CAA Benchmarking Proposal & Responses to the CAA Paper Presented by Sylvana Thiele & Lori Palotas

1. CAA Benchmarking Proposal & Responses to the CAA PaperPresented by Sylvana Thiele & Lori Palotas

2. Main reason for Benchmarking • 2 main problems with setting regulation: • Regulators don‘t have sufficient info • Therefore the firm has an incentive to influence the system • Benchmarking suggested as an alternative to overcome these problems • CAA proposes that benchmarking could be used to set price caps

3. Benchmarking for Price Cap Setting • A firm‘s future and present price cap would not be set by its own costs – incentive gone to ‘game‘ the system • Setting price caps by this method would be challenging • Difficulty in finding the right comparators, do not have complete information and need to find a way to be able to take differences of airports into account • Benchmarking doesn‘t have to be used alone • Benchmarking must be sustainable over time

4. Benefits of Benchmarking • Reduces asymmetries of info between regulators and firms - therefore reduces scope of game playing • Increases incentives for firms to reduce costs through price caps • Incentives for making appropriate investment decisions • Comparison is not restricted to cost and efficiency – can be used to compare other factors In terms of other Economic Regulation: • To estimate a fully specified cost function for airports and their services • To benchmark costs of major investments • To estimate long-run incremental costs • To assess performance on service quality standards

5. Criticisms of Benchmarking • Could provide poor incentives for firms to try to meet the needs of users and customers • Methodology might not be robust over time • Benchmarking could set the price incorrectly • Depending on whether price is set below or above costs could lead to problems • Price cap setting should be limited to quality of the benchmarking and the potential of its benefits should outweigh the negatives

6. Problems that are acknowledged in Benchmarking Airports • Outputs have to be defined • Airport data is often limited • Data adjustments have to be made, therefore a degree of judgement is unavoidable • Airports have different strategic objectives • Lumpy investments / different investment cycles • Unexplained differences could be wrongly concluded as an efficiency gap

7. CAA Assessment and Next Steps • If benchmarking is not robust enough to set price caps, it could still be valuable • E.g. Projecting average or incremental costs or to improve understanding of key cost & revenue drivers CAA plans to: • fully estimate airport efficiency, performance and cost functions using quantitative techniques • Make an assessment of the main partial productivity indicators • Make a case study comparison between each of the regulated airports and appropriate comparators

8. Comments on using top-down approach to cost benchmarking? • a) key factors which differentiate airports Source: BAA response – Use of benchmarking p. 7.

9. Comments on using top-down approach to cost benchmarking? • b) factors which cannot be meaningfully • address: • Capital intensity • Service standards • Operating costs link to revenue • Product innovation • Airport investment is lumpy • Indirect cost

10. Comments on using top-down approach to cost benchmarking? • Conclusion: • not enough adequate data • too many fundamental differences • large number of external variables affecting results • unreliable results • wide error range

11. Comments on using top-down approach to cost benchmarking? • Proposal: • bottom-up approach • assessing investment projects • specific areas e.g. service level agreement • examination of key processes • Identification of Material and controllable costs • Identification of inefficiencies • quantifiable improvements due to a target setting approach

12. 2. In what areas is benchmarking likely to be of greatest value? • Benchmarking alternative to regulation for setting price caps? • instability of the results may not provide a sound basis for setting the price cap • regulatory risk for the company

13. 2. In what areas is benchmarking likely to be of greatest value? • Proposal: • focussing on key processes • complementary tool: • measuring operational and economic efficiency • providing explanatory data • Helpful: • as a performance guideline for regulator • for judging the optimum price and service quality

14. 3. Comments on quantitative techniques and benchmarking? • Conclusion: • Econometric Analysis: • need a clear understanding of how to interpret and use data • limited to sample sizes • are error prone • too complicated • Reasons: • fundamental differences between airports • cost data is not available

15. 3. Comments on quantitative techniques and benchmarking? • Proposal: • use partial statistical and qualitative measures

16. Thank you for your attention!

17. References: • Civil Aviation Authority: The Use of Benchmarking in the Airport Reviews, Consultation Paper, December 2000. • BAA plc: BAA Response, The Use of Benchmarking, February 2001. • others: Airtours, BARUK, BATA, BMI, British Airways, Gatwick Consultative Committee, Heathrow AOC, IATA, Manchester Airport plc, Monarch airlines, Ryanair, Virgin Atlantic Airways. • Papers online at: • http://www.caa.co.uk/docs/5/ergdocs/benchmarking/benchmarking.zip