Transcript Deregulation and Privatization of the Air Transport Industry

Deregulation and Privatization of
the Air Transport Industry
Kenneth Button
University Professor
George Mason University
June 2008
“Only the psychologically disturbed or
inadequate want transport for its own
sake.”
Denys Munby, 1968
Some quotes
“These days no one can make money on the goddam airline
business.The economics represent sheer hell”
C.R.Smith American Airlines
“People who invest in aviation are the biggest suckers in the world”
David Neeleman, jetBlu Airways, 1999
“If the Wright brothers were alive today Wilbur would have to fire
Orville to reduce costs”
Herb Kelleher, Southwest Airlines, 1994
“They don't realize that while you're sitting here talking, someone is
f**king you. Changing a fare, changing a flight, moving
something. There's no autopilot, and that's why I've seen a lot of
guys come and go”
Gordon Bethune, Continental Airlines, 2004
“There are always going to be some stupid people who will invest in
airlines”
Kenneth Button, Washington Post, 2005
Institutions
• Formal: laws, regulations, contracts
• Informal: “ways of doing business,
interpretation of laws
• Personal: habit
Do institutions matter?
• Coase said in Nobel speech:
“These ex-communist countries are advised to move to a
market economy, and their leaders wish to do so, but without the
appropriate institutions no market economy of any significance
is possible.”
• Matthews in his Royal Economic Society address
said:
“.. Economics of institutions has become one of the liveliest
areas of our discipline. …institutions do matter…the
determinants of institutions are susceptible to analysis by tools
of economic theory”
Do institutions matter?
However, Williamson points out:
“we are still very ignorant about institutions”
“Chief among the causes of ignorance is that
institutions are very complex. That neo-classical
economics was dismissive of institutions and much
of organization theory lacked scientific ambitions
have been contributing factors.”
“New” institutional economics
• Old institutional economics
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–
–
–
Descriptive
Legalisic
Historic
Often negative (attacking neo-classical economics)
• “New” institutional economics
– Holistic approach to economics
– Analytical in nature
Linkages between economic institutions
Resource allocation
and employment
continuous
Neoclassical
economics/agency theory
Governance:
especially contracts
1-10 years)
Transaction cost
economics
Institutional environment:
formal rules
(10-100 years)
Economics of property
rights/political economy
Embeddedness:
customs, traditions
(over 100years)
Social theory
Characteristics of air transport
•
•
•
•
•
•
•
•
Long/medium distance
Fast and reliable (important for some types of freight)
Highly flexible (spatially and temporally)
Quick to put in place (relatively low fixed costs)
Significant development about terminals
Relatively secure (no track)
Relatively safe
Relatively easy to develop private/public structures
Airlines part of an air transport system
Flow c ontrol
T ower c ontrol
G round c ontrol
A irport A
T ower c ontrol
G round c ontrol
A irport B
Air transport is a major industry
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•
•
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•
•
•
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1,600 million passengers a year
3.9 million jobs
$260 billion turnover
18,000 aircraft
15 million kilometer network
10,000 airports
130 billion revenue ton kilometers
30 million tons of freight
Further features of the global market
• Large industry in its own right (1% of Western
European GDP, more than 1% of US GDP)
• Important for key modern industries (high-tech
management flies 60% more than traditional
industries)
• Important for long term economic/political integration
• Lubricant for the economic system
• Half of tourists outside of Europe travel by air
Dimensions of economic benefits of air
transport
•
•
•
•
•
•
•
•
•
•
Simulates macro economic growth
Regional effects
Access to remote regions
Sector effects (e.g.tourism)
Air cargo (high value goods)
International markets
Foreign exchange earnings
Social cohesion
Retaining family/social ties
Cultural understanding
Air transport can benefit economic
development
•
•
•
•
Primary effects. (e.g., building an airport)
Secondary effects. (e.g., running an airport)
Tertiary effects. (e.g., using an airport)
Perpetuity effects. (e.g., changing the
economy)
Some studies of airport impacts
• US MSAs - hub airport increases region’s employment by
12000
• Chicago O’Hare – 50% increase in traffic will increase
employment in the region by 185,000.
• Atlanta - 264 foreign-based firms, direct international services
was 3rd most important thing in location
• 57 companies in Europe – air transport network the 3rd most
important factor in location.
