Economic regulation of airports in Germany Is the current system - PDF document

08/10/03 2nd Workshop on applied infrastructure research Economic regulation of airports in Germany Is the current system still able to cope with today’s realities? Some thoughts on possible reform necessities Dr. Lars Petzold, Berlin, October 11th, 2003 Table of contents 1. HOCHTIEF AirPort – brief overview 2. Goals and objectives of economic regulation 3. Regulation in Germany – Status Quo 4. Some questions which are (too) rarely asked 5. Conclusions 6. Annex L. Petzold Page 2

1. Facts and figures - Overview of HOCHTIEF AirPort Year founded: 1997 Head Office: Essen, Germany Employees: ca. 60 Total assets (12/02): EUR 716 million HOCHTIEF AirPort (HTA) focuses on • Investment in and management of airports and airport facilities, • Provision of individual services at airports or in connection with the development, design, planning and operation of airports. HOCHTIEF AirPort operates autonomously and independently from HOCHTIEF’s construction business. Page 3 L. Petzold 1. HOCHTIEF AirPort as world-wide airport developer/manager and advisor Private partner for successful airport development �������������������������� • Supporting airports in their individual development (�� ������������������������#����$%�% ����&���'����������� • Strengthen competitive position and enlarge customer base ��������� � ����!��� ���� �"�� ���������������!��� �"�� • Realize highest operational and economic efficiency and customer satisfaction ��������� ������������� ()�� ������������������� • Optimize aviation and non-aviation business areas $�!�������#������%�*�!%� �""�� • Integrate airport investments • Stimulate cooperation between network airports • Realize synergies L. Petzold Page 4

2. Main goals and objectives of economic regulation Monopoly regulation: Prevent abuse of market power No excess profits No excess prices Goals No discrimination Subgoals: Criteria for the Enhance / imitate Acceptance by Prevent abuse Secure provision of selection of regulatory competition general public of monopoly population and market power No distortions of Maximum Appropriate the bases for restriction of Enhancing remuneration for management political and efficiency and instruments risks taken decisions regulatory innovation influence Creation of clear Keep financial Clear differentiation Minimisation o f and predictable integrity and regulatory and framework between regulatory creditworthiness conditions for and operational administrative of companies tasks costs enterprises instruments Regulatory Rate of return regulation Price cap regulation Access regulation Mixed forms Quality regulation Regulation of access charges and conditions Page 5 Source: Petzold, L. (2002): Infrastrukturreform ..., Privatisierung, Liberalisierung von Flughäfen..., S. 86. L. Petzold 3. Economic Regulation of German airports International institutions ICAO, IATA European Union European Commission Federal Govt. BMVWB German Länder Transport Ministries Important part of regulation is influence on airport charges or profit, i.e. the ‘economic regulation’. L. Petzold Page 6

4. Some questions, which are (too) rarely asked 4.1 Which airport activities / facilities could require regulation? 4.2 What does competition mean for airport regulation? 4.3 Which impact does airlines’ market power have? 4.4 Competitive distortions caused by (over-) subsidisation? 4.5 How could airports be regulated? 4.6 Who should regulate airports? Page 7 L. Petzold 4.1 Which airport activities / facilities should be regulated? Aviation Non-aviation business business Services Assets Airport with assets / Commercial used on infrastructure on airport activities infrastructure infrastructure Transfer O/D Real need for regulation traffic traffic Further options (Dual-till concepts) Single-till-concept Source: based on Petzold. L. (2002): Infrastrukturreform ..., Köln, p. 94. L. Petzold Page 8

