Regulation of Charges at Small Airports in Austria

1. Regulation of Charges at Small Airports in Austria Team Charges Berlin Jürgen Müller, Marius Barbu, Peter Schröder

2. Outline • Austrian Price Cap • Recommendations for a better Price Cap • Theoretical Excursus: Perfect Price Cap

3. Introduction of the Price-Cap in 2001 • 1998: AUA wanted to participate from the passenger growth and decreasing average cost (economies of scale) of the airports. • So far the airports had not shared any of the higher revenues (Zambelis, AUA) • Planning security (5–3–1 Years) for airports, airlines and owners

4. Negotiation of the formula • The parties involved (plus UK-Experts) spend a lot of time in negotiations • Negotiation between airlines and airports in the user council (Nutzerausschuss) was very tough, almost every propostion of airlines was declined. In the second phase public authority entered the process. • Many compromises made airlines unhappy. Authority tends to be on the airports side. (Zambelis, AUA)

5. How does the price cap look like? • Maximum increase is: inflation + 0.5. • No floor for decrease • Growth incl. PAX and MTOW of Current year and the forecast of next year. If T > 0 : L = -0,35*T+I+0,5 If T < 0: L = I+0,5 key: L = Maximum Increase in Charges T = Traffic Growth I = Inflation

6. Diagramm Price Cap • There is no bottom when passanger growth increases • Absolute Price-Cap is 2,7 • Viennas Price-Cap is lower (...+0.25)

7. Assessment • 2009 gap for growth forcasts was to big for the AL • No compromise in the first place. Public authority accepted to cease the price cap regime. • Eventually, the parties accepted to have the price cap for another year because in 2009 the directive will be implemented. 

8. The Airlines Suggest: • The increase in the formula (0.5) should be deleted.   • The share of passenger growth of 35% should be higher or more flexible • AP should have single till. Klagenfurt could not survive with aviation revenues but makes a lot of money from non aviation (for example parking) this revenues don’t affect the level of charges under dual-till.

9. The Future of Regulation in Austria • Ministry argues: Good regulation doesn’t have a positve macroeconomic effect • An important element that is accepted and will be applied is the weighted average cost of capital (WACC) • In general it is difficult to implement new concept that are accepted by all parties • Try to achieve state of the art in the medium term

10. Impact of EU-Charges Directive • It doesn‘t contain much information but it is a at least a legal basis • There are 3 possible outcomes: 1. EU directive will be copied into Austrian law without any revision. This would leave a lot of unclear space for negotiation and conflict 2. The former price cap will be introduced into Austrian law, this would disappoint the airlines because it’s very unfavourable for them. 3. The idea of more transparency and non discrimination could be introduced in a reasonable way. The AL would welcome that.

11. A better Price-Cap • The actual level that was present at the time was just accepted. • The beginning level should be calculated form an independent and competent party from a zero-budget-level • An accurate benchmark-study would be mandatory • a better more complex price-cap means cost increase • the easier the regulation the easier is the acceptance in the industry

12. Theoretical Excursus: The Perfect Price Cap Conditions: 1. Recover inflation 2. Stable total revenues 3. Price elasticity of – 1

13. Theoretical Excursus: The Perfect Price Cap • L = -T + I • L = max increase charges level, T = passenger growth, I = inflation • Price elasticity is –1 now. Should result in constant total revenues.

14. Theoretical Excursus: The Perfect Price Cap • Problem • Relation cost / revenue must be stable • Total cost will increase with increasing passengers (disincentive to increase pax?) • Which charges will be increased according to the price cap? Total price or per passenger? Assumably, total price since condition 2 relates to revenues.

15. Scenario 1 • margin between total costs and total revenues gets bigger and bigger. Airports make higher and higher profits. Eventually, the new (lower) level of costs have to be incorporated in the initial level for the next year in order to curb the profit development

16. Scenario 2 • the efficiency gains of the airports compensate the increasing total costs that are inevitable because of passenger growth. Airports have neither profits nor a loss. This situation is more or less stable. No need for adjustments.

17. Scenario 3 • passenger growth is negative. Airports have the same revenues but less costs, the positive profit development is even reinforced by the efficiency gains. Airlines have higher average costs per passenger (economies of scale) and have to pay higher charges not only per passenger but in total numbers. Profits will be cut drastically. Level of costs have to be incorporated.

18. Questions • How probable are the scenarios? • Is it a problem that airports want to have less passengers according to charges revenues? • We have to think more about the execution of the price increases: which charges make sense? maybe only passenger related revenues should be affected • Is this the perfect price cap?