Deregulation and Privatization of the Air Transport Industry - PowerPoint by grapieroo6

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									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
   –   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                           Institutional environment:    Embeddedness:
                               Governance:
      and employment                                      formal rules          customs, traditions
                            especially contracts
        continuous                                      (10-100 years)           (over 100years)
                                1-10 years)



       Neoclassical           Transaction cost        Economics of property       Social theory
  economics/agency theory        economics           rights/political economy
         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 control




Tower control                             Tower control




        Ground control                  Ground control
        Airport A                        Airport B
        Air transport is a major industry

•   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           Economic Impact ($millions)

          Direct Total       Direct Total

High      2000   8000        225     1600
Medium    1500   6000        75      650
Low       750    2500        35      130
Tourist growth ($millions) by destination

                     1995    2020    % Annual Change

 Europe              338.4     717         3.0
 Americas            108.9     282         3.9
 East Asia/Pacific    81.4     397         6.5
 Africa               20.2      77         5.5
 Middle East          12.4      69         7.1
 South Asia            4.2      19         6.2
 Intra regional      464.1   1,183         3.8
 Intercontinental    101.3     378         5.4
 Total Trips         565.4   1,561         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                         Outboound         Marketing and
            Operations                                             Services
logistics                        Logistics             sales




                          Support activities

               Procurement Human resource management
               Infrastructure Technological development
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

•   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 hit-
  and-run entry when there is perfect contestability
• Perfect competition is a special case of perfect
  contestability
    Competitive, contestable and monopoly
                   markets


Feature                       Perfect Competition   Perfectly Contestable   Monopoly


Profit maximization                  Yes                   Yes              Normally
No barriers to entry/exit            Yes                   Yes              No
Perfect mobility of inputs           Yes                   Yes              No
Ubiquitous information               Yes                   Yes              No
Large number of firms                Yes                   Maybe            No
Homogeneous product                  Yes                   Maybe            Yes
Firms confronted by same
 cost functions                      Yes                   Yes              Yes
U-shaped average cost functions      Yes                   Maybe            Maybe
Profits                              Normal                Normal           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
                                          Phased approach
          0
                       A              B           Time




          Š
               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
•   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

                                De mo ns tra ti on                       Ne w E co no mi c
                                   Effe cts                                  Ide as




    Extra-EU Bi l atera l                 EU Ai r T ran sp ort   Re l ate d EU Pol i c ie s   Na ti on al Ai r T ran sp ort
       Ag ree me nts                         Po l i cy                                                 Po l i ci es




    Ma rke t C on d iti on s                                                                     Intra-E U Bi l ate ra l
                                                                                                    Ag ree me nts
                                                     Impact on EU Air
                                                        Transport




                                                                    Pa ram eters of
    Ai rl i ne A l li a nc es                Sa fety                                                Infras tru c tu re
                                                                     Co mp eti tio n
 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

                           60
Percentage of passengers




                           50

                           40

                           30

                           20

                           10

                            0
                                Under 1000   1000 to 2000   2000 to 3000   3000 to 4000   4000 to 5000   over 5000
                                                               Dist ance (kilometers)
                        Travel mix in the US and Europe

                                            United States   Europe

                   60


                   50
Percent of Trips




                   40


                   30


                   20


                   10


                    0
                          Business   Sightseeing            Visting f riends   Other

                                             Reason for Trav el
Airline labor physical productivity in
     Europe (ATK per employee)

                   170

                   160
Index (1991=100)




                   150

                   140

                   130

                   120

                   110

                   100
                         1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001
                                                            Year
Passenger and cargo yield for European
      Union scheduled airlines
                                                        Passenger           Cargo

                     100


                      95


                      90
  Index (1991=100)




                      85


                      80


                      75


                      70
                           1991   1992   1993   1994   1995   1996   1997    1998   1999   2000   2001
                                                              Year
  The proportion of UK business
passengers traveling business class
                                             Longhaul          Shorthaul

                  65


                  60
% Premium Cabin




                  55


                  50


                  45


                  40


                  35
                       1986   1988   1990   1992        1994      1996     1997   1999
                                                   Year
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


