Easily accessible and profitable industries are likely to attract new entrants which may lead to intense levels of competition (Wharton School, 1997) with profits declining for some existing firms due to forcing prices down (Porter, 1980). The accessibility of the market and the threat of new entrants are dependent on the number of entry barriers that may discourage potential entrants and lower their profit prospects. In some industries, in order to be able to compete, the entry to the market requires significant capital costs, not only to be spent on resources and facilities but also on advertising and R&D (Porter 1980). Such financial requirements may deter new entrants who are not willing to participate in such investment.
In the case of airports, the construction of a new airport or even the building of a new terminal requires large investment on land, facilities and equipment, as well as on qualified people to operate and handle aircraft, passengers and goods. The cost of such airport development projects can differ significantly depending on size, location and objective of the company. For example, while the expansion of a terminal building in
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Lima, Peru, required a capital investment of US$1.2 billion, the development of a Greenfield airport in Bangalore, India, required an investment fund of only US$180 million (Kraus and Koch, 2006). Another example is the current Zagreb Airport in Croatia, which is currently undergoing an expansion in order to increase its capacity from its current 2 million passengers per year to 3.3 million passengers per year (Airport Technology, 2007). This three-year project, which will add a second terminal building to the current airport, is expected to cost between €280 million and €300 million before its completion in 2012 (Airport Technology, 2007). Likewise, the expansion of Muscat International Airport in Oman is projected to cost US$1.7 billion for expansion of the existing terminal and building a second terminal in order to accommodate 12 million passengers per year (Airport Technology, 2009). Therefore, the substantial capital cost required to build a new airport can deter firms from entering the airport market (Cream, 2009).
Government policy can limit the entry of new competitors through imposing some regulations and restrictions on some industries. In some industries, the entry of a new firm can also be controlled by governments that impose rules to protect incumbents. Licenses and patents can prevent and deter the entry of new firms and create imbalances between existing firms and potential entrants (Oster, 1994). As outlined earlier when reviewing the macro-external environment, industries may be controlled and monitored by government bodies or authorities that would be likely to demand control requirement which may expand the capital needed in order to enter the market. There are usually long, expensive and complicated planning procedures that need to be followed in order to obtain an approval for a new airport development, which may act as barriers to participating in the airport business (Cream, 2009). Furthermore, the involvement of national government in determining the prime hubs can also form a barrier for other secondary airports to establish their position in the market (Williams 2006). The limited availability of land sites for airport development and expansion projects is also another barrier to the airport market (Cream, 2009).
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On the other extreme, some government policies may encourage the entry of new competitors. For example, decisions by government to convert military airfields to civil airports, due to reducing military requirements, may influence the operation performance and competitive situation of existing airports (Barrett, 2000). Airport privatisation, which is driven mainly from the need to make airports more self-sufficient and to minimise government spending on capital investment (Delfmann et al., 2005), may also encourage the entry of new competitor airports to the market.
It is argued (Johnson, 1999) that for some industries, economies of scale5 are extremely important and can discourage new entrants through forcing them to enter either at a large scale and thus having the risk of strong response from existing competitors or at a small scale and having cost disadvantages. Neither of these situations is acceptable to firms (Porter, 1980). Due to the nature of their infrastructure and fixed costs, it is argued (Doganis, 1992) that airports can benefit from marked economies of scale. Economies of scale can lead airports to gain an advantage over other rivals (Cream, 2009).
A number of studies have highlighted the relationship between airport traffic volume and unit cost. A study by Doganis and Thompson (1973, cited in Doganis, 1992) indicates that as traffic grows beyond a level of about 3 million passengers, unit costs flatten out and do not seem to vary with airport size. In other words, as traffic builds up at an airport, facilities are better utilised and their costs are spared over a larger number of users. ICAO undertook a study and found that work unit costs for an airport of less than 300,000 passengers averaged US$15, and around US$9.4 for airports with passenger throughput between 300,000 and 2.5 million, and around US$8.00 for airports handling traffic between 2.5 million and 25 million (Graham, 2003). Salazar (1999, cited in Graham, 2003) conducted a study for larger airports and found constant average costs in the range of 3.5 to 12.5 million passengers per year. He argues that the average unit cost increases if airports become congested. Researchers (e.g. Helm and Thompson 1991, Doganis 1992) also believe that airports can benefit from significant
5
Economies of scale is identified as the decline in product unit cost due to an increase in a firm’s output by expanding its scale of operation (Oster, 1994).
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economies of scale unless they overinvest in their infrastructure, which is likely to lead to a greater unit cost over the short-term due to the increase in operational costs. Therefore, they suggest that airports should delay any development programme as long as it is possible to keep their unit costs down. However, studies (e.g. Starkie, cited in Graham, 2004) indicate that economies of scale have no impact on deterring new airport entrants. The entry of a new competitor airport, which will take traffic away from the congested one, would be likely to lead to a more efficient allocation of flights at airports (Forsyth, 2003), which in turn would lead to lowering the unit cost at the congested airports.