Airport Revenue Sharing and Complementary Airline Services

We develop a model of airport revenue sharing in a connecting market where two independent airlines provide complementary flight segments and choose fares and flight frequencies.Because each airline's frequency improves the quality of the connecting itinerary, it generates benefits for both the complementary carrier and the airport that are only partly captured by the airline making the frequency choice.By sharing non-aeronautical revenue with the airlines, the airport can strengthen their incentives to provide frequency and attract connecting passengers.Our main message is that the airport's incentive to use revenue sharing depends on how strongly airlines are privately motivated to provide complementary service quality.Under zero-cost layovers, private frequency incentives are relatively weak, giving the airport a stronger incentive to share non-aeronautical revenue.Under high-cost layovers, the lower-frequency airline determines the effective frequency of the connecting itinerary, strengthening private frequency incentives and leading to a weakly lower optimal revenue-sharing rate.When adopted, revenue sharing increases frequency, lowers fares, and expands passenger traffic, raising airline profits, consumer surplus, and total welfare.These results imply that airport--airline revenue-sharing arrangements should be evaluated in conjunction with the technology of connecting service provision and the incentives it creates for airline service quality.