            Regional A                     Regional A


                                                 I
                 I
                                                 U
                 U




Capital                  Labor   Capital                Skilled
                                                        Labor




               I                               I
               U                               U


          Regional B                       Regional B

    Classi cal Model                New Growth Theory Model
       The notion of gateways




Gateway City   Hub City   Gateway City
Impact of opening more gateways




                          Qu ic kTime ™ and a
                      TIFF (L ZW) dec omp re sso r
            are n eed ed to se e thi s pi cture.
Inbound passengers from the EU to the
 UK using Stansted and Luton airports


  Passenge r    Passenger s    Passenger s   2000 to 2005   Percentage of    Perce ntage of
     type          2000           2005         change        total in 2000    total in 2005

 Business      0.9 million    1.8 million    98%            22%              17%
 Leisure       1.6 million    4.0 million    150%           39%              38%
 Visiting      1.6 million    4.8 million    198%           39%              45%
 friends &
 relatives
             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 Canada Tango               Pacific Southwest Airlines
Air South                      Pan Am
America West Airlines          Pearl Air
ATA A irlines                  PEOPLExpress
Canada 3000                    Safe Air
Compass                        Saro
East-West                      Skybus Airlines
Eastwind Airlines              SkyValue
Greyhound Air                  Song (Delta)
Hooters Air                    Southeast Airlines
Impulse Airlines               TAESA
Independence Air               Tower Air
JetGreen Airways               U Air
Kiwi Airlines                  United Shuttle
Kiwi International Air Lines   ValuJet
LAPA                           Vanguard Airlines
MetroJet                       Vistajet
Midway Airlines                Western Pacific Airlines
National Airlines              Zip
Oasis Hong Kong Airlines
Economic margins in the air transport
             sector
Margins in segments of European air
             transport
                        20




                        15
 Operating Margin (%)




                        10




                         5




                         0
                                Global       Leasing      Aircraft           Airports   Catering   Airlines
                             Distribution   Companies   Manufacturers
                              Systems
                        -5
                                                                  Industry
 European & US schedule passenger
 airlines operating margins (by 2002
               revenue)

               Europe                              United States


Lufthansa Group              9.4%   American Airlines              -19.2%
Air France Group             1.5%   United Airlines                -19.9%
British Airways              3.8%   Delta Air Lines                 -9.8%
SAS Group                   11.2%   Northwest Airlines              -8.9%
KLM Royal Dutch Airlines    -2.1%   Continental Airlines            -3.7%
Alitalia                    -2.4%   US Airways                     -18.9%
Iberia Airlines              5.3%   Southwest Airlines               7.6%
Swiss                      -21.2%   Alaska Air Group                -4.0%
Austrian Airlines Group      1.7%   America West                    -7.8%
                Returns of airports in Europe


Airport group               Operating margin (2001)   Operating margin (2002)


BAA plc (UK)                         29.8%                  30.6%
Fraport (Germany)                    18.0%                  15.8%
A¸roport de Paris (France)            6.0%                   9.2%
Schiphol Group (Netherlands)         31.7%                  32.0%
Luftartsverket (Sweden)               3.7%                   9.1%
Flughafen MŸ  nchen GmbH (Germany)   11.8%                   3.7%
Avinor (Norway)                      22.9%                  17.1%
Aeroporti di Roma Spa (Italy)        16.8%                  21.2%
SEA Aeroporti di Milano (Italy)      11.5%                  10.4%
Manchester Airport Group (UK)        19.2%                  19.3%
             The main GDS providers, 2003


Company             Revenues ($ millions) Operating margin Operating result ($ millions)


Amadeus                     2,195                         16.6%                365
Cedent Group*              10,034                         15.3%              1,534
Sabre                       2,045                          8.1%                166
Worldspan                     929                          9.7%                 90

                             s
* This represents the companyÕ 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-and-
           spoke 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 American 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
    Ho r as
   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         American Airlines       Delta Airlines
        Lufthansa             British Airways         Continental
          BMI                   Aer Lingus             Northwest
      TAP Portugal                 Iberia               Alitalia
         Finnair                                      Air France
        Lauda Air                                  CAS Czech Airlines
   LOT Polish Airlines                           KLM Royal Dutch Airlines
         Spanair
 SAS Scandinavian Airlines
    Austrian Airways
    Tyrolean Airlines
      European and US passenger airlines
       revenues ranked by 2002 revenue


