MARKET POWER OF AIRPORTS: A CASE STUDY FOR AMSTERDAM AIRPORT SCHIPHOL

Transcription

1 MARKET POWER OF AIRPORTS: A CASE STUDY FOR AMSTERDAM AIRPORT SCHIPHOL Volodymyr Bilotkach* and Andreas Polk** Abstract We analyze the extent of market power of Amsterdam airport Schiphol in its aviation related business. First, we use information on airport charges, and a natural experiment with a passenger tax, to propose a detailed delineation of markets for the airport. Our market definition is in line with the European competition case practice, and we consider the applied methodology as also relevant for other airports. As the second step, we assess the market power of Amsterdam airport Schiphol in all the markets we have defined. We empirically analyze overlaps in the markets served by the airport and catchment areas of the airport, and demonstrate how this approach is helpful in determining the extent of the market power of an airport. Keywords: airports; aviation; competition policy; market power; regulation policy JEL Codes: K21, L41, L43 1. INTRODUCTION At nearly 50 million passengers per annum, Amsterdam airport Schiphol is the largest airport in the Netherlands, the 4 th largest airport in Europe and a top-20 airport worldwide by this metric. By the Dutch Aviation Act, it is subject to economic regulation, which is conducted by the Netherlands Competition Authority, NMa. At the request of the Dutch Ministry of Infrastructure and the Environment, and as part of the evaluation of the Dutch Aviation Act, NMa examined whether Amsterdam airport Schiphol enjoys a dominant position on one or more markets for aviation activities, and on markets for activities closely related to aviation. 1 These questions * Newcastle University. Volodymyr.Bilotkach@newcastle.ac.uk. ** Berlin School of Law and Economics. 1 Information on the economic regulation of Amsterdam airport Schiphol can be found at Intersentia

2 Market Power of Airports: A Case Study for Amsterdam Airport Schiphol were analyzed in an external study, aimed at assessing whether Amsterdam airport Schiphol possesses a dominant position in one or several markets related to aviation and aviation-related services. Non-aviation services, such as car parking or shop rental were not within the scope of the study. This contribution reports on important analytical proceedings and results of the above-mentioned study. We analyze the institutional and regulatory framework the airport operates under. In addition, we conduct an analysis of the data on services offered by the airport s main customers, the airlines, and complement the findings with what we learned from various interviews with stakeholders, i.e. Schiphol Group itself, airlines (e.g., Air France-KLM and easyjet), cargo and ground handling companies. To our knowledge, studies on market power of airports are rare, especially if they consider the institutional framework of competition policy. This case study provides not only useful insights on Amsterdam airport Schiphol, but also on general principles for the assessment of market power of airports. This study also provides the first empirical application of our earlier framework for analysis of market power of hub airports (Polk and Bilotkach, 2013). We demonstrate how the conceptual issues outlined in the earlier paper can be applied to an analysis of a specific airport s market power. We anticipate growing demand for such studies, as the airports are increasingly being viewed as firms rather than infrastructure objects. At the same time, airports in many cases remain local monopolies with the potential to exercise market power. Our study provides a practical case of an analysis aimed at understanding the extent of the market power problem. We proceed as follows. After a short description of Amsterdam airport Schiphol, we first define, in accordance with the European competition case law, the relevant product markets in which the airport operates. Based on these definitions, we next assess the market position of Amsterdam airport Schiphol on the defined markets for the provision of infrastructure to airlines and the access to ground handlers to the airport. 2. THE AMSTERDAM AIRPORT SCHIPHOL Amsterdam airport Schiphol (AMS) serves as the main entrance gate by air to Amsterdam and the Netherlands. It is also one of the largest hub airports worldwide in terms of capacity, passenger numbers, and freight volume. The airport s six runways have been used to handle about 450,000 aircraft movements in 2011, serving nearly 50 million passengers and approximately 1.5 million tonnes of cargo. These numbers make AMS the fourth largest airport in Europe with respect to passenger transport (after London Heathrow, Paris Charles de Gaulle and Frankfurt), fifth largest with respect to air transport movements, and third in cargo. Worldwide, it rates among the top twenty busiest airports (Schiphol Group, 2011). Competition and Regulation in Network Industries, Volume 14 (2013), No

