AN INCOMPLETE REGULATORY FRAMEWORK? VERTICAL INTEGRATION IN ARGENTINE AIRPORTS
Tomás Serebrisky1 Pablo Presso2,3
Key words:
Abstract Argentina concessioned its most important airports to a single operator (AA2000) in 1997. The regulatory framework and the concession contract do not establish any limit to vertical relations between the airport operator and airlines. This paper analyzes the effects that vertical integration between the airport operator and an airline (assuming the air transport market is deregulated) has on competition. Given the international experience and the regulatory design adopted and implemented in Argentina, we recommend two policies: the explicit prohibition of vertical integration (vertical separation) or limits to the exercise of exclusionary conducts –open access and accounting separation-.
JEL: L93, L42, L43
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Introduction
The process of awarding concession contracts for 33 of the 57 most important airports of Argentina began in 1997. Hereby, the provision of airport services was privatized. Airport operating licenses rendered airports comparable to businesses. Such a shift reflects a growing worldwide trend (Doganis, 2001) as governments choose to concession the operation of airport infrastructure driven by efficiency concerns or budgetary constraints. The Argentine commercial aviation market was deregulated in 19924. In spite of a remarkable increase in the number of passengers (FIEL, 1999) which suggests that the deregulation was successful, the industry wallows in a deep financial crisis since 1999. Airlines have large liabilities that hinder their performance and experience a substantial decline of air transport demand due to the fall of the gross domestic product (Villalba, 2001). Recent evidence from the commercial aviation market shows that crises instigate the exit of established companies as well as mergers and acquisitions (OCDE, 2000). Until early 2002, no relevant horizontal mergers had been recorded in the argentine commercial aviation market. However, by the end of 2001, the National Airports System operator announced plans to acquire LAPA5, the second airline in volume of customers. If this vertical integration takes place, it would be the first time that an airport concessionaire operates an airline in a deregulated market. The aim of this paper is to examine the effects of vertical integration between air-transport companies6 and airport operators. Vertical integration will be analyzed from the perspective of antitrust policy objectives. Problems arising within the commercial aviation market and their possible regulatory solutions will be expounded. The paper is structured as follows: The second section displays problems arising from vertical relations between companies. The third section specifies the services provided by airports, details the relationship between airports and airlines and analyzes the variables that affect airport competition. The fourth section zooms in on the anti-competitive practices in which a vertically integrated airport operator may incur. The fifth section outlines possible regulatory policies. The sixth and seventh sections explore the composition and experience of international and Argentine airport markets, respectively. The eighth section presents the conclusions.
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Vertical Relations
There exists a vertical relation between two companies when one of them is a consumer of a product or service produced by the other. Company vertical relations have certain characteristics that may affect their efficiency, the most salient being: • Externalities: a company’s conduct may affect the optimal decisions taken by another in the vertical chain of an industry. This effect results from the fact that one company does not internalize7 the impact that its decisions have on the other. For example, the quality of airport services may affect the quality of the transport service provided by airlines. If the airport operator provides a poor quality service, the number of passengers using an airline operating from that airport will decrease. However, the airport operator’s revenue will not suffer. • Opportunism problems: when one of the parties makes a specific transaction investment, the other party will be motivated ex post not to reimburse total costs. Therefore, an ex
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•
•
ante contractual agreement is necessary to insure the optimal level of specific assets investment. Transaction costs: are expenses that companies must assume when performing market transactions. Some are: • costs of finding an operation partner (buyer or seller) • contract development costs • costs of monitoring contracts and their fulfillment Risk: every market transaction poses risky or uncertain situations for the parties involved – an example being price volatility of inputs and services.
In the face of these issues that raise market-derived costs, companies may adopt different strategies to make the relationship between parties more efficient (such as maximum and minimum price setting; territorial exclusivities for distribution and sales; long-term contracts8 and vertical integration). Of these strategies, vertical integration is the most extreme because companies stop using the market in favor of carrying out transactions among themselves. Besides solving market flaws, vertical integration may increase production efficiency. Such is the case of industries where there are economies of scope9. However, the purpose of the integration is not necessarily to achieve greater efficiency but may well be to exert greater market power. In this sense, a company can, by means of vertical integration, transfer its market power to another market in which it does not operate. For instance, a monopolyholder operating a bottleneck infrastructure has incentives to transfer its market power upstream or downstream by integrating vertically with one of the businesses that require access to the bottleneck. In the commercial aviation market, an airport operator could transform potentially competitive markets into monopolist markets through policies of restrictive access to infrastructure.
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Commercial Aviation Market
This paper holds airports, companies operating within airport facilities and airlines to be components of the commercial aviation market. Airlines provide air transport services by combining aircrafts, personnel, airport and meteorological services, among other inputs, in the production process. Given the technological characteristics of air transport services, aircrafts require specific infrastructure to link air and ground transportation. This infrastructure is provided by airports. Airports supply a series of services to air transport companies and to passengers, which can be classified as follows: • Aeronautical services (security, rescue, fire-fighting, runway and taxiway maintenance and infrastructure supply) • Aeronautical-related commercial services (baggage, passenger and aircraft handling, catering, supply of fuel and lubricants, among others) • Commercial services (restaurants, car parking, assorted sales, banks, hotels, car rentals, duty-free shops) A vertical relation between airlines (downstream) and airports (upstream) can be appreciated. The latter constitute the ‘entry point’ into the network of air transport, through terminals and runways. It is for this reason that an indiscriminate access of airlines to the airport is a necessary condition for the market to be competitive.
