Privatization, restructuring and its effects on

performance: a comparison between German

and British airport sector

Jrgen Mller, Tolga lk,

Jelena ivanovi
1

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

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.

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
4

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.

Privatization in Germany 06
AIRPORT
Dsseldorf
International (DUS)

OPERATING
COMPANY
Flughafen
Dsseldorf GmbH

SHAREHOLDERS

SHARE

City of Dsseldorf

50%

Airport Partners GmbH

50%

Federal Republic of Germany 18,38%

Frankfurt/Main (FRA)

Fraport AG

Federal State of Hessen

32,13%

Stadtwerke Frankfurt Holding 20,52%

Portfolio Investments
Hamburg (HAM)

Hanover (HAJ)

Munich (MUN)

Stuttgart (STR)

Flughafen Hamburg
GmbH

Flughafen Hannover
Langenhagen GmbH

28,97%

City of Hamburg
Hamburg Airport Partners
GmbH Co KG
Hannoversche Beteiligung
GmbH

51%

City of Hannover

35%

Fraport AG and Nord LB

30%

Federal State of Bavaria

51 %

49%
35%

Public Airport
Federal Republic of Germany 26 %

Public Airport

City of Munich
Federal State of BadenWuerttemberg

23 %

City of Stuttgart

50%

50%

Privatization in the
UK 06
Airport

Status

Principal Owner

Aberdeen

private

ADI(BAA)

Glasgow

private

ADI(BAA)

London City

private

Marketspur

London Gatwick

private

BAA

London Heathrow

private

BAA

London Stansted

private

BAA

Manchester

public

----------

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)

Data
Britain

Germany

Aberdeen (ABE)

Dsseldorf (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
9

Methodology
1-Partial Factor Productivity (PFP):
Focus of Measurement

Indicator
Real Costs per PAX
Real Revenues per PAX
Revenue/Expenses Ratio

Financial Performance

PAX per Employee

Movements per Employee

Labor Productivity

Runway Capacity

Movements/Runway Length

Terminal Capacity

PAX(000) per Gate

PAX/Terminal Area(m2)

Capital Productivity

10

Methodology
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
11

Data

Millions

A General Look at the Airports in the Sample

70

60

50
1998
1999
40

2000
2001
2002

30

2003
2004
2005

20

10

0
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

LGW

LHR

STN

MAN

Size of Airports (1998-2005) measured in mill. Passengers

12

Financial Comparison
Averages, Growth Rates and Yearly Figures:
(1) Real Costs per PAX
(2) Real Revenues per PAX
(3) Revenues / Expenses

13

Partial Productivity Analysis

Average Values for Financial Indicators 1998-05
20
18
16
14
12
Germany

10

UK

8
6
4
2
0

Real Costs Per PAX

Real Revenues per PAX

Revenue/Expenses Ratio

Both costs and revenues are larger for British airports

Effect of vertical integration dominate
British airports have a higher revenues/expenses ratio
14

Partial Productivity Analysis

Growth Rates for Financial Indicators 1998-2005
6.00%

4.00%
Germany

2.00%

0.00%
Real Costs Per PAX

Real Revenues per PAX

Revenue/Expenses Ratio

UK

-2.00%

-4.00%

-6.00%

-8.00%

-10.00%

For British airports both costs and revenues decreased

(revenues by almost 10%)
Interestingly revenue/expenses ratio also decreased by almost 6%
15

Partial Productivity Analysis

Financial Indicators for each Airport
40

35

30

25

Costs

20

Revenues
15

10

0
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

LGW

Costs and Revenues per PAX, 8-year average

LHR

STN

MAN

16

Partial Productivity Analysis

35.00

30.00

DUS
FRA

25.00

HAM
HAJ
MUN

20.00

STR

ABE
15.00

GLA
LCY
LGW

10.00

LHR
STN
5.00

MAN

0.00
1998

1999

2000

2001

2002

2003

2004

2005

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
17
After 2001 a gradual growth in costs due to higher security measures

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!
18

Partial Productivity Analysis

45

40
DUS
FRA

35

HAM
HAJ

30

MUN
STR

25

ABE
GLA

20

LCY

LGW
15

LHR
STN

10

MAN

5
1998

1999

2000

2001

2002

2003

2004

2005

Real revenues per PAX

Frankfurt generates the highest
revenues
Hamburg and Dsseldorf 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
19

1.8

Partial Productivity
Analysis

1.7

1.6

DUS
FRA

1.5

HAM
HAJ

1.4

MUN
STR

1.3

ABE
GLA

1.2

LCY
LGW

1.1

LHR
STN

MAN

0.9

0.8

1998

1999

2000

2001

2002

Revenues / Expenses

2003

2004

2005

20

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
21

LABOR
PRODUCTIVITY
(1) Data: Number of Employees
(2) Averages, Growth Rates and Yearly Figures:

