Privatization, restructuring and its effects on performance: a comparison between German and British airport sector

1. Privatization, restructuring and its effects on performance: a comparison between German and British airport sector Jürgen Müller, Tolga Ülkü, Jelena Živanović

2. Outline • Introduction • Privatization in Germany and the UK • Methodology • Data • Empirical Analysis • (1) Partial Factor Productivity • i - Financial Analysis • ii - Labor Productivity • iii - Capital Productivity • (2) Financial Ratio Analysis • (3) Data Envelopment Analysis • Summary Analysis • Conclusion

3. Introduction • Some sales of state-owned airports • Flows of money to public sector • Increasing profit motive of private sector • Against this background, we aim at an effective benchmarking analysis to identify first effects . • The main issue is to identify the organizational structure that leads to more efficiency and better performance.

4. Introduction • Differences between performance and efficiency may arise from different ownership structures: • UK vs Germany • Our analysis differentiates between • fully and partially privatized, as well as • public airports • 7 British, 6 German airports which have been exposed to similar market and economic conditions. • Econometric methods to identify the effects of ownership structure on productivity: PFP, DEA, FRA and SFA

5. Effects of Privatisation? • The greater inefficiency of public utilities comes as a result of the lack of incentive and sanction mechanism. • Privatized or partially privatized airports are likely to aim at higher productivity and cost efficiencies, better capacity utilization and the expansion of the non-aviation sector. • The change of the ownership structure should result in cost efficiencies and higher profit-orientation.

6. Privatization in Germany 06

7. Privatization in the UK 06

8. Privatization in the UK • Three types of airport ownership predominate in the United Kingdom: • Fully privatized airports (managed and owned by a private company; examples include Liverpool and the BAA airports) • Partially privatized airports (under joint local government and private ownership; examples include Birmingham and Newcastle) • Public airports (owned and often managed by local governments, e.g. Manchester)

9. Data • Years : 1998 – 2005 • Financial, Capacity and Traffic data

10. Methodology 1-Partial Factor Productivity (PFP):

11. Methodology 2-Financial Ratio Analysis (FRA): 3-Econometric Approaches: 3.1. Data Envelopment Analysis (DEA) 3.2. Stochastic Frontier Analysis (SFA)

12. Data A General Look at the Airports in the Sample Size of Airports (1998-2005) measured in mill. Passengers

13. Financial Comparison • Averages, Growth Rates and Yearly Figures: • Real Costs per PAX • Real Revenues per PAX • Revenues / Expenses

14. Partial Productivity Analysis Average Values for Financial Indicators 1998-05 • Both costs and revenues are larger for British airports • Effect of vertical integration dominate • British airports have a higher revenues/expenses ratio

15. Partial Productivity Analysis Growth Rates for Financial Indicators 1998-2005 • For British airports both costs and revenues decreased (revenues by almost 10%) • Interestingly revenue/expenses ratio also decreased by almost 6%

16. Partial Productivity Analysis FinancialIndicators for each Airport Costs and Revenues per PAX, 8-year average

17. Real Costs per PAX Partial Productivity Analysis • Frankfurt incurs the highest costs • Partially privatized airports, Hamburg and Hanover, run lower costs • Interesting time trend: Frankfurt rising, Hamburg falling • British airports have higher cost efficiency • The lower degree of vertical integration and the greater degree of outsourcing • London City generates the highest costs • Real costs show a significant drop for Manchester and an increase for Aberdeen • Stansted and Glasgow have the lowest ratio of all airports, possibly due to pressure from low cost carriers • After 2001 a gradual growth in costs due to higher security measures

18. Financial Performance Higher cost efficiency at British airports Higher revenues at German airports BUT: The effects of vertical integration and market power lead to biased results! Should only do within group comparisons!

19. Partial Productivity Analysis Real revenues per PAX • Frankfurt generates the highest revenues • Hamburg and Düsseldorf generated the lowest revenues, followed by Hanover • The effects of market power at Frankfurt are evident • British airports have lower revenues • London City generates the highest revenues most probably due to market power • Stansted has the lowest ratio of all airports, possibly due to pressure from low cost carriers

20. Partial Productivity Analysis Revenues / Expenses

21. Partial Productivity Analysis: Financial comparison ofRevenues and Expenditures • The ratio is not affected by VI, but effects of market power and regulation (more important for monetary indicators than for physical indicators) • The large differences between German and UK airports have disappeared • Heathrow had the best performance, closely followed by the partially privatized Hamburg • Manchester does well, but is a public airport • Other British airports score very well, whereas Stuttgart, Munich and Frankfurt are bad performers