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Airports have large economies of scale: unitary costs of infrastructure supply decrease as airport traffic increases. This is due to high fixed capital costs and maintenance of infrastructure and equipment (runways, accesses, etc.) The costs of duplicating airport infrastructure (runways, accesses, platforms) to assist aircraft landing are very high given the existence of high sunk costs and indivisibility of capacity. Thus, an efficient resource allocation requires the presence of a single airport to supply a given volume of traffic (for which such economies of scale exist)10. By virtue of economies of scale, frequently there is only one airport at the origin/ destination of a route. This situation implies that the market is configured in such a way that upstream there is a monopolist airport operator and downstream, passenger and freight air transport companies acting in a competitive market segment. Given the high sunk costs, the difficulty of substituting airports at reasonable costs renders the airport infrastructure (needed for the provision of aeronautical services) a bottleneck for airlines. Despite the fact that airlines cannot substitute access to one airport for another11, in some cases they can choose the terminal in which they operate. This goes to say that there are two dimensions where competition may occur: intra-airport (terminals and other services are licensed to different operators) and inter-airport (a single operator controls the services of an airport but airlines have access to a choice of airports within a geographically relevant market). In an air transportation market where the ownership or operation of assets is deregulated, the following scenarios can be observed: • Non-vertically integrated scenario: the airport operator provides access to infrastructure (landing services) to airlines that demand it. • Vertically-integrated scenario: the airport operator provides access to infrastructure both to itself - as an airline company owner - and to other airlines air transport companies. In the absence of regulation of ownership or running of the airport, the airport operator has incentives to transfer its monopolistic power to the airline market. Vertical integration allows the operator to impose anti-competitive measures to displace competing airlines. These measures are pointless if the airport operator sets the tariffs of the services it provides unrestrictedly. In this case, the operator’s monopolistic power is transferred downstream seizing all the income produced in the competitive segment of the market. In Argentina, as in all other countries where airport services have been concessioned, tariffs are fixed by a regulatory agency. The integrated airport operator that restricts access to competing airlines (either by means of price or quality of service discrimination) increases the airlines’ costs of providing air transportation. These higher costs may cause a decline in the supply of air transport services and hence a decline in the quantity of airport services supplied. The reduction of the quantity of airport services supplied will take place insofar as the integrated operator has excess capacity to increase the production of air transport services with its airline. Therefore, if the integrated airline does not have excess capacity, the discrimination will generate costs for the airport operator in terms of a reduced income by way of airport services. The airport operator will compare these costs to the benefits of exercising restrictive-access policies that allow it to transfer its market power downstream. If the benefits exceed the costs, the operator will be motivated to restrict airport access so as to exercise its market power in the air transport segment.
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The integrated airport operator’s possibility of employing anti-competitive practices will depend on the choice of airports available to the non-integrated airlines. The airlines’ possibility to substitute one airport for another (at reasonable costs) will allow non-integrated airlines to remap the ends of their route should they face an airport-access restriction. A survey of the competition among suppliers of airport access is fundamental to identify the potential negative effects that the vertical integration of an airport operator and an airline will have upon competing businesses. Following is an examination of the factors that determine the competition among suppliers of access to airport facilities. 3.1
Competition in Airport Access Supply
The competition between companies that provide aircraft landing support can be given in either of two ways: > Competition among airports (inter-airport) > Competition within airports (intra-airport) 3.1.1
Competition Among Airports
The demand for aeronautical airport services depends on the demand for air transport. Hence, an airport’s demand for aeronautical services will be determined by the demand for the air transport of passengers and freight to and from the aforementioned infrastructure. Although an airport’s demand is to a large extent determined by external factors such as population density and degree of economic activity of the nearest city, airports compete to attract additional flights and to establish airline passenger or freight hubs in their premises. 12 This type of competition presents varying features according to the function fulfilled by each airport in the route subject to analysis. It becomes necessary, for this reason, to distinguish airports that are used as hubs from those that are used as points of origin/ destination. The degree of competition among airports will depend on how interchangeable they are for airlines. The main variables that determine their substitution are: geographical location, transportation costs and technological capacity (size of aircrafts, runways and facilities). 13 The importance of these variables will depend on the function that the airport satisfies for each airline. In the case of hubs, for instance, the airline will consider carefully the mapping of its routes to optimize the use of its aircrafts. Passenger transport costs and duration of flights will constitute a chief variable when an airline chooses an origin/ destination airport. The technological capacity of airports to assist different size aircrafts will determine whether or not they belong in the same relevant market. An airport whose infrastructure caters for landing small aircrafts only is not replaceable, where certain routes are concerned, with an airport with infrastructure capacity for large aircrafts.14 Another variable affecting airport competition is the switching costs for airlines. Rerouting and sunk investments (mainly publicity) account for the airlines’ costs of changing airports. The existence of these costs reduces the elasticity of demand for airport services by airlines. Effective competition among airports limits the market power of operators. Therefore, the existence of alternative airports prevents operators from transferring their market power to the air transportation segment through vertical integration15. Under such circumstances, airlines with restricted access to any of the airports would serve their routes through a different airport.