• Zurich – 34% of firms considered the airport as ‘very important’
and 38% as ‘important’ as location factor.
• Schiphol Airport (Netherlands) – 85,000 jobs for the country.
Jobs and income from having a local
airport (per million passengers)
Jobs
High
Medium
Low
Economic Impact ($millions)
Direct Total
Direct Total
2000
1500
750
225
75
35
8000
6000
2500
1600
650
130
Tourist growth ($millions) by destination
Europe
Americas
East Asia/Pacific
Africa
Middle East
South Asia
Intra regional
Intercontinental
Total Trips
1995
2020
% Annual Change
338.4
108.9
81.4
20.2
12.4
4.2
464.1
101.3
565.4
717
282
397
77
69
19
1,183
378
1,561
3.0
3.9
6.5
5.5
7.1
6.2
3.8
5.4
4.1
Trend in air transportation
• Growth in both passenger and freight forecast
• Lower fares
– Deregulation; Technology; Improved management (low cost
carriers)
• Lower cargo rates
– Improved management (supply chain logistics)
• Integrated networks
– Mergers; Alliances
• Internationalization
– Open Skies; European Union; Role of ICAO, etc
Traditional regulation
• Economic efficiency
• Largely static
• Major concern with monopoly practices
–
–
–
–
Monopolies
Predatory pricing
Mergers
Barriers to market entry
Regulation of air transport
• Airlines
–
–
–
–
Fares
Market entry
Revenue allocation
Ownership
• Information/booking systems
– Displays
• Airports
– Ownership
– Rates
• Air navigation systems
– Ownership
– Rates
– Profits
Social regulation
• Covers environment, labor protection, consumer
protection, etc.
• Growing in importance
• Often uses command-and-control regulation rather
than fiscal instruments (such as prices)
• Can interact with economic regulation (e.g., change
relative prices and affect market structure)
• Sometimes captured to achieve economic objectives
(e.g., redistribute income)
Problems with traditional regulation/public
ownership
• Regulatory capture
– By industry
– By regulators
•
•
•
•
•
Political manipulation
Lack of efficiency
High transactions costs (policing, administrating)
Lack of dynamism in adjusting parameters
Impedance to innovation
Vertical or horizontal regulation
• Problems of impact on value chain of regulating one
element
• Problem across sectors if one value chain is
regulated because of linkages
Porter’s value chain
Primary activities
Inboound
logistics
Operations
Outboound
Logistics
Marketing and
sales
Support activities
Procurement Human resource management
Infrastructure Technological development
Services
Phases of Regulatory Reform in Aviation
THE LEGACY
• To 1910 -> gentle assistance for innovation
• 1910-1918 -> military importance
• 1920s -> national integration (mail services)
• 1930s -> internationalism (esp. Empires)
• 1940s+ ->military development
• Late 1940s-1970s -> economic regulation
–Chicago convention
–domestic price/ market access controls
MODERN AGE
• 1970s+ -> “deregulation of operations”
–domestic from late 1970s in US
–international (Open Skies, EU packages, etc)
• 1980s+ -> “deregulation of infrastructure”
• 2000s+ -> environmental regulations
Forces for regulatory reform
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•
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•
•
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Academic work (Levine, Jordon)
Issue of capture (Stigler, Peltzman)
Ideas of contestability (Baumol)
Concepts of “competition for the market” (Demsetz)
Role of countervailing power
Better understanding of cost structures
New forms of regulation (price-capping)
Winners and losers
• Regulation always has winners and losers - i.e., not
usually a Pareto benefit
• Net benefits should be positive!
