Decentralization: A way to Help Airlines Achieve Greater Competitiveness

Throughout the West, companies face fewer and fewer barriers because of the ongoing process of deregulation. While most sectors have been “deregulated,” the air transportation sector is one of the few where the deregulation of services has not developed simultaneously with the deregulation of infrastructure [the airports].

 

Spain is the only country of its size that has a centralized network of airports and state ownership. Aeropuertos Españoles y Navegación Aérea (Aena), which is responsible for managing a total of 48 locations, argues that there is a need for coordinating those operations and maintaining that centralization. Aena says that this approach makes sense for the control of air space, but not for Aena’s airport operations.

 

Some experts have proposed a model of decentralized management for Spanish airports in an effort to make it easier for them to pursue flexible strategies for differentiating themselves from others. Because of the competitive pressures facing airlines, and the geographical layout of the Spanish airport network, a downward spiral deprives some airports of their competitiveness. Although it may come as a surprise, a totally public and centralized management model, as in the case of Spanish airports, is a very common approach in the countries of the OECD. It is common to choose a majority-owned form of territorial decentralization in an effort to stimulate competition among different locations. The goals of this approach are greater efficiency for the airlines and greater satisfaction for their users.

 

Imagine, for example, that Aena is driving a vehicle on a highway in one direction. It can continue straight ahead, even though a sign says there is an exit off to the right. If Aena decides to take a different road, it would eliminate its ability to compete for airlines, and in Spain, it would constitute a model for decentralized management. If, on the other hand, Aena continues to drive in the same direction, it would lead to centralized management, in which airports continue to operate with a series of cross-subsidies.

 

These sorts of competitive distortions are a hot topic for discussion and debate in Spain and elsewhere, according to a recent article titled, “The New Model for European Airports – More Competition, Better Regulation,” published in Universia Business Review. It was written by Julio García Cobos, who heads PQ Axis, an economic consulting group, and is a professor at Carlos III University of Madrid. Two years ago, the European Commission prepared a case study about Ryanair, the low-cost Irish airline that was receiving subsidies from [Belgium’s] Walloon region. The subsidies enable Ryanair to use the airport of Charleroi [in Belgium], which competes against the Brussels airport. According to the Commission, these sorts of assistance programs were illegal.

 

“The air transportation sector is one of the few sectors in which deregulation of services – airlines – has not proceeded simultaneously with deregulation of the infrastructure – the airports,” says García Cobos in the study. This is because the airports were monopolies not subject to effective competition, and they had an important function as instruments of regional policy. A 2002 study by Cranfield University, the most important study of airport competition in Europe at that time, predicted growing competition among airports in Europe. This would create a number of fragile airlines that suffer from a lack of competitiveness.

 

According to García Cobos’ analysis, if the centralized model continues, Aena will fix its rates and prices through administrative regulations. Tariffs are the same for all airports of the same category; they vary only slightly from one airport to another. His analysis criticizes the tariff strategy, arguing that it distorts competition among Spanish airports and, indirectly, blocks competition between the airlines that use the airports. Cross subsidies favor some airlines as well as users of deficit-ridden regional airports. They also inflict direct damage on some direct competitors, namely those who use airports that run a surplus.

 

Those are the factors behind the European Commission’s decision to take sides on the topic. García Cobos notes that the Commission has already published the criteria that the European Community will use for analyzing the public-sector financing of airport infrastructure and operating deficits. If they were to take effect, these criteria would oblige those airports that compete for a specific type of traffic to transfer the costs of their operations to those airlines that generate the traffic.

 

If the system manages to take a 180-degree turn – and wind up running according to this decentralized scenario – García Cobos anticipates that airports will carry out various pricing strategies: For example, the small regional airports, which are mostly deficit-ridden, would raise their airport tariffs and fees, especially on passengers, in order to bring their revenues closer to their costs, as comparable European airports are doing. According to García Cobos, “The subsidies would decline, and their obligations [debt] would rise when competition with other airports grows. They would be obliged to eliminate that part of their competitiveness that depends on assistance from airports that are not subsidized.”

 

The analysis emphasizes those airports that already run a surplus or that have the potential to earn a profit in the short term. Companies in large regional airports “would maintain or decrease the average level of their tariffs, as cross subsidies between airports disappear,” says García Cobos. In addition, they would take advantage of a broad range of innovations in the design of airport tariffs, in order to arrange for the recovery of the fixed costs that vary among different categories of tariffs and rates.

