Deregulation of Ground Handling Services at Airports

Table of contents

List of figures

List of abbreviations

1. Introduction

2. Framework
2.1 Developments in the aviation sector
2.2 Airlines
2.2.1 Low cost airlines
2.2.2 Traditional Airlines
2.3 Airports
2.3.1 Role
2.3.2 Activities
2.3.3 Types
2.3.4 Competition
2.3.5 Costs and revenues

3. Market structure of ground handling services
3.1 Definition
3.2 Ground handling market
3.2.1 Providers
3.2.2 Interests
3.3 Analysis of competitive forces

4. Economic implications
4.1 Airports as natural monopolies
4.1.1 Airports as natural monopolies in general
4.1.2 Airports as natural monopolies regarding ground handling
4.2 Public regulation
4.2.1 Reasons for regulation
4.2.2 Instruments
4.3 Public deregulation
4.3.1 Reasons for deregulation
4.3.2 Deregulation methods and obstacles

5. EU Directive 96/67/EC
5.1 Background
5.2 Provisions of the Directive
5.3 Exemptions
5.4 Implementation
5.4.1 Implementation of the Directive in Germany

6. Effects of the Directive 96/67/EC
6.1 Overall effects
6.1.1 Prices
6.1.2 Quality
6.1.3 Competition
6.1.4 Centralized infrastructure and access conditions
6.2 Horizontal and vertical integration
6.2.1 Reasons for integration
6.2.1.1 Contracts
6.2.1.2 Transaction costs
6.2.1.3 Economies of scale and scope
6.2.1.4 Learning effects
6.2.1.5 Risk reduction
6.2.2 Horizontal integration
6.2.2.1 Types of horizontal integration
6.2.2.2 Need for regulation
6.2.2.3 Developments after the implementation of the Directive
6.2.3 Vertical integration
6.2.3.1 Types of vertical integration
6.2.3.2 Need for regulation
6.2.3.3 Developments after the implementation of the Directive
6.3 Employees

7. Empirical study on the position of stakeholders

8. Conclusion and outlook

Appendix
Appendix 1: Council Directive 96/67/EC of 15 October 1996 on access to the ground handling market at Community airports
Appendix 2: Annex list of ground handling services
Appendix 3: EC Treaty Article 81
Appendix 4: Questionnaire – Deregulation of ground handling services at German airports (for third party handlers)
Appendix 5: List of respondents

Literature

List of figures

Figure 1: Obstacles to European airport competition of the Chicago convention

Figure 2: World air traffic growth between 2001 and 2010

Figure 3: European airline segmentation

Figure 4: Airport revenue flows

Figure 5: Turnaround processes - ground handling activities

Figure 6: Ground handling activities

Figure 7: Ground handling market value growth between 2005 and 2010

Figure 8: Ground handling split by providers

Figure 9: Top global ground handlers

Figure 10: Estimated numbers of M&A deals in the ground handling industry

Figure 11: Cost curves for a natural monopolist

Figure 12: Freedoms and possible restrictions of Council Directive 96/67/EC

Figure 13: Implementation of the EU Directive in Europe

Figure 14: Contractual problems in an integrated scenario

Figure 15: Considered network deals by airlines in the future

Figure 16: Consolidation trend in the ground handling market: 2003-2005

Figure 17: Consolidation trend in the ground handling market: 2006-2010

Figure 18: Development in the type of contracts under which GH staff works in the EU 15, 1997-2007: according to employers

Figure 19: Development in the type of contracts under which GH staff works in the EU 15, 1997-2007: according to trade unions

Figure 20: Results of empirical study on the position of the different interest groups in the ground handling market

List of abbreviations

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1. Introduction

Current occurrence of strikes by ground and cabin staff, the formation of strategic alliances between airlines, mergers and acquisitions of ground handling (GH) companies and the expansion of airport infrastructures dominate the actual news in the aviation sector and reveal noticeable changes and new dynamics as well as new challenges in the industry. The changes did not only start now but began with the introduction of more competition into the market through the liberalization of airlines at the end of the 1980s which was followed by intensified airport competition and the deregulation of the GH market in 1996. The introduction of competition generally leads to more efficient market conditions. Overall, prices for flights have dropped considerably in the past two decades which has led to dramatic increases in air traffic demand and a new strategic environment for all market participants. Nevertheless, ongoing strikes by airline, GH and airport staff reveal that the situation in the aviation industry is far from optimal.

