with differentiated products for a given network structure. The model shows that, in general, if airlines are allocated to different terminals, the level of competition is reduced, the ticket prices are higher and the consumer surplus and social welfare are lower. Only in some routes, and under certain conditions on the market size, ticket prices may be lower.