Scale and (quasi) scope economies in airport technology: An application to United Kingdom airports

In this study we consider a sample of the largest United Kingdom (UK) airports, using the dataset provided by the Centre for the Study of Regulated Industries of the University of Bath, in order to estimate, for the first time for this sector, a multiproduct cost function using a flexible technology that nests most of the functional forms commonly employed in the empirical literature, such as the trans-log, the generalized Box-Cox and the quadratic specifications. Another novelty of this work is that we provide estimates of quasi- scope economies for the airport industry, defined as the cost advantage for a diversified firm of jointly providing a set of outputs/services with respect to the costs of their provision through a set of firms quasi-specialized in a single production. Our multiproduct cost function includes as outputs domestic passengers, international passengers, cargo and a proxy of commercial revenues. Our main results suggest the existence of quasi-scope economies that tend to decline with the size of the airport. This finding, coupled with the results of a set of cost complementarity tests, suggest that cost savings mainly arise from the joint provision of services for national and international passengers and, to a lesser extent, to the addition of cargo transport activities. In turn, pairs of outputs that include (a proxy of) commercial revenues seem to be characterized by anti-cost complementarities. Finally, we confirm previous results for the UK airport sector that global economies of scale seem to be exhausted at about five million passengers. The results of this study might be of interest to policymakers who a) need to undertake a cost-benefit analysis to inform a decision on whether to open a small airport and b) need to decide whether to close an airport and concentrate the activity in a neighboring one (which might be producing different outputs).