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Restructuring of the Value Chain of the European
Ground Handling Market after the EU market
liberalization

• Günes Orak, Evgeni Petkov and Stefan Schulz

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Contents

• 1. Introduction
• 2. The European Council Directive 96/67/EC
• 3. Theoretical Background and Propositions
• 4. Ground Handling at the Major European Airports
• 5. Impact on Prices and Quality, Winners and
  Losers in Europe
• 6. Transformation of Ground Handling in Germany
• 7. Conclusion

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1. Introduction

• GHS are divided in 5 Categories
• Ramp handling
• Baggage handling
• Fright/mail handling
• Fuel oil handling
• Passenger handling

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1. Introduction

• Definition Ground Handling

Source Fraport AG
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1. Introduction

• Questions arising after the liberalization of the
  market
• How did the market change?
• How did prices and quality change?
• How did the organization of the value chain
  change?
• Who benefited and who losed from the changes?

Source Fraport AG
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2. The European Council Directive 96/97/EC
Source SHE Study
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3. Theoretical Background and Propositions
Value Chain of GH Airport ?
Handler ?
Airline
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3. Theoretical Background and Propositions

• Before the implementation of the Directive
• monopoly of backward integrated national airline,
• monopoly of forward integrated airport, and
• duopoly or oligopoly of independent ground
  handlers and self-handling airlines

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3. Theoretical Background and Propositions

• Transaction costs are
• the costs of acquiring an input over and above
  the amount paid to the input supplier.
• Include
• costs incurred before making the contracts
  (search and bargaining costs),
• opportunity cost of forgone transactions,
• costs incurred after making the contracts
  (enforcing costs)

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3. Theoretical Background and Propositions

• Determinants of transaction costs are
• the frequency of the contracts between two
  parties,
• the specificity of investments made for the
  supply relationship,
• environmental or behavioral uncertainty

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3. Theoretical Background and Propositions

• Based on the determinants of transaction
  costs Fuhr (2005) made his propositions about how
  the GHS should be organized and tested them on
  both hub and spoke airports
• Proposition 1 (regarding transaction frequency)
  
• Weak vertical control with short to mid-term
  contracts is feasible for spoke airports, whereas
  strong vertical control (eg. self handling) is
  only feasible for HSC at their hub and secondary
  airports.
• Result Strong vertical control is suitable for
  hub airports.

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3. Theoretical Background and Propositions

• Proposition 2 (regarding enviromental
  uncertainty)
• The contractual form between the hub airport and
  the handler is of moderate vertical control,
  whereas the contractual form between the
  secondary or spoke airport and the handler is of
  weak vertical control.
• Result
• Weak vertical control is suitable for secondary
  and spoke airports.

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3. Theoretical Background and Propositions

• Propositions 45 (regardin asset and human
  capital specifity)
• There is a large hold up threat in relationships
  between HSCs and handler, and a medium hold up
  threat in relationships between secondary
  airports and handler.
• Result
• High hold up threat is expected at hub airports
  due to high asset and human capital specificity.
  However this threat is at a medium level at
  secondary airports.

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4. GHS at the Major European Airports

• We look at the GHS market after the
  liberalization on the six
• largest airports in Europe
• London Heathrow (LHR)
• Paris Charles de Gaulle (CDG)
• Frankfurt (FRA)
• Amsterdam Schiphol (AMS)
• Madrid Barajas (MAD)
• Rome Fiumicino (FCO)

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4. GHS at the Major European Airports
Airport LHR CDG FRA AMS MAD FCO
PAX (2004) 67.3 51.3 51.1 42.5 38.7 28.1
Ex-ante situation 8 airlines doing self- and 3rd party GH Duopoly of airport and Air France Monopoly of FRAPORT KLM doing self- and 3rd party GH Monopoly of Iberia Monoply of the airport
Total of handlers (ramp) 11 5 2 5 5 3
Airport doing GH no yes yes no no yes
Self-handling airlines 7 1 0 2 4 2
Independent handlers 4 3 1 3 0 0
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4. GHS at the Major European Airports

• Market shares at London Heathrow

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4. GHS at the Major European Airports

• Market shares at Paris Charles de Gaulle

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4. GHS at the Major European Airports

• Market shares at Frankfurt

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4. GHS at the Major European Airports

• Market shares at Amsterdam Schiphol

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4. GHS at the Major European Airports

• Market shares at Madrid Barajas

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4. GHS at the Major European Airports

• Market shares at Rome Fiumicino

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4. GHS at the Major European Airports

• Barriers to competition
• Capacity constraints are used as a motive for
  limiting on all
• airports.
• This was supposed to change with a revision of
• the Directive, which is, however facing strong
  opposition, and most likely will not be voted
  soon.