The purpose of this paper is to examine the developments in the GH market with regard to their origins, current trends and potential future consequences. The main focus will lie on the analysis of the effects of the deregulation of ground handling services (GHS) at Community airports assessed by the EU Directive 96/67/EC in 1996. The liberalization process of the GH market shall be observed from different angles focusing on the broadly differing stakeholders’ points of view. The thesis is structured as follows: First, an overall framework and background of developments in the aviation industry shall give an introduction to the subject. Second, the market structure of GHS in Europe with a focus on Germany shall be observed and connected to the broader framework of public regulation and deregulation. Third, the effects of the deregulation of GHS at airports will be further specified and elaborated. The analysis of the effects will be segmented into four parts: overall effects, effects on horizontal integration, effects on vertical integration and effects on the employees. Finally, the theoretical concepts and practical findings will be completed by real observations and empirical data obtained from interviews with different stakeholders in the GH industry.

2. Framework

2.1 Developments in the aviation sector

In 1944, the International Civil Aviation Conference in Chicago established rules for international air commerce for the first time. An independent international body, the International Civil Aviation Organization (ICAO), was founded to supervise order in the air, obtain maximum technical standardization and recommend certain practices which member countries should follow. After the conference, the air transport market represented one of the most regulated sectors in the economy.¹ Different national regimes which were based on national ownership and a system of flag carriers were established. Aviation was organized on bilateral air service agreements in which a route was typically served by one single airline per country at a fixed tariff. There was no competition on price, airlines agreed capacity on routes in advance and aggregated revenues. High fares, high costs, low productivity and rent seeking by airline management and service suppliers characterized the aviation system after 1994.² Airport management at hub airports was able to pass on its costs to airlines without the limitations that price competition between airlines would have generated. Furthermore, “the world of non-competing airlines was mirrored in non-competing airports”.³ Figure 1 outlines further obstacles to airport competition after the Chicago convention.

The first steps of air transport market liberalization in Europe were taken by the end of the 1980s and consisted of three different legislative packages introduced between 1987 and 1997. The first two packages introduced measures to deregulate the market access for airlines and new rules for capacity sharing, fares for scheduled services, airline competition and airline license specifications.⁴ A third package introduced the freedom to provide services within the EU as well as the freedom to provide so called “cabotage” which establishes the right to operate within the domestic borders of another country.

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Figure 1: Obstacles to European airport competition of the Chicago convention ⁵

The main goal of the liberalization process was to improve the efficiency of air traffic by the introduction of competition, thereby dismantling market entry barriers and abolishing high tariff structures. In the face of an environment with fairer conditions for competition and the struggle for market share, airlines were enticed to develop new strategies and efficiency enhancing market adjustments leading to a more consolidated market structure.

Airline deregulation was a major factor in stimulating airport competition as the increased rivalry between airlines led to a more competitive environment for airport operators as well. With airlines competing mainly on price, airports could no longer charge fixed fees on a “take it or leave it” approach but had to react to the new situation. Regulated capacity limits or fixed tariffs no longer existed and airlines forwarded their cost pressure directly to airport operators.⁶

The more competitive market environment drove an airport privatization trend throughout Europe. Many airports, traditionally publically owned, were completely or partially privatized to assure that required investments in airport infrastructure would be guaranteed in the face of the States’ tightened finances. The extent of privatization varies among the different European Member States and there is also a great variety of structures that have emerged, often combining public and private ownership with public and private operations. The concept of privatization will not be explored in depth in this thesis but needs to be addressed with regard to the deregulation of the GH market. Competition and privatization are two logically distinct but practically intertwined concepts: logically distinct because private ownership does not automatically imply competition and public ownership does not automatically imply a monopoly. They are practically intertwined because in many cases privatization is combined with deregulation and a change of monopoly regulation.⁷ While public ownership might be a solution to market failure, privatization might lead to more competition. Thus, to analyze the effects of the deregulation of the GHS industry, it needs to be kept in mind that some effects might be evident for different reasons and that the privatization trend can also be responsible for some of the changes that occurred.