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3.1.2
Competition within an airport
As mentioned above, airports are multi-service companies that intervene in the productive process of the air transport service. Competition in airport services markets depends on the technological characteristics of production of each of the multiple services. Within airport premises, some services will be efficiently offered in competitive conditions and others will be provided by a single company. For instance, the market of ground handling services is a potentially competitive one because various suppliers may operate under efficient conditions within the same airport (as long as the volume of traffic reaches the minimum efficient scale). On the other hand, it is convenient that aeronautical services of operation and infrastructure maintenance (such as operation of runways) be provided by a single company due to the high fixed costs required to provide these services. There is international consensus (Doganis, 1995) regarding the convenience of introducing competition in airport services if the available technology permits and of circumscribing regulation to services that have natural monopoly characteristics16. Competition within an airport is produced by different commercial operators managing different terminals and competing to cater for the flights that make use of the airport. This style of management is popular in a number of US airports where some airlines manage their own terminals under the supervision of a government authority. The existence of potentially competitive terminals permits the vertical integration of terminals with airlines, posing no danger of incurring in monopolistic practices concerning airport access restriction as airlines choose the terminal in which they operate. Competition among airport terminals introduces efficiency gains through price declines, quality improvements and investments in capacity. Simultaneously however, it creates the costs of having more than one terminal operator. Among these, there are costs of coordination (planning and operation of building and runway infrastructure) and transaction (between terminal operators and both customers and the central airport management). Efficiency gains resulting from introducing competition among airport terminals must be compared to the costs also generated in the process, bearing in mind that transaction and coordination costs increase proportionately to the increase in the quantity of operators. The average costs of passenger assistance at the terminal will decrease as the volume of passengers increases, up to the point where terminals use the full potential of their capacity. Additional traffic generates congestion, thus increasing the average costs of passenger assistance17. The introduction of competition among terminals implies doubling terminal infrastructure. If terminals have decreasing average costs of passenger assistance, doubling the infrastructure will increase them, given that the minimum efficient scale will not be met. This explains why doubling terminal infrastructure causes efficiency losses for terminals with low volumes of traffic, in addition to the transaction and coordination costs. Instead, where the volume of traffic exceeds a certain value, competition will prompt efficiency gains. Costs generated by the introduction of competition within an airport will be lower in airports with a significant volume of traffic. Thus, competition will bring about net efficiency gains only in large airports with a high volume of traffic.
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4
Lack of Competition in the Airport Market and Vertical Integration
A cost/ benefit analysis must assess the net effect that vertical integration has on competition in the air transport market. I.e., efficiency gains resulting from integration and costs (potential anti-competitive practices) resulting from the new market structure. In the commercial aviation market, a tariff-regulated operator of all airports or of all terminals in one airport has incentives to integrate vertically and transfer the market power it derives from running an essential facility downstream. The examination of anti-competitive practices in this section assumes that the airport market does not allow airlines to substitute one airport for another at reasonable costs. It also assumes that tariffs of aeronautical services are regulated and that prices of nonaeronautical services are fixed freely by the airport operator. 4.1
Anti-competitive Practices
Anti-competitive practices are such that limit, restrict, or distort either competition or market access by aim or effect, or constitute an abuse of a dominant market position18. The administration of airport infrastructure (a bottleneck for aeronautical services) allows the airport operator to carry out the following practices: > Refusal to deal: the integrated operator will be motivated to deny competing airlines access to the network of air transport. In this way, the integrated monopolist will be able to transfer its monopoly downstream. Two practices that do not constitute a refusal to deal but act in the same direction are: > Price discrimination (assuming lack of tariff regulation): the monopolist sets higher tariffs (landing, parking fees; check in and office space rental, etc.) for competing airlines. > Diminution of quality: this practice can be pursued in a way that affects different service component variables: > Assignment of terminals > Assignment of VIP lounges > Assignment of check in space > Assignment of office space > Access discrimination to ground handling services: if the airport operator controls the supply of these services, it will be motivated to restrict or discriminate the access of competing airlines to the supply of ground handling services. > Slot assignment discrimination (take-off and landing rights): 19 there are different slot assignment mechanisms20. If the right to assign slots is in the hands of the airport operator and there is air traffic congestion, the operator can reserve the most convenient slots for its own airline. Thus, competing airlines will get the slots that are least convenient for passengers. In addition, the management of slot allocation allows the integrated airline to channel the traffic that uses the airport as a hub. > Predatory practices using cross-subsidies: the vertically integrated airport operator is able to finance tariff reductions for its airline below the (competitive) air transport market cost with recourse to income from the airport market (if it were a regulated monopoly) and in this way, adversely affect the profitability of competing airlines.