22. LABOR PRODUCTIVITY • Data: Number of Employees • Averages, Growth Rates and Yearly Figures: • PAX per Employee • Movements per Employee

23. Data Number of Employees at airports in the sample

24. Vertical Integration and Number of Employees • As a result of high vertical integration, employee numbers in German airports are more than double those of Britain‘s. ...which do not allow us to compare the labor productivities directly. - Number of Employees

25. Labor Productivity : effects of VI Main finding of a rough analysis of graphs: -UK Airports that outsource many activities achieve higher labor productivity. But, looking at employment levels reveals that VI leads to biased results about labor productivity. Large differences in labor productivity come from large differences in vertical integration! What to do? TRL adjustments of VI next task

26. Labor Productivity Averages: Average and Growth Rate of Labor Productivity Indicators btw. 1998-2005 --------------------------------------------------------------------------------------------------------------------- Growth Rates:

27. Labor Productivity PAX/Employee, 8-year-average

28. Labor Productivity PAX per Employee

29. Labor Productivity Aircraft Movement per Employee, 8-year-average

30. Labor Productivity Aircraft Movement per Employee

31. Labor Productivity vs. Aircraft Size PAX per Aircraft Movement • Aircraft size (bigger airplanes and fewer movements) affects labor productivity by changing the level of outsourcing!

32. CAPITAL PRODUCTIVITY • Data: Runway Length,Number of Gates, Terminal Area (m2) • Averages, Growth Rates and Yearly Figures: • Aircraft Movements / Runway Length • PAX (000) per Gate • PAX / Terminal Area (m2)

33. Data

34. Frankfurt Airport The new landing runway will be some 2,800 meters long. The centerline separation from the existing North runway will be approx. 1,400 meters. This will allow for simultaneous landing operations on these two runways, which are not possible on the existing parallel runways because they are not far enough apart.

35. Data Terminal Area (m2, in thousands)

36. Capital productivity or Capacity utilization? Length of runways, gates and terminal size are measures for capital, but not perfect measures but measure also capacity utilization instead of capital productivity How to measure capacity? Problems with no of runways : example of Frankfurt Adjustment: Runway length instead of runways Using declared capacity? Data?

37. Capital Productivity Averages and Growth Rates of Capital Productivity Indicators btw. 1998-2005 • Vertical integration does not matter • British airports, however, perform better than German airports in terms of • capacity utilization • In Germany, decreasing growth due to investments in capital

38. Capital Productivity Aircraft Movement/Runway Length, 8-year Average

39. Capital Productivity Aircraft Movement/Runway Length

40. Capital Productivity PAX (000) per Gate, 8-year Average

41. Capital Productivity PAX (000) per Gate *Dusseldorf, Stuttgart

42. Capital Productivity PAX / Terminal Area (m2) , 8-year Average

43. Capital Productivity PAX / Terminal Area (m2) Stansted vs. Dusseldorf

44. Capital productivity or Capacity utilization? • Problem of lumpy investment • Gates: they represent a less lumpy investment than terminals and runways(e.g. Stansted built a terminal and increased capacity utilization.) Düsseldorf reduced gates with fire? • still, are there indications of excessive investment, overcapacity?

45. Financial Ratio Analysis (FRA) • Profitability

46. Profitability Effect of market power and of regulation The average operating margin was 24.3%, in 2005, down from 26.3% UK airports achieved higher margins Heathrow had the highest ratio at 39.1% Frankfurt had the lowest at 14.6% The margin for Düsseldorf decreased from 31.4% in 2002 to 21.1% in 2005 due to large investment program

47. Financial Ratio Analysis (FRA) • Liquidity Ratio of current assets to current liabilities

48. Financial Ratio Analysis (FRA) • Debt Management Percentage of total funds provided by creditors

49. Data Envelopment Analysis (DEA) • Following Pels, Nijkamp and Rietveld (2001) and Kamp (2004), the most appropriate input-output combination for the DEA seemed to be the following: • Output: • Number of Passengers • Inputs: • Terminal Area • Number of Check-in Counters • Number of Gates

50. Data Envelopment Analysis DEA Scores •  More powerful efficiency measure since it gives the whole picture: • It confirms some of the previous findings • Frankfurt performs best because it has high number of passengers and high capacity • Hanover could have had twice as many passengers as it has given the capacity (small airport effect)‏