• Effects may be long term so winners and losers may
involve future generations
• Often adverse effects of regulations are widespread
while benefits are more focused
Normative income considerations
• Policy makers more concerned with equity than
efficiency - Frey
• Interpersonal comparisons of welfare
• Equity (Bentham, Rawls)
–
–
–
–
Income
Wealth
Spatial
Inter-generational (sustainable development)
Privatization
• Objectives
– Raise revenue for government
– Make industry more efficient
– ‘Share owning democracy’ (Thatcher)
• Methods
–
–
–
–
–
Sell shares
Sell to managers/employees
Outsource
Allow private companies to compete with state owned ones
Sell to a single company
• There are financial costs in privatization
Privatization and regulation
• State ownership
– Extreme form of economic regulation
• Privatization equals more regulation
– Social regulation
– Mergers policies
– Anti-trust/competition policy
• Public corporations
– State involvement
– Non-profit
Features of contestable market
• No sunk costs - ultra free entry and exit
• There may just be one supplier
• No excess profits are earned because of fear of hitand-run entry when there is perfect contestability
• Perfect competition is a special case of perfect
contestability
Competitive, contestable and monopoly
markets
Feature
Perfect Comp etition
Profit maximization
No barriers to entry/exit
Perfect mo bility of inputs
Ubiquitous info rmation
Large number of firms
Homo geneous product
Firms confronted by same
cost functions
U-shaped average cost fu nctions
Profits
Perfectly Contestable
Monopoly
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Maybe
Maybe
Normally
No
No
No
No
Yes
Yes
Yes
Normal
Yes
Maybe
Normal
Yes
Maybe
Monopoly rent
Structure of regulatory change
• Big-bang
–
–
–
–
Sudden reform
Stranded costs
Quick payback
Little scope for capture
• Gradualism
–
–
–
–
Phased reform
More time to adjust resource use
Longer time before benefits emerge
Scope for industry to capture the system
Big bang or gradualism?
+
Big-bang approach
Net
benefit
P hased approach
0
A
Š
B
T ime
Nature of liberalization
• US : ‘Big Bang’
• Airline Deregulation Act 1978
• Open Skies Policy from 1979
• EU: Phased liberalization
• Add hoc reforms (from early 1980)
• Package 1 (1988)
– Opening up the existing structure
• Package 2 (1990)
– Liberalizing the EU international market
• Package 3 (1993)
– An open European air transport market
• Extra-territorial authority (2003)
Measuring efficiency of
deregulation/privatization
• Benchmarks (Quality constancy)
– International (comparable data)
– Public/private or regulated/deregulated (counterfactual)
– Time trends (trend shifts)
• Simulations
• Expert opinion
Internal African liberalization
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•
•
•
•
•
•
•
1988 Yamoussoukro Declaration
1984 Mauritius guidelines
1997 Banjul Accord
1998 ACAC Agreement
1999 CEMAC Agreement
1999 COMESA Agreement
1999 Yamoussoukro II Decision
2000 Abuja Treaty
Factors influencing EU air transport
D emo ns tra tion
Effects
Ex tra -EU Bi late ral
Ag ree me nts
N ew Eco no mic
Id eas
EU Ai r Tr an spo rt
Po licy
R elated EU Pol icie s
Mark et C on ditio ns
Impac t on EU Air
T rans port
Ai rline Al lian ces
Sa fety
Pa rameters of
C omp eti tion
N atio nal Air Tra ns por t
Po lici es
In tra- EU Bila ter al
Ag ree me nts
In fras tru ctu re
Relative efficiency of European airlines
 UK Civil Aviation Authority (1983) EU airlines costs were double US trunk carriers.
 Starkie/Starrs (1984) Comparing 5 years to 1975 with the subsequent 5 years found
productivity growth of US carriers continued at pre-US deregulation levels but
declined 40% for non-US airlines.
 Barrett (1987) In 1984, the productivity of US airlines was 36% greater than their
European counterparts in terms of traffic units per staff member.
 Caves et al (1987) for the period 1970 to 1983 found EU carriers to be less efficient
than their US counterparts.
 McGowan/Seabright (1989) In the late 1980s US majors enjoying 1.6 million revenue
passenger kilometers per employee compared to 1.1 for the best European carrier.
 Encaoua (1991) Convergence of European airline costs between 1981 and 1986.
 Good, et al (1995) European airlines from 1976 to 1986 would have saved about
$4billion a year (1986 dollars) if they became as efficient as US airlines.
 Distexhe/Perelman (1994) Reduced X-inefficiency amongst EU airlines 1973 to 1983.
 Oum/Yu (1995) 1986 to 1993 saw productivity improvements in the European carriers
compared to US counterparts.
