Airport privatization has allowed for options such as horizontal and vertical integration to be adopted,

although the practical benefits of such developments specifically for the airport industry do not seem
very clear.

Vertical Integration Definition:
Vertical Integration is the degree to which a firm owns its upstream suppliers and its downstream
buyers.

Vertical Integration is one when a company expands its operations either backwards into an industry
that produces inputs for the companys products (backward vertical integration) or forward into an
industry that uses, distributes, or sells the companys products.
Citation: Strategic Management An Integrated Approach, 10
th
Edition, Charles Hill, Gareth Jones,
Vertical Integration can either be forward integration when organizations seek increased control of
distributors or backward integration when organizations seek control of suppliers.
Vertical Integration scenarios in Airport:
Forward Integration:
Forward vertical integration is when a company owns the subsidiaries that market the product.
Regional airports Cardiff and Norwich had developed local travel agency business to provide flight
bookings through the airport. This forward integration can cause market development from a passenger
perspective since new passengers may be persuaded to fly from the airport.
Backward Integration:
Backward vertical integration is when a company owns some of the subsidiaries that produce some of
the inputs used in the production of its products.
BAAs development of World duty Free (recently sold in 2008) and also some airport operators will
choose to supply some of the airport products e.g.: In Ground handling and in Air traffic control services.
UK, Norwich airport chartered its own aircraft to prove to tour operators that there was a demand for
charter flights
Balanced Integration:

Advantages of VI:
Improve supply chain coordination
Capture upstream & downstream profits
Increase entry barriers to potential competitors

Disadvantages of VI:
Monopolization of markets.
Higher cost due to lack of supplier competition.

Vertical Integration vs Outsourcing:
If Airport, because of vertical integration, charges and conditions should be public and included in
monitoring reports.
This transparency would facilitate regulatory action under competition law if an airport acted to impede
competition in order to inflate its car park prices or revenues.
[ECONOMIC REGULATION OF AIRPORT SERVICES]
http://www.pc.gov.au/__data/assets/pdf_file/0006/114648/02-airport-regulation-overview.pdf
Vertically Integrated airports performing ground handling may face a higher cost of providing the
services, because the airport has many divisions to manage and because the organization does not
benefit from the learning that comes with specializing in a single activity.
When the Airport itself provides ground handling completely, the cost basis would be much broader and
include costs of operation and maintenance, administrative overheads and capital costs attributable to
personnel, vehicles, equipment and premises engaged in or used for providing ground handling,
whereas when outsourced costs would be limited to few specific areas.
http://www.icao.int/sustainability/documents/doc9562_en.pdf
Airport Economics Manual 3
rd
edition 2013 ICAO.
When GH is vertically integrated, In the case of passengers declining as a result of weak economic
conditions, while airport employment remains unchanged, resulting in a drop in the airports
performance indicators. Whereas this can be controlled through outsourcing GH.