                Europe                                   United States


Lufthansa Group (4)             $16,123   American Airlines (1)          $17,299
Air France Group (7)            $12,697   United Airlines (5)            $14,286
British Airways (8)             $11,940   Delta Air Lines (6)            $13,305
SAS Group (13)                   $6,977   Northwest Airlines (10)         $9,489
KLM Royal Dutch Airlines (14)    $6,490   Continental Airlines (12)       $8,402
Alitalia (20)                    $6,400   US Airways (37)                 $6,977
Iberia Airlines (21)             $4,600   Southwest Airlines (18)         $5,522
Swiss (31)                       $2,771   Alaska Air Group (33)           $2,224
Austrian Airlines Group (32)     $2,278   America West (39)               $2,047
                            The “S-curve”

               100%
Market share




                          Case B


                                                     Case A




                      0                                       100%
                                   Frequency share
                              United out of Chicago O‟Hare 1990 and
                                   2003 with a single competitor
                                             ORD UA 2 comp                                                       UA ORD 2 comp

                              100.0%
% passengers (market share)




                                                                                                  100.0%
                              90.0%                                                                90.0%
                              80.0%                                                                80.0%
                              70.0%




                                                                                   % passengers
                                                                                                   70.0%
                              60.0%                                                                60.0%
                              50.0%                                                                50.0%
                              40.0%                                                                40.0%
                              30.0%                                                                30.0%
                              20.0%                                                                20.0%
                              10.0%                                                                10.0%
                               0.0%
                                                                                                    0.0%
                                   0.0%   20.0%   40.0%   60.0%   80.0%   100.0%                        0.0%   20.0%   40.0%   60.0%   80.0%   100.0%

                                                   % frequency                                                         % frequencies
United out of Chicago O‟Hare 2003 with
            two competitors
                                    UA ORD 3 comp

                    100.0%
                     90.0%
                     80.0%
     % passengers




                     70.0%
                     60.0%
                     50.0%
                     40.0%
                     30.0%
                     20.0%
                     10.0%
                      0.0%
                          0.0%   20.0%   40.0%   60.0%   80.0%   100.0%
                                         % frequencies
Temporal-fares offered; curves, previous
                 work
 Pape r             Marke t                                 h
                                                    Re se arc Te chnique

 Pels & Rietveld    London-Paris routes for         Statistical analysis, short-run airline responses to competitorsÕprice
 (2004)             legacy carriers                 Partial analysis. SUR estimation.
                                                    Regression of residuals on lagged residuals (autocorrelation)

 Pitfield (2005a)   Low-cost services from the      Cross Correlation Analysis, subject to a variety of lags.
                    UK                              Series pre-whitened using ARIMA or Box-Jenkins to determine:
                                                      - Cross correlation functions (CCF)
                                                      - Autocorrelation functions (ACFs)
                                                                                      i
                                                      - Partial Autocorrelation Functons (PACFs)

 Pitfield (2005b)   Low-cost services from the      ARIMA time series models, CCF, ACFs, PACFs.
                    UK

 Barbot (2006)      Low-cost services Paris         OLS regress ion, no lags introduced
                    Millan                          Theoretical model based in Bertrand competition

 Button & Vega      Low costs carriersÕinternal     Graphical analysis, case studies
 (2006)             service competition in the US

 Button, Costa      Price leadership for routes     Graphical analysis and Granger causality tests
 & Cruz (2007a)     from Portugal

 Button, Costa      Price leadership for routes     Graphical analysis, comparative statistics
 & Cruz (2007b)     from Portugal
Competitive Market
Monopoly markets
Two legacy carriers
LCCs/legacy carriers
Regional LCCs/legacy carriers
        LCCs/LCCs

         Phoenix - Kansas City : 1 August

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 400



 350


                                            Southwest 05:45-16:20
$ 300
                                            America West 09:07-17:35


 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                                           America West 09:11-18:00
$ 250                                            Southwest 08:00-17:20      $ 300                                   Southwest 06:40-16:15
                                                 Southwest 06:50-17:20                                              Southwest 09:25-16:15