Passenger numbers by distance of
service
United States Europe
70
Percentage of passengers
60
50
40
30
20
10
0
Under 1000
1000 to 2000
2000 to 3000
3000 to 4000
Distance (kilometers)
4000 to 5000
over 5000
Travel mix in the US and Europe
United States
Europe
60
Percent of Trips
50
40
30
20
10
0
Business
Sightseeing
Visting friends
Reason for Trav el
Other
Airline labor physical productivity in
Europe (ATK per employee)
170
Index (1991=100)
160
150
140
130
120
110
100
1991
1992
1993
1994
1995
1996
Year
1997
1998
1999
2000
2001
Passenger and cargo yield for European
Union scheduled airlines
Pas senger
Cargo
100
Index (1991=100)
95
90
85
80
75
70
1991
1992
1993
1994
1995
1996
Year
1997
1998
1999
2000
2001
The proportion of UK business
passengers traveling business class
Longhaul
Shorthaul
65
% Premium Cabin
60
55
50
45
40
35
1986
1988
1990
1992
1994
Year
1996
1997
1999
Weighted average fares within the EEA
Growth of no-frill carriers
Cost differences between a no-frill carrier
and a legacy carrier
Simplified theories of migration
Reg ional A
Reg ional A
I
U
I
U
Labor
Capital
I
U
Reg ional B
Classical Model
Skilled
Labor
Capital
I
U
Reg ional B
New Growth Theory Model
The notion of gateways
Gateway City
Hub City
Gateway City
Impact of opening more gateways
Qu i c k T i m e ™ a n d a
T I F F (L Z W ) d e c o m p re s s o r
a re n e e d e d to s e e th i s p i c t u re .
Inbound passengers from the EU to the
UK using Stansted and Luton airports
Passenger
ty pe
Business
Leisure
Visiting
f riends &
relativ es
Passengers
2000
0.9 million
1.6 million
1.6 million
Passengers
2005
1.8 million
4.0 million
4.8 million
2000 to 2005
change
Percentage of
total in 2000
Percentage of
total in 2005
98%
150%
198%
22%
39%
39%
17%
38%
45%
Operating margins of airlines
Europe
US
Global
6
4
2
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-2
-4
-6
-8
-10
A few failed airlines
Air Ca nada Tango
Air South
Amer ica West Airlines
ATA Airlines
Ca nada 3000
Compass
East -West
Eastw ind Airlines
Greyhound Air
Hooters A ir
Imp ulse Airlines
Independence Air
JetGree n Airw ays
Kiwi Airlines
Kiwi International Air Lines
LAPA
MetroJet
Midw ay Airlines
Nat ional Airlines
Oas is Ho ng Kong Airlines
Pac ific Southw est Airlines
Pa n Am
Pear l Air
PEOPLE xpress
Safe Air
Saro
Skybus Airlines
SkyValue
Song (Delta)
Southeast Airlines
TAESA
Tow er Air
U A ir
United Shuttle
ValuJet
Vanguard Airlines
Vistajet
Western Pac ific Airlines
Zip
Economic margins in the air transport
sector
Margins in segments of European air
transport
20
Operating Margin (%)
15
10
5
0
Global
Distribution
Systems
Leasing
Companies
Aircraft
Manufacturers
Airports
-5
Industry
Catering
Airlines
European & US schedule passenger
airlines operating margins (by 2002
revenue)
Europe
Lufthansa Group
Air France Group
British Airways
SAS Group
KLM Royal Dutch Airlines
Alitalia
Iberia Airlines
Swiss
Austrian Airlines Group
United States
9.4%
1.5%
3.8%
11.2%
-2.1%
-2.4%
5.3%
-21.2%
1.7%
American Airlines
United Airlines
Delta Air Lines
Northwest Airlines
Continental Airlines
US Airways
Southwest Airlines
Alaska Air Group
America West
-19.2%
-19.9%
-9.8%
-8.9%
-3.7%
-18.9%
7.6%
-4.0%
-7.8%
Returns of airports in Europe
Airport group
Operating margin (2001)
BAA plc (UK)
Fraport (Germany )
A¸roport de Paris (France)
Schiphol Group (Netherlands)
Luftartsverket (Sweden)
Flughafen MŸnchen GmbH (Germany)
Avinor (Norway)
Aeroporti di Roma Spa (Italy)
SEA Aeroporti di Milano (Italy)
Manchester Airport Group (UK)
29.8%
18.0%
6.0%
31.7%
3.7%
11.8%
22.9%
16.8%
11.5%
19.2%
Operating margin (2002)
30.6%
15.8%
9.2%
32.0%
9.1%
3.7%
17.1%
21.2%
10.4%
19.3%
The main GDS providers, 2003
Company
Amadeus
Cedent Group*
Sabre
Worldspan
Revenues ($ millions) Operating margin Operating result ($ millions)
2,195
10,034
2,045
929
16.6%
15.3%
8.1%
9.7%
365
1,534
166
90
* This represents the com pany Õ
s total travel services, some 55% of its overall business.