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> Increase transaction costs: the airport operator can increase costs endorsed by the vertical relation it has with competing airlines. For example, by means of “administrative norms” of access to the airport. > Evade tariff regulation: due to the fact that price elasticity of demand for aeronautical services is low, the airport operator has incentives to distort tariff regulation in order to increase the regulated prices. If tariff regulation is of the cost-plus type, the operator intentionally affects airport tariffs when it increases its costs. This action will increase costs for competing airlines. If tariff regulation is of the price-cap type and the adjustment factor X includes the operator’s rate of return (as is the case in Argentina), the operator may artificially decrease the adjustment factor X. By doing this, the decrease in tariffs will be lower when they are revised and thus have a negative impact on competing firms’ costs. The major anti-competitive potential of vertical integration lies in the discrimination of slot allocation. In case of congestion, the integrated operator may assign the best take-off/ landing rights (corresponding to peak demand) to its controlled airline. In this way it is able to capture a great portion of the demand for inbound or outbound flights from the airport. International experience dealing with airport vertical integration is scarce. In a recent article Crocioni (2000) summarizes the European and American experience of defining relevant markets for mergers in the aeronautical market. Only two cases of mergers involving potential vertical integration problems are mentioned. In a minor acquisition case that did not raise competition concernsin Alaska, US, the Civil Aviation Board (CAB) warned that the main problems of vertical integration are market foreclosure and raising rivals’ costs. 21 The European Commission has carried out a more detailed analysis of the potential problems concerning vertical integration. Regarding the Air France - Sabena merger, it stated that “Airports and their facilities must be regarded as essential production factors for which it is not easy to find substitutes. In the Community these production factors are offered and administered by the public authorities, which make them available to the companies. Moreover, they are physically limited by the efficiency and size of the facilities and by the constraints affecting extension projects. Therefore, control of these production factors by one or more companies may in certain cases lead to the erection of barriers to entry and create vertical effects capable of creating or strengthening a dominant position in the air transport market”. 22
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Possible Solutions
Policy options to solve the potential problem of anti-competitive practices in the air transport market are framed within the following two options: > Vertical integration with conduct regulation: The regulated company (the airport) is allowed to operate competitively with others in competitive segments (non-regulated), but restrictions are imposed on its vertically integrated conduct. > Vertical separation: the company that operates in a regulated market segment is not allowed to participate in another -competitive- segment. 5.1
Vertical Integration with Conduct Regulation
There are two types of conduct regulation: ex–ante and ex-post. Both are explained below. The ex-ante regulation is carried out by means of a specific sectorial regulatory policy that usually takes into account two types of instruments: open access and accounting separation.
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Open Access: the open access policy compels the bottleneck infrastructure operator to offer access at reasonable prices.23 This regulation seeks to resolve infrastructure operators refusal to deal conducts. Nevertheless, open access itself does not solve access discrimination. The operator may discriminate effective access by resorting to variables other than price (ex.: quality discrimination, imposing tie-in sales of services). Additionally, open access to the airport market must include the access to airport infrastructure required for the provision of commercial services linked to aeronautics, because the latter market, most of the times, does not present the technological conditions that are typical of a natural monopoly. Accounting Separation: this regulation compels the vertically integrated company to separate the accounting of each company under its control. In this way, the company must establish the price of each airport service it offers and use them as transfer prices among companies. These transfer prices must be the same ones the airport operator offers every other airline in the market. The objective of accounting separation is to avoid price discrimination and cross-subsidies between airport and air transport services. It must be noted that accounting separation cannot prevent non-tariff discrimination and it must be complemented with open access regulation, or it would be unable to avoid airport access restriction. The objective of ex-post regulation is to penalize actions that distort competition. Here, company conducts are controlled by an antitrust agency24. If only ex-post regulations are implemented, the integrated company (airport operator and airline) will be subject to the general regime of anti-monopoly laws. In order for the work of the agency in charge of enforcing these laws to be effective, rules that tend to make the information on the aeronautical service market publicly available must be established. These rules should also aim to limit the strategic advantages that the integrated airport operator may have. 25 5.2
Vertical Separation
The vertical separation of the airport infrastructure operation and the air transport market entails limiting the cross-ownership of individuals and legal entities in companies that operate in both markets. This policy bars a company from simultaneously controlling the airport operator and companies that operate in the (deregulated) air transport market. Vertical separation allows the airport operator no incentives to transfer its market power to the air transport market. Therefore, the benefits of vertical separation stem from the absence of monopolistic practices by the airport operator to displace competing airlines in the nonregulated market (air transport). Besides, by eliminating the incentives to transfer market power, vertical separation eliminates incentives to establish barriers to entry to the air transport market. The costs of vertical separation include the efficiency gains that come with vertical integration. Such efficiency gains are significant when there are economies of scope in the production of airport and transport services. Vertical integration benefits derive from airline planning and development of infrastructure. Airlines possess ample information on air traffic demand trends to plan infrastructure
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investment. These benefits however, can also be obtained without vertical integration by means of an adequate regulation framework for infrastructure development. Regulation of market structure (vertical separation) presents advantages over conduct regulation when the costs of anti-competitive conducts are very high (negatively impacting the general economic welfare) and the necessary corrective actions are very difficult to carry out26. In turn, structural regulation offers the advantage of having low monitoring costs, as opposed to conduct regulation that requires constant and highly specialized supervision.