    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
    600                                          Northwest 06:55-17:20


    500

    400

    300

                 July
    200
Trends in the transatlantic air services
                market
                                                 450
       Revenue passsenger kilometers (billion)
                                                 400
                                                 350
                                                 300
                                                 250
                                                 200
                                                 150
                                                 100
                                                  50
                                                   0
                                                    85



                                                           90



                                                                  95



                                                                           00

                                                                           01

                                                                           02

                                                                           03

                                                                           04
                                                  19



                                                         19



                                                                19



                                                                         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    In Force                 10/14/92
   Belgium        Provisional                3/1/95
   Finland        In Force                  3/24/95
   Denmark        In Force                  4/26/95
   Norway         In Force                  4/26/95
   Sweden         In Force                  4/26/95
   Luxembourg     In Force                   6/6/95
   Austria        In Force                  6/14/95
   Czech Repub.   In Force                  12/8/95
   Germany        Provisional               2/29/96
   Italy          Comity and Reciprocity   11/11/98
   Portugal       In Force                 12/22/99
   Malta          In Force                 10/12/00
   Poland         In Force                  5/31/01
   France         In Force                 10/19/01
Studies of the effects of strategic alliance

Study                  Alliances                 Findings


Gellman Research       BA/US Air,                Profits increased for all parties with
Associates (1994)      KLM/NW                    BA and KLM gaining more than
                                                 their partners

Youssef and Hansen     Swissair and SAS          Increases in flight frequency; variations
(1994)                                           in fare levels; the strongest service
                                                 levels had the lowest fa re increases.

US General             KLM/NW, USAir/            All carriers enjoyed increased revenues
Accounting Off ice     BA, UAL/Lufthansa         and traff ic gained at competitorsÕ
(1995)                 UAL/Ansett, UAL/          expense, not industry growth.
                       BMA

Oum et al (2000)       Star Alliance, oneWorld   Increased traffic on alliance routes
                       Skyteam, KLM/NW

Brueckner and Whalen   US international          Fare are some 18% to 20% lower on
(2000)                 alliances                 international alliance, inter-lining routes
     Brattle Group‟s estimates of European
     airport employment effects of an Open
                 Aviation Area

                                         Airline                   Airport      Airport
                                       employment                employment   employment


                                           Low bound scenario

Pricing synergies                          600                      188           481
No output-restricting ASA bilaterals      1587                      436          1092
          Total                           2178                      624          1573

                                           High bound scenario

Pricing synergies                         3523                     1124          2820
No output-restricting ASA bilaterals      1578                      436          1092
          Total                           5101                     1560          3912
          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 Prospects           Poor Prospects

            Airlines                   Buses
Competitive Telecommunications         Ports
            Electricity generation     Post office




             Airports                  Rail track
Monopoly     Water                     Railways
             Electicity distribution
             Gas
      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                 Ownership


    Australia        1995   Government corporation
    Canada           1996   Not-for-profit private corporation
    France           2003   State department
    Germany          1993   Deutsche Flugsicherung GmbH
    Ireland          1993   Government corporation
    Netherlands      1993   Government agency
    New Zealand      1987   Government corporation
    South Africa     1996   Not-for-profit joint-stock corporation
    Switzerland      2001   Not-for-profit joint-stock corporation
    United Kingdom   2004   Public/private partnership
    United States    1953   State department
Regulation features of the air navigation
           service providers

   Country               Rate Regulation                 Safety


   Australia        Commission oversight             Separate agency
   Canada           Legislated principles/appeals    Separate agency
   France           Approved by transport ministry   Internal but separate
   Germany          Approved by transport ministry   Internal
   Ireland          Regulatory commission            Internal but separate
   Netherlands      Approved by transport ministry   Transport ministry/separate
   New Zealand      Self-regulating                  Separate agency
   South Africa     Transport ministry committee     Separate agency
   Switzerland      Approved by transport ministry   Separate agency
   United Kingdom   Price capping                    Separate agency
   United States    Financing from taxation          Internal but separate
Annual ANS provider costs by instrument
                                        flight rules movements