3 Volodymyr Bilotkach and Andreas Polk The airport is owned by Schiphol Group, which describes itself as a `commercial enterprise with a socio-economic function`. The Dutch state owns nearly 70 percent of the shares. The Group s combined revenue was billion Euro in 2011, with an EBITDA of 512 million Euro. The airport receives the largest part of its revenues (about 57 percent) from regulated charges, which are paid by the airlines for the use of the aviation infrastructure. Airlines offer passenger and cargo transportation services at Schiphol, linking the airport with over 300 destinations with non-stop services. KLM is the Schiphol s most important customer, which uses the airport as its hub. Among others, the airport serves as an important hub into the North American region, and handles a significant share of passenger traffic to/from the UK s regional airports. Schiphol airport provides infrastructure to airport users for take-off and landing of aircraft. These services include provision and maintenance of the runways and aprons, provision of passenger security handling, access to different types of infrastructure such as aircraft service, aircraft maintenance, loading and unloading, as well as access to refueling infrastructure at the airport. The customers of Schiphol airport include airlines which provide transportation services to passengers, as well as freight transportation. The airport does not provide ground handling services directly to the airlines, fully relying on third party ground handlers. In this respect, the airport differs from other airports like Frankfurt (where Fraport also offers ground handling services to airlines), or Paris Charles de Gaulle. The ground handling business at Schiphol is perceived by the interview partners as the most liberalized market in the European Union. 3. DEFINITION OF THE RELEVANT MARKETS AT AMSTERDAM AIRPORT SCHIPHOL This section defines the relevant product markets for the services of Schiphol airport in line with the European competition law. 2 The conceptual framework for the definition of the relevant market focuses on demand-side substitution, i.e. it considers if certain goods or services which the airport provides are substitutable from a customer s point of view. 3 As we stated above, the customers of the airport are the airlines which offer passenger and cargo transportation services. The demand for the 2 We elaborate the most important principles for the definition of markets in Polk and Bilotkach (2013). The interested reader may also consult Motta (2004), Bishop and Walker (2010), or the Merger Guidelines Workbook of the International Competition Network (2006). 3 We do not discuss the geographic market definition, which crucially depends on the catchment areas for the downstream transportation markets, that is the area around the airport from which a flight attracts passengers. Geographic markets tend to be smaller with respect to O&D-passenger flights, and more extensive for transfer passenger and cargo flights. 322 Intersentia

4 Market Power of Airports: A Case Study for Amsterdam Airport Schiphol airport infrastructure services upstream is derived from the demand for transportation services downstream. Upstream, the airport offers to the airlines the infrastructure they require for landing and take-off of aircraft, as well as for the relevant ground handling services. It also provides infrastructure and services needed to ensure that aviation security requirements are met, and it gives access to the airport facilities for self-handling airlines and third party ground handling companies. On the upstream markets there are different types of customers, specifically airlines offering passenger versus cargo flights. 4 Some flights carry both passengers and cargo, and passenger flights may also carry cargo in the belly holds. On the downstream markets, passenger flights can be subdivided according to different characteristics of the transportation services, for instance short-haul versus long-haul flights, origin and destination flights (O&D) versus transfer flights (i.e., flights carrying predominantly originand-destination traffic or transfer passengers), or flights by full service, low cost, or charter airlines. With respect to market definition in the downstream transportation markets, it is common practice in European competition law to define separate product markets for transportation services, which are directly offered by airlines to customers, and transportation services which are offered to customers via tour operators. 5 We will discuss how this relates to the market definition for the upstream markets at Schiphol airport, in which the airport serves infrastructure to airlines. Several general aspects play a role when we define product markets for the airports. First, switching costs are usually high for airlines in case they face unfavorable price increases, especially for hub carriers. Relocation is difficult due to congestion at possible alternative airports, sunk costs, economies of scale for the operation at an airport, network effects, long-term contracts (especially in passenger transportation where frequent scheduling changes are not possible) and the loss of passenger volumes. 6 High switching costs tend to limit the geographic market to the airport itself. The same applies for switching between cargo and passenger transportation services, which indicates that the definition of separate product markets upstream is appropriate. Second, the role of secondary products or services may play a role at airports. A secondary service is consumed as a follow-up to a demand for a primary product. For instance, an airport provides infrastructure for take-off and landing, which makes services like aircraft parking, refueling and ground handling potentially 4 The airport has a minor share of movements for local & instruction flights, which are left aside here. 5 Nemeth and Niemeier (2012) discuss the evolution of the market definition by the European Competition Commission in the downstream aviation transportation markets. 6 This general aspect has also been confirmed in interviews with respect to Amsterdam airport Schiphol. Airlines report that it would be difficult to leave the airport in case of unfavorable price increases due to high investment costs which are sunk. For a discussion of switching costs of airlines, see Appendix 3.1 of Competition Commission (2009). Competition and Regulation in Network Industries, Volume 14 (2013), No

5 Volodymyr Bilotkach and Andreas Polk secondary. 7 In this case it may be appropriate to define a common product market even if different prices for secondary services exist. Third, bundling may play a role at airports, for instance for services like passenger security handling or refueling. It may be appropriate to define a common product market for the whole product bundle. Taking these preliminary remarks into account, we turn to the definition of the relevant product markets for the provision of infrastructure to airlines at Schiphol airport MARKETS FOR THE PROVISION OF INFRASTRUCTURE TO AIRLINES To be in line with European competition law, we begin by discussing recent European competition practice. Up to now, airport related cases only give some general indications as to the European Commission s approach to market definition for the airports, without providing an exact definition. For instance, in the Birmingham International Airport case the Commission notes, that ``[a]irport operation and management consists of several broad categories of services within which infrastructure, ground handling and commercial services could be distinguished as separate markets. Finally, the question could be raised whether each of these categories of airport services could be divided into several distinct markets depending on the nature of services supplied. (European Commission, 1997). This indicates that the Commission tends towards a relatively broad market definition, and that it is open for evidence towards more narrow market definitions. Subsequently, in the Ferrovial et. al. merger case, the Commission adds that different types of customers in the downstream markets may also affect the market definition upstream. Appropriateness of this approach depends on the types of services and the overall economic circumstances (European Commission, 2006). This is also in line with the approach of the UK Competition Commission in its report on the BAA airports, which notes that, ``[w]here different prices are offered to different users, and differences are not cost-related, it may be appropriate to define separate markets (Competition Commission, 2009). As different prices are not observable at the investigated BAA airports, the Competition Commission defines a common market for ``aeronautical services provided to airlines and their ground-handling agents in Section 2 of the report. We follow this line and define separate product markets for aviation related services dependent on the price structure at Schiphol airport. A natural experiment we report on below supports this definition. We then check against alternative definitions (especially further sub-divisions of the defined markets) and defend our approach. 7 We will see, however, that this is not the case at Schiphol airport. 324 Intersentia