Problems for European airlines
• Issues
– Bankruptcy (Sabena, Swissair)
– Large losses (Alitalia)
– Cut-backs by the “legacy” carriers
• Reasons
– Advent of internet meant loss of ability to yield manage
– High load factors (and some taxation) reduce value of frequent flyer
miles
– Low cost carriers “creaming traffic” from hub-and-spoke system
– Number of “protected” international routes
– Power of other elements in value chain
Issues with contestable markets
• Power of potential versus actual competition
– Moore; Morrison and Winston
• Continuing need for anti-trust policy?
• Degree to which unbundling is possible
• Handling elements of production where there are
sunk costs
Excessive competition
• Problem of recovering full costs when there is
competition and declining average cost curves
• Leads to violent fluctuations in supply OR
undersupply
• Normal solution in the past was subsidies or public
ownership
• Fear of poor quality (or dangerous) services
• Unreliability of service
Concerns with excess competition in
practice
• Regulations in Europe/US from 1920
– Trucks
– Buses
– Taxis
• Setting up of the EEC ‘Common Transport Policy’
• Controls over some professions
– Doctors
– Architects
Instability
• Definition
– Predictable cycles
– Unpredictable cycles
• Problems
–
–
–
–
Problems “down the line” for investors
Lack of investment in the long-term
Questions of quality of service
Social costs to those in the industry (workers)
Conditions leading to instability
•
•
•
•
•
Fixed costs/fluctuating demands
Fixed costs/highly competitive markets
Indivisibilities
Lags in supply adjustment (institutional/technical)
Speculation
Empty core problem
MC1
P1
MC1+MC2
Ac
P1+P2
D
Methods of full cost recovery
• Subsidies/public ownership
– Now largely illegal
– Loan guarantees (US and Italy)
• Statutory monopolies
– Now gone except on some international routes (“Open Skies”)
• Pre-payment
– Charters hit by low cost carriers in Europe
• Bankruptcy
– Common US practice
• Airline quasi-monopoly power
–
–
–
–
–
–
–
Frequent flier programs (devalued by high load factors)
CRS systems (legal controls)
Yield management (ubiquitous information with web)
Dominate hubs (low cost carriers)
Vertical integration (travel agents but limited)
Mergers (anti-trust authorities)
Complementary activities (belly-hold cargoes)
Subsidies
• Direct subsidies
–
–
–
–
Opportunity cost of raising revenue
X-inefficiency
Stifles incentive
Transactions costs
• Cross subsidies
– By means such a joint licensing etc
– Inefficiency in ‘taxed’ supply
Network structures
Point to Point Network
Hub and Spoke Network
10 different routes
4 different routes
The “dog-bone” international hub-andspoke network
x
a
y
b
z
A
B
c
j
i
TAP networks (1990)
Figure 3a - European network in 1990
Figure 3b - South American network in 1990
Figure 3c - North Ame rican network in 1990
Figure 3d - African network in 1990
TAP network (2004)
Figure 7a - European network in 2004
Figure 7b - South American network in 2004
Figure 7c - North American network in 2004
Figure 7d - African network in 2004
Banks at Lisbon Airport, January 9, 2004
outbounds
inbounds
Horas
6 7 8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23
US and European airlines that are part of
the three main strategic alliances
Star Alliance
oneWorld
SkyTeam
United Airlines
Lufthansa
BMI
TAP Portugal
Finnair
Lauda Air
LOT Polish Airlines
Spanair
SAS Scandinavian Airlines
Austrian Airways
Ty rolean Airlines
American Airlines
British Airways
Aer Lingus
Iberia
Delta Airlines
Continental
Northwest
Alitalia
Air France
CAS Czech Airlines
KLM Royal Dutch Airlines
European and US passenger airlines
revenues ranked by 2002 revenue
Europe
Lufthansa Group (4)
Air France Group (7)
