An analysis of an airport–airline relationship under a risk sharing contract

This paper analyzes a risk sharing incomplete contract under which an airline agrees to serve an airport in exchange for payment to/from the airport based on the difference between a realized and a target load factor. The key results are that we specified the relevant conditions on payments and utilities under which the incomplete contract can overcome the under-effort problem and achieve the efficient utility levels. These results are numerically illustrated by showing the impacts of the project prospect deterioration and the uncertainty increases on effort and utility levels.

► The article analyzes a risk sharing incomplete contract between airport (AP) and airline (AL). ► It specifies a payment based on the difference between a realized load factor and a target they share. ► Under the contract, AL also commits to serve the AP in exchange for such payment. ► We revised Hart & Moore hold up model to analyze AP–AL joint-venture type contractual relationship. ► The results show that under certain conditions the incomplete contract can achieve the first best.