6 Market Power of Airports: A Case Study for Amsterdam Airport Schiphol Figure 1. Structure of charges at Schiphol airport (Schiphol Group, 2008) Airport Charges Effective as of 1 April 2009 (in euros) Landing and take-off charges* (charge per 1,000 kg) Category MCC3 Category A Category B Category C day night day night day night day night landing/ landing take-off landing/ take-off take-off landing take-off landing/ landing take-off landing/ landing take-off take-off take-off Point-to-point flight Connected handling Disconnected handling Local/instruction flight Connected handling Disconnected handling Cargo flight *) minimum charge is based on an MTOW of 20 tonnes Passenger Service Charge Per departing local passenger Per departing transfer passenger 5.98 Security Service Charge Per departing local passenger Per departing transfer passenger 7.25 Parking Charge Per 1,000 kg per period of 24 hours 1.64 Note: Connected handling refers to handling with the use of jet bridges Figure 1 shows the prevailing airport charges at the time of the study to which we refer. 8 They consist of a set of landing and take-off fees for the aircraft using the airport s infrastructure. Charges include different types of passenger fees, fees for aircraft parking, and fees to cover the costs which the airport has to bear for the provision of the infrastructure at the airport, such as the baggage handling system, the passenger counters, or access to the energy infrastructure. There are different types of aircraft related charges for passenger point-to-point flights or cargo flights. 9 All of these fees consist of a landing and take-off charge, differentiated according to the noise level generated by the aircraft, the take-off and landing time and the type of handling. During daytime (6:00 23:00 hours) the airport charges for landing and take-off are the same, at nighttime (23:00 6:00 hours) the fees for landing and takeoff differ. The smaller of these two, the nighttime fee for landing, is still higher than the fees for take-off and landing during the daytime. In addition, the airport charges a parking fee if the aircraft stays for more than 6:15 hours (e.g., overnight) at the 8 The current charges (as of 1 April 2013; Schiphol, 2013) show the same structure, and add a third charge for handling at Schiphol East. This charge was not present at the time of our study, and it does not affect the market definition we discuss in this contribution. 9 We ignore local & instruction flights, because they are economically unimportant for the airport. Competition and Regulation in Network Industries, Volume 14 (2013), No

7 Volodymyr Bilotkach and Andreas Polk airport. The aircraft can park at the airport for free, otherwise. Fees are calculated per tonne of aircraft weight. According to this price structure, it is appropriate as a first step to separate product markets for the provision of infrastructure to the airlines serving passengers from same for the airlines offering cargo transportation. With regards to the downstream transportation markets, it is common practice in European competition practice to consider passenger transportation and cargo as separate. 10 If airlines could easily switch the provision of transportation services from cargo to passenger transportation and vice versa, demand-side substitution would be sufficient to consider these markets as common; yet, this is not the case. Indeed, there are substantial differences between business models of full freighter and passenger airlines, switching costs between provision of passenger and cargo transportation are substantial, the two business areas pose different demands to the networks, and costs of marketing and branddevelopment associated with passenger transportation are significant. In fact, airport charges represent a larger share of total operating costs for cargo airlines compared to passenger services, which makes demand from cargo airlines more price-elastic to airport charges compared to passenger airlines (Tretheway and Kincaid, 2010). The price structure of the airport, stating lower charges for cargo compared to passenger flights, reflects those differences in the downstream transportation markets. This indicates that the airport indeed addresses two different markets. We note that passenger airlines do also carry freight, and transportation of cargo and passengers are complementary to some extent. However, this fact is not sufficient to treat passenger and cargo transport as a common market from the airport s point of view. Here, the relevant question is if a hypothetical price increase, say in the cargo business, leads to a substantial substitution towards the transportation of cargo in the belly holds of passenger flights, which rendered the initial price increase unprofitable from the airport s point of view. This is not the case. Most importantly, belly cargo is a by-product of passenger transportation. Airlines fill the available space to increase the aircraft load factor, and substitution between passengers and cargo freight is absent (Tretheway and Andriulaitis, 2010). Moreover, the charge for full freighter aircraft per tonne of weight is still way lower than the charge for passenger aircraft per tonne of weight at Schiphol airport. As a second step, it is appropriate to further subdivide the market for the provision of infrastructure to airlines serving passengers into a market for airlines serving O&D passengers and a market for airlines serving transfer passengers. There are several arguments in defense of this sub-division. First, Schiphol airport charges different fees for carrying transfer passengers and `local` (or origin and destination) passengers. Even though the landing and take-off fee is aircraft related and independent of the 10 Cargo is less time-sensitive than the transportation of passengers, duration of stop-overs are less important, and cargo relies a lot more on flexible short-term contracts. See for instance European Commission (2008). 326 Intersentia

