Presentation on theme: "1 Privatization, restructuring and its effects on performance: a comparison between German and British airport sector Jürgen Müller, Tolga Ülkü, Jelena."— Presentation transcript:
1 Privatization, restructuring and its effects on performance: a comparison between German and British airport sector Jürgen Müller, Tolga Ülkü, Jelena Živanović
2 Outline Introduction Privatization in Germany and the UK Methodology Data Empirical Analysis (1) Partial Factor Productivity i - Financial Analysis ii - Labor Productivity iii - Capital Productivity (2)Financial Ratio Analysis (3) Data Envelopment Analysis Summary Analysis Conclusion
3 Introduction Some sales of state-owned airports – Flows of money to public sector – Increasing profit motive of private sector Against this background, we aim at an effective benchmarking analysis to identify first effects. The main issue is to identify the organizational structure that leads to more efficiency and better performance.
4 Introduction Differences between performance and efficiency may arise from different ownership structures: UK vs Germany Our analysis differentiates between – fully and partially privatized, as well as – public airports 7 British, 6 German airports which have been exposed to similar market and economic conditions. Econometric methods to identify the effects of ownership structure on productivity: PFP, DEA, FRA and SFA
5 Effects of Privatisation? The greater inefficiency of public utilities comes as a result of the lack of incentive and sanction mechanism. Privatized or partially privatized airports are likely to aim at higher productivity and cost efficiencies, better capacity utilization and the expansion of the non-aviation sector. The change of the ownership structure should result in cost efficiencies and higher profit-orientation.
6 Privatization in Germany 06 AIRPORT OPERATING COMPANY SHAREHOLDERSSHARE Düsseldorf International (DUS) Flughafen Düsseldorf GmbH City of Düsseldorf50% Airport Partners GmbH50% Frankfurt/Main (FRA)Fraport AG Federal Republic of Germany18,38% Federal State of Hessen32,13% Stadtwerke Frankfurt Holding20,52% Portfolio Investments28,97% Hamburg (HAM) Flughafen Hamburg GmbH City of Hamburg51% Hamburg Airport Partners GmbH Co KG49% Hanover (HAJ) Flughafen Hannover Langenhagen GmbH Hannoversche Beteiligung GmbH35% City of Hannover35% Fraport AG and Nord LB30% Munich (MUN) Public Airport Federal State of Bavaria51 % Federal Republic of Germany26 % City of Munich23 % Stuttgart (STR) Public Airport Federal State of Baden- Wuerttemberg50% City of Stuttgart50%
7 Privatization in the UK 06 AirportStatusPrincipal Owner AberdeenprivateADI(BAA) GlasgowprivateADI(BAA) London CityprivateMarketspur London GatwickprivateBAA London HeathrowprivateBAA London StanstedprivateBAA Manchesterpublic
8 Privatization in the UK Three types of airport ownership predominate in the United Kingdom: – Fully privatized airports (managed and owned by a private company; examples include Liverpool and the BAA airports) – Partially privatized airports (under joint local government and private ownership; examples include Birmingham and Newcastle) – Public airports (owned and often managed by local governments, e.g. Manchester)
9 Data Years : 1998 – 2005 Financial, Capacity and Traffic data BritainGermany Aberdeen (ABE)Düsseldorf (DUS) Glasgow (GLA)Frankfurt (FRA) London City (LCY)Hamburg (HAM) London Gatwick (LGW)Hanover (HAJ) London Heathrow (LHR)Munich (MUN) London Stansted (STN)Stuttgart (STR) Manchester (MAN)
10 Methodology 1-Partial Factor Productivity (PFP): Focus of MeasurementIndicator Financial Performance Real Costs per PAX Real Revenues per PAX Revenue/Expenses Ratio Labor Productivity PAX per Employee Movements per Employee Capital Productivity Runway CapacityMovements/Runway Length Terminal Capacity PAX(000) per Gate PAX/Terminal Area(m2)
11 Methodology 2-Financial Ratio Analysis (FRA): 3-Econometric Approaches: 3.1. Data Envelopment Analysis (DEA) 3.2. Stochastic Frontier Analysis (SFA) Indicators Profitability Liquidity Debt Management InputsOutput Terminal Area (m2)Number of Passengers Number of Check-in Counters Number of Gates
12 Data A General Look at the Airports in the Sample Size of Airports ( ) measured in mill. Passengers
13 Financial Comparison Averages, Growth Rates and Yearly Figures: (1)Real Costs per PAX (2)Real Revenues per PAX (3)Revenues / Expenses