Against this background, overall air traffic is steadily growing in the course of the globalization of markets and increasing real income which goes along with an increasing demand for mobility.⁸ The development of low cost carriers is intensifying this movement, making flights available to a broader spectrum of customers. Forecasts in a study by KPMG from 2006 predict a world air traffic growth of 5.4% for passenger traffic and 6.3% for cargo traffic between 2006 and 2010.

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Figure 2: World air traffic growth between 2001 and 2010 ⁹

In light of the fast world air traffic growth, airlines and airports are forced to align their interests even more closely to ensure that the increasing demand can be met. They must develop new business strategies and optimize their existing processes whilst at the same time facing growth in existing and new flying routes and a range of new challenges. Furthermore, the economic environment surrounding the aviation industry is strongly cyclical with external challenges such as volatile fuel prices, security concerns and international health crises.

In order to satisfy the rapidly growing yet highly competitive air traffic market, airports have adopted different strategies. They are required to provide enough capacity to handle the demand which often entails the need for expansion or at least modernization of existing premises. Especially hub airports in congested urban areas experience heavy capacity constraints which are not easy to resolve. Today, some airports focus on cost leadership strategies while others choose differentiation and seeking niche markets by focusing on non-aviation activities to target particular customer groups. Furthermore, different forms of integration, horizontal as well as vertical, are increasing throughout European airports.

2.2 Airlines

2.2.1 Low Cost Airlines

The increase of overall air traffic can be explained to a large extent by the emergence of low cost airlines which offer more affordable flying options and attract new target groups to the aviation market. A KPMG study shows that the share of low cost airlines in the European airline segmentation is expected to account for 33% by 2010 compared with 18% in 2004. The new business model with reduced service packages “enable(s) the operation of scheduled flights at a significant lower cost per passenger than the ‘traditional’ airlines”.¹⁰ “Out-and-back” flight schedules enable aircrafts to take off right after they have been cleared and cleaned. Furthermore, up to 30-60% of complexity cost savings can be achieved as low cost airlines do not operate at hub airports and thus do not need to delay departure to accommodate connecting passengers from incoming flights.¹¹ By being able to enter the market establishing a new price curve with lower fares, low cost airlines exert massive cost pressure on the other actors in the aviation market, especially traditional airlines.

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Figure 3: European airline segmentation ¹²

2.2.2 Traditional Airlines

Traditional airlines have no other choice but to adapt their business models to those of the low cost airlines by increasing their productivity and lowering their operating costs with the help of more efficient flight schedules. They have to come up with new commercial strategies. Some airlines have responded to the new pressure by lowering the fares on competitive routes, and others by buying or setting up their own low cost carriers or withdrawing from unprofitable routes.¹³ Efficiency- increasing market adjustments such as pooling of interests, consolidation and alliances between airlines have been taking place since the end of the 1990s. The emergence of alliances such as oneworld, Skyteam and Star Alliance demonstrate that competition between airlines has, to a degree, been replaced by competition between airline alliances. This leads to a new competitive structure in the airline industry and affects at the same time airlines’ bargaining power vis-à-vis airport operators and other stakeholders such as providers of GHS as will be shown in the following chapters.

2.3 Airports

2.3.1 Role

Airports have the main objective to provide centralized infrastructures (CI) which allow landings and take-offs of aircrafts. They have two types of customers, namely airlines and passengers, and have to ensure that the steadily increasing demand for flights can be met by available capacity and that safety regulations are enforced in order to protect customers and the environment. Airlines choose airports according to factors such as quality and capacity of runways, air traffic control ability, network factors or delay statistics. Further essential criteria to ensure passenger satisfaction include punctuality, convenience, aid to orientation, professional transfer organization, variety, cleanliness and service orientation.¹⁴ The activities undertaken by the individual airports and the degree of responsibility which the airports bear are very different between different countries. This is mainly due to historical, legal and commercial factors. While some airports offer the whole spectrum of services themselves, others choose to outsource some services to independent enterprises.

2.3.2 Activities

Airports are highly complex industrial organizations characterized by a wide range of transportation activities which enable the interaction between air and ground traffic. Activities performed at airports can be classified in three different groups: operational, handling and commercial services. The different services are either performed at landside areas which comprise for example transportation facilities, parking lots and shopping and leisure facilities or at airside areas which include runways, taxiways, ramps or apron systems. Besides the provision of security zones and ground navigation facilities, airports comprise a large number of service facilities dealing with the handling of passengers, baggage, freight or mail through terminals and gates. In addition, airports with international flights have customs and immigration facilities.

