Regulation of Charges at Small Airports in Austria

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Regulation of Charges at Small Airports in Austria

• Team Charges Berlin
• Jürgen Müller, Marius Barbu, Peter Schröder

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Outline

1. Austrian Price Cap
2. Recommendations for a better Price Cap
3. Theoretical Excursus Perfect Price Cap

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Introduction of the Price-Cap in 2001

• 1998 AUA wanted to participate from the
  passenger growth and decreasing average cost
  (economies of scale) of the airports.
• So far the airports had not shared any of the
  higher revenues (Zambelis, AUA)
• Planning security (531 Years) for airports,
  airlines and owners

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Negotiation of the formula

• The parties involved (plus UK-Experts) spend a
  lot of time in negotiations
• Negotiation between airlines and airports in the
  user council (Nutzerausschuss) was very tough,
  almost every propostion of airlines was declined.
  In the second phase public authority entered the
  process.
• Many compromises made airlines unhappy. Authority
  tends to be on the airports side. (Zambelis, AUA)

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How does the price cap look like?

• Maximum increase is inflation 0.5.
• No floor for decrease
• Growth incl. PAX and MTOW of Current year and the
  forecast of next year.

• If T gt 0 
• L -0,35TI0,5
• If T lt 0
• L I0,5
• key
• L Maximum Increase in Charges
• T Traffic Growth
• I Inflation

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Diagramm Price Cap

• There is no bottom when passanger growth
  increases
• Absolute Price-Cap is 2,7
• Viennas Price-Cap is lower (...0.25)

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Assessment

• 2009 gap for growth forcasts was to big for the
  AL
• No compromise in the first place. Public
  authority accepted to cease the price cap regime.
• Eventually, the parties accepted to have the
  price cap for another year because in 2009 the
  directive will be implemented. 

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The Airlines Suggest

• The increase in the formula (0.5) should be
  deleted.  
• The share of passenger growth of 35 should be
  higher or more flexible
• AP should have single till. Klagenfurt could not
  survive with aviation revenues but makes a lot of
  money from non aviation (for example parking)
  this revenues dont affect the level of charges
  under dual-till.

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The Future of Regulation in Austria

• Ministry argues Good regulation doesnt have a
  positve macroeconomic effect
• An important element that is accepted and will be
  applied is the weighted average cost of capital
  (WACC)
• In general it is difficult to implement new
  concept that are accepted by all parties
• Try to achieve state of the art in the medium
  term

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Impact of EU-Charges Directive

• It doesnt contain much information but it is a
  at least a legal basis
• There are 3 possible outcomes
• 1. EU directive will be copied into Austrian law
  without any revision. This would leave a lot of
  unclear space for negotiation and conflict
• 2. The former price cap will be introduced into
  Austrian law, this would disappoint the airlines
  because its very unfavourable for them.
• 3. The idea of more transparency and non
  discrimination could be introduced in a
  reasonable way. The AL would welcome that.

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A better Price-Cap

• The actual level that was present at the time
  was just accepted.
• The beginning level should be calculated form an
  independent and competent party from a
  zero-budget-level
• An accurate benchmark-study would be mandatory
• a better more complex price-cap means cost
  increase
• the easier the regulation the easier is the
  acceptance in the industry

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Theoretical Excursus The Perfect Price Cap

• Conditions
• 1. Recover inflation
• 2. Stable total revenues
• 3. Price elasticity of 1

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Theoretical Excursus The Perfect Price Cap

• L -T I
• L max increase charges level, T
  passenger growth, I inflation
• Price elasticity is 1 now. Should result in
  constant total revenues.

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Theoretical Excursus The Perfect Price Cap

• Problem
• Relation cost / revenue must be stable
• Total cost will increase with increasing
  passengers (disincentive to increase pax?)
• Which charges will be increased according to the
  price cap? Total price or per passenger?
  Assumably, total price since condition 2 relates
  to revenues.

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Scenario 1

• margin between total costs and total revenues
  gets bigger and bigger. Airports make higher and
  higher profits. Eventually, the new (lower) level
  of costs have to be incorporated in the initial
  level for the next year in order to curb the
  profit development

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Scenario 2

• the efficiency gains of the airports compensate
  the increasing total costs that are inevitable
  because of passenger growth. Airports have
  neither profits nor a loss. This situation is
  more or less stable. No need for adjustments.

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Scenario 3

• passenger growth is negative. Airports have the
  same revenues but less costs, the positive profit
  development is even reinforced by the efficiency
  gains. Airlines have higher average costs per
  passenger (economies of scale) and have to pay
  higher charges not only per passenger but in
  total numbers. Profits will be cut drastically.
  Level of costs have to be incorporated.

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Questions

• How probable are the scenarios?
• Is it a problem that airports want to have less
  passengers according to charges revenues?
• We have to think more about the execution of the
  price increases which charges make sense? maybe
  only passenger related revenues should be
  affected
• Is this the perfect price cap?