14 Partial Productivity Analysis Average Values for Financial Indicators Both costs and revenues are larger for British airports Effect of vertical integration dominate British airports have a higher revenues/expenses ratio
15 Partial Productivity Analysis Growth Rates for Financial Indicators For British airports both costs and revenues decreased (revenues by almost 10%) Interestingly revenue/expenses ratio also decreased by almost 6%
16 Partial Productivity Analysis Costs and Revenues per PAX, 8-year average Financial Indicators for each Airport
17 Partial Productivity Analysis Real Costs per PAX Frankfurt incurs the highest costs Partially privatized airports, Hamburg and Hanover, run lower costs Interesting time trend: Frankfurt rising, Hamburg falling British airports have higher cost efficiency The lower degree of vertical integration and the greater degree of outsourcing London City generates the highest costs Real costs show a significant drop for Manchester and an increase for Aberdeen Stansted and Glasgow have the lowest ratio of all airports, possibly due to pressure from low cost carriers After 2001 a gradual growth in costs due to higher security measures
18 Financial Performance Higher cost efficiency at British airports Higher revenues at German airports BUT: The effects of vertical integration and market power lead to biased results! Should only do within group comparisons!
19 Partial Productivity Analysis Real revenues per PAX Frankfurt generates the highest revenues Hamburg and Düsseldorf generated the lowest revenues, followed by Hanover The effects of market power at Frankfurt are evident British airports have lower revenues London City generates the highest revenues most probably due to market power Stansted has the lowest ratio of all airports, possibly due to pressure from low cost carriers
21 Partial Productivity Analysis: The ratio is not affected by VI, but effects of market power and regulation (more important for monetary indicators than for physical indicators) The large differences between German and UK airports have disappeared Heathrow had the best performance, closely followed by the partially privatized Hamburg Manchester does well, but is a public airport Other British airports score very well, whereas Stuttgart, Munich and Frankfurt are bad performers Financial comparison of Revenues and Expenditures
22 LABOR PRODUCTIVITY (1)Data: Number of Employees (2)Averages, Growth Rates and Yearly Figures: PAX per Employee Movements per Employee
23 Data Number of Employees at airports in the sample
24 Vertical Integration and Number of Employees As a result of high vertical integration, employee numbers in German airports are more than double those of Britain‘s....which do not allow us to compare the labor productivities directly. - Number of Employees
25 Labor Productivity : effects of VI Main finding of a rough analysis of graphs: -UK Airports that outsource many activities achieve higher labor productivity. But, looking at employment levels reveals that VI leads to biased results about labor productivity. Large differences in labor productivity come from large differences in vertical integration! What to do? TRL adjustments of VI next task
26 Labor Productivity Average and Growth Rate of Labor Productivity Indicators btw Growth Rates: Averages:
29 Labor Productivity Aircraft Movement per Employee, 8-year-average
30 Labor Productivity Aircraft Movement per Employee
31 Labor Productivity vs. Aircraft Size PAX per Aircraft Movement Aircraft size (bigger airplanes and fewer movements) affects labor productivity by changing the level of outsourcing!
32 CAPITAL PRODUCTIVITY (1)Data: Runway Length,Number of Gates, Terminal Area (m2) (2)Averages, Growth Rates and Yearly Figures: Aircraft Movements / Runway Length PAX (000) per Gate PAX / Terminal Area (m2)
33 Data Airport (2005) Length of Runway (m) DUS FRA HAM HAJ MUN STR ABE GLA LCY LHR LGW STN MAN Number of Gates Airport DUS 3484 FRA 174 HAM 4355 HAJ 20 MUN STR 1570 ABE 11 GLA 38 LCY 10 LHR 58 LGW 62 STN 99 MAN 57
34 Frankfurt Airport The new landing runway will be some 2,800 meters long. The centerline separation from the existing North runway will be approx. 1,400 meters. This will allow for simultaneous landing operations on these two runways, which are not possible on the existing parallel runways because they are not far enough apart.