8 Market Power of Airports: A Case Study for Amsterdam Airport Schiphol type of passengers carried by the aircraft, the Passenger Services Charge and the Security Service Charge differ substantially (see Figure 1). 11 This leads to an overall price for landing and take-off which contains aircraft and passenger related elements. The existence of passenger mix dependent aircraft prices reflects the ability of the airport to address these types of services differently, an instrument which the airport in fact uses in its pricing scheme. Charging different prices can only be profitable if substitution on the demand side is limited. Even if the passenger mix can be adjusted marginally, it is difficult for the airlines to react to price changes to such an extent that it renders the initial price increase unprofitable to the airport. The fact that the business model for low cost carriers (serving O&D passengers) is different from the business model for full service airlines (serving O&D and transfer passengers) supports this view. 12 Moreover, the price is charged on the upstream transportation markets, which is transparent to the customers and affects the airlines ability to pass on price increases. It differs between transfer and O&D passengers, leading upstream to different demand elasticities for the airport. Second, introduction of the Air Passenger Tax at Schiphol airport provides evidence that the provision of infrastructure to airlines serving transfer passengers and the provision of infrastructure to airlines serving O&D passengers constitute separate markets. The tax was levied only on the local passengers departing from Schiphol airport transfer passengers were exempted. 13 The tax introduction has the property of a natural experiment in this context. If transfer and O&D passengers belonged to the same market, the price increase induced by the tax should have led to a substantial substitution towards the transfer passenger market. Yet this has not been observed. The tax led to a decline in the growth rate of O&D passengers at Schiphol airport, leaving the market for transfer passengers mostly unaffected (Gordijn and Kolkman, 2011). 14 This provides additional evidence that transfer and O&D markets are independent of each other, and that the airport addresses separate markets by the provision of infrastructure services to local and transfer flights. 11 This difference does not appear to be primarily cost-driven, as it cannot be explained purely by the extra costs (mostly aviation security related) imposed by the local passengers on the airport. Some portion of the price differences are driven by cost differences, especially with regard to the PSC (NMa, 2009; para. 118). Concerning the SSC, the NMa comes to the conclusion that security checks constitute equivalent services (ibid., para. 123). This gives evidence that the airport employs the fee to address these types of customers differently. 12 Representatives of Schiphol airport indicated in interviews that KLM, the most important customer of the airport, did not react to a substantial change in the relative price structure between O&D and transfer passengers in 2007, which confirms this view. 13 The tax came into effect July 1, 2008 and was abandoned a year later, having brought in much less money than expected. 14 This was also confirmed in our interviews by Schiphol airport representatives, who indicated that the airport lost about 10 percent of its O&D passenger traffic as a consequence of the introduction of the tax to other airports, and saw the cancellation of planned expansions which were moved across the border into Germany. Competition and Regulation in Network Industries, Volume 14 (2013), No

9 Volodymyr Bilotkach and Andreas Polk Third, there is strong evidence that the elasticity of demand differs between transfer and O&D passengers in the downstream transportation markets (Gordijn and Kolkman, 2011). From the airport s point of view, different price elasticities in the downstream markets give discretion to address these markets differently upstream, as the ability to pass-on price increases differs. Transfer passengers tend to be more price responsive than O&D passengers. Passengers using Schiphol airport as a hub to travel to other destinations consider traveling via other hub airports as alternatives, whereas this is less likely the case for O&D passengers. A firm s ability to charge prices above marginal costs is inversely related to the price elasticity of demand. If substitution between passengers using Schiphol airport for transfer and O&D flights is small, different elasticities of demand in the downstream markets translate into different demand elasticities upstream. Hence the airport has the ability to address these types of customers differently, which is reflected in the price structure: lower fees are charged for transfer passengers as compared to O&D passengers. Differences in costs imposed on the airport by transfer versus O&D passengers are reflected in the different security charges. We deem further subdivisions of the markets as inappropriate for the following reasons. First, it is not reasonable to define separate markets depending on the type of aircraft used, as airlines can relatively easily substitute between the plane types. Even though Schiphol charges prices depending on the aircraft type, this relates to the aircraft noise emissions with the intent to allocate capacity within the airport s noise contours. 15 They are not intended to increase the airport s profits in a Ramsey pricing manner. Second, it is not reasonable to define separate markets for the provision of infrastructure to airlines for daytime and nighttime flights. Airlines are able to substitute at least to a limited extent between daytime and nighttime slots, which puts a competitive constraint on pricing. 16 Third, a separation of markets with regard to connected or disconnected handling is not appropriate for the assessment of market power. Disconnected handling takes place at pier H at Schiphol, which is mainly used by easyjet. We note that it may be appropriate to define a separate product market for this type of handling dependent on the competition case. For the purpose of market power analysis, however, it seems more suitable to not define separate product markets for any individual business partner who might be able to negotiate individual price and quality discounts. Finally, aircraft parking is secondary and does not constitute a separate product market. The airport does not provide any incentives to the airlines to use the airport mainly as a parking space, and parking activities depend on the use of 15 This kind of price structure is stipulated by the ICAO s Policies on Airport and Air Navigation Charges, to which the European directive on airport charges refers (European Union (2009), para. 9 refers to ICAO (2004). The most recent edition of the ICAO s Policies is ICAO (2012)). 16 We note that this aspect may play a more important role, but for the purpose of the conducted study a more detailed differentiation was not necessary. Also, separate product markets for peak hours and off-peak hours could be discussed, but the price structure at Schiphol airport does not differentiate in this respect. 328 Intersentia