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International Experience
A brief explanation of the airport market structure in various countries is presented below. The existence of norms regarding the feasibility of vertical integration between air transport companies and airport operators are emphasized. 6.1
Organization of the Airport Industry in the United States
The ownership, management and income-generation methods of US airports are very different from practices observed in the rest of the world. In the US, most airports are publicly-owned and operated by counties, cities, states or airport authorities. A remarkable trait of US airports is the close relationship that binds them to air transport companies regardless of ownership issues. This type of public/ private airport management has an impact on financial, investment and price setting airport policies. In some airports, for example, the airlines participate in the financial risks of investments and on infrastructure management. Investments carried out by airports are financed in a number of ways. A form of financing is using bonds backed by public funds or by the future income of the airport. Another source of financing is the Program for Airport Improvement, which is made up of public federal funds that come from taxes on the air transport market. These two sources of financing are the most used ones. Other lesser sources of financing are state contributions and airline financial contributions. The airlines sign contracts of “Airport Use Agreements” (Doganis, 1995) with the airport manager where the conditions regarding the use of infrastructure are detailed. There are basically two kinds of contracts to establish airport fees: Residual Method: airline companies must meet airport management costs that exceed commercial services revenues. In this way, the airport owner transfers the airport management risk to airlines. Consequently, the airlines are motivated to increase the airport traffic flow. Compensatory Method: airlines pay airport fees set on the basis of the cost recovery of operating the facilities. Generally, airlines that are based in an airport rent or lease terminals. These may be assigned in an exclusive or a shared manner. The contractual relationship of airport management that exists between the airports and airlines in the US does not affect air transport competition because the following conditions are met:
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> The presence of various terminals in airports allows for competition between their operators. > The fact that most airports are managed by different airlines makes it less-than-optimum to restrict airport access to competing airlines, as these could pursue the same conduct in the airports they manage. In turn, the presence of hubs in different geographical locations and the contractual relationship (terminal leasing or rent) between airports and airlines explain the phenomenon above. In brief, the distribution of air routes, the size of the commercial aviation market and the style of airport management hinder US airports to abuse their market power. 6.2
Italy
Airports are government-owned in this country. The form of ownership is either direct or by semi-autonomous state companies. Large airports are operated by companies created exclusively for this purpose. In some middle-sized airports (Naples, Florence and Geneva), the national airline is a minor shareholder of the company that operates the infrastructure. Generally, private investors are also minority shareholders. In a paper on the airport sector, the OECD27 points out that “a recent law… facilitates the elimination of previous restrictions on the number of shares owned by private investors. If related regulations are sanctioned, airlines will be forbidden to control an airport”. 6.3
Australia
The largest 22 airports in the country are owned by Federal Airports Corporation. The management of these airports is going through a concession process. Ownership monitoring of privatized airports is regulated by the Airports Act 1996 constrains ownership in the following ways: > Maximum foreign company ownership of operating company, 49%. > Limits to cross-ownership of airports. > Maximum airline ownership of operating company, 5%.
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which
It should be noted that the Airport Act prohibits the vertical integration between an airport operator and air transport companies. 6.4
Chile
Chilean airports are government-owned and have been concessioned to private operators through bidding processes.29 Airport concessions have been undertaken individually, that is, each airport has had a separate bidding process. The Bidding Outlines30 specify that the infrastructure concessionaire “Cannot have decisive influence on the administration or management of the licensing society, neither individually nor as a part of a group of people that have agreed to act together, directly or through other individuals or legal entities that have decisive influence over the administration or management of companies that offer air transport services, be they domestic or international, or any other kind of commercial air-navigation services”. It goes on to say “Without prejudice of the above, the sum of percentages of capital participation with a right to vote in the licensing board for companies that offer air transport services, be they domestic or international, or any other kind of commercial air-navigation services, cannot exceed 20%”.
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Clearly, the bidding specifications include vertical integration restrictions that aim to prevent potential anti-competitive conducts.
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Argentine Airport Market
