1. Jürgen Müller, Tolga Ülkü,
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
SHAREHOLDERS
SHARE
Düsseldorf International (DUS)
Flughafen Düsseldorf GmbH
City of Düsseldorf
50%
Airport Partners GmbH
Frankfurt/Main (FRA)
Fraport AG
Federal Republic of Germany
18,38%
Federal State of Hessen
32,13%
Stadtwerke Frankfurt Holding
20,52%
Portfolio Investments
28,97%
Hamburg (HAM)
Flughafen Hamburg GmbH
City of Hamburg
51%
Hamburg Airport Partners GmbH Co KG
49%
Hanover (HAJ)
Flughafen Hannover Langenhagen GmbH
Hannoversche Beteiligung GmbH
35%
City of Hannover
Fraport AG and Nord LB
30%
Munich (MUN)
Public Airport
Federal State of Bavaria
51 %
26 %
City of Munich
23 %
Stuttgart (STR)
Federal State of Baden-Wuerttemberg
City of Stuttgart

7. Privatization in the UK 06
Airport
Status
Principal Owner
Aberdeen
private
ADI(BAA)
Glasgow
London City
Marketspur
London Gatwick
BAA
London Heathrow
London Stansted
Manchester
public

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 Britain Germany Years : 1998 – 2005
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)
Years : 1998 – 2005
Financial, Capacity and Traffic data

10. Methodology 1-Partial Factor Productivity (PFP): Focus of Measurement
Indicator
Financial Performance
Real Costs per PAX
Real Revenues per PAX
Revenue/Expenses Ratio
Labor Productivity
PAX per Employee
Movements per Employee
Capital Productivity
Runway Capacity
Movements/Runway Length
Terminal Capacity
PAX(000) per Gate
PAX/Terminal Area(m2)

11. Methodology Indicators Profitability Liquidity Debt Management Inputs
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
Inputs
Output
Terminal Area (m2)
Number of Passengers
Number of Check-in Counters
Number of Gates

12. Size of Airports (1998-2005) measured in mill. Passengers
Data
A General Look at the Airports in the Sample
Size of Airports ( ) measured in mill. Passengers
Airports with different scale chosen. These figures are important, because they play an important role on partial indicators, e.g. PAX/Employee
Stansed increasing, almost tripled..MUN and FRA also..

13. Financial Comparison Averages, Growth Rates and Yearly Figures:
Real Costs per PAX
Real Revenues per PAX
Revenues / Expenses

14. Average Values for Financial Indicators 1998-05
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. Growth Rates for Financial Indicators 1998-2005
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. Financial Indicators for each Airport
Partial Productivity Analysis
Financial Indicators for each Airport
Costs and Revenues per PAX, 8-year average

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

20. Partial Productivity Analysis
Revenues / Expenses

21. Partial Productivity Analysis:
Financial comparison of Revenues and Expenditures
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

22. LABOR PRODUCTIVITY Data: Number of Employees
Averages, Growth Rates and Yearly Figures:
PAX per Employee
Movements per Employee

23. Number of Employees at airports in the sample
Data
Average employee number : Germany: Britain: 1290
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
Averages:
Growth Rates:

27. PAX/Employee, 8-year-average
Labor Productivity
This picture depicts a high labor productivity in British airports, but we can not draw a strong conclusion because of different VI levels, hence we are going to look at the labor productivity indicators within countries and try to understand the different figures.
PAX/Employee, 8-year-average

28. Labor Productivity
PAX per Employee

29. Aircraft Movement per Employee, 8-year-average
Labor Productivity
Aberdeen gets small aircrafts
Aircraft Movement per Employee, 8-year-average

30. Aircraft Movement per Employee
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 Data: Runway Length,Number of Gates,
Terminal Area (m2)
Averages, Growth Rates and Yearly Figures:
Aircraft Movements / Runway Length
PAX (000) per Gate
PAX / Terminal Area (m2)

33. Data DUS 5.700 FRA 12.000 HAM 6.916 HAJ 6.920 MUN 8.000 STR 3.345 ABE
Airport
(2005)
Length of Runway
(m)
DUS
5.700
FRA
12.000
HAM
6.916
HAJ
6.920
MUN
8.000
STR
3.345
ABE
1.829
GLA
3.762
LCY
1.319
LHR
3.098
LGW
9.511
STN
3.048
MAN
6.095
Number of Gates
Airport
1998
2005
DUS 34 84
FRA
174
HAM 43 55
HAJ 20
MUN
103
218
STR 15 70
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
Terminal Area (m2, in thousands)

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. Aircraft Movement/Runway Length, 8-year Average
Capital Productivity
Aircraft Movement/Runway Length, 8-year Average

39. Aircraft Movement/Runway Length
Capital Productivity
Aircraft Movement/Runway Length

40. PAX (000) per Gate, 8-year Average
Capital Productivity
PAX (000) per Gate, 8-year Average

41. Capital Productivity
PAX (000) per Gate
*Dusseldorf, Stuttgart

42. PAX / Terminal Area (m2) , 8-year Average
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 Results
Coefficient
Standart Error
t-ratio ßo
2.2644
7.0339
Terminal Area
0.1511
Check-in Counters
0.5700
0.2991
1.9058
Gates
0.1833
Sigma-Squared
1.3789
0.9553
1.4434
Gamma
0.9890
0.0087

52. Stochastic Frontier Analysis (SFA)
SFA Scores

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
1998
1999
2000
2001
2002
2003
2004
2005
DUS 52 53 49 39 38 40 35
FRA 46 47 44
HAM 41 43 37 36
HAJ 33 32
MUN 48 51 50 42 45
STR 58 59 54 56
ABE 76 71 70 74 72 69 78
GLA 65 55 57 60
LCY 61
LGW 77 81 80 75
LHR 84 85 82
STN 63 73
MAN 62 64
Worst
Best
Total Scores according to the rankings

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 58

59. Thank you for your Attention...