10 Market Power of Airports: A Case Study for Amsterdam Airport Schiphol the airport s infrastructure for transportation purposes. Moreover, the parking fee is non-discriminatory and published in a transparent way. Airlines consider it as being part of the whole for infrastructure demand at Schiphol airport. In sum, our discussion suggests the definition of separate markets for the: Provision of infrastructure to airlines serving O&D passengers, Provision of infrastructure to airlines serving transfer passengers, Provision of infrastructure to airlines offering cargo transportation MARKETS FOR THE ACCESS TO THE INFRASTRUCTURE FOR THE PROVISION OF GROUND HANDLING SERVICES BY THIRD PARTIES The airport grants access to the airport s infrastructure to any company offering ground handling services. There are no concession fees, and access is granted to an unlimited extent to any company on a non-discriminatory basis. 17 The market for ground handling is basically served by three different types of actors: Integrated airlines like KLM provide ground handling services in-house. Some airlines also offer these services to third party airlines, and specialized ground handling companies like Menzies or Aviapartner offer ground handling services to airlines, but do not offer air transportation services themselves. Schiphol airport does not provide ground handling service to airlines. Services are usually offered in bundles. Therefore, it is not appropriate to define separate markets for any single activity. Though the portfolio of activities differs from company to company, the ground handling market is generally very flexible in terms of services supplied and adjusts to the particular needs of the customers. We suggest clustering into five groups, namely passenger handling services, freight and mail handling services, aircraft handling services, catering services and refueling services, which follows from the practical combination of these activities. Catering and refueling are separate markets, because these services require different facilities. Freight and mail handling, passenger handling and aircraft handling are not substitutable, and other ground handling services are complementary to them, resulting in the five remaining clusters. We agree that other definitions might be suitable depending on the purpose of the investigation, and our approach is in line with the European competition practice. In several cases, the Commission discusses the definition of the relevant markets related to ground handling services. It regards ground handling services as a separate market compared to other services provided at an airport 18, and indicates that a further 17 Interviews indicated that the ground handling business at Schiphol is perceived by stakeholders as the most liberalized market in the European Union. 18 See for instance European Commission (1997, 2008). Competition and Regulation in Network Industries, Volume 14 (2013), No

11 Volodymyr Bilotkach and Andreas Polk subdivision may be appropriate dependent on the case (European Commission, 1998). In these cases, the Commission also gives reference to different types of categorizations, for instance IATA s Standard Ground Handling Agreement 19, or the definition of the markets in the EC Ground Handling Directive. 20 In sum, this leads to the definition of five different markets for the access of Schiphol airport for companies which offer: Passenger handling services, Freight and mail handling services, Aircraft handling services, Refueling services, Catering services. 4. ASSESSMENT OF MARKET POWER AT AMSTERDAM AIRPORT SCHIPHOL 4.1. MARKET POWER AND THE PROVISION OF INFRASTRUCTURE TO AIRLINES When assessing the issue of Schiphol s market power on the market for providing infrastructure to the airlines, it is appropriate to start by asking a simple question. Do the airlines have an alternative airport, which can provide similar infrastructure, and if so, how easy will it be for them to switch to that alternative provider? In addressing this question, we should also keep in mind our delineation between the markets for provision of infrastructure to airlines serving origin and destination (O&D), transfer or cargo traffic. Indeed, the relevant sets of potential alternative airports will be different for each of these markets, and it will depend on both the availability of the relevant infrastructure, and passengers /cargo customers willingness to switch to the alternative gateways. Starting with the origin and destination market considering the geographical proximity and consequently the potential for overlapping catchment areas and complementing this with the opinions expressed by stakeholders at interviews, we suggest the following list of airports capable of providing the infrastructure to the airlines serving origin and destination passenger traffic to Schiphol s catchment area: Brussels, Düsseldorf, Eindhoven, Enschede, Groningen, Maastricht, Charleroi, and Weeze. Of these potential alternative gateways, four are not even located in the same country as AMS (Brussels and Charleroi are in Belgium, while Düsseldorf and Weeze are in Germany). Further, the following factors weaken the position of the alternative 19 IATA Standard Ground Handling Agreement, Appendix A. 20 Council Directive 96/67/EC of 15 October 1996 on access to the groundhandling market at Community airports. 330 Intersentia

