Privatization, restructuring and its effects on performance: a comparison between German and British

1
Privatization, restructuring and its effects on
performance a comparison between German and
British airport sector
Jürgen Müller, Tolga Ülkü, Jelena ivanovic
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Outline

• Introduction
• Privatization in Germany and the UK
• Methodology
• Data
• Empirical Analysis
• (1) Partial Factor Productivity
• i - Financial Analysis
• ii - Labor Productivity
• iii - Capital Productivity
• (2) Financial Ratio Analysis
• (3) Data Envelopment Analysis
• Summary Analysis
• Conclusion

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Introduction

• Some sales of state-owned airports
• Flows of money to public sector
• Increasing profit motive of private sector
• Against this background, we aim at an effective
  benchmarking analysis to identify first effects .
• The main issue is to identify the organizational
  structure that leads to more efficiency and
  better performance.

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Introduction

• Differences between performance and efficiency
  may arise from different ownership structures
• UK vs Germany
• Our analysis differentiates between
• fully and partially privatized, as well as
• public airports
• 7 British, 6 German airports which have been
  exposed to similar market and economic
  conditions.
• Econometric methods to identify the effects of
  ownership structure on productivity PFP, DEA,
  FRA and SFA

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Effects of Privatisation?

• The greater inefficiency of public utilities
  comes as a result of the lack of incentive and
  sanction mechanism.
• Privatized or partially privatized airports
  are likely to aim at higher productivity and cost
  efficiencies, better capacity utilization and the
  expansion of the non-aviation sector.
• The change of the ownership structure should
  result in cost efficiencies and higher
  profit-orientation.

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Privatization in Germany 06
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Privatization in the UK 06

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Privatization in the UK

• Three types of airport ownership predominate in
  the United Kingdom
• Fully privatized airports (managed and owned by a
  private company examples include Liverpool and
  the BAA airports)
• Partially privatized airports (under joint local
  government and private ownership examples
  include Birmingham and Newcastle)
• Public airports (owned and often managed by local
  governments, e.g. Manchester)

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Data

• Years 1998 2005
• Financial, Capacity and Traffic data

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Methodology

• 1-Partial Factor Productivity (PFP)

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Methodology

• 2-Financial Ratio
  Analysis (FRA)
• 3-Econometric Approaches
• 3.1. Data Envelopment Analysis (DEA)
• 3.2. Stochastic Frontier Analysis
  (SFA)

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Data

• A General Look at the Airports in the Sample

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Financial Comparison

• Averages, Growth Rates and Yearly Figures
• Real Costs per PAX
• Real Revenues per PAX
• Revenues / Expenses

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Average Values for Financial Indicators
1998-05
Partial Productivity Analysis

• Both costs and revenues are larger for British
  airports
• Effect of vertical integration dominate
• British airports have a higher revenues/expenses
  ratio

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Growth Rates for Financial Indicators
1998-2005
Partial Productivity Analysis

• For British airports both costs and revenues
  decreased
• 
  (revenues by almost 10)
• Interestingly revenue/expenses ratio also
  decreased by almost 6

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Financial Indicators for each Airport
Partial Productivity Analysis

• Costs and Revenues per PAX, 8-year average

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Partial Productivity Analysis

• Real Costs per PAX

• Frankfurt incurs the highest costs
• Partially privatized airports, Hamburg and
  Hanover, run lower costs
• Interesting time trend Frankfurt rising, Hamburg
  falling

• British airports have higher cost efficiency
• The lower degree of vertical integration and the
  greater degree of outsourcing
• London City generates the highest costs
• Real costs show a significant drop for Manchester
  and an increase for Aberdeen
• Stansted and Glasgow have the lowest ratio of all
  airports, possibly due to pressure from low cost
  carriers
• After 2001 a gradual growth in costs due to
  higher security measures

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Financial Performance

• Higher cost efficiency at British airports
• Higher revenues at German airports
• BUT The effects of vertical integration and
  market power lead to biased results!
• Should only do within group comparisons!

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Partial Productivity Analysis

• Real revenues per PAX

• Frankfurt generates the highest revenues
• Hamburg and Düsseldorf generated the lowest
  revenues, followed by Hanover
• The effects of market power at Frankfurt are
  evident

• British airports have lower revenues
• London City generates the highest revenues most
  probably due to market power
• Stansted has the lowest ratio of all airports,
  possibly due to pressure from low cost carriers

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Partial Productivity Analysis

• Revenues / Expenses

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Partial Productivity Analysis
Financial comparison of Revenues and Expenditures

• The ratio is not affected by VI, but effects of
  market power and regulation (more important for
  monetary indicators than for physical indicators)
• The large differences between German and UK
  airports have disappeared
• Heathrow had the best performance, closely
  followed by the partially privatized Hamburg
• Manchester does well, but is a public airport
• Other British airports score very well, whereas
  Stuttgart, Munich and Frankfurt are bad
  performers

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LABOR PRODUCTIVITY

• Data Number of Employees
• Averages, Growth Rates and Yearly Figures
• PAX per Employee
• Movements per Employee

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Data

• Number of Employees at airports in the sample

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Vertical Integration and Number of Employees

• As a result of high vertical integration,
  employee numbers in German airports are more than
  double those of Britains.
• ...which do not allow us to compare the labor
  productivities directly.