4.2 Which airports should be regulated? – Intra- and intermodal competiton • Germany has very high airport density with average distance between airports (paved runway of >2,44 km) of 77km: • Existing airports, • Former military bases (potential competition / contestability). • Low-cost airlines increase airport catchment areas. • Near airports abroad create additional competitive pressure. • Germany has very high rail and road density. Many airports already have or plan rail access. This increases inter- modal competition and enlarges airport catchment areas. Page 9 L. Petzold Chart: ADV. 4.3 Countervailing market powers – monopoly power of airlines? Market share of Lufthansa together with partnering airlines at selected German Airports, winter flight plan period 2002* 90,0% 9,4 186,8 138,7 LOT 80,0% 11,4 52,4 Air Dolomiti 44,5 70,0% 71,0 11,8 United 53,8 60,0% 51,2 SAS 25,4 20,6 9.0 50,0% British Midland Germanwings 40,0% Condor 30,0% Cirrus Airlines 20,0% Luxair Augsburg Airways 10,0% Austrian 0,0% Eurowings t n g g t n n r g k n r r f l u a r e e c e e i r e n r z u o g v e ü f h g m o Lufthansa d k p d o b e b r s c t B b n i m t l e T n n n e u e e a - n a ü L r n r r a t s B n ü n r S a D F M s l H i ö N s ü l H r O K D e B / r e t s n ü Number of air traffic movements in the winter flight plan 2002, in 1.000 M Source: Own compilation based on data *) Market share of only the largest airlines at the respective airports of the Flight Plan Coordinator. L. Petzold Page 10

4.3 German airlines’ market power – only recently eroded by low-cost carriers Price index for German air passenger traffic* 130 126,4 126,4 125 121,0 120 113,3 115 112,8 109,1 108,2 111,8 108,0 113,2 110 107,8 105 104,6 103,7 103,3 103,3 103,1 100 100 100 95 90 5 6 7 8 9 0 1 2 3 9 9 9 9 9 0 0 0 0 9 9 9 9 9 0 0 0 0 1 1 1 1 1 2 2 2 2 . 8 0 Total traffic Traffic within Germany * = 1995=100 Source: Own calculations based on Statistisches Bundesamt Wiesbaden (2003) Page 11 L. Petzold 4.4 Competitive distortions caused by state (over-)subsidisation • Many airports in state (local or federal) ownership receive direct or indirect subsidies: • Direct subsidies for e.g. expansion measures • Provision of equity or subordinated debt below capital costs (or zero cost) • Better credit conditions (whole state entity taxable income as basis for assessment of credit risk) • These subsidies lead to artificially low charges at these airports and represent indirect support to the respective airlines. • Example Munich Airport: • MUC/FMG equity costs • Costs of reduced capacity utilisation in T1 due to transfer of Star Alliance traffic to T2 • Expected economic development of T2 If these costs were properly reflected in MUC’s airport charges, they would have to rise c.p. by approx. 140%! L. Petzold Page 12

4.5 How could be regulated – the example of Sydney Airport • Contrary to other Australian airports Sydney is not governed by a price cap. • Aviation and non-aviation areas are separated (dual till). • Some so called non-aviation areas are supervised, but mainly those with large market power (e.g. fuelling). • Airport charges are defined on the basis of an appropriate return on the capital employed – the respective ‘Regulatory Asset Base’ is very carefully specified. Thus for the first time positive results are permitted in all areas. • The permitted return is defined on the basis of the Capital Asset Pricing Model. • Charges can be set freely; in the case of (potential) market power abuse the regulator ACCC can be called. • After five years the results of this system will be reviewed. Page 13 L. Petzold 4.6 Who should regulate? • An independent review should assess the market power of each airport - only dominant positions require the threat of regulation. • The designation of airports (if any), which should be regulated, could be made by the Federal Ministry of Transport. • Regulation of designated German airports should be carried out by one regulator - one centre of competence instead of (inefficient) multiple regional institutions. • Due to synergies with other infrastructure sectors (e.g. ports, energy, telecommunication) a joint regulator could be installed (‘infrastructure regulator’) or infrastructure regulation could be ‘networked’ through a regulatory ombudsman / coordinator. • The airport regulator aims at reaching consensus between the interests of the various aviation market players. • Excess bureaucracy should be prevented, the regulator should be obliged to transparency (e.g. CAA in UK) and could be controlled by an external state institution, such as • The Federal Cartel Office or L. Petzold Page 14 • An institution similar to the Monopoly Commission.