12 Market Power of Airports: A Case Study for Amsterdam Airport Schiphol airports as gateways for origin and destination passenger traffic into and from Amsterdam area. First, none of the alternative infrastructure providers are as wellconnected to the city of Amsterdam as Schiphol. Second, infrastructure available at smaller airports is clearly insufficient to support the needs of larger full-service carriers, such as KLM. Third, bigger alternative airports, namely Brussels and Düsseldorf, despite having the infrastructure necessary to support hub operations, will probably be considered clearly inferior options for traveling into Amsterdam area by the priceinsensitive and time-sensitive business travelers. Finally, smaller alternative airports are used by low-cost carriers, predominantly Ryanair; some airlines will probably be wary of opening themselves up to direct head-to-head competition with the LCCs. In general, Schiphol is a clearly dominant airport in the area, serving about as many passengers as all the potential substitute gateways combined. Of the main carriers currently active at AMS, the most likely candidate for re-location is the low-cost airline easyjet. Such a move would seriously affect Schiphol, as easyjet is now the airport s third largest customer. In the interview, easyjet suggested that moving to an alternative airport will not be easy. The factors hindering such a move include substantial investment the carrier made at Schiphol airport and high likelihood of losing relatively price insensitive passengers exhibiting strong preference for AMS over other area airports. Stakeholders indicated that easyjet may respond to potential pressure from AMS in an indirect way, by not assigning new aircraft to Schiphol. This is similar to Ryanair s response to the ticket tax via developing new services at Weeze rather than Eindhoven. EasyJet itself indicated that over the last several years it has been able to grow much more robustly at airports offering lower charges and easier access to slots as compared to AMS. Most other EU s full service carriers are present at AMS, and up to now they were not seen leaving Schiphol to serve the area via other gateways: Düsseldorf (DUS) and Brussels (BRU) airports are apparently viewed by those carriers as separate destinations in their networks. More intense competition on the airline markets (including competition from the low cost carriers serving airports near Amsterdam) may force those carriers to curtail their services rather than completely exit the airport. We can suggest that potential increases in charges by Schiphol may affect the size of full service carriers presence rather than the presence itself. Regarding KLM, the airport s largest customer, it pays to note that this carrier is effectively a multi-product company, being active on origin and destination, transfer, and cargo markets. Further, regulatory restrictions the carrier faces on a number of routes mean that the airline will probably be unable to relocate outside the Netherlands in the near future. No other airport in the Netherlands is currently able to provide similar infrastructure to that available at Schiphol This indicates that even in the unlikely case that the management of KLM is completely independent of national considerations and freed of regulations which make relocation less likely, there is a strong argument that KLM will remain one of the most important customers at Amsterdam airport Schiphol. Competition and Regulation in Network Industries, Volume 14 (2013), No

13 Volodymyr Bilotkach and Andreas Polk Having said this, we have noted that over the last decade, Charleroi, Eindhoven, and Weeze effectively emerged as competitors with Schiphol for O&D passengers, in a sense of increasing overlap between the number of destinations served out of these airports and Schiphol. However, despite the trend towards more overlap in the absolute number of destinations, in relative terms Schiphol s exposure to the nearby airports changed only modestly. This is related to the fact that over the same time period airlines serving AMS added more destinations to their schedules, quite possibly taking advantage of the incentives provided by AMS to the airlines opening new routes out of the airport. In addition, we conduct an analysis of the extent of overlaps of the competing airports catchment areas for origin and destination passengers from a demand-side perspective. The analysis was conducted by the consulting company MKmetric with the use of a proprietary estimation model. 22 Figure 2 presents the outline of the findings of this research. Figure 2. Diffusion of AMS and Competing Airports Catchment Areas for O\&D passengers The group of competing airports includes RTM, GRG, EIN, NRN, MST, BRU, CLR, DUS. The first number in the legend corresponds to the share of O\&D passengers choosing AMS, the second number is the share of passengers choosing either of the eight above-mentioned alternative airports, and the third corresponds to the share of traffic choosing an airport outside of AMS or either of the eight alternatives. 22 The study by MKmetric formed an integral part of our report to the Netherlands Competition Authority. 332 Intersentia