PAX per Employee

Movements per Employee

22

Data
14,000

12,000

10,000
1998

1999
8,000

2000
2001
2002

6,000

2003
2004
2005

4,000

2,000

0
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

LGW

Number of Employees at airports in the sample

LHR

STN

MAN

23

Vertical Integration and

Number of Employees
As a result of high vertical
integration, employee
numbers in German
airports are more than
double those of Britains.
...which do not allow us to
compare the labor
productivities directly.
- Number of Employees
24

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

25

Labor Productivity
Average and Growth Rate of Labor Productivity Indicators
btw. 1998-2005
Averages:
PAX per Employee

Movements/ Employee

16,000

170

14,000
165

12,000
10,000

160

8,000

PAX per Employee

6,000
4,000

Movements/ Employee

155
150

2,000
0

145
Germany

UK

Germany

UK

--------------------------------------------------------------------------------------------------------------------Growth Rates:
35.00%

16.00%

30.00%

14.00%
12.00%

25.00%

10.00%

20.00%
15.00%
10.00%

PAX per Employee

8.00%

Movements/ Employee

6.00%
4.00%

5.00%

2.00%

0.00%

0.00%

26

Labor Productivity
20000

18000

16000

14000

12000

10000

8000

6000

4000

2000

0
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

PAX/Employee, 8-year-average

LCY

LGW

LHR

STN

MAN

27

Labor Productivity
25000

DUS
20000

FRA
HAM
HAJ

15000

MUN
STR
ABE
GLA

10000

LCY
LGW
LHR
5000

STN
MAN

0
1998

1999

2000

2001

2002

2003

2004

2005

PAX per Employee

28

Labor Productivity
400

350

300

250

200

Series1

150

100

50

0
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

Aircraft Movement per Employee, 8-year-average

LGW

LHR

STN

29

Labor Productivity
450

400

350

DUS
FRA
HAM

300

HAJ

MUN

250

STR
ABE

200

GLA
LCY

150

LGW
LHR
STN

100

MAN
50

0
1998

1999

2000

2001

2002

2003

2004

2005

Aircraft Movement per Employee

30

Labor Productivity vs. Aircraft Size

160

140

120
1998
1999

100

2000
2001

80

2002
2003

60

2004
2005

40

20

0
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

LGW

LHR

STN

MAN

PAX per Aircraft Movement

Aircraft size (bigger airplanes and fewer movements) affects labor productivity
by changing the level of outsourcing!

31

CAPITAL
PRODUCTIVITY
(1) Data: Runway Length,Number of Gates,
Terminal Area (m2)
(2) Averages, Growth Rates and Yearly Figures:
Aircraft Movements / Runway Length
PAX (000) per Gate
PAX / Terminal Area (m2)

32

Data
Airport
(2005)

DUS
FRA
HAM
HAJ
MUN
STR
ABE
GLA
LCY
LHR
LGW
STN
MAN

Length of
Runway
(m)

5.700
12.000
6.916
6.920
8.000
3.345
1.829
3.762
1.319
3.098
9.511
3.048
6.095

Number of Gates
Airport
DUS
FRA
HAM
HAJ
MUN
STR
ABE
GLA
LCY
LHR
LGW
STN
MAN

1998

2005

34
174
43
20
103
15
11
38
10
58
62
99

84
174
55
20
218
70
11
38
10
58
62
99

57

57
33

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.

34

Data
900

800

700

600

1998
1999

500

2000
2001
2002

400

2003

2004

300

2005

200

100

0
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

LGW

LHR

STN

MAN

Terminal Area (m2, in thousands)

35

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?
36

Capital Productivity
Averages and Growth Rates of Capital Productivity Indicators btw. 1998-2005
450

50%

400

40%

350
300

30%

250
200

20%

150
100
50

Germany 10%

Germany

UK

UK

0%

0
-10%

Movements/Runway
Length

PAX(000) per Gate

PAX/ M2 (Terminal
Side)

