1. 1 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Regulation in turbulent time: an adaptive behavior? Stefano Paleari (Scientific Director) T HE AIRPORT CHARGES AFTER THE NEW EU DIRECTIVE : FROM REGULATION TO THE MARKET ? Rome, March 13 th 2009

2. 2 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why is this time turbulent?

3. 3 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why is this time turbulent?  Expansion of low cost carriers: parallel and mass market % ASK offered in competition (spring 2007) Airline % ASK with altern routes % ASK with direct competition Ryanair60%11% easyJet69%43% Air Berlin56%77% Jet2.com71%35% Lufthansa45%80% Iberia42%87% Air France65%58% British Airways84%83% SAS43%72% Alitalia56%89% Source: ICCSAI elaboration on Eurocontrol data Source: ICCSAI Factbook 2008

4. 4 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why is this time turbulent?  Expansion of low cost carriers: parallel and mass market  Concentration process among traditional carriers Set up of CAI (Alitalia + AirOne) and Air France Shareholdings in CAI Takeover/merger Lufthansa over SwissAir, Austrian, SN Brussels Next merger? AF - KLM - Alitalia ; Lufthansa - SAS ; British Airways - Iberia ? Source: ICCSAI elaboration on AEA data

5. 5 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why is this time turbulent?  Expansion of low cost carriers parallel and mass market  Concentration process among traditional carriers  Turbulence in oil prices Source: IATA

6. 6 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why is this time turbulent?  Expansion of low cost carriers : parallel and mass market  Concentration process among traditional carriers  Turbulence in oil prices  Turbulence in financial markets

7. 7 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why is this time turbulent?  Expansion of low cost carriers : parallel and mass market  Concentration process among traditional carriers  Turbulence in oil prices  Turbulence in financial markets  Credit crunch and rise in risk premium

8. 8 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why is this time turbulent?  Expansion of low cost carriers : parallel and mass market  Concentration process among traditional carriers  Turbulence in oil prices  Turbulence in financial markets  Credit crunch  Dramatic decrease of the demand due to the economic downturn Forecast 2009 IATA: World RPK -3% ACI: world pass. -4% ACI: EU pass. -5% Eurocont: EU flight -5%

9. 9 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why is this time turbulent?  Expansion of low cost carriers : parallel and mass market  Concentration process among traditional carriers  Turbulence in oil prices  Turbulence in financial markets  Credit crunch  Dramatic decrease of the demand due to the economic downturn  High speed train competition at work Source: ICCSAI elaboration By air By train hours By train

10. 10 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why is this time turbulent?  Low cost carriers expansion: parallel and mass market  Concentration process among traditional carriers  Turbulence in oil price  Turbulence in financial markets  Credit crunch  Dramatic decrease of the demand with the economic downturn  High speed train competition at work  Hub competition among “national hubs” now at risk of marginalization N. ITA-World code%hub 1 CDG69,8% 2 FRA68,5% 3 MUC58,8% 4 FCO53,1% 5 AMS48,9% 6 LHR42,4% 7 ZRH40,8% 8 MXP34,3% % of airport pairs (italian airports toward worldwide airports) that the hub can interconnet with a competitive overall travel time (i.e. the hub is the best choice available or it requires an extra travel time, compared to the best path, less then15%) Source: ICCSAI elaboration on Innovata data

11. 11 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why the behavior is (should be) adaptive?

12. 12 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why the behavior is (should be) adaptive?  The new Directive is “adaptive”, at least conceptually. It takes into account the existing differences across Europe (many path dependencies) CountryAirport Indep. Regulator Type of Regulation Single or Dual Till AustriaViennaYesPrice cap with sliding scaleSingle till BelgiumBrusselsNoRate of return with yardstick elementsIntrod. dual till DenmarkCopenhagenNoPrice capDual till FinlandHelsinkiNoNo regulation, charges based on cost recoveryn/a FranceParisNoHybrid average revenue based price capSingle till GermanyNo Price cap with sliding scale (HAM), revenue sharing (FRA,DUS) All other airports are cost plus regulated HAM/FRA dual? Single till GreeceAthensNoAirport sets own chargesDual till HungaryBudapestNoPrice capDual till IrelandDublinYesPrice cap revenue basedSingle till MaltaMalta Int.n/aPrice capDual till NetherlandsAmsterdamYesRoR with WACC as asset baseDual till NorwayOsloNoCost basedSingle till PortugalANAYesCost basedSingle till SpainAENANoCost basedSingle till SwedenStockholmn/aCost basedSingle till UK BAAYesPrice capSingle till Sources: Gillen and Niemeier (2007). Davy, European Commission (2006a), Graham, Cranfield, IATA, Airport websites

