Low cost carriers, secondary airports and State aid: an economic assessment of the Charleroi affair

In this paper a vertical differentiation model is built in order to analyse the effects of subsidies to secondary airports, or of lower prices set by them, on the competition between LCC’s and FSC’s. The Ryanair/ Charleroi agreement is used as an example and as a basis for the model. The main findings are that subsidisation (or lower airport charges) benefits consumers and negatively affects incumbent airlines. However, they may be more affected by competition than by the subsidy. An empirical analysis provides a few insights on LCC’s price strategies, namely that they retain rents resulting from lower aeronautical fees on dominated airports, and that their price strategy does not change with the presence of other LCC’s. * The author gratefully acknowledges the financial support of CETE and Fundação para a Ciência e Tecnologia.