                                150

                                140

                                130                                                                                  SkyGuide
     First year of data = 100




                                                                                                                     NATS U.K.
                                120                                                                                  Airservices Australia
                                                                                                                     Irish Aviation
                                110
                                                                                                                     Airways NZ
                                                                                                                     DSNA
                                100
                                                                                                                     DFS
                                90                                                                                   LVNL
                                                                                                                     South Africa
                                80                                                                                   FAA
                                                                                                                     NAV Canada
                                70

                                60
                                      1 9 97   1 9 98   1 9 99   2 0 00          2 0 01   2 0 02   2 0 03   2 0 04
                                                                          Year
Air traffic controllers pay including
       overtime (2004 prices)


                                          150
   Normalized, first year of data = 100




                                          140

                                                                                                               SkyGuide
                                          130
                                                                                                               NATS U.K.
                                                                                                               Irish Aviation
                                          120                                                                  DFS
                                                                                                               LVNL
                                          110                                                                  South Africa
                                                                                                               FAA
                                                                                                               NAV Canada
                                          100


                                          90
                                                1997   1998   1999   2000          2001   2002   2003   2004
                                                                            Year
Trends in the number of air traffic control
                 staff
                                160

                                150

                                140

                                                                                                     SkyGuide
                                130
                                                                                                     NATS U.K.
     First year of data = 100




                                                                                                     Airservices Australia
                                120                                                                  Irish Aviation
                                                                                                     Airways NZ
                                110                                                                  DSNA
                                                                                                     DFS
                                100                                                                  LVNL
                                                                                                     South Africa
                                                                                                     FAA
                                90
                                                                                                     NAV Canada

                                80

                                70

                                60
                                      1997   1998   1999   2000          2001   2002   2003   2004
                                                                  Year
Flights controlled under instrument flight
                   rules

                                 170

                                 160
                                                                                                                  SkyGuide
                                 150
                                                                                                                  NATS U.K.
      First year of data = 100




                                 140                                                                              Airservices Australia
                                                                                                                  Irish Aviation
                                 130                                                                              Airservices NZ
                                                                                                                  DSNA
                                 120                                                                              DFS
                                                                                                                  LVNL
                                 110                                                                              South Africa
                                                                                                                  FAA
                                 100
                                                                                                                  NAV Canada
                                 90

                                 80
                                       1 9 97   1 9 98   1 9 99   2 0 00      2 0 01   2 0 02   2 0 03   2 0 04
                                                                       Year
                                          En route unit rates


                           140

                           130

                           120
First year of data = 100




                           110
                                                                                                                SkyGuide
                                                                                                                NATS U.K.
                           100                                                                                  Airservi ces Australi a
                                                                                                                Irish Aviat ion
                           90                                                                                   Airways NZ
                                                                                                                DSNA
                           80                                                                                   DFS
                                                                                                                L VNL

                           70

                           60

                           50
                                 1 9 97   1 9 98   1 9 99   2 0 00          2 0 01   2 0 02   2 0 03   2 0 04
                                                                     Year
Air traffic management induced delays
            (minutes per flight)

                            3 50


                            3 00


                            2 50
 First year of data = 100




                                                                                                              SkyGuide

                            2 00                                                                              NATS U. K.

                                                                                                              DSNA
                            1 50                                                                              DFS

                                                                                                              FAA
                            1 00


                             50


                              0
                                   1 99 7   1 99 8   1 99 9   2 00 0      2 00 1   2 00 2   2 00 3   2 00 4
                                                                   Year
Number of serious air traffic management
     safety incidents (approxes)


                                300

                                250
                                                                                                                      SkyGuide
    Firs t year of data = 100




                                200                                                                                   NATS U.K.
                                                                                                                      Airservices Australia
                                150                                                                                   Irish Aviation
                                                                                                                      Airways NZ
                                                                                                                      DSNA
                                100
                                                                                                                      DFS
                                                                                                                      LVNL
                                50                                                                                    South Africa
                                                                                                                      NAV Canada
                                  0

                                -5 0
                                       1 9 97   1 9 98   1 9 99   2 0 00          2 0 01   2 0 02   2 0 03   2 0 04
                                                                           Year

								
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