In 1997, the National Airport System (SNA) that includes 57 airports located throughout Argentina was created by intermediary of the Decree 375. The same decree put out to tender the concession of 33 (“Group A”) SNA airports. In 1998, the airports are concessioned to Aeropuertos Argentina 2000 SA (AA2000) for a period of 30 years. 31 The concession of the airports includes the facilities required to offer both aeronautical and non-aeronautical services, although air traffic control and meteorological services remain in hands of the Argentine Air Force (FFAA). Ground handling services, duty free shops and bonded warehouses were also excluded from the concession because prior licenses were in force.32 The shareholder composition of the airport operator (AA2000) is as follows:33 > Societa per Azioni Esercizi Aeroportuali 28 %, > OGDEN Corporation 28 %, > Corporación América Sudamericana SA 35 %, > Societa Italiana per le Imprese Miste all´Estero SPA 8 %, > Riva SAIICFyA 1%. The concession of these 33 airports is subject to regulation by the National Airport System Regulatory Agency (Organismo Regulador del Sistema Nacional de Aeropuertos – ORSNA), created by the Decree 375/97. The remaining SNA airports are operated by provincial or municipal governments. Ushuaia and El Calafate airports as well as the passenger terminal in Trelew have been concessioned to London Supply. 7.1
Airport Market Structure
An analysis of the relative importance of concessioned airports shows that the group of airports belonging to AA2000 SA accounts for 90.3% of passenger movement. On the other hand, an analysis of airplane traffic shows that AA2000 accounts for 70% of the movement. Thus, it can be inferred that airports that are not operated by AA2000 service a very low percentage of passenger traffic. Table 1 Airport Aeroparque* Ezeiza* Córdoba* Mendoza* Neuquen Bariloche* Tucumán* Mar del Plata*
Passenger Percentage Aircraft Percentage movement movement 6.854.009 31.505% 147.267 20.63% 6.338.227 29.134% 63.694 8.92% 1.762.359 8.101% 49.293 6.91% 769.120 3.535% 21.059 2.95% 552.845 2.541% 20.262 2.84% 469.258 2.157% 10.527 1.47% 462.385 2.125% 13.427 1.88% 418.262 1.923% 12.495 1.75%
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Airport
Passenger Percentage Aircraft Percentage movement movement Salta* 398.405 1.831% 13.057 1.83% Rosario 342.341 1.574% 22.578 3.16% Iguazú* 332.336 1.528% 5.542 0.78% C. Rivadavia* 294.553 1.354% 15.768 2.21% Bahía Blanca 284.173 1.306% 8.559 1.20% Río Gallegos* 280.547 1.290% 14.020 1.96% Ushuaia # 257.596 1.184% 10.033 1.41% Trelew 241.893 1.112% 8.173 1.15% San Juan* 155.610 0.715% 4.832 0.68% Sauce Viejo 155.389 0.714% 11.536 1.62% Resistencia* 150.957 0.694% 7.671 1.07% Jujuy* 128.893 0.592% 4.206 0.59% Río Grande* 107.562 0.494% 10.977 1.54% Posadas* 104.825 0.482% 4.718 0.66% Corrientes 103.481 0.476% 4.784 0.67% La Rioja* 80.279 0.369% 4.009 0.56% Paraná* 76.307 0.351% 4.965 0.70% San Luis* 69.497 0.319% 4.194 0.59% S. del Estero* 61.612 0.283% 3.547 0.50% Catamarca* 55.843 0.257% 3.560 0.50% Formosa* 47.583 0.219% 2.268 0.32% Chapelco 46.286 0.213% 3.009 0.42% Pto. Madrin* 43.007 0.198% 1.675 0.23% Santa Rosa* 33.758 0.155% 2.948 0.41% S. Fernando* 28.903 0.133% 42.293 5.93% V. Reynolds* 25.735 0.118% 8.020 1.12% Río Cuarto* 24.716 0.114% 2.778 0.39% Concordia 23.961 0.110% 3.107 0.44% Viedma* 21.185 0.097% 3.768 0.53% Villa Gesell 19.823 0.091% 2.259 0.32% Esquel* 17.935 0.082% 2.107 0.30% S. Rafael* 15.445 0.071% 3.228 0.45% Tandil 12.241 0.056% 5.960 0.84% Malargue* 10.778 0.050% 1.744 0.24% General Pico* 9.178 0.042% 4.351 0.61% Tartagal 9.111 0.042% 2.442 0.34% Necochea 8.783 0.040% 2.269 0.32% General Roca 8.538 0.039% 1.339 0.19% Don Torcuato 6.672 0.031% 92.922 13.02% La Plata 6.374 0.029% 6.864 0.96% Reconquista* 5.501 0.025% 5.877 0.82% Junin 5.451 0.025% 4.015 0.56% Santa Teresita 5.062 0.023% 1.716 0.24% Paso de los Libres 4.862 0.022% 1.039 0.15% Lago Argentino 4.621 0.021% 554 0.08% Cutral Co 1.498 0.007% 449 0.06% Total 21.755.571 713.754 100.00% *Airports operated by AA2000 SA. #Airports operated by London Supply. Source: ORSNA, Annual Report 2000.
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The market structure chosen for the bidding process generates the following problems: > It limits potential competition between airports, > It prescribes yardstick competition,34 > It presents an adequate scenario for cross-subsidies between airports.35 AA2000’s total income is broken down by airport in Table No. 2. This data shows that the two most important airports in the country account for 84% of the airport operator’s annual income. Table 2 Airport
Percentage of operator’s income
Ezeiza Aeroparque Córdoba Mendoza Salta Tucumán Mar del Plata Bariloche Otros Source: ORSNA, Annual Report 2000. 7.2
63.00% 21.00% 5.00% 2.00% 1.00% 1.00% 1.00% 1.00% 5.00%
Price Regulation
Tariff regulation only affects aeronautical services in Argentine airports. The regulated tariffs of services offered by the airport operator are: > Airport utilization tariff (passengers charged on departure). > Landing tariff. > Airplane parking tariff. > Finger (or Airbridge) utilization tariff. Security is another regulated airport service and it is managed by FFAA. Non-aeronautical service tariffs are not regulated. The concession contract merely states that prices of such services “must be fair and reasonable”. Aeronautical service prices are set using a price-cap that is adjusted for five-year periods and corrected using the PPI36 – X formula. The adjustment factor X is calculated by weighing a group of variables: traffic increase, efficiency gains, service quality levels, projected investment levels and projected rate of return. In Argentina, the single till tariff regulation system is employed. The single till mechanism considers the income generated by aeronautical and non-aeronautical37 services when calculating the rate of return. This system enables non-aeronautical (non regulated) services to subsidize aeronautical services.