14 Market Power of Airports: A Case Study for Amsterdam Airport Schiphol We can see that Schiphol s catchment area, loosely defined to include regions from which at least 25 percent of O&D passengers choose AMS over competing airports, spans the Netherlands, as well as most of Belgium, and some regions in Northwest Germany. In the Netherlands, AMS is clearly a preferred airport, with at least 75 percent of passengers preferring this gateway over the alternatives on about three quarters of the country s territory. We can also see that all the above-mentioned alternative gateways for O&D passenger traffic fit quite well into the overlaps of the catchment areas. Figure 2 shows that while Schiphol s catchment area for origin and destination passenger traffic does overlap with some of the alternative airports, AMS holds a dominant position on this particular market. On the market for the provision of infrastructure to the airlines serving transfer passengers, Schiphol can be viewed as either the only hub in KLM s network, or as one of the two hubs in the joint Air France-KLM network. Depending on the view one adopts, the perception of the airport s market power on this segment changes. Multihub airlines may end up with somewhat of an upper hand in the airport-airline relationships (e.g., Air France can keep Schiphol s market power in check by threatening to respond to higher charges by moving some of its transfer traffic to CDG; see Polk and Bilotkach (2013). If, however, KLM has no other place to move its transfer traffic, Schiphol s market power on the transfer passenger segment is restricted only by the extent of competition between the main network carriers. At the time when we carried out the study, we took the former view, as double-hub guarantees adopted following the Air France KLM merger were still in place. The stakeholders indicated Paris Charles de Gaulle (CDG), Frankfurt International (FRA), and London Heathrow (LHR) as Schiphol s main competitors for transfer passengers. At the same time, examining competition between AMS and CDG, we can get an idea about the possible effect that the Air France KLM merger could have had on reorganization of the airlines networks. We have conducted an analysis of the extent of overlaps in the markets that can be served via the four hubs (for instance, we analyze whether a potential passenger traveling on a certain day from Berlin to New York would be able to make relatively convenient connections via AMS, CDG, FRA, and LHR). We conducted our analysis at the alliance rather than airline level, so that a connection from a Lufthansa to a United Airlines flight would be considered feasible, whereas an otherwise equivalent connection from a Lufthansa to a Delta Air Lines service would be deemed not feasible, as in the latter case the two airlines belong to different alliances. Our analysis has shown that on over forty percent of all airport-pair markets serviced via guided connections, AMS does not meet an immediate competitive threat from either of its main competitors on the market for transfer passengers. That is, out of ten randomly selected markets for which a convenient connection via AMS is available on average four will not have a convenient connection available via any of the three competing hub airports. At the same time, markets for which connections are available only via AMS tend to be thin (KLM s strong position on routes to regional Competition and Regulation in Network Industries, Volume 14 (2013), No

15 Volodymyr Bilotkach and Andreas Polk UK airports, for instance, creates a large number of such routes). This means that the share of passengers for whom connections are available only via Schiphol is probably smaller than 40 percent. Interestingly, following the Air France KLM merger AMS did not gain as many new transfer markets as did CDG. At the same time, KLM has worked on adding connections on the existing markets, so that the total number of connections at both airports grew at about the same rate following the merger. We can generally conclude that Schiphol s market power on the market for provision of infrastructure for the airlines serving transfer traffic is less pronounced than on the markets for the provision of infrastructure to airlines serving O&D passengers. Further, expiration of double hub guarantees shifts the balance in the airport-airline relationships away from Schiphol and in the airlines favour. More detailed information about this analysis can be found in Bilotkach and Mueller (2012). With respect to the provision of infrastructure to airlines offering cargo transportation, a number of stakeholders suggested that the cargo market is generally much more competitive than the passenger market. Here, Schiphol faces competition from many airports (CDG, FRA, Luxembourg, Liege, CGN, Leipzig, BRU, Maastricht). Surface transportation infrastructure, including road and rail networks, facilitates this competition between airports for cargo service providers. Note important differences between this list and the one we provided when analyzing competition for O&D passengers. First, Schiphol s competitors on freight market include more remote airports. Second, some of the airports in the list (CDG and FRA) are more important players on the cargo market than Schiphol. So, AMS is not the dominant airport in the corresponding catchment area, which is in stark contrast to Schiphol s position on the market for provision of infrastructure to the airline serving origin and destination passengers. Third, some of Schiphol s competitors face fewer restrictions as compared to AMS (e.g., are allowed to handle night flights, operate under less stringent noise restrictions, etc.). Some stakeholders indicated that cargo catchment area encompasses entire Europe. Generally speaking, there is sufficient evidence of strong competition on cargo market. Competition on the downstream market limits airports ability to exercise its market power at the wholesale level, even if airlines are unlikely to abandon the airport and move to an alternative location. Schiphol s market power on the cargo segment is clearly lower than on either of the two passenger segments MARKET POWER AND ACCESS TO THE AIRPORT FOR GROUND HANDLERS Providing access to companies offering ground handling services is one area where an airport could potentially exercise its market power, by virtue of effectively holding the keys to the gate. We have discussed above that at this time the issue of provision of ground handling services does not raise any competition concerns, as Schiphol airport has chosen to provide unfettered access to the ground handlers. 334 Intersentia

