1. GAP Berlin Günes Orak, Evgeni Petkov and Stefan Schulz Restructuring of the Value Chain of the European Ground Handling Market after the EU market liberalization

2. 30/04/20152 Contents 1. Introduction 2. The European Council Directive 96/67/EC 3. Theoretical Background and Propositions 4. Ground Handling at the Major European Airports 5. Impact on Prices and Quality, Winners and Losers in Europe 6. Transformation of Ground Handling in Germany 7. Conclusion

3. 30/04/20153 1. Introduction GHS are divided in 5 Categories: -Ramp handling -Baggage handling -Fright/mail handling -Fuel oil handling -Passenger handling

4. 30/04/20154 1. Introduction Definition Ground Handling Source: Fraport AG

5. 1. Introduction Questions arising after the liberalization of the market: How did the market change? How did prices and quality change? How did the organization of the value chain change? Who benefited and who losed from the changes? 30/04/20155 Source: Fraport AG

6. 30/04/20156 2. The European Council Directive 96/97/EC Source: SH&E Study

7. 3. Theoretical Background and Propositions Value Chain of GH: Airport ↓ Handler ↓ Airline

8. 30/04/20158 3. Theoretical Background and Propositions Before the implementation of the Directive: monopoly of backward integrated national airline, monopoly of forward integrated airport, and duopoly or oligopoly of independent ground handlers and self-handling airlines

9. 30/04/20159 3. Theoretical Background and Propositions Transaction costs are : “the costs of acquiring an input over and above the amount paid to the input supplier.” Include: costs incurred before making the contracts (search and bargaining costs), opportunity cost of forgone transactions, costs incurred after making the contracts (enforcing costs)

10. 30/04/201510 3. Theoretical Background and Propositions Determinants of transaction costs are : the frequency of the contracts between two parties, the specificity of investments made for the supply relationship, environmental or behavioral uncertainty

11. 30/04/201511 3. Theoretical Background and Propositions Based on the determinants of transaction costs Fuhr (2005) made his propositions about how the GHS should be organized and tested them on both hub and spoke airports Proposition 1 (regarding transaction frequency) : Weak vertical control with short to mid-term contracts is feasible for spoke airports, whereas strong vertical control (eg. self handling) is only feasible for HSC at their hub and secondary airports. Result: Strong vertical control is suitable for hub airports.

12. 3. Theoretical Background and Propositions Proposition 2 (regarding enviromental uncertainty) : The contractual form between the hub airport and the handler is of moderate vertical control, whereas the contractual form between the secondary or spoke airport and the handler is of weak vertical control. Result: Weak vertical control is suitable for secondary and spoke airports.

13. 3. Theoretical Background and Propositions Propositions 4&5 (regardin asset and human capital specifity): There is a large hold up threat in relationships between HSCs and handler, and a medium hold up threat in relationships between secondary airports and handler. Result: High hold up threat is expected at hub airports due to high asset and human capital specificity. However this threat is at a medium level at secondary airports.

14. 30/04/201514 4. GHS at the Major European Airports We look at the GHS market after the liberalization on the six largest airports in Europe: London Heathrow (LHR) Paris Charles de Gaulle (CDG) Frankfurt (FRA) Amsterdam Schiphol (AMS) Madrid Barajas (MAD) Rome Fiumicino (FCO)

15. 4. GHS at the Major European Airports Airport LHRCDGFRAAMSMADFCO PAX (2004) 67.351.351.142.538.728.1 Ex-ante situation 8 airlines doing self- and 3rd party GH Duopoly of airport and Air France Monopoly of FRAPORT KLM doing self- and 3rd party GH Monopoly of Iberia Monoply of the airport Total # of handlers (ramp) 1152553 Airport doing GH noyes no yes Self- handling airlines 710242 Independent handlers 431300

16. 30/04/201516 4. GHS at the Major European Airports Market shares at London Heathrow:

17. 30/04/201517 4. GHS at the Major European Airports Market shares at Paris Charles de Gaulle:

18. 30/04/2015 18 4. GHS at the Major European Airports Market shares at Frankfurt:

19. 30/04/201519 4. GHS at the Major European Airports Market shares at Amsterdam Schiphol:

20. 30/04/201520 4. GHS at the Major European Airports Market shares at Madrid Barajas:

21. 30/04/201521 4. GHS at the Major European Airports Market shares at Rome Fiumicino:

22. 30/04/201522 4. GHS at the Major European Airports Barriers to competition: Capacity constraints are used as a motive for limiting on all airports. This was supposed to change with a revision of the Directive, which is, however facing strong opposition, and most likely will not be voted soon.