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7.3
Slot Allocation
Slot allocation is very important when airports are congested. This problem only exists in Aeroparque Jorge Newberry where there are approximately 220 regular flight take-offs per day. 38 FFAA is the agency in charge of coordinating slot allocation. However, the administrative nature of the allocation mechanism does not call for a formal role delegation: it is based on the number of slots and airlines grandfather rights. Upon consideration of these variables, airlines agree on the distribution of available slots.39 Airlines lose slots if minimum utilization requirements are not met, and they are allowed to exchange, not sell, slots. 40 As Briggs and Petrecolla (2001) point out, the administrative slot allocation mechanism causes efficiency losses and creates incentives to restrict access to new airlines when the airport infrastructure is congested. Vertical integration in Argentina should not pose airport access restriction problems because the entity that coordinates slot allocation does not depend on the airport operator. However, problems could arise if the integrated airport operator gained control (capture) over this entity (FFAA). 7.4
Competition among Airports in Argentina
The degree of competition among airports will depend on how interchangeable they are for airlines at reasonable prices. In Argentina, there is no more than one airport in each geographical market due to cities’ demographical and geographical distribution, technical conditions in airports and air traffic flow patterns.41 As previously mentioned, airport “bundle” concession worsens the lack of competition among airport operators and inhibits yardstick competition or airport cost benchmarking. 7.5
Competition within Airports in Argentina
The airport services that can be provided competitively within an airport are: ground handling services (for a market size that may lead to an attainable minimum efficient scale), commercial services (shops, restaurants, kiosks, ground transport services, etc.) and bonded warehouses. Competition for office and desk rentals and an increase in the number of competitors providing commercial services may occur if there are more than one airport terminals and they are being operated by different companies. In Argentina, the provision of ground handling services for airplanes is being partially deregulated. As of Decree 698/01, domestic airlines can enter into joint ventures to provide these services themselves and assist other internal transport companies. On the other hand, international transport airlines can only provide their own ramp services or hire them from a monopolistic, State-owned company (Intercargo SAC). 42 The exclusive contract (Intercargo SAC-FFAA) for the provision of ground handling services expires in the year 2010. From that date on, the airport operator will be in charge of managing these services. AA2000 will have strong incentives to restrict access to airport infrastructure to other companies that wish to offer ground handling services and hence operate as the sole provider of these services that foreign airlines will be demanding. In addition, if the airport operator is vertically integrated, it may use ground handling services as an instrument to discriminate prices and worsen the quality of the service competing airlines offer.43
15
Airports in Argentina only have one terminal. Therefore competition within the infrastructure is not feasible in the short or medium run. In the long run, once airport terminals reach congestion peaks, new terminals will be built and if they could be operated by companies other than AA2000 competition will result.44 Competition among terminals will occur when sufficient traffic generates efficiency gains that are greater than costs of introducing more than one terminal operator per airport. It can be inferred that given the present low traffic flow, the introduction of competition within airports in Argentina will not result in efficiency gains.
8
Conclusions
In the late 80’s and through the 90’s, the operation of airports was concessioned or privatized in various countries. This process began in England and was transferred to other countries where alternative systems of ownership and management of infrastructure were adopted. Governments saw the need to implement regulatory policies for airport systems to control infrastructure licensing and the natural monopolistic characteristics of certain airport services. The specific market structure in which airport operators perform was considered when these policies were outlined. Some countries have implemented regulations for the relationship between airlines and airports. They explicitly forbade the vertical integration between these market agents by means of regulations that restrict cross-ownership. Other countries, on the other hand, scrutinize vertical integration in this market under their anti-trust laws. This paper analyzed the consequences of a vertically integrated aeronautical market structure (between the transport and airport market) in detail. International evidence was studied and special emphasis was placed on the evaluation of the Argentine case. The operation of an airport creates incentives to transfer its upstream market power to the air transport market (downstream). If the airport market is regulated but the airport operator is allowed to control at least one airline, the aforementioned incentives give rise to anticompetitive practices that seek to displace competing airlines. This is why the main problem of the Argentine regulatory framework is the absence of regulations that forbid or constrain simultaneous ownership in both markets. The analyses in this paper draw to the conclusion that vertical integration regulation (open access and accounting separation) or vertical separation are the least costly instruments with which to guarantee competition in the commercial aviation market. Their major advantages include low monitoring costs, elimination of incentives to transfer market power to the transport sector and the certainty it provides to current and potential airlines.
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9
References
Airports Council Europe. (October 1999). “European Airports: A Competitive Industry”. Policy Papers. Attorney General´s Department. (July 1999). “Airports Act 1996”. Australian Competition and Consumer Commission. (May 1998). “Access UndertakingMelbourne Airport”, Draft Determination. Australian Competition And Consumer Commission. (December 1997).”Declaration of Airport Services- Section 192 of the Airports Act”, Draft Discusion Paper. Australian Productivity Commission. (September 1998). “International Air Services”. Inquiry Report, N° 2, Briggs, M. C.; Petrecolla, D. (Marzo 2001). “Temas de Competencia en la Asignación de Capacidad de los Aeropuertos, El Caso Argentino”. Texto de Discusión N° 24. Centro de Estudios Económicos de la Regulación, UADE. Crocioni Pietro. (Spring 2000). “Defining Airline Markets: a Comparison of the U.S. and EU Experiences”, The Antitrust Bulletin. Estache, A.; de Rus G. (June 2000). “Privatization and Regulation of Transport Infrastructure, Guidelines for Policy Makers and Regulators”. World Bank Institute. FIEL. (1999). “La Regulación de la Competencia y de los Servicios Públicos. Teoría y Experiencia Argentina Reciente”. Ministerio de Obras Públicas de Chile. Bases de Licitación. (June 1997). “Concesión Aeropuerto Internacional Arturo Merino Benítez de Santiago”. New Zealand Civil Aviation Authority. (October 2000). “Air Traffic Services & Airspace Policy, Issues”, Consultation Paper. OCDE. (2000). “Airline Mergers and Alliances”, Committee on Competition Law and Policy, Organismo Regulador del Sistema Nacional de Aeropuertos (ORSNA).(2000). Anuario 2000. Doganis Rigas. (1995). “La Empresa Aeroportuaria”. Aena. Editorial Paraninfo. Doganis Rigas. (2001). “The Airlines Business in the 21th Century”. Londres, Routledge. United Kingdom Civil Aviation Authority. (February 2001). “Competitive Provision of Infrastructure and Services Within Airports”. Consultation Paper. United Kingdom Civil Aviation Authority. (December 2000).The “Single Till” and the “Dual Till” Aproach to the Price Regulation of Airports”, Consultation Paper. Valletti, T. M.; Estache, A. (March 1998). “The Theory of Access Pricing: An Overview for Infrastructure Regulators”, World Bank Institute.
