The importance of concession revenues in the privatization of airports

•Examine how congestion affects revenue focus for public and private airports.•Illustrate trade-offs between frequency and concession revenue.•Introduce the impact of valuation of concession goods on privatization decision.•Determine the importance of concession revenue for airport privatization.

We investigate the tradeoff between the airport’s concession and aeronautical revenues—two complementary services. Increasing the frequency of flights may result with congestion which could stimulate demand for concessions, but may also harm the demand for flights. When passengers have a low valuation for the concession good, the opportunity for concession revenue is small and the airport focuses its revenue on the aeronautical (i.e., landing) fees. With a sufficiently large valuation for concession goods, the airport may lower the aeronautical charges to stimulate greater flight frequency in order to lower airfares thereby attracting more passengers ultimately to increase concessions revenues. It is in the latter case where we observe minimal loss of aeronautical welfare when airports are privatized. Thus, our research could help guide decision makers in the airport privatization process. Namely, we find that privatization is not recommended unless the potential for concession revenues is sufficiently large.