British Airways (8)
SAS Group (13)
KLM Royal Dutch Airlines (14)
Alitalia (20)
Iberia Airlines (21)
Swiss (31)
Austrian Airlines Group (32)
United States
$16,123
$12,697
$11,940
$6,977
$6,490
$6,400
$4,600
$2,771
$2,278
American Airlines (1)
United Airlines (5)
Delta Air Lines (6)
Northwest Airlines (10)
Continental Airlines (12)
US Airways (37)
Southwest Airlines (18)
Alaska Air Group (33)
America West (39)
$17,299
$14,286
$13,305
$9,489
$8,402
$6,977
$5,522
$2,224
$2,047
The “S-curve”
Market share
100%
Case B
Case A
0
Frequency share
100%
United out of Chicago O’Hare 1990 and
2003 with a single competitor
UA ORD 2 comp
100.0%
90.0%
80.0%
70.0%
% passengers
% passengers (market share)
ORD UA 2 comp
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
0.0%
20.0%
40.0%
60.0%
% frequency
80.0%
100.0%
100. 0%
90. 0%
80. 0%
70. 0%
60. 0%
50. 0%
40. 0%
30. 0%
20. 0%
10. 0%
0. 0%
0. 0%
20. 0%
40. 0%
60. 0%
% freq u en cies
80. 0%
100. 0%
United out of Chicago O’Hare 2003 with
two competitors
% passengers
UA ORD 3 comp
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
0.0%
20.0%
40.0%
60.0%
% frequencies
80.0%
100.0%
Temporal-fares offered; curves, previous
work
Pape r
Mark e t
Re s e arch Te chnique
Pels & Rietveld
(2004)
London-Paris routes for
legacy carriers
Statistical analysis, short-run airline responses to competitorsÕprice
Partial analysis. SUR estimation.
Regression of residuals on lagged residuals (autocorrelation)
Pitfield (2005a)
Low-cost services f rom the
UK
Cross Correlation Analysis, subject to a variety of lags.
Series pre-whitened using ARIMA or Box-Jenkins to determine:
- Cross correlation functions (CCF)
- Autocorrelation f unctions (ACFs)
- Partial Autocorrelation Functions (PACFs)
Pitfield (2005b)
Low-cost services f rom the
UK
ARIMA time series models, CCF, ACFs, PACFs.
Barbot (2006)
Low-cost services Paris
Millan
OLS regression, no lags introduced
Theoretical model based in Bertrand competition
Button & Vega
(2006)
Low costs carriersÕinternal
service competition in the US
Graphical analysis, case studies
Button, Costa
& C ruz (2007a)
Pr ice leadership f or routes
f rom Portugal
Graphical analysis and Granger causality tests
Button, Costa
& C ruz (2007b)
Pr ice leadership f or routes
f rom Portugal
Graphical analysis, comparative statistics
Competitive Market
Monopoly markets
Two legacy carriers
LCCs/legacy carriers
Regional LCCs/legacy carriers
LCCs/LCCs
Phoenix - Kansas City : 1 August
450
400
350
Southwest 05:45-16:20
America West 09:07-17:35
$ 300
250
200
July
150
Internal competition between air services
Phoenix - Austin : 1 August
Phoenix - Sacramento : August 1
400
450
350
400
300
350
America West 07:33-18:20
Southwest 08:00-17:20
Southwest 06:50-17:20
$ 250
200
250
150
200
July
July
150
100
Phoenix - Minneapolis ; 1 August
1100
1000
900
800
700
America West 08:52-17:15
Northwest 09:15-17:20
Northwest 06:55-17:20
$
600
500
400
300
200
July
America West 09:11-18:00
Southwest 06:40-16:15
Southwest 09:25-16:15
$ 300
Revenue passsenger kilometers (billion)
Trends in the transatlantic air services
market
450
400
350
300
250
200
150
100
50
0
85
19
90
19
95
19
00 01 02 03 04
20 20 20 20 20
Years
Benefits of market based bilateral ASAs
Open Skies
• Removal of capacity constraints (more seats/flights)
• Move airline choice for passengers (move out in demand)
• Easier alliance formation (lower costs/better service for
passengers)
Open Aviation Area
• More flexible operations with cabotage (lower unit costs)
• More flexible capital markets (lower unit costs/more stability in
airline finances)
The European based “Open Skies”
initiatives (passenger services)
Netherlands
Belgium
Finland
Denmark
Norway
Sweden
Luxembourg
Austria
Czech Repub.