23. 30/04/201523 5. Impact on Prices and Quality, Winners and Losers in Europe In 2002 SH&E conducted a study on prices and quality on behalf of the EU. An increase in prices was reported only from Brussels and Manchester. Largest decreases were reported from Lyon, Lisbon and Athens – up to 50%. Reports on quality were ambiguous, however we can conclude that quality stayed more or less the same.

24. 30/04/201524 5. Impact on Prices and Quality, Winners and Losers in Europe Airlines were the clear winners of the liberalization. Unfortunately, the gains were not noticed by the passengers, due to the fact that GHS costs are only 4-7% of total flight costs. Another winner were the independent handling companies, which gained market shares after the market oppened.

25. 30/04/201525 5. Impact on Prices and Quality, Winners and Losers in Europe Expectedly, the former monopolists lost significant market shares and profits. Due to the labor intensity of Ground Handling, employees were also among the losers of the market opening- independent handlers were reported to pay up to 30% lower wages.

26. 6. Transformation of GH in Germany Before the Directive airports were monopolists in Ground Handling After the implementation of the Directive in 1997 there have been changes, but the market seems to be less open than other European markets Regulators try to protect airports and their employees from competition

27. 6. Transformation of GH in Germany The market for the airside services, such as ramp handling, is still quite protected [this includes luggage handling and mail, refuelling and other ramp services such as push out, etc] The market for the landside services such as check in, cleaning, maintenance, bus transfer, catering and all the associated services like station and crew support is less strictly regulated.

28. 6. Transformation of GH in Germany Market entry in Germany is controlled through: the criteria for the selection of service providers or self handlers that we also have observed in the other countries, the administrative rules set down by the regional state regulator for the airport user council involved in the selection procedure The maximum number of service providers allowed for each service (usually not more than 2) The expected revision of the service directive in 2007 would allow to increase this number to 3 or 4

29. 6. Transformation of GH in Germany Major feature of the German market: Airports stay in the business, but through GH subsidiaries. Hamburg, Hannover und Düsseldorf were early movers in creating own subsidiaries while Cologne and Frankfurt continue with their current organizational arrangement in which GHS are fully integrated within the core airport organisation

30. 6. Transformation of GH in Germany Why subsidiaries? The European Commission requires subsidiaries for cost transparency – no cross subsidisation German airports are doing it on order to move out of the inflexible and expensive old labor contracts

31. 6. Transformation of GH in Germany Differences between the “old“ and “new“ employees: -“old” paid as public service employees -“new” paid similar to logistics or cleaning sector employees -difference also in retirement provisions

32. 6. Transformation of GH in Germany Evidence on changes in flexibility- Stuttgart 2004:

33. 6. Transformation of GH in Germany Evidence on changes in flexibility- Stuttgart 2005:

34. 6. Transformation of GH in Germany New entrants in Germany: International service providers like Acciona, Swissport, Avia Partner, Securicor, or Menziees and local service providers like Losch Airports created AHS, a service company owned by several airports active in landslide services like check-in, in order to achieve scale economies like those specialized companies achieve

35. 6. Transformation of GH in Germany Questions about the development of GH in Germany: Is it just a question of who can pay lower wages? When will the airports be able to move completely out of the old labor contracts? Why do airports want to stay in that business? How do we measure efficiency in GH? What will happen if the market opens completely?

36. 30/04/201536 7. Conclusion Directive had varied success in the different countries, since some important barriers to entry still exist, mostly due to capacity constraints and the short license period Transformation of GH in Germany is slower and has different patterns than in other countries Labor costs and labor organization seem to be crucial for success and survival in that business Strong opposition to further opening of the market, mostly from labor unions

37. 30/04/201537 Thank you for your attention!