- Number of Employees
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Labor Productivity effects of VI

• Main finding of a rough analysis of graphs
• -UK Airports that outsource many activities
  
• achieve higher labor productivity.
• But, looking at employment levels reveals that
  VI leads to biased results about labor
  productivity.
• Large differences in labor productivity come
  from large differences in vertical integration!
• What to do? TRL adjustments of VI next task

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Labor Productivity

• Average and Growth Rate of Labor Productivity
  Indicators btw. 1998-2005

Averages
--------------------------------------------------
--------------------------------------------------
-----------------
Growth Rates
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Labor Productivity

• PAX/Employee, 8-year-average

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Labor Productivity

• PAX per Employee

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Labor Productivity

• Aircraft Movement per Employee, 8-year-average

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Labor Productivity

• Aircraft Movement per Employee

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Labor Productivity vs. Aircraft Size
PAX per Aircraft Movement

• Aircraft size (bigger airplanes and fewer
  movements) affects labor productivity by changing
  the level of outsourcing!

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CAPITAL PRODUCTIVITY

• Data Runway Length,Number of Gates,
• Terminal Area (m2)
• Averages, Growth Rates and Yearly Figures
• Aircraft Movements / Runway Length
• PAX (000) per Gate
• PAX / Terminal Area (m2)

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Data
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Frankfurt Airport
The new landing runway will be some 2,800 meters
long. The centerline separation from the existing
North runway will be approx. 1,400 meters. This
will allow for simultaneous landing operations on
these two runways, which are not possible on the
existing parallel runways because they are not
far enough apart.
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Data

• Terminal Area (m2, in thousands)

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Capital productivity or Capacity utilization?

• Length of runways, gates and terminal size are
  measures for capital, but not perfect measures
• but measure also capacity utilization instead of
  capital productivity
• How to measure capacity? Problems with no of
  runways example of Frankfurt
• Adjustment Runway length instead of runways
• Using declared capacity? Data?

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Capital Productivity

• Averages and Growth Rates of Capital Productivity
  Indicators btw. 1998-2005

• Vertical integration does not matter
• British airports, however, perform better than
  German airports in terms of
• capacity utilization
• In Germany, decreasing growth due to investments
  in capital

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Capital Productivity

• Aircraft Movement/Runway Length, 8-year Average

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Capital Productivity

• Aircraft Movement/Runway Length

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Capital Productivity

• PAX (000) per Gate, 8-year Average

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Capital Productivity

• PAX (000) per Gate

Dusseldorf, Stuttgart
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Capital Productivity

• PAX / Terminal Area (m2) , 8-year Average

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Capital Productivity

• PAX / Terminal Area (m2)

Stansted vs. Dusseldorf
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Capital productivity or Capacity utilization?

• Problem of lumpy investment
• Gates they represent a less lumpy investment
  than terminals and runways(e.g. Stansted built a
  terminal and increased capacity utilization.)
  Düsseldorf reduced gates with fire?
• still, are there indications of excessive
  investment, overcapacity?

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Financial Ratio Analysis (FRA)

• Profitability

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Profitability

• Effect of market power and of regulation
• The average operating margin was 24.3, in 2005,
  down from 26.3
• UK airports achieved higher margins
• Heathrow had the highest ratio at 39.1
  Frankfurt had the lowest at 14.6
• The margin for Düsseldorf decreased from 31.4 in
  2002 to 21.1 in 2005 due to large investment
  program

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Financial Ratio Analysis (FRA)

• Liquidity

Ratio of current assets to current liabilities
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Financial Ratio Analysis (FRA)

• Debt Management

Percentage of total funds provided by creditors
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Data Envelopment Analysis (DEA)

• Following Pels, Nijkamp and Rietveld (2001) and
  Kamp (2004), the most appropriate input-output
  combination for the DEA seemed to be the
  following
• Output
• Number of Passengers
• Inputs
• Terminal Area
• Number of Check-in Counters
• Number of Gates

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Data Envelopment Analysis

• DEA Scores

• ? More powerful efficiency measure since it gives
  the whole picture
• It confirms some of the previous findings
• Frankfurt performs best because it has high
  number of passengers and high capacity
• Hanover could have had twice as many passengers
  as it has given the capacity (small airport
  effect)?

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Stochastic Frontier Analysis (SFA)

• Results of the SFA analysis

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Stochastic Frontier Analysis (SFA)

• SFA Scores

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Summary Analysis

• Evaluation of each airport according to each
  indicator
• Ranking them according to their points
• Summing up all of the partial indicators
• e.g.

?Worst
?Best
Total Scores according to the rankings
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Summary Analysis

• Heathrow is leading,
• whereas Hanover is at the bottom
• British airports clearly outperforms their German
  counterparts

• From a benchmarking point of view
• Dusseldorf can collect only half of the points in
  2005 compared to 1998, Stuttgart also loses a lot
• Stansted and Manchester are performing
• the best in 8 years
• Frankfurt and Munich are the only 2 German
  airports who have been developing their scores

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Summary

• Differences resulting from privatization are
  difficult to prove
• Not many observations for privatization inD
• Not enough public airports in the UK and
  private airports in Germany
• Comparisons across the 2 countries are difficult

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Results revisited (1)?

• Strong evidence that the British airports were
  more efficient in terms of costs and labour
  productivity.
• The picture of the overall performance of
  privatized airports in the sample is less
  conclusive.
• Mixed results on German airports
• Partially privatized German airports tend to
  achieve lower labor and capital productivity
  (e.g. Frankfurt, Hanover) while Stuttgart has the
  best labor productivity.

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Results revisited (2)?

• Higher traffic volume and better capacity
  utilization are characteristics of British
  airports, whereas more overcapacities are
  encountered at the German airports.
• Some ratios in the PFP analysis supported the
  hypothesis for higher efficiency of privatized
  airports, but sometimes this trend is subtle.
• Partial indicators are dramatically affected by
  the changes in capacity.

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Need for Further Research

• Longer time series and more observations
• VI biases some measures TRL adjustment may
  help
• Capacity- Big driver is capacity rather than
  privatization
• Never-ending story

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• Thank you for your Attention...