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Date: 7 April 2006

Regulate Europe's Airport Monopolies, Brussels

We have a busy morning. So I will get to the point. We have a problem in Europe that the Commission must take a leading role in fixing.

Air transport is important to Europe's competitiveness. 

Air transport is at the heart of a value chain that is critical to Europe's economy. Airlines directly contribute US$45 billion to Europe's GDP.

  • This results in over US$270 billion in economic activity.

That is 2% of total European GDP. More importantly air transport connects European business to global markets.

  • Air transport is the backbone of tourism
  • It links markets and makes just-in-time manufacturing a reality
  • And it made European integration more effective

Efficient air transport is critical for European businesses to be globally competitive. In fact, it is a catalyst for the Lisbon Agenda:

  • To make Europe the world's most dynamic economy

Europe's airlines have re-invented themselves to be more efficient.

You are all aware of the difficulties that air transport has faced since 2001.

  • SARS, terror, wars, economic downturns, high oil prices have all impacted the industry.
  • And new competition from the low cost carriers came at the same time
  • Over US$43 billion in airline losses globally is an enormous case for change

To survive, airlines improved efficiency.

  • For us, the Lisbon Agenda was do or die
  • Globally labour productivity increased 34% in 4 years

Since 2001 Europe's airlines.

  • Cut aircraft operating costs by 9%—even with record high oil prices
  • Reduced distribution and back-office costs by 24%
  • And even got the pilots to work 14% more hours!

Consumers benefited with a 30% drop in real term prices for air travel in the last decade. To deliver this to consumers, everything has been re-engineered.

  • Except infrastructure—that is beyond our control

Between 2001 and 2005 Air France/KLM non-fuel operating costs per passenger dropped 7.3% but infrastructure costs per passenger increased by 10.7%.

  • BA gained 9.9% on efficiency, but infrastructure costs rose by 0.9%
  • Or look at Lufthansa, which was able to reduce costs by an enormous 13.2%--compared with only a 2% drop in infrastructure.

Airlines in a competitive environment delivered on the Lisbon Agenda.

  • Monopoly infrastructure providers have not

There is no reason why infrastructure partners cannot achieve what the airlines have achieved.

  • Improving efficiency must be on everyone's agenda.

Some air navigation service providers have delivered results. The weighted Average unit rates for Eurocontrol member states reduced by 12.5% between 2003 and 2006.

  • Transparency and effective benchmarking played a role.

The problem is that too many of Europe's airports are not playing their role in Lisbon. 15 of the 25 most expensive airports in the world are in Europe. Airlines and their customers pay US$14.5 billion to European airports.

  • And the cost per passenger rose 13% between 2001 and 2004

But the devil is in the detail. Some airports are moving in the right direction with double digit decreases between 2001 and 2004.

  • Manchester –38%
  • Rome –25%
  • Birmingham –13%

Manchester is the best-in-class performer and a model for the Lisbon agenda. Unfortunately, many more airports are moving in the wrong direction with double-digit increases between 2001 and 2004.

  • Aeroports de Paris +44%
  • Amsterdam +34%
  • Stockholm +35%
  • Spanish Airports +24%
  • And Munich +26%

Compare that to airline operating costs per passenger for 2001 to 2005.

  • Air France/KLM –7.3%
  • SAS –14.8%
  • Iberia –4.0%
  • And Lufthansa –13.2%

Quite frankly this chart is an embarrassing example of airport monopolies living in the dark ages.

And they are a call to action for the commission.

Economists agree on how to deal with monopolies. Professor David Begg, Director of the Centre for Transport Policy at Robert Gordon University, said it best. "We cannot guarantee that private management will be efficient unless it is subject to effective competition and challenge, either from other competitors in the market-place or from a tough and watchful regulatory body."

Our Request

What am I asking you? To drive the Lisbon Agenda with results on airport efficiency! What does that mean?

  • Profitable airports providing safe infrastructure
  • And airport investment to meet growth

Airports must achieve all of this with greater cost efficiency. Impossible?

  • I would say reasonable
  • To compete, airlines have delivered on efficiency
  • We don't raise fares when we buy a new aircraft—or when we put in new seats
  • So it is reasonable to ask the Commission to ensure that airport monopolies deliver similar results
  • We are not asking anything that we have not done ourselves.

Where do we go from here?

  • Developing a Directive on Airport Charges is a step in the right direction
  • It acknowledges
    • That there is a problem
    • And that the Commission has a role in fixing it
  • Now we must get the content right

The Directive must require robust independent national regulation of airport monopolies over 5 million passengers—Europe's top 50.

  • Some may say that we already have national regulators
    • My answer is that these are phantoms that approved the embarrassing numbers we saw earlier
  • They must be replaced with effective national regulators

We need results—not process. What should it achieve? Four things:

1. Take politics out of airport management

2. Comply with ICAO principles

  • Including non-discrimination

3. Ensure stakeholder engagement

  • Real transparent consultation with airline customers
  • If we pay the bill, we need to have a say in what is being bought…at what price…and agree how it is financed

4. And above all, act as a substitute for competition ensuring continuous improvement on cost efficiency

  • It must prevent increases above inflation
  • And challenge airports to do better by reducing charges
  • A CPI minus x formula comes to mind

This is not a big request.

Any business subject to competition takes beating inflation as a matter of survival.

  • Our customers expect that the real cost of air travel will reduce
  • Monopoly suppliers cannot sit outside the realities of the industry

Transparency is critical—and there is little on the airport side. The airports have the numbers, but they do not want to share. But regulation must bring transparency to

  • Productivity
  • Cost effectiveness
  • Service Levels

Remember our best-in-class airport—Manchester. It is regulated and producing results. And the terms of reference for the UK regulator are very similar to what I have just outlined.

The UK model is not the only option.

But it is a useful reference for regulation with teeth. Clearly it is more effective than the phantom regulation process in France, Germany and the Netherlands that has allowed massive cost increases.

Two last points….

First, we don't want a big bureaucracy

  • The Commissions approach with gas and electricity could be a model
  • A European Regulators Group could exist, but we need national regulators to ensure speed

Second, we need quick action because the situation is rapidly changing and we are at a critical moment with two major developments:

  • Airport privatization
    • The charges fiasco with ADP can only be seen in light of fattening up the airport in order to sell it at a high price
    • And we can expect more privatizations in the future
  • Consolidation of airport ownership
    • Privatization and cross-border investments could change today's monopolies into mega-monopolies and airlines will be stuck with the bill
    • Look at the Ferrovial bid for BAA with US$4 billion in debt that put BAA on CreditWatch with Standard and Poors
    • Effective regulation today is the pill that will prevent a serious disease from becoming a critical illness

To conclude.

My message is not complicated. We all agree that Europe must become more competitive. Airlines are on board with the Lisbon Agenda and delivering impressive results.

  • Competition is producing airline efficiency that directly contributes to Europe's competitiveness.

Too many of Europe's airports are not contributing to the success of the Lisbon Agenda.

  • They are monopolies with no commercial discipline
  • National regulation today is not delivering results on efficiency
  • Airports a drag on European competitiveness

If the Commission is serious about the Lisbon agenda it must act now.

Efficiency is our common agenda.

A European Directive on Airport Charges is the tool.

And effective, independent national regulation with teeth is the answer.

'Regulate Europe's Airport Monopolies', Brussels
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