-20%

-30%
-40%

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
37

Capital Productivity
90

80

70

60

50

40

30

20

10

DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

LGW

LHR

STN

MAN

Aircraft Movement/Runway Length, 8-year Average

38

Capital Productivity
90

80
DUS

70

FRA
HAM

60

HAJ
MUN

50

STR
ABE

40

GLA
LCY

30

LGW
LHR

20

STN
MAN

10

0
1998

1999

2000

2001

2002

2003

2004

2005

Aircraft Movement/Runway Length

39

Capital Productivity
1200

1000

800

600

Series1

400

200

0
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

LGW

LHR

STN

MAN

PAX (000) per Gate, 8-year Average

40

Capital Productivity
1200

1000
DUS
FRA
HAM

800

HAJ
MUN

STR
600

ABE
GLA
LCY

400

LGW
LHR
STN

200

MAN

0
1998

1999

2000

2001

2002

2003

2004

2005

PAX (000) per Gate

*Dusseldorf, Stuttgart

41

Capital Productivity
400

350

300

250

200

Series1

150

100

50

0
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

LGW

LHR

STN

MAN

PAX / Terminal Area (m2) , 8-year Average

42

Capital Productivity

500

450

400

DUS
FRA

350

HAM
HAJ

300

MUN
STR

250

ABE
GLA

200

LCY

LGW

150

LHR
STN

100

MAN

50

0
1998

1999

2000

2001

2002

2003

2004

2005

PAX / Terminal Area (m2)

Stansted vs. Dusseldorf

43

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.)
Dsseldorf reduced gates with fire?
still, are there indications of excessive
investment, overcapacity?
44

Financial Ratio Analysis (FRA)

Profitability
50%
40%
30%
20%
10%

2002

2003

2004

Mean

STN

LHR

LGW

DUS

HAM

FRA

0%

2005

45

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 Dsseldorf decreased from 31.4%
in 2002 to 21.1% in 2005 due to large investment
program

46

Financial Ratio Analysis (FRA)

Liquidity
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5

2002

2003

Mean

STN

LHR

LGW

DUS

HAM

FRA

0,0

2004

Ratio of current assets to current liabilities

47

Financial Ratio Analysis (FRA)

Debt Management
100%
80%
60%
40%
20%

2002

2003

Mean

STN

LHR

LGW

DUS

HAM

FRA

0%

2004

Percentage of total funds provided by creditors

48

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
49

Data Envelopment Analysis

1.000
0.900
0.800

1998

0.700

1999

0.600

2000

0.500

2001

0.400

2002
2003

0.300

2004

0.200

2005

0.100
0.000
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

LGW

LHR

STN

MAN

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)
50

Stochastic Frontier Analysis (SFA)

SFA Estimation
Results

Coefficient

Standart Error

t-ratio

15.9275

2.2644

7.0339

Terminal Area

-0.0732

0.1511

-0.4844

0.5700

0.2991

1.9058

-0.1128

0.1833

-0.6155

Sigma-Squared

1.3789

0.9553

1.4434

Gamma

0.9890

0.0087

113.4524

Check-in Counters
Gates

Results of the SFA analysis

51

Stochastic Frontier Analysis (SFA)

SFA Scores
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00

1998
1999
2000
2001

te
r
es
ch

2004

M
an

ns

2003

Lo

nd

on

St
a

He
a

on
nd

te
d

ow
th
r

ck
Ga
tw
i
Lo

Lo

nd

on

nd

on

Ci
ty

ar
t
Lo

St
ut
tg

en
M
n

ch

er
ov
Ha
nn

Ha
m

bu

rg

rt
kfu
Fr
an

D
ss

el

do

rf

2002

SFA Scores

52

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

39

38

40

35

FRA

38

46

47

47

46

46

46

44

HAM

41

43

40

37

36

38

36

37

HAJ

38

36

41

33

32

32

32

MUN

40

44

48

51

50

42

47

45

STR

58

59

54

56

53

56

47

45

ABE

76

71

70

74

72

69

70

78

GLA

65

55

55

55

57

59

60

59

LCY

60

55

58

59

59

61

61

61

LGW

77

81

80

78

78

75

75

76

84

85

81

81

82

78

78

STN

54

59

63

70

73

74

74

77

MAN

45

41

42

48

51

60

62

64

LHR

Total Scores according to the rankings

33 Worst

74 Best

53

Summary Analysis
Total Score
Heathrow is leading,
whereas Hanover is at the bottom

700
600
500

British airports clearly

outperforms their German
counterparts

400
300
200
100

0
DUS

FRA

HAM

HAJ

MUN

STR

ABE

GLA

LCY

LGW

LHR

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

STN

MAN

Growth of scores(1998-2005)
30%
20%
10%
0%
DUS FRA HAM HAJ MUN STR ABE GLA

LCY LGW LHR STN MAN

-10%
-20%

Frankfurt and Munich are the only 2

German airports who have been
developing their scores

-30%
-40%

54
-50%

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
55

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.

56

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.

57

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

Thank you for your Attention...

59