13. 13 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Why the behavior is (should be) adaptive?  The new Directive is “adaptive”, at least conceptually. It takes into account the existing differences across Europe (many path dependencies)  The situation is changing rapidly and with high volatility Principles (cost relatedness, non discriminatory, flexibility etc..) are more important than the specific procedures

14. 14 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Which consequences for the domestic regulators?

15. 15 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 Which consequences for the domestic regulators?  Monitor competition as a must  Policy targets become more important Promote or stop investments ? Attract private capital or government investment program ? Limit airports’ size?  Flexibility becomes a part of the regulation contract Role of risk sharing mechanisms in turbulent time Promote quicker processes

16. 16 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 What about Italy?

17. 17 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 What about Italy?  Flag carrier Alitalia merged with Air One and completely privatized ? AP 2008 AZ 2008 Source: ICCSAI Business report 2008

18. 18 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 What about Italy?  Flag carrier Alitalia completely privatized  A decreasing “level of investment” Airport operator 200520062007 Overall (€mln) Per pax (€) Overall (€mln) Per pax (€) Overall (€mln) Per pax (€) ADR692,1581,6852,2 Sea1213,51213,81063,6 SAVE547,6273,5384,4 GESAC194,0132,5345,8 SACBO143,3112,1152,5 GESAP102,7173,9n.a. SAB92,5123,071,6 SAT73,1155,0184,7 SAGAT5316,7154,461,6 ADF42,51912,751,8 SACAL0,70,60,20,10,20,1 Aeroporti FVG0,60,90,50,70,2 Average ITA4,23,62,5 Weighted average ITA4,02,92,6 Average top 20 EU airport operator 7,16,27,6 Weighted average top 20 EU airport operator 8,67,812,0 Source: ICCSAI Business report 2008

19. 19 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 What about Italy?  Flag carrier Alitalia completely privatized  A decreasing “level of investment” scenario  Airport charges among the cheapest in Europe Airports Airport charges rank in 2008 (5 typical flight scenarios) Long HaulMedium-haulCharterFeederPoint to Point (LCC) Amsterdam-Schiphol 1° Athens Eleftherios 5°2° Paris Orly 2°4°3°6°4° London Heathrow 8°3°5°3° Paris CdG 3°7°4°8°7° Vienna 11°5°8°5° Brussels National 9°6°9°4°6° Zurich 4°8°7° 8° Frankfurt 6°11°6°10°9° Düsseldorf 7°14°16°9°11° Oslo 12° 13°12°10° Manchester 10°9°10°13°18° Munich F.J. Strauss 15°13°11° 12° Stockholm-Arlanda 20°16°15°17°14° Copenhagen 17°15°14°24°13° London Gatwick 23°10°23°14°15° Lisbon 16°20°12°18°20° Milano Malpensa 22°18° 15°16° Roma Fiumicino 21°19°17°16°17° Madrid Barajas13°21°19°20°21° Source: ICCSAI Business report 2008

20. 20 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 What about Italy?  Flag carrier Alitalia completely privatized  A decreasing “level of investment” scenario  Airport charges among the cheapest in Europe  Economic and financial situation is getting worse also for airports Passengers in Italian airports: 2008 -1,8% Gen 09 -14,8% Source: ICCSAI elaboration on Thomson Datastream data

21. 21 The airport charges after the new EU Directive: from regulation to the market? Rome, March 13 th 2009 What should we promote? Investment Flexibility Making things easy: a general framework accepted by all the airports with more than 5 million passengers