16 Market Power of Airports: A Case Study for Amsterdam Airport Schiphol We should however note that absence of competition policy issues at present does not mean that regulators should simply disregard the issue of access to ground handlers as unimportant. In the future, an airport can decide to get into the ground handling business by either establishing its own ground handling subsidiary, or buying one of the companies presently proving such services on the airport s premises. In such a case, as effectively vertically integrated company (both owner of infrastructure and provider of infrastructure-related services), the airport may have incentives to discriminate against other providers of ground handling services by either blocking their entry or overcharging for access to infrastructure. Any future regulatory regime should then take the issue of market foreclosure into account, and require at the minimum that the airport continues providing non-discriminatory infrastructure access to ground handling operators. 5. CONCLUSIONS This article reports on the main findings of a study on market power of Amsterdam airport Schiphol. We suggest a number of methodological innovations, which could also be applied to future airport market power studies. We propose a detailed market definition for the activities of an airport, which is to our knowledge done for the first time and which we consider as relevant for future studies of hub airports as well. Our methodology is also applicable to airports not serving as hubs, with understanding that non-hub airports are not usually active in the market for the provision of infrastructure to the airlines serving transfer passengers. Also, we analyze overlaps in markets served as an approach to facilitate understanding of the airport s market power, and we include a limited analysis of overlaps in catchment areas to provide us with further understanding of the airport s market position. We also show that, in addition to the data analysis, obtaining detailed information on the institutional framework the airport is operating under, as well as on the expected changes in that framework, can play a rather important role in understanding both the current and the future market power of the airport. For example, expiration of dual hub guarantees following the Air France KLM merger brings in additional important information, which helps us better understand the issue of Schiphol s market power on the market for provision of infrastructure to the airlines serving transfer passengers. Looking at the markets for provision of infrastructure to the airlines, the extent of Schiphol s market power falls with the number of substitute gateways the airlines can use to obtain access to the infrastructure they need. The airport s market power appears the strongest on the market for provision of infrastructure to the airlines serving origin and destination traffic, as the airport clearly dominates any alternative gateways located within its catchment area, from both the airlines and the origin and destination passengers perspective. The airport is still able to wield market power on Competition and Regulation in Network Industries, Volume 14 (2013), No

17 Volodymyr Bilotkach and Andreas Polk the market for provision of infrastructure to the airlines serving passenger traffic, despite the presence of at least three competing hubs. However, expiration of the dual hub guarantees may change this situation, with the balance of power in the airportairline relationship moving away from Schiphol and towards Air France KLM. Provision of infrastructure to cargo airlines appears to be a very competitive market, with a vast catchment area and a substantial number of alternative airports that can provide the infrastructure the airlines need. REFERENCES Bilotkach, V. and Mueller, J. (2012) Supply Side Substitutability and Potential Market Power of Airports: Case of Amsterdam Schiphol, Utilities Policy, 23(C), Bishop, S. and Walker, M. (2010) The economics of EC competition law. Sweet & Maxwell. Competition Commission (2009) BAA airports market investigation, March European Commission (1997) Case No COMP/M.786 Birmingham International Airport. European Commission (1998) Case No COMP/M.1124 Maersk Air / LFV Holding. European Commission (2005) Case No COMP/M.3770 Lufthansa / Swiss. European Commission (2006) Case No COMP/M.4164 Ferrovial / Quebec / GIC / BAA. European Commission (2008) Case No COMP/M.5141 KLM / MartinAir. European Union (2009) Directive 2009/12/EC of the European Parliament and of the Council of 11 March 2009 on airport charges, Official Journal of the European Union, , L 70/11. Forsyth, P., Gillen, D., Mueller, J. and Niemeier, H.-M. (eds) (2010) Airport Competition, Ashgate Publishing. Gordijn, H., and Kolkman, J. (2011) Effects of the Air Passenger Tax. Behavioral responses of passengers, airlines and airports. KiM Netherlands Institute for Transport Policy Analysis. ICAO (2004) ICAO s Policies On Charges For Airports And Air Navigation Services, seventh edition. ICAO (2012) ICAO s Policies On Charges For Airports And Air Navigation Services, ninth edition. International Competition Network (2006) Merger Guidelines Workbook. Motta, M. (2004) Competition policy: Theory and practice. New York and Melbourne: Cambridge University Press. Nemeth, A. and Niemeier, H.-M. (2012) Airline mergers in Europe An overview on the market definition of the EU commission, Journal of Air Transport Management, 22: Intersentia

18 Market Power of Airports: A Case Study for Amsterdam Airport Schiphol NMa (2009) Besluit number /137.BT1377, accessed at nl/download/bijlage/?id=3110 [27 May 2013]. Polk, A., and Bilotkach, V. (2013) The Assessment of Market Power of Hub Airports, Transport Policy, 29: Schiphol Group (2008) Schiphol Airport Charges and Conditions. 1 April Schiphol Group (2011) Schiphol Group Annual Report Schiphol Group (2013) Schiphol Airport Charges and Conditions. 1 April Tretheway, M.W. and Andriulaitis, R.J. (2010) Airport Competition for Freight, In Forsyth et al. (eds), Airport Competition. Ashgate Publishing, Tretheway, M.W. and Kincaid, I. (2010) Competition Between Airports: Occurence and Strategy, In Forsyth et al. (eds), Airport Competition, Ashgate Publishing, Competition and Regulation in Network Industries, Volume 14 (2013), No