Services offered by airports can also generally be divided into three types of processes: primary, secondary and tertiary.¹⁵ While primary processes include all operations which deal directly with the handling of passengers, baggage, freight or mail, secondary processes refer to all services which support the primary ones. The sale of flight tickets by travel agencies or airline counters, car rental services and additional infrastructural facilities such as baggage carts are examples of these secondary services which are directly linked to the primary processes but are not obligatory for airport operation. Tertiary processes comprise services and infrastructures which are not directly linked to the primary tasks of the airport. They serve to increase the attractiveness of an airport by optimizing customer and passenger satisfaction with the provision of facilities such as restaurants, bars, shops, banks or conference centers.

Primary and secondary processes are referred to as aviation services while tertiary activities belong to the non-aviation segment. The latter often accounts for more than 50% of the total revenue of an airport.¹⁶ Due to the introduction of competition in the GH market, some airports experienced large profit slumps in the aviation segment which enticed them to focus on alternative revenue sources and lead to an increased focus on non-aviation, resulting in some cases in airports which resemble large shopping malls with ramps and aprons attached to them.

Nevertheless, an efficient functioning is not possible without well structured aviation processes which are coordinated by the airport management.

2.3.3 Types

There are four types of airports. Mega hubs are airports in congested urban areas which serve mainly international carriers, big airlines or airline alliances with large traffic volumes such as major nodes for transcontinental flights. As predicted in a review of the airline market published by the Boston Consulting Group in 2004¹⁷, the following nine mega-hubs emerged in the past years: London, Frankfurt and Paris in Europe, Chicago, Dallas-Fort Worth and Atlanta in the Unites States and Tokyo, Singapore and Hong Kong in Asia. These hubs also match the home bases of the key members of the three largest international alliances: OneWorld, Sky Team and Star Alliance.

Secondary hubs are middle-sized airports which are mainly specialized in holiday travelling and serve as second bases for flag carriers. They have large catchment areas but a lower share of transfer traffic offering a less-extensive global network than mega hubs. Airports such as Munich or Zurich in Europe, San Francisco and Washington DC in the United States and Shanghai or Sydney in the Asia Pacific area are typical secondary hubs. Regional airports with a low share of transfer traffic offer generally only point-to-point connections and serve as base airports for low cost carriers. Finally, small low cost airports are situated far from urban areas, have a very simple infrastructure and normally low traffic rates.¹⁸

2.3.4 Competition

The limited scope of this work does not allow for a detailed exploration of the different forms of competition between airports. They are, nevertheless, listed and mentioned in order to draw a complete framework. Some aspects will be taken up in the course of this paper.

Tretheway and Kincaid summarize the following six types of competition between airports:

- competition for serving a shared market,
- competition for connecting traffic,
- competition for cargo traffic,
- destination competition,
- competition for non-aeronautical services,
- competition with other transportation modes (trains, buses,…).¹⁹

It is important to note that as much as airports might be qualified as natural monopolies as will be further developed in chapter 4, they are exposed to all different forms of competition within each other and with other modes of transportation.

2.3.5 Costs and revenues

Airport costs are compound by labor costs which represent on average between 47-80%, concession fees and charges for CI around 25% and other operational costs accounting for the rest.²⁰

In order to recover these costs incurred for the provision of facilities and services related to the operation of aircrafts and the handling of passengers and cargo, airports impose charges. These account for between 4-8% of the major European air carriers’ operational costs.²¹ In fact, airport revenues can be divided into two different types: aviation and non-aviation revenues as illustrated in figure 4. Here, CI charges represent aviation revenues whilst retail concession fees are counted as non-aviation revenues. Hubs are more capable of exploiting non-aviation activities which offer higher returns on investments and present a possibility to leverage vast real estate for commercial gain. Regional and small airports depend almost entirely on aviation revenues. Especially CI charges will be important for the further development of this paper in regard to the market power of airport operators and the concept of natural monopolies.

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Figure 4: Airport revenue flows ²²

3. Market structure of ground handling services (GHS)

Starting with a definition of GHS, the GH market structure and its main stakeholders will be described in order to depict their different positions and interests and the competitive forces of the GH market will be analyzed.