17
Villalba, Luis. (2001). “Estudio del Mercado Aerocomercial Argentino”, Tesis de Licenciatura, Universidad de San Andrés. Viscusi, W. K.; Vernon J. M.; Harrington jr., J. E., “Economics of Regulation and Antitrust”, The MIT Press, 2000. .
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10 Notes 1
Ex Economista Jefe de la Comisión Nacional de Defensa de la Competencia (Antitrust Commission Argentina). Email:
[email protected]. 2 Secretaría de la Competencia, la Desregulación y la Defensa del Consumidor (Secretariat for Competition, Deregulation and Consumer Affairs - Argentina). Email:
[email protected] 3 We would like to thank Lucía Spinelli and Andrés Ricover for their comments. The authors alone are responsible for the views expressed here. 4 Decree 2186/92 issued by the Executive Power. 5 This operation was reported to the Comisión Nacional de Defensa de la Competencia which has not, as of yet, issued a sanction or rejection. 6 Reference to “air transport” encompasses transport of passengers, freight and mail. 7 In other words, the company does not assume the direct costs that its decisions induce in other companies by means of price or cost variations. 8 It is highly probable that contracts between parties are unable to comprehend all future contingencies (incomplete contracts). Therefore, property rights problems may arise in future as well as ensuing opportunist conducts. 9 Economies of scope exist when the total cost of producing different goods (in a single company) is lower than the cost of producing them separately (in different companies). 10 Airports are natural monopolies in most cities given the current demand of air transport. 11 There is little substitution of airports for origin/ destination flights. On the other hand, intermediate airports (where the airline has no traffic rights) have a higher rate of substitution. 12 The hub system concentrates all direct flights of a given airline in a central airport (hub) that services every other destination and allows for the redistribution of passengers.
13
Relevant transportation costs are those that airlines and their passengers must meet. A key variable that must be considered in transportation costs is the value of passenger time. 14 An airport that can cater for large aircrafts will replace an airport that cannot (although not efficiently so if there is airside congestion.) 15 This reasoning assumes that there is no airport congestion. 16 The international trend clearly moves in that direction. The European Economic Community (Policy Guideline 96/67) opened the market of ground handling services (GHS) to competition in 2001 establishing that there must be two or more suppliers per airport (among which at least one must not be controlled by the airport operator or the dominant airline). 17 For example, when terminal capacity utilization is at its peak, passengers wait longer to be served. 18 Cf. Ley de Defensa de la Competencia 25156 (Anti-trust Law - Argentina). 19 A slot is a time allocated to an airline for take-off or landing purposes. 20 The most popular slot assignment mechanisms may be classified as administrative (this includes slot allocation committees, first-come-first-serve policies, grandfather rights, etc.) or market (bidding processes with or without secondary markets). Mixed slot assignment mechanisms combining administrative and market mechanisms also feature. 21 Bergt-Aia-Wien Docket No 40432, July 30, 1982 (CAB) 22 Air France-Sabena (1992) (IV/M. 157) 23 Access regulations must take into account increases in infrastructure capacity as the operator may restrict access by refusing to increase capacity. 24 The institutional organization of the anti-trust policy is not considered relevant in the frame of this study with regards to whether it corresponds to a specific agency or is included in the functions of sectorial regulation agencies. 25 Strategic advantages and the ability to use them to discriminate other airlines are explained, to a great extent, by the asymmetries in the availability of information for the airport operator and the anti-trust agency. 26 The obligation to disinvest may be an advisable action. This process is highly time-consuming and requires a State that can resist private-sector pressure. 27 See OECD (1998). 28 See Attorney General’s Department (1996).
19
29
Only landside airport services have been concessioned in Chile. See Chilean Department of Public Works (1997). 31 To date only 32 airports have been transferred to AA2000; the province of Jujuy has not entrusted its airport yet. 32 AA2000 will obtain exclusive rights to offer ground handling services once the contract between FFAA and Intercargo SAC expires. 33 The objective of the concessionaire must be exclusively to exploit, administer and operate Group A airports services. 34 Although there is consensus regarding the difficulty of comparing airport structures and their costs, the regulator may benefit from benchmarking them. 35 Cross-subsidies between airports generate inefficient resource allocation. If the aim of the “bundle” concession was to assure that low profitability airports be operated, this aim could have been achieved using other instruments that present lower costs for society, for example: combining concessions and subsidies for non-profit airports. 36 Producer Price Index of the United States Department of Labor. 37 Alternatively, the dual-till system separates aeronautical from non-aeronautical income profitability. 38 See Briggs and Petrecolla (2001). 39 If there is overlapping after slots are initially distributed, FFAA notifies airlines that were put at a disadvantage to reschedule. 40 The slot allocation mechanism described is employed at Aeroparque Jorge Newbery. It must be noted that there is no reglamentary law or decree formally establishing a slot allocation mechanism. 41 Although the Ezeiza and Aeroparque airports are in the same geographical market, the latter does not have adequate runways for large airplanes and thus cannot compete in the long distance international traffic segment. 42 The authorized self-providing measure for international transport companies forbids associations of the companies for such a purpose. 43 For example, it may delay baggage delivery and jetway installment upon arrival. These are key variables in assessing the quality of an airline’s customer service. 44 The licensing contract signed by the Argentine government and AA2000 SA must be modified to create a competitive scenario within airports. 30
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