Airport Charges

1
Airport Charges their Potential for Abuse

• 3rd July 2007
• Presentation to the Expert Group on Air Transport
• IMPRINT-NET
• Ian Clayton

2
Market Power

• Many EU airports enjoy high levels of market
  power, as the supply of airport infrastructure is
  finite potentially constrained
• runway constraints are the most difficult to
  overcome so
• typically, availability of morning peak
  departures slots becomes the constraining factor
  
• demand for airport infrastructure is increasing,
  as competition in the airline market intensifies
  
• as a result, a number of larger EU airports have
  been regulated.

3
Airport Profitability

• The most profitable customers for airports are
  short haul scheduled carriers because
• flights operate all year round
• passengers are increasingly travelling for
  business purposes
• leisure passengers are less tied to traditional
  summer breaks
• EU integration has stimulated the VFR market
• flights operate relatively full
• airline pricing models ensure high load factors
  
• flights operate all day long
• efficient airline business models require optimal
  fleet utilisation
• simple route structure minimal complexity so
• an airports most profitable customers are the
  same ones over which it may exercise the most
  market power.

4
Investment Return

• The directors of companies are obligated to seek
  an optimal balance of risk return for their
  shareholders so
• to be an attractive investment, airports must
  deliver a return over above that which the
  stock market would typically deliver for a
  similar level of risk
• risks in the EU aviation sector have diminished,
  as a result of market maturation so
• airports have increasingly focused on delivering
  increased returns however
• where airports are regulated, this has led to
  some interesting pricing structures

5
Airport Revenues (1)

• Fundamentally, in order to deliver an attractive
  return on investment, airports must increase
  their revenues
• where these revenues are subject to price
  regulation, airport operators will seek to
• find ways to realise revenues outside the scope
  of regulation
• find ways to realise increased regulated
  revenues, where the regulatory system allows
  this
• outside the scope of regulation might mean
• through commercial activities
• through vertical integration
• through common interest
• regulatory systems may reward efficiency so
  airports may over-forecast expenditure in order
  to benefit from this.

6
Airport Revenues (2)
Shareholders
Airport Operator
Aeronautical Charges
Property Rents, unregulated charges etc.
Property Rents, unregulated charges etc.
Retail, car parking, hotels etc.
Service Providers
Airlines
Fees
Passengers
Fares
7
Increased Revenues through Commercial Activities
(1)

• A dual-till system allows unregulated revenues
  from commercial activities, whereas aeronautical
  activities are regulated so
• OPEX allocated to the regulated, aeronautical
  till are guaranteed to be remunerated through
  airport charges
• consequently, commercial activities can deliver
  increased net revenues eg.
• in 2005/6, Schiphol Group allocated 74 of OPEX
  at Amsterdam (dual-till) to aeronautical
  activities, recovering 10.72/passenger, whereas
  BAA allocated just 24 of OPEX at Heathrow
  (single-till) to aeronautical activities,
  recovering 7.11/passenger so
• returns on commercial activities at Amsterdam
  were 130, whereas those at Heathrow were 61.

8
Increased Revenues through Commercial Activities
(2)

• Airport retail is demonstrably not in competition
  with other retail channels
• retail commercial rents accrue to a single
  landlord
• passengers are required to dwell at airport
  retail facilities
• passengers are decreasing provided with catering
  on short haul flights
• heightened security requirements preclude some
  products (eg. cosmetics) being carried through
  control posts
• there may be tax advantages to airport shopping
  
• the benefits of commercial revenues flow from
  passengers, airlines, service providers others,
  yet where a dual-till regulatory mechanism
  exists, these accrue just to the airports sector.

9
Increased Revenues through Vertical Integration
(1)

• Where airport operators own (or control) service
  providers, there exists a potential to distort
  competition eg.
• although the EC Groundhandling Directive ensures
  that charges for access to monopoly
  infrastructure must be non-discriminatory
  transparent, this does not effectively preclude
  an airport operator from making excessive charges
  to all groundhandlers, for access to its monopoly
  infrastructure
• from a group perspective this would
• be cost-neutral between an airport operator its
  subsidiary but
• deliver increased overall revenues, where
  third-party groundhandlers operate
• where accounts are consolidated, such abusive
  behaviour is difficult to prove.

10
Increased Revenues through Vertical Integration
(2)
11
Increased Revenues through Vertical Integration
(3)
12
Increased Revenues through Vertical Integration
(4)
13
Increased Revenues through Common Interest (1)

• Where an airports shareholders share a common
  interest with those of airlines, there exists a
  potential to distort competition as
• airport charges may be structured to deliver
  advantage to a favoured airline eg.
• by weighting charges away from a particular
  business model or
• by weighting charges towards or away from
  passenger or aircraft activity
• a rational investor would chose a charging regime
  that was structured in such a way as to deliver
  the maximum net present value of benefits from a
  portfolio of assets
• in a constrained airport, this is likely to be
  one which incentivises best use of
  infrastructure, such as high load factors quick
  turnaround of aircraft, ie. is weighted towards
  aircraft activity.

14
Increased Revenues through Common Interest (2)

• the Schiphol Group is owned (76) controlled by
  the Dutch state ( 24 owned by regional
  Government)
• AF/KLM is 21 owned by the previous shareholders
  of KLM, who are predominantly Dutch investors
• airport charges at Schiphol favoured transfer
  passengers over point-to-point passengers, by a
  factor of 31 (26.00 vs 8.67)
• 60-70 of AF/KLMs passengers are transferring
  through Amsterdam.

15
Rewards for Efficiency

• Regulatory systems may allow airports to retain
  so-called capital operational efficiencies
  stemming from
• capital savings
• operation savings
• increased commercial revenues however
• these are simply the differences between forecast
  actual expenditure /or revenues
• between 2003 2008, BAA under spent its capital
  budget at Stansted by 229m (40) so is
  currently achieving returns of 11.41, in
  contrast to a regulatory settlement of 7.75
• the UK CAA is considering changing the regulatory
  mechanism in order to return such revenues to
  airlines.

16
Key Points

• Constrained airports enjoy excessive market
  power, potentially over their most profitable
  customers
• airport owners are obligated to seek to maximise
  returns
• this can be achieved through increasing revenues
  outside the scope of regulation by leveraging
  regulatory systems
• dual-till, vertical integration common interest
  all have the potential to distort competition
• experience shows that the majority of abuse takes
  place in constrained airports, whether or not
  these are regulated so
• rigorous targeted regulation is needed to
  increase competition.