Restructuring of the Value Chain
of the European Ground Handling
Market after the EU market
liberalization
Günes Orak, Evgeni Petkov and Stefan Schulz
GAP Berlin
Contents
1. Introduction
2. The European Council Directive 96/67/EC
3. Theoretical Background and Propositions
4. Ground Handling at the Major European Airports
5. Impact on Prices and Quality, Winners and Losers in Europe
6. Transformation of Ground Handling in Germany
7. Conclusion
22/03/2016
2
1. Introduction
GHS are divided in 5 Categories:
-
Ramp handling
-
Baggage handling
-
Fright/mail handling
-
Fuel oil handling
-
Passenger handling
22/03/2016
3
1. Introduction
• Definition Ground Handling
22/03/2016
Source: Fraport AG
4
1. Introduction
Questions arising after the liberalization of the market:
• How did the market change?
• How did prices and quality change?
• How did the organization of the value chain change?
• Who benefited and who losed from the changes?
Source: Fraport AG
22/03/2016
5
2. The European Council Directive 96/97/EC
Source: SH&E Study
22/03/2016
6
3. Theoretical Background and Propositions
Value Chain of GH:
Airport
↓
Handler
↓
Airline
3. Theoretical Background and Propositions
Before the implementation of the Directive:
• monopoly of backward integrated national airline,
• monopoly of forward integrated airport, and
• duopoly or oligopoly of independent ground handlers and
self-handling airlines
22/03/2016
8
3. Theoretical Background and Propositions
Transaction costs are :
“the costs of acquiring an input over and above the amount
paid to the input supplier.”
Include:
• costs incurred before making the contracts (search and
bargaining costs),
• opportunity cost of forgone transactions,
• costs incurred after making the contracts (enforcing costs)
22/03/2016
9
3. Theoretical Background and Propositions
Determinants of transaction costs are :
• the frequency of the contracts between two parties,
• the specificity of investments made for the supply
relationship,
• environmental or behavioral uncertainty
22/03/2016
10
3. Theoretical Background and Propositions
Based on the determinants of transaction costs Fuhr (2005)
made his propositions about how the GHS should be
organized and tested them on both hub and spoke airports
Proposition 1 (regarding transaction frequency) :
Weak vertical control with short to mid-term contracts is
feasible for spoke airports, whereas strong vertical control
(eg. self handling) is only feasible for HSC at their hub and
secondary airports.
Result: Strong vertical control is suitable for hub airports.
22/03/2016
11
3. Theoretical Background and Propositions
Proposition 2 (regarding enviromental uncertainty) :
The contractual form between the hub airport and the
handler is of moderate vertical control, whereas the
contractual form between the secondary or spoke airport
and the handler is of weak vertical control.
Result:
Weak vertical control is suitable for secondary and spoke
airports.
3. Theoretical Background and Propositions
Propositions 4&5 (regardin asset and human capital specifity):
There is a large hold up threat in relationships between
HSCs and handler, and a medium hold up threat in
relationships between secondary airports and handler.
Result:
High hold up threat is expected at hub airports due to high
asset and human capital specificity. However this threat is
at a medium level at secondary airports.
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)
22/03/2016
14
4. GHS at the Major European Airports
Airport
LHR
CDG
FRA
AMS
MAD
FCO
PAX (2004)
67.3
51.3
51.1
42.5
38.7
28.1
Ex-ante
situation
8 airlines
doing selfand 3rd
party GH
Duopoly of
airport and
Air France
Monopoly of
FRAPORT
KLM doing
self- and 3rd
party GH
Monopoly of
Iberia
Monoply of
the airport
Total # of
handlers
(ramp)
11
5
2
5
5
3
Airport
doing GH
no
yes
yes
no
no
yes
Selfhandling
airlines
7
1
0
2
4
2
Independent
handlers
4
3
1
3
0
0
4. GHS at the Major European Airports
Market shares at London Heathrow:
British Airways
3%
4%3%
Air Canada
American Airlines
United Airlines
43%
26%
Air France Services
Alitalia Servizi
KLM Ground Services
Aviance UK
Plane Handling
3%
6%
22/03/2016
2%
4%3%3%
Penauille Servisair
Menzies
16
4. GHS at the Major European Airports
Market shares at Paris Charles de Gaulle:
14%
2%
Air France
6%
ADP
Penauille Servisair
Groupe Europe Handling
13%
65%
22/03/2016
Swissport
17
4. GHS at the Major European Airports
Market shares at Frankfurt:
20%
Fraport
Acciona
80%
22/03/2016
18
4. GHS at the Major European Airports
Market shares at Amsterdam Schiphol:
11%
11%
KLM
Martinair
AviaPartner
7%
Penauille Servisair
2%
69%
22/03/2016
Menzies
19
4. GHS at the Major European Airports
Market shares at Madrid Barajas:
11%
12%
Iberia
American Airlines
Air Europa
7%
Spanair
1%
Ineuropa
69%
22/03/2016
20
4. GHS at the Major European Airports
Market shares at Rome Fiumicino:
33%
Alitalia Airport
EAS
50%
ADR Handling
17%
22/03/2016
21
4. GHS at the Major European Airports
Barriers to competition:
Capacity constraints are used as a motive for limiting on all
airports.
This was supposed to change with a revision of
the Directive, which is, however facing strong opposition,
and most likely will not be voted soon.
22/03/2016
22
5. Impact on Prices and Quality, Winners and
Losers in Europe
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.
22/03/2016
23
5. Impact on Prices and Quality, Winners and
Losers in Europe
Airlines were the clear winners of the liberalization.
Unfortunately, the gains were not noticed by the
passengers, due to the fact that GHS costs are only 4-7% of
total flight costs.
Another winner were the independent handling companies,
which gained market shares after the market oppened.
22/03/2016
24
5. Impact on Prices and Quality, Winners and
Losers in Europe
Expectedly, the former monopolists lost significant market
shares and profits.
Due to the labor intensity of Ground Handling, employees
were also among the losers of the market openingindependent handlers were reported to pay up to 30% lower
wages.
22/03/2016
25
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
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,
cleaning, maintenance, bus transfer, catering and all the
associated services like station and crew support is less
strictly regulated.
6. Transformation of GH in Germany
Market entry in Germany is controlled through:
• 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 allow to
increase this number to 3 or 4
6. Transformation of GH in Germany
Major feature of the German market:
Airports stay in the business, but through GH subsidiaries.
Hamburg, Hannover und Düsseldorf were early movers in
creating own subsidiaries while Cologne and Frankfurt
continue with their current organizational arrangement in
which GHS are fully integrated within the core airport
organisation
6. Transformation of GH in Germany
Why subsidiaries?
The European Commission requires subsidiaries for cost
transparency – no cross subsidisation
German airports are doing it on order to move out of the
inflexible and expensive old labor contracts
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
6. Transformation of GH in Germany
Evidence on changes in flexibility- Stuttgart 2004:
6. Transformation of GH in Germany
Evidence on changes in flexibility- Stuttgart 2005:
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 economies like those specialized
companies achieve
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?
When will the airports be able to move completely out of the
old labor contracts?
Why do airports want to stay in that business?
How do we measure efficiency in GH?
What will happen if the market opens completely?
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
22/03/2016
36
Thank you for your attention!
22/03/2016
37