Privatization and Re-Regulation of Airports in Germany. Berlin University of Technology Workgroup for Infrastructure Policy

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1 Privatization and Re-Regulation of Airports in Germany WIP Berlin University of Technology Workgroup for Infrastructure Policy Jörg-Stefan Fritz rg

2 Privatization and Re-Regulation of Airports in Germany Results of the student-run Research Project started in 2002 with Workgroup for Infrastructure Policy (WIP) at TU Berlin Participants of the Project: Jörg-Stefan Fritz (co-ordination) Gregor Farchmin Axel Garbrecht Martin Herrmann Stephan Kuhn Stefan Müller Gregor Rasch Wojtek Slimok Support and Consultancy: Visiting Prof. Dr. Christian von Hirschhausen Dipl.-Ing. Thorsten Beckers Contact: Christian von Hirschhausen Tel ) Thorsten Beckers Tel ) Jörg-Stefan Fritz Tel ) Slide no. 22

3 Agenda Problems, Tasks, System of Objectives Sample Airports in Germany Market Power of Airports Focus on Corporatistic Regulation International Experiences Recommendations Slide no. 33

4 Complex of Problems and Main Tasks There is need for action of economic policy at German airports Positive: Airports are already fully financed by users But: Continuing growth of the aviation market: ca. 5% p.a. (Boeing, 2003) Need for demand oriented investments in capacity expansion at the airports Promising experiences with privatization and re-regulation in Great Britain, Australia and other countries Hypothesis on governance: Public governance is tendentiously inefficient and less innovative Problems with accumulation of capital for investments in capacity expansion Hypothesis on regulatory practise: Current cost-plus-regulation shows many serious inefficiencies Clash of interests, as government unites functions of owner and regulator How to privatise? How to regulate? Slide no. 44

5 System of Objectives Cost Recovery Airport company has to be able to cover its entire costs User based financing should be continued without any subsidies of the government Welfare CS + PS = WF max Benefits Costs Productive Efficiency Allocative Efficiency Investment Incentives Qualitative Efficiency costs of the regulatory institution Transaction costs with market members Distribution Distribution of the surplus is rather a secondary objective But could become important with the assessment of the implementation of any regulation Slide no. 55

6 First Experiences with Partial privatization and Re-Regulation in Germany Düsseldorf 50% partial privatization: NRW sold its shares to a strategic investor in 1998 Cost plus regulation according to the old model Hamburg 40% partial privatization: federal government sold its shares to the same strategic investor HochTief Airport / Aer Rianta in 2000 Implementation of price cap regulation since May 2000 with dual till and revenue yield formula as well as sliding scale risk allocation Frankfurt 29% partial privatization: through increase of capital of Fraport AG in 2001 Change of the regulatory framework since April 2002 with a price cap agreement between airlines and airport similiar to the Hamburg model Slide no. 66

7 Theory: Market Power of Airports Factors intensifying market power Factors weakening market power Barriers to market entry High sunk costs Institutional framework: approval / environmental law Countervailing power Influence capability of dominant carrier as the major customer Economies of scale Subadditive cost function with runways, terminals and central infrastructure Strength of competition Intramodal competition Intermodal competition with other traffic modes Specific investments Airports could skim off revenues from hub airlines (hold up problem) Complementarities Demand for aviation and non-aviation activities is complementary Slide no. 77

8 Marktmacht bei den einzelnen Airporttypen Primary Airports Economies of scale and scope are already exhausted (capacity > 5 mn WLU) Strong complementarities of demand (revenue share of non-aviation up to 50%) Competition for transfer passengers (between combinations of hub-airport and hub-airlines) But: Secondary Airports Specific investments of the dominant carrier weaken its countervailing power Competition between feeding airports via But: Tertiary Airports Softened at airports with higher shares of business passengers in their catchment area Cost recovery of capacity expansion is the main business objective Market entry of former military airfields and regional airports But: Economies of scale are not fully exploited yet Faint complementarities due to less importance of non-aviation business activities Implementation of incentive regulation with less intensity of interference is needed and recommended for most airports Slide no. 88

9 Focus on Corporatistic Regulation Contract agreement between Airports and Airlines And if necessary with other user groups like ground handling service providers about Price development and Investments at the airport for a certain period (e.g. 5 years) as a regulatory substitute Under the threat of an extern regulation if no agreement is attained Threatened regulatory system (e.g. price cap regulation with a sliding scale) acts as a sample for market based negotiations But market participants can develop a better working solution To secure the credibility of the regulatory threat a task force of experts should be established as a permanent regulatory authority Slide no. 99

10 Discussion of the argumentats of Monopolkommission onopolkommission against Corporatisti orporatistic Regulation (vgl vgl.. MONOPOLKOMMISSION [2001]) Contra Pro Arguments of Monopolkommission Agreements burden third parties Exclusion of foreign companies from negotiations Contracts with many parties lead to a dramatic increase of transaction costs Lower requirements for the regulatory institution Relevance for Airports Few participants less serious collision of interests, thus to avoid more easily Foreign carriers are invited to join negotiations from the beginnig At airports there are only some participnats involved (one flight with only one origin and one destination airport) lower transaction costs At the moment is not clear, since any market participant can call for regulatory action Market participants can use information more efficiently Incentives to make use of the information advantage, to innovate the system directly Legitimate criticism of Monopolkommission about the Verbändevereinbarungen in the energy sector can not be entirely adopted for the special situation of airport business. Slide no. 10

11 Development of the Regulatory Practise abroad: Trend to Cutback the Regulatory Interference Status Quo Trend Rate-of- Return- Regulation Price-Cap-Regulation with Sliding Scale Single-Till Dual-Till Corporatistic Regulation Monitoring (Price and Quality) Status Quo Great Britain Trend Four designated AP are regulated RRCB, peakload pricing, tariff basket Incentive system to promote von market based agreements Smaller Airports with Revenues >1mn Smaller Airports revenues >1mn Status Quo New Zealand Trend Light-handed only ex-post Is to be continued against the Recommendation for a Price Cap Status Quo Australia Trend AP in the area of Sydney before privatization 2002 All 22 privatized airports with tariff- basketprinciple Access to Facilities under Threat of Regulation Additionally Enforcement of Market based Agreements All other small airports Just the four biggest airports incl. Sydney Slide no. 11

12 Recommendations Establishment of a Task-Force acting as Consultant and Moderator independent (Agency-Model) On the Federal Level At first with usage of the administrative Ressources of the Luftfahrtbandesamt Implementation of Corporatistic Regulation For all Primary and Secondary Airports and for selected Tertiary Airports Enforcement of Industry negotiated Contract Solutions Under Threat of an extern ex-ante Regulation (Price-Cap with Sliding Scale, Dual Till, Tariff-Basket, and if needed Investment Agreements) For some Tertiary Airports Ex-Post Price Monitoring is sufficient Full Privatization Of all German Airports Sale of all public shares in Secondary and Tertiary Airports to Strategic Investors within a Competitive Bidding Process for each single Airport Selling of the Public Shares in Primary Airports via Stock Market Placement Implementation of a Practicable Slot Trading between Airlines Slide no. 12

13 Questions or Comments? Slide no. 13

Environmental restrictions and the efficiency of airports - the case of slot restrictions at Dusseldorf Airport -

Environmental restrictions and the efficiency of airports - the case of slot restrictions at Dusseldorf Airport - 5th Conference INFRADAY GARS TU Berlin 07 October 06 Hansjochen Ehmer, Thorsten Heidelmeier