 

Meanwhile, the big international airports, which are currently the main source of subsidies provided to the rest of the airport network, would lower their tariffs. That would “increase their competitiveness with other international airports in the network or, in the case of the major airports for tourism, their competitiveness with other international destinations for tourism.”

 

More Competitive Rates

 

Business revenues are a key tool for management when it comes to developing competition among airports because higher revenues make it easier for airports to set tariffs that are more competitive.

 

“It is important for the big international airports that have greater traffic volume to be able to allocate their [takeoff and landing] slots to those airlines that provide greater value added,” notes García Cobos. He adds that those airports that want to specialize in regularly scheduled flights should continuously improve the variety and quality of their complementary services, such as nearby hotels, accessible meeting rooms and conference centers, and Wi-Fi connections, among other amenities.

 

When it comes to Spain, the study by García Cobos recommends a more decentralized system that would facilitate the development of competitive strategies that differentiate one airport from another. “The small regional airports could opt to maintain subsidies and limit their market to transportation services. Or they could reduce or cancel their dependence on these assistance programs and broaden their market to a segment of international flights that are relatively nearby,” he adds. On the other hand, he projects that the big regional airports could opt to combine low-cost international flights with those regularly scheduled international flights that have a higher added value per unit. That would put them in direct competition with the hubs. They would focus more on competing against the big national and European airports for regular international traffic, whether it involved direct flights or connecting flights.

 

A decentralized system brings together various improvements in airport management with greater financial transparency, and it leads to fewer distortions in competition among airlines. For airport managers, this leads to improved productivity and quality because it creates sustainable competition between various airports.

 

If the real goal is to improve the efficiency of airport management, decentralization is a good recipe, García Cobos says. However, he adds, “Your starting point for applying this is a global concept of reform, based on rigorous analysis of the operational model that you intend to carry out. You need to follow the example of the large global airports, and the private sector must play an essential role.” It is worth noting that companies such as Abertis and Ferrovial have participated in open competitions for managing European airports. Abertis manages airports in Great Britain, Sweden, Costa Rica, Colombia, the United States, and Canada.

 

In most of the European Union, the control of airports is in the hands of various companies that are owned by city governments and regional administrations. Spain’s Ministry of Development would like to imitate that approach, which is already used in Germany and Italy. In the airports of Italy, the United Kingdom, Germany, Belgium and even France, managers have a significant capacity to make territorial decisions. Private ownership is playing an ever greater role. According to García Cobos, “Centralization can harm some airports when they compete against other airports that function on the basis of decisions made by management and ownership. However, it would be a mistake to substitute state interventionism for self-governing institutions, which are traditionally more incisive.”   In addition, in a country like Spain, where companies like Abertis and Ferrovial manage important foreign airports, it is easy to make the accusation that airports will benefit from opening up to foreign traffic while there is still a centralized, public-sector monopoly that is protected [from competition].

 

The United Kingdom heads the list of countries that have privatized their airports. BBA, the company that currently wants to be acquired by Spain’s Ferrovial, controls London’s Heathrow, among others. In France, the three airports in Paris are all in the hands of the government. Local chambers of commerce operate the rest [of France’s airports].

 

Currently, the government of Spain is playing a key role in the debate about the concession for the El Prat de Barcelona airport. Spain’s governing party, the PSOE (Spanish Socialist Workers’ Party) is resisting the idea of having the government cede authority over the Catalonian airport. This approach, based on article 150.2 of Spain’s constitution, would create a consortium that includes the government of Catalonia, the [Barcelona] city council, and the private sector. The Spanish government supports the consortium approach, but only on the condition that the public sector has a majority of 51% [ownership in the consortium].

 

The negotiations between the Spanish government and Catalonian participants about transferring management of El Prat airport have been followed closely by Spain’s autonomous regions – which have a lower level of self-government than that of the [Spanish] national government – because the regions are interested in managing those airports that are within their territories. Experts say that this approach would avoid the temptation, inherent in centralization, to allow administrators the discretion to make decisions that directly or indirectly help some airports but damage others. If airports had the ability to make decisions about awarding slots (landing and take-off rights), to make decisions about preferential access to their facilities, and to set their own rates, then airports would be able to react to any possible losses in their market share. Airports, these experts add, would be able to use every mechanism at their disposal to win over both the traveling public and the airlines they travel on.

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