Germ any
Italy
Portugal
Malta
Poland
France
In Force
Provisional
In Force
In Force
In Force
In Force
In Force
In Force
In Force
Provisional
Comity and Reciprocity
In Force
In Force
In Force
In Force
10/14/92
3/1/95
3/24/95
4/26/95
4/26/95
4/26/95
6/6/95
6/14/95
12/8/95
2/29/96
11/11/98
12/22/99
10/12/00
5/31/01
10/19/01
Studies of the effects of strategic alliance
Study
Alliances
Findings
Gellman Research
Associates (1994)
BA/US Air,
KLM/NW
Profits increased for all parties with
BA and KLM gaining more than
their partners
Youssef and Hansen
(1994)
Swissair and SAS
Increases in flight frequency; variations
in fare levels; the strongest service
levels had the lowest fare increases.
US General
Accounting Office
(1995)
KLM/NW, USAir/
BA, UAL/Lufthansa
UAL/Ansett, UAL/
BMA
All carriers enj oyed increased revenues
and traffic gained at competitorsÕ
expense, not industry growth.
Oum et al (2000)
Star Alliance, oneWorld
Skyteam, KLM/NW
Increased traffic on alliance routes
Brueckner and Whalen
(2000)
US international
alliances
Fare are som e 18% to 20% lower on
international alliance, inter-lining routes
Brattle Group’s estimates of European
airport employment effects of an Open
Aviation Area
Airline
em ploy ment
Airport
em ploy ment
Airport
em ploy ment
188
436
624
481
1092
1573
1124
436
1560
2820
1092
3912
Low bound scenario
Pricing synergies
No output-restricting ASA bilaterals
Total
600
1587
2178
High bound scenario
Pricing synergies
No output-restricting ASA bilaterals
Total
3523
1578
5101
Ideas favoring state ownership
•
•
•
•
•
•
•
•
Benefits go to the state not limited number of share holders
Need not just following profit motive
No foreign influence
Can be used to influence other sectors or for macro economic
management
Less uncertain than the private sector
Have access to government funds for investment
Can exploit economies of scale
Coordination with other sector and demonstration effects in
“indicative planning”
Assumptions of state ownership
•
•
•
•
•
There is no capture of the system
There are incentives for static and dynamic efficiency
That size does not affect ability to manage
That there is no day-to-day political interference
That suitable management is available
Competition for the market
• Tendering for the services
–
–
–
–
–
Radio bandwaves
Bus services
Hospital services
Social air services
Airports
• Use of auctions
–
–
–
–
Defining the ‘product’
Method of auctioning
Problem of auction ‘capture’
Cheating
State ownership
•
•
•
•
•
•
•
•
•
Military (“public good”)
Political cohesion
Merit goods
“Need”
Effective way of controlling externalities
“Commanding heights of industry”
Effective way of controlling monopoly power
Macro-economic Keynesian policy
Capture of processes by administration
Evidence on state ownership
•
•
•
•
•
•
•
Problems in setting objectives
Uneven flow of investment funds
Significant inert areas in management
Scale makes effective management difficult
Difficulty of getting “close” to customers
Repeated political interference
Difficulties of retracting services/output
Movements to privatization in 1980s
• Academic findings
–
–
–
–
•
•
•
•
Rampant inefficiency (econometric work, e.g on US airlines)
Technological inertia (also knock-on effects to other industries)
Capture by labor and by officials
Inability to compete international
Issues “Stagflation” (inflation and high unemployment)
Ideas of “balanced budget” in macroeconomics
Manifest failures of the Soviet style economies
Revenues could be large from selling enterprises
Approaches to UK privatization
Good Prospect s
A irlines
Competitive T elec ommunic ations
E lec tric ity generation
Monopoly
A irports
