Tackling uncertainty in airport design : a real options approach

Abstract

The airport industry is changing. Once understood as stand-alone public infrastructures, many modern airports now operate within privatized multi-airport systems and contend with previously unknown competitive pressures. As a result, many of the same airports which once enjoyed natural monopolies and government protections must now compete with secondary facilities both for airline patronage and for passenger traffic. Further, changes in the airline industry such as the success of the low-cost carrier, ongoing consolidation, and possible changes to the hub structure now threaten to impose new demands on airport services. In this environment, airport owners are being made to tackle not only significant uncertainty in traffic levels and passenger demand but also the sometimes conflicting needs of varying airline customers. By referencing the experiences of airports across Europe and the US, this paper seeks to highlight strategies for confronting these uncertainties. In particular, research conclusions focus on providing flexible responses that may prove useful given the continued growth of multi-airport systems, expansion of low-cost carriers, and associated industry restructuring. To this end, this thesis presents methodologies for evaluating the financial benefits which may be accrued through applying real options principles at new and developing airports. Two evaluative models, one focused on the construction of airport runway systems and the other on airport terminal design, are presented. Each model - as developed by the author - is designed to permit the simple application of economic and decision analyses in order to gauge the possibility of success in terms of airport cost, accessibility, and patronage.

(cont.) The models are therefore particularly useful for the preliminary evaluation of various airport development strategies, especially within educational contexts. The development of a second major airport outside of Lisbon provides the central case study.