3.1 Definition

The term ground handling has no official definition but commonly represents a number of services which are carried out before, after and in between flights. The ICAO Airport Economics Manual (Doc 9562) separates the GH function into terminal handling and ramp handling.²³ This division corresponds to the more common differentiation between “landside” and “airside” handling and is based on where the service is carried out. This differentiation is important for the following analysis of the GH market deregulation because landside activities had been exposed to complete competition already before the implementation of the Directive 96/67/EC in many European countries whereas airside activities had often been restricted to airport operators. Landside activities are all cargo and passenger services processed on publicly accessible airport premises such as check-in, ticketing, baggage handling as well as parking and warehousing. Activities which take place on the airside are activities which are performed after security check, mainly ramp services. Passenger and freight terminals constitute the interface between the two. The following figure gives an overview of landside and airside GHS.

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Figure 5: Turnaround processes - ground handling activities²⁴

A complete GHS “package” comprises all these listed services and is generally referred to as “turnaround”. A turnaround begins with the arrival of the airplane at the handling position and ends with its departure. The different elements of the turnaround can be carried out consecutively or simultaneously by one single handler or divided into different combinations carried out by different parties. Not all ground handlers offer the full range of services. Some rather concentrate on specific services which then are referred to as “specialized service providers”.²⁵

The Annex of the Community Directive 96/67/EC is a little bit more precise in the definition of GH and lists eleven activities which are comprised in the term.

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Figure 6: Ground handling activities²⁶

GHS possess specific characteristics which differentiate them from other services or products. Their demand is indirectly dependent on external factors such as weather conditions, trends or the economic and political climate of a country which, in turn, influence the total traffic volume and the aggregated demand for flights. Depending heavily on the activities of airlines and therefore also on deviations from flight schedules and irregularities such as seasonalities and peak-times during the day, GH activities are required to be performed very flexibly on request. They have to be carried out on-site and cannot be stored or easily transferred to another airport.

Interchangeability or replaceability are thus very limited.²⁷ The geographical market for GHS is thus limited to each single airport where they are carried out and to which they are bound. Basically, each GHS taken individually constitutes a particular market because handling agents offer different combinations of services and a functional exchangeability of an overall service package is not given.²⁸ For simplification, in this paper it will be referred to as “the” GH market including all the different GH activities mentioned above unless indicated otherwise.

Templin observed that GHS are positioned at the maturity stage of the life cycle curve where no significant innovations can be expected besides some possible process automation innovations.²⁹ This further enhances the dependency of the GH sector on high traffic activity in order for its services to be profitable and to achieve the desired profit margins.

3.2 Ground handling market

A study by KPMG identified the world market volume of GH to be about 28 billion Euro in 2005 and predicted the volume to increase up to 34 billion Euro in 2010.

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Figure 7: Ground handling market value growth between 2005 and 2010³⁰

The industry is still very heterogeneous with many local, regional and global GH companies which are organized in very different ways even though the market becomes more and more consolidated. The number of small local handlers acting individually prevails, reducing the number of large global companies to only a few even if changes in the structure towards a more consolidated situation with more large providers can be observed.³¹

GH is not always carried out by independent GH agents. Airlines may service their aircrafts themselves which is referred to as “self-handling” or provide their services to other carriers, referred to as “third party handling”. Furthermore, some airport operators or airport affiliated companies also offer third party handling.

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Figure 8: Ground handling split by providers³²

3.2.1 Providers

Self-handling is defined as a “situation in which an airport user directly provides for himself one or more categories of GHS and concludes no contract of any description with a third party for the provision of such services”.³³ Airlines generally choose to self-handle at their home base airports to improve resource utilization. Self-handling has been adapted very differently across air carriers within Europe and worldwide. Today, self- and third party handling airline operators dominate the world market with a market share of about 59%.³⁴ Nevertheless, there are still markets where no self-handling is adopted at all. Instead, airlines outsource GH activities to independent third parties which enable them to concentrate on their core business and offer more favorable cost structures. The investment in handling equipment is often too high to make self-handling cost effective for many airlines.