Water
E lec tic ity dis tribution
G as
Poor Prospect s
Bus es
P orts
P os t offic e
Rail trac k
Railways
Nature of air navigation systems
• Intermediate product used by an intermediate
producer
• Almost exclusively private good features (rival and
excludable)
• Several elements (route control, tower control)
• Economies of scale (network economies)
• Some monopsony elements of supply (labor)
• Technologically progressive
• Social issues (safety, environment, security, “need”)
Ownership features of the air navigation
service providers
Country
Australia
Canada
France
Germ any
Ireland
Netherlands
New Zealand
South Africa
Switzerland
United Kingdom
United States
Ownership
1995
1996
2003
1993
1993
1993
1987
1996
2001
2004
1953
Government corporation
Not-for-profit private corporation
State department
Deutsche Flugsicherung GmbH
Government corporation
Government agency
Government corporation
Not-for-profit joint-stock c orporation
Not-for-profit joint-stock corporation
Public/private partnership
State department
Regulation features of the air navigation
service providers
Country
Australia
Canada
France
Germ any
Ireland
Netherlands
New Zealand
South Africa
Switzerland
United Kingdom
United States
Rate Regulation
Com mission oversight
Legislated principles/appeals
Approved by transport ministry
Approved by transport ministry
Regulatory com mission
Approved by transport ministry
Self-regulating
Transport ministry committee
Approved by transport ministry
Price capping
Financing from taxation
Safety
Separate agency
Separate agency
Internal but separate
Internal
Internal but separate
Transport ministry/separate
Separate agency
Separate agency
Separate agency
Separate agency
Internal but separate
Annual ANS provider costs by instrument
flight rules movements
150
140
First year of data = 100
130
Sk y Gu id e
N A TS U .K .
A irserv ices A u stralia
Ir ish A v iatio n
A irw ay s N Z
D SN A
D FS
LV N L
So u th A fr ica
FA A
N A V Can ad a
120
110
100
90
80
70
60
199 7
199 8
199 9
200 0
200 1
Year
200 2
200 3
200 4
Air traffic controllers pay including
overtime (2004 prices)
Normali zed, fi rst year of data = 100
150
140
Sk y Gu id e
130
N A TS U .K .
Ir ish A v iatio n
120
D FS
LV N L
110
So u th A fr ica
FA A
N A V Can ad a
100
90
1997
1998
1999
2000
2001
Year
2002
2003
2004
Trends in the number of air traffic control
staff
160
150
140
Sk y G u id e
N A TS U .K .
A irserv ices A u stralia
Ir ish A v iatio n
A irw ay s N Z
D SN A
D FS
LV N L
So u th A fr ica
FA A
N A V Can ad a
Fi rst year of data = 100
130
120
110
100
90
80
70
60
1997
1998
1999
2000
2001
Year
2002
2003
2004
Flights controlled under instrument flight
rules
170
160
Sk y Gu id e
N A TS U .K .
A irserv ices A u stralia
Ir ish A v iatio n
A irserv ices N Z
D SN A
D FS
LV N L
So u th A fr ica
FA A
N A V Can ad a
First year of data = 100
150
140
130
120
110
100
90
80
199 7
199 8
199 9
200 0
Year
200 1
200 2
200 3
200 4
En route unit rates
140
130
First year o f data = 10 0
120
110
SkyGuide
NATS U.K.
Airservices Australia
Irish Aviation
Airways NZ
DSNA
DFS
LVNL
100
90
80
70
60
50
199 7
199 8
199 9
200 0
200 1
Year
200 2
200 3
200 4
Air traffic management induced delays
(minutes per flight)
350
First year of dat a = 100
300
250
Sk y Gu id e
N A TS U .K .
200
D SN A
150
D FS
FA A
100
50
0
1997
1998
1999
2000
2001
Year
2002
2003
2004
Number of serious air traffic management
safety incidents (approxes)
300
First year o f data = 100
250
Sk y Gu id e
N A TS U .K .
A irserv ices A u stralia
Ir ish A v iatio n
A irw ay s N Z
D SN A
D FS
LV N L
So u th A fr ica
N A V Can ad a
200
150
100
50
0
-5 0
199 7
199 8
199 9
200 0
200 1
Year
200 2
200 3
200 4