35 Terminal Area (m2, in thousands) Data
36 Capital productivity or Capacity utilization? Length of runways, gates and terminal size are measures for capital, but not perfect measures but measure also capacity utilization instead of capital productivity How to measure capacity? Problems with no of runways : example of Frankfurt Adjustment: Runway length instead of runways Using declared capacity? Data?
37 Capital Productivity Averages and Growth Rates of Capital Productivity Indicators btw Vertical integration does not matter British airports, however, perform better than German airports in terms of capacity utilization In Germany, decreasing growth due to investments in capital
38 Capital Productivity Aircraft Movement/Runway Length, 8-year Average
39 Capital Productivity Aircraft Movement/Runway Length
40 Capital Productivity PAX (000) per Gate, 8-year Average
41 Capital Productivity PAX (000) per Gate *Dusseldorf, Stuttgart
42 Capital Productivity PAX / Terminal Area (m2), 8-year Average
43 Capital Productivity PAX / Terminal Area (m2) Stansted vs. Dusseldorf
44 Capital productivity or Capacity utilization? Problem of lumpy investment Gates: they represent a less lumpy investment than terminals and runways(e.g. Stansted built a terminal and increased capacity utilization.) Düsseldorf reduced gates with fire? still, are there indications of excessive investment, overcapacity?
45 Financial Ratio Analysis (FRA) Profitability
46 Profitability Effect of market power and of regulation The average operating margin was 24.3%, in 2005, down from 26.3% UK airports achieved higher margins Heathrow had the highest ratio at 39.1% Frankfurt had the lowest at 14.6% The margin for Düsseldorf decreased from 31.4% in 2002 to 21.1% in 2005 due to large investment program
47 Financial Ratio Analysis (FRA) Liquidity Ratio of current assets to current liabilities
48 Financial Ratio Analysis (FRA) Debt Management Percentage of total funds provided by creditors
49 Data Envelopment Analysis (DEA) Following Pels, Nijkamp and Rietveld (2001) and Kamp (2004), the most appropriate input-output combination for the DEA seemed to be the following: – Output: Number of Passengers – Inputs: Terminal Area Number of Check-in Counters Number of Gates
50 Data Envelopment Analysis DEA Scores More powerful efficiency measure since it gives the whole picture: It confirms some of the previous findings Frankfurt performs best because it has high number of passengers and high capacity Hanover could have had twice as many passengers as it has given the capacity (small airport effect)
51 Stochastic Frontier Analysis (SFA) Results of the SFA analysis SFA Estimation ResultsCoefficientStandart Errort-ratio ßo Terminal Area Check-in Counters Gates Sigma-Squared Gamma
53 Summary Analysis Evaluation of each airport according to each indicator Ranking them according to their points Summing up all of the partial indicators e.g. Results DUS FRA HAM HAJ MUN STR ABE GLA LCY LGW LHR STN MAN Total Scores according to the rankings Best Worst
54 Summary Analysis Heathrow is leading, whereas Hanover is at the bottom British airports clearly outperforms their German counterparts From a benchmarking point of view Dusseldorf can collect only half of the points in 2005 compared to 1998, Stuttgart also loses a lot Stansted and Manchester are performing the best in 8 years Frankfurt and Munich are the only 2 German airports who have been developing their scores
55 Summary Differences resulting from privatization are difficult to prove Not many observations for privatization inD Not enough public airports in the UK and private airports in Germany Comparisons across the 2 countries are difficult
56 Results revisited (1) Strong evidence that the British airports were more efficient in terms of costs and labour productivity. The picture of the overall performance of privatized airports in the sample is less conclusive. Mixed results on German airports: – Partially privatized German airports tend to achieve lower labor and capital productivity (e.g. Frankfurt, Hanover) while Stuttgart has the best labor productivity.
57 Results revisited (2) Higher traffic volume and better capacity utilization are characteristics of British airports, whereas more overcapacities are encountered at the German airports. – Some ratios in the PFP analysis supported the hypothesis for higher efficiency of privatized airports, but sometimes this trend is subtle. Partial indicators are dramatically affected by the changes in capacity.
58 Need for Further Research Longer time series and more observations VI biases some measures: TRL adjustment may help Capacity- Big driver is capacity rather than privatization Never-ending story