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5. Impact on Prices and Quality, Winners and
Losers in Europe

• In 2002 SHE conducted a study on prices and
  quality on
• behalf of the EU.
• An increase in prices was reported only from
  Brussels and
• Manchester.
• Largest decreases were reported from Lyon, Lisbon
  and
• Athens up to 50.
• Reports on quality were ambiguous, however we can
• conclude that quality stayed more or less the
  same.

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5. Impact on Prices and Quality, Winners and
Losers in Europe

• Airlines were the clear winners of the
  liberalization.
• Unfortunately, the gains were not noticed by the
• passengers, due to the fact that GHS costs are
  only 4-7 of
• total flight costs.
• Another winner were the independent handling
  companies,
• which gained market shares after the market
  oppened.

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5. Impact on Prices and Quality, Winners and
Losers in Europe

• Expectedly, the former monopolists lost
  significant market
• shares and profits.
• Due to the labor intensity of Ground Handling,
  employees
• were also among the losers of the market opening-
• independent handlers were reported to pay up to
  30 lower
• wages.

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6. Transformation of GH in Germany

• Before the Directive airports were monopolists
  in Ground Handling
• After the implementation of the Directive in
  1997 there have been changes, but the market
  seems to be less open than other European markets
• Regulators try to protect airports and their
  employees from competition

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6. Transformation of GH in Germany

• The market for the airside services, such as ramp
  handling, is still quite protected this includes
  luggage handling and mail, refuelling and other
  ramp services such as push out, etc
• The market for the landside services such as
  check in, cleaning, maintenance, bus transfer,
  catering and all the associated services like
  station and crew support is less strictly
  regulated.

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6. Transformation of GH in Germany

• Market entry in Germany is controlled through
• the criteria for the selection of service
  providers or self handlers that we also have
  observed in the other countries,
• the administrative rules set down by the
  regional state regulator for the airport user
  council involved in the selection procedure
• The maximum number of service providers allowed
  for each service (usually not more than 2) The
  expected revision of the service directive in
  2007 would allow to increase this number to 3 or
  4

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6. Transformation of GH in Germany

• Major feature of the German market
• Airports stay in the business, but through GH
  subsidiaries. Hamburg, Hannover und Düsseldorf
  were early movers in creating own subsidiaries
  while Cologne and Frankfurt continue with their
  current organizational arrangement in which GHS
  are fully integrated within the core airport
  organisation

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6. Transformation of GH in Germany

• Why subsidiaries?
• The European Commission requires subsidiaries
  for cost transparency no cross subsidisation
• German airports are doing it on order to move
  out of the inflexible and expensive old labor
  contracts

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6. Transformation of GH in Germany

• Differences between the old and new
  employees
• old paid as public service employees
• new paid similar to logistics or cleaning
  sector employees
• difference also in retirement provisions

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6. Transformation of GH in Germany

• Evidence on changes in flexibility- Stuttgart
  2004

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6. Transformation of GH in Germany

• Evidence on changes in flexibility- Stuttgart
  2005

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6. Transformation of GH in Germany

• New entrants in Germany
• International service providers like Acciona,
  Swissport, Avia Partner, Securicor, or Menziees
  and local service providers like Losch
• Airports created AHS, a service company owned by
  several airports active in landslide services
  like check-in, in order to achieve scale
  economies like those specialized companies achieve

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6. Transformation of GH in Germany

• Questions about the development of GH in Germany
• Is it just a question of who can pay lower
  wages?
• When will the airports be able to move
  completely out of the old labor contracts?
• Why do airports want to stay in that business?
• How do we measure efficiency in GH?
• What will happen if the market opens completely?

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7. Conclusion

• Directive had varied success in the different
  countries, since some important barriers to entry
  still exist, mostly due to capacity constraints
  and the short license period
• Transformation of GH in Germany is slower and
  has different patterns than in other countries
• Labor costs and labor organization seem to be
  crucial for success and survival in that business
• Strong opposition to further opening of the
  market, mostly from labor unions

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• Thank you for your attention!