Independent GH firms are organized very differently. Usually, they offer a broad range of services at more than one airport even though some have specialized in specific tasks. Global handlers which offer their services internationally are still very rare. This situation may be changing prospectively as a movement towards consolidation can be observed throughout the GH industry.

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Figure 9: Top global ground handlers ³⁵

Within this consolidation movement, there has been a significant number of merger and acquisition deals in the GH industry over the past five years, as can be seen in the following figure.

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Figure 10: Estimated numbers of M&A deals in the ground handling industry ³⁶

One example is the alliance of airport service providers Aviance which was created in 1999 as the first and only GH alliance of twelve handlers to provide air carriers with a cooperative alternative to global handlers, profiting from synergies through cooperation, standardization and harmonization of processes while allowing their members to stay legally and financially independent.³⁷ Being part of the alliance and thus a large network, gives members the possibility of placing multi-station-contracts with airlines which offer them advantages over handlers which act individually.³⁸ Nevertheless, the existence of such global GH organizations to date remains limited to Aviance.

The overall market share of independent GH agents is predicted to be rising from 35% in 2005 to 45% in 2010.³⁹ This increase can be partially explained by the opening up of the GH market in Europe but is also related to increasing acquisition activities worldwide. Airside services are still subject to stringent safety regulations and only one handler is allowed so far whereas for landside services independent handlers are free to take advantage of a more liberalized market situation.

In some Member States a legal obligation exists for airports to provide GHS in order to “prevent a situation where airports would exist where no GHS are provided at all”.⁴⁰ In other Member States, third party handling by airports is based on historical factors as in the case of Germany where after 1945, under occupation by the Allies, only airport authorities were granted the right to provide GHS.⁴¹ Thus, some airport operators or airport affiliated companies offer third party handling in addition to the provision of the CI which is reserved exclusively to airport operators in Article 8 of the EU Directive 96/67/EC. CI includes services whose “complexity, cost or environmental impact does not allow of division or duplication” and consists generally of a baggage conveyor belts, de-icing devices, water purification and fuel- distribution systems. The offering of additional GHS follows a business model similar to that of many privately operated airports which aim at new revenue sources allowing them to become less dependent on traditional revenue areas. On the other side, airports are increasingly starting to outsource their handling activities as cost structures of competing independent handling agents become more attractive.

3.2.2 Interests

Ultimately, it is the passenger who decides which airline he or she chooses in order to get from A to B. This decision will be primarily based on price as well as good service and fast connections. The ability to use the internet for price comparison puts the passenger in a dominant position. However, passenger preferences in air transportation have only indirect impact on the demand for GHS.

Airlines’ demand for GHS is very inelastic as it depends on externalities and cannot dictate or generate traffic volume itself. Even if GHS account for not more than 5-8% of the airline ticket⁴², airlines depend on efficient pre and post flight services to create or maintain competitive advantages. Due to airline liberalization and the resulting cost pressures, airlines are motivated more than ever to cut costs and reduce their expenditures. At the same time, they demand from the GHS high service quality in the form of punctuality, flexibility, reliability, safety and minimal turnaround times.

Hub and spoke airline models, where travelers need to change planes en route to their destination, have very complex transfer processes and demand highly coordinated GHS. Low cost carriers and charter airlines have different needs. They have less complex transfer processes and “light handling services” play a more important role. Overall, the different airline types show an increasing interest in multi-station contracts which are far more cost efficient than single contracts with different handling agents all around the world.⁴³ Multi-station contracts facilitate transfer processes as well as providing volume discounts.

To provide their services, handlers normally hold a license or pay fees to the airport. In Europe, the setting of these fees has to be done in accordance with Article 8 of the EU Directive 96/67/EC. In Germany, the setting of fees for the access of CI is regulated in § 6 of the German implementation of the EU Directive, the BADV (Bodenabfertigungsdienst-Verordnung). It is in the interest of independent handlers to reduce the costs for the use of airport facilities. They choose to enter those markets which offer the highest efficiency vantage and the most favorable competitive structure. Furthermore, they have a strong incentive to offer high quality services over the long term. In a highly competitive market competing over an experience good where quality can only be observed after the contract is signed, a good reputation is an essential factor.

Thompson lists several reasons which make the supply of GHS interesting for airports:

- marketing tool when approaching new airlines,
- the ability to control and enhance customer service,
- exploitation of synergies,
- less dependency on traditional revenue areas,
- advantage through cross-training of employees to add diversity and operate, slow periods due to seasonal fluctuations more efficiently.

