Jürgen Müller, Günes Orak, Evgeni Petkov and Stefan Schulz

1. Restructuring of the Value Chain of the European Ground Handling Market after the EU market liberalization Jürgen Müller, Günes Orak, Evgeni Petkov and Stefan Schulz

2. Contents 1. Introduction 2. The European Council Directive 96/67/EC 3. Theoretical Background and Propositions 4. The Ground Handling Market at 6 European Hubs 5. Impact on horizontal and vertical Market Structure, and on Prices and Quality, 6. Restructuring he German Ground Handling Market 7. Conclusion

3. 1. Introduction • Definition Ground Handling Source: Fraport AG Source: Fraport AG

4. 1. Introduction GHS are divided in 5 Categories: • Ramp handling • Baggage handling • Fright/mail handling • Fuel oil handling • Passenger handling

5. 1. Introduction These five activities can be performed by the airlines themselves (self-handling), by a third party, or a mixture of the two. The third party handlers can be airports, specialized ground handling companies or another airline, which serves as such. The global market for GHS was estimated to have a size of about 32bn € , about 5 to 8 percent of the airline ticket, (Templin, 2007). Due to the size and importance of the market, the effectiveness of these services, their organization, and by whom they are performed, is a significant issue for all the stakeholders in the GH industry 05/08/2014 5

6. 1. Introduction Questions arising after the liberalization of the market: • How did the market structure and the organization of the value chain change? Vertically? Horizontaly? • I.e. the move from an artificial to a competitively organized value chain • How did prices and quality change? • Who benefited and who lost from the changes? • What lessons for other markets?

7. 2. The European Council Directive 96/97/EC Source: SH&E Study

8. 3. Theoretical Background and Propositions

9. 3. Theoretical Background and Propositions Before the implementation of the Directive, we found artificial market structures, mainly based on legal monopolies. Namely : monopoly of forward integrated airport monopoly of backward integrated national airline ( on the bases of special league exceptions) and duopoly or oligopoly of independent ground handlers and self-handling airlines We want to analyze how this changes and what are the reasons for the better organizational arrangement 9 05/08/2014

10. 3. Theoretical Background and Propositions Summary of the theoretical predictions: We would expect to find high degree of vertical integration on hub airports, but a lower degree of vertical integration on spoke airports

11. 3. Theoretical Background and Propositions • Question: Is this what we observe in real life? Although strong vertcal control, in other words self handling or joint ventures are implied by the TCE theory, this is not the case in practice. Independent handlers or subsidiries of airlines and airports tend to dominate the GHS market.

12. 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)

13. 4. GHS at the Major European Airports

14. 4. GHS at the Major European Airports

15. 4. GHS at the Major European Airports What explains these different market shares? Mainly licencing policies It seems that nstitutional Barriers to competition differ, eventhough we start with one directive, due to national interpretation and vested intersts (airports, uninons vc airlines : Capacity constraints are used as a motive for limiting 3rd party handlers on all airports. This was supposed to change with a revision of the Directive, first envisaged in 2006, which was canceled due to strong opposition from airports and unions, especially from Germany.

16. 5. Impact on Prices and Quality, Winners and Losers In 2002 SH&E 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. This indicates there must have benn productivity reserves and a lowwering of factor costs

17. 5. Impact on Prices and Quality, Winners and Losers Price reductions, changes in quality an no of competitors on the 6 hubs: does market structure matter? Source: Templin, 200617 05/08/2014

18. 5. Impact on Prices and Quality, Winners and Losers Airlines (and their customers )were the winners of the liberalization, because of reduced GH charges. Unfortunately, the gains were probably not large enough to be noticed by the passengers, due to the fact that GHS costs are only 4-8% of total flight costs, more on short haul LCC. Expectedly, the former monopolists lost significant market shares and profits, eventhough we have fewf igures. Another winner were the independent handling companies, which gained market shares after the market oppened. So the value added chain changed, but final results still have to emerge

19. 5. Impact on Prices and Quality, Winners and Losers Due to the labor intensity of Ground Handling, employees were among the main losers of the market opening. Independent handlers were reported to pay up to 30% lower wages, and require a much higher flexibility to meet the airports changing requirements during the day. in order to compete with them, the airports also try to reduce wages and to increase the flexibility of labor. We are now studying this issue in detail.

20. 5. The need for greater labor flexibility Evidence on changes in flexibility- Stuttgart 2004:

21. 5. What lessons for other markets? Questions arising after the liberalization of the market: How did the market structure and the organization of the value chain change? Vertically? Some changes, but restricted by licence process Horizontaly? Much more by the strengthening of the independent operators I.e. the move from an artificial to a competitively organized value chain is apparent, but still strongly depandent on licencing 05/08/2014 21

22. 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

23. 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, and all the associated services like station and crew support is less strictly regulated, also cleaning, maintenance, bus transfer, catering etc

24. 6. Transformation of GH in Germany Market entry in Germany is controlled through institutional barriers like: • 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 have allowed to increase this number to 3 or 4

25. 6. Transformation of GH in Germany Major feature of the German market: Airports stay in the business, but through GH subsidiaries which provied for greater labor flexibility and lower wages. Large differences across airports, why? Hamburg, Hannover und Düsseldorf were early movers in creating own subsidiaries and could pay lower wages there Cologne and Frankfurt continue with their current organizational arrangement in which GHS are fully integrated within the core airport organisation, but have also increased productivity Munich ist late to restructuring

26. 6. Transformation of GH in Germany Why seperate subsidiaries? The European Commission requires subsidiaries for cost transparency – no cross subsidisation German airports are doing it mainly in order to move out of the inflexible and expensive old labor contracts

27. 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

28. 6. Transformation of GH in Germany Evidence on changes in flexibility- Stuttgart 2004:

29. 6. Transformation of GH in Germany Evidence on changes in flexibility- Stuttgart 2005:

30. 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 and multi station economies like those specialized companies achieve

31. 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 and be more flexible? What will happen if the market opens completely? When will the airports be able to move completely out of the old labor contracts and will they then abandon the subsidiaries? Why do airports want to stay in that business?

32. 7. Conclusion Entry barriers still exist Prices fell Quality stayed more or less the same Airlines and independent handlers won Former monopolists and employees lost Effects on reorganization of the value chain not so clear because of significant technnical barriers to entry remain, we see only small reorganization

33. 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 05/08/2014 33

34. Thank you for your attention!