On the other hand, he lists potential disadvantages:

- tight competition with slim profit margins,
- the need for investments in extensive primary and refresher training programs to provide for personnel safety and limit liability exposure prior to entering market,
- ongoing training cost,
- potential reduction in terminal rental space revenue,
- the possibility of losing money in the venture.⁴⁴

3.3 Analysis of competitive forces

Besides the competition among themselves, the three main interest groups, independent handlers, airport and airline operators, are faced with additional drivers powers in the GH market.

Following Porter’s model of the five competitive forces, new potential competitors and substitutional services have to be taken into account in addition to the rivalry among existing firms and the bargaining power of customers and suppliers.⁴⁵

The assessment of the intensity of rivalry requires an analysis of several factors: the market structure and the number of market participants, product differentiation, the reaction rate of competitors and transaction transparency.⁴⁶ Homogeneity, transparency and a small number of competitors increase the intensity of rivalry. As observed above, the number of GH competitors at each airport is quite low and ramp services are homogenous and substitutable. The transparency of transactions and prices is very low. Nevertheless, the reaction rate between two competitors is high: if one of them lowers its prices, the others will react immediately. Overall, the GHS industry is intensely competitive even if the situation proves to be very different throughout Europe. In London and Amsterdam, for example, intensity of rivalry is much higher than in Germany.

[...]

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¹ Ecorys study (2007), p.11

² Barrett (2000), p.13

³ Barrett (2000), p.13

⁴ Ecorys study (2007), p.11

⁵ Own figure on the basis of Barrett (2000), p.14

⁶ Barrett (2000), p.17

⁷ Niemeier (2006), p.5

⁸ Templin (2007), p.5

⁹ Own figure on the basis of KPMG (2006), p.1

¹⁰ Ecorys Study (2007), p. 25

¹¹ Boston Consulting Group (2006), p. 4

¹² Own figure on the basis of KPMG (2006), p. 4

¹³ Ecorys Study (2007), p.29

¹⁴ Sterzenbach, Conrady (2003), p.130

¹⁵ Mensen (2003), pp.260-261

¹⁶ Doganis (1992), n.p.

¹⁷ Boston Consulting Group (2004), p.14ff

¹⁸ In this paper, when referring to airports, it will be mainly referred to mega and secondary hubs if not specified elsewise.

¹⁹ Tretheway, Kincaid (2005), p.3

²⁰ Smith (2004), p.16

²¹ Proposal for a Directive of the European Parliament and of the Council on airport charges presented by the European Commission in 2007

²² Own figure on the basis of the SH&E study (2002), p.96

²³ International Civil Aviation Organization (2006), p.2-19, no 2.91

²⁴ Own figure on the basis of Templin (2005), p.3

²⁵ Templin (2007), p.22

²⁶ Own figure on the basis of the Council Directive 96/67/EC (1996), p.17

²⁷ Templin (2007), p.23

²⁸ Templin (2007), p.26

²⁹ Templin (2007), p.24

³⁰ Own figure on the basis of KPMG (2006), p.2

³¹ Interview with Aviance France cf. appendix 5

³² Own figure on the basis of KPMG (2006), p.2

³³ Directive 96/67/EC, Article 2(f)

³⁴ Based on data from Templin (2007), p.30 and reconfirmed by different respondents in personal interviews cf. appendix 5.

³⁵ Own figure on the basis of KPMG (2006), p.7

³⁶ Own figure on the basis of KPMG (2006), p.8

³⁷ see homepage http://www.aviance.com

³⁸ Interviews with ADV and Aviance UK cf. appendix 5

³⁹ KPMG (2006), p.2

⁴⁰ Report from the Commission on the application of Council Directive 96/67/EC of 15 October 1996, p.6 ,no.16

⁴¹ Piper (1994), p.51

⁴² Schmitz (2004), p.277 and Smith (2004), p.13+14

⁴³ Interview with Aviance UK cf. appendix 5

⁴⁴ Thompson (2007), pp.393-397

⁴⁵ Porter (1998), pp.3-32

⁴⁶ cf. Besanko, Dranove, Shanley (1996), pp.255-273, and Templin (2007), pp.209-211