The economic market power of Amsterdam Airport Schiphol: A review

Airneth Column
March 2010
By David Starkie

The regulation of Amsterdam Airport Schiphol’s charges was first formulated nearly a decade ago and since then a great deal has happened to change the face of European aviation. Consequently, it is understandable that the Dutch competition authority, NMa, should have decided to instigate a review of Schiphol’s market power and it has done so by commissioning an academic consortium under the nomenclature German Airport Performance (GAP) to undertake a study, the report of which was released in January. The report is a long one, 185 pages (with annexes) and it is difficult to do justice to its analysis and conclusions in this short appraisal. It is a well-written report set within the traditional framework of an investigation in the context of competition law. Competition law often provides a difficult framework for economists to exercise their skills because of its pro-forma approach and this report belies these difficulties. As a consequence, its analysis and conclusions, unfortunately, beg a number of important questions.

Dominance
First, is the issue of whether dominance per se really matters; the world is replete with imperfect markets in which different degrees of dominance abound but, on the whole, society takes a relaxed view because to do otherwise would invoke numerous interventions that, in their totality, would change the paradigm under which market economies operate. What does matter is the exercise of dominance leading to abuse and it is this that is the central concern of European competition law. On this point, the report unfortunately skirts this issue: “[T]he question whether the airport abuses its market position has to be left open, as such an assessment cannot be inferred from the available data” (45)^1,2. However, in 145, the report makes the general point that: “...the airport might decide not to increase charges and other aviation-related costs in order to increase the number of passengers (i.e. the number of potential customers for shops and restaurants)”. This, of course, is a powerful argument as to why airports in general might not abuse market power but, curiously, such non-aviation revenues are judged “beyond the scope of this study” although “...these revenues play an important role in the strategic decision making process of an airport...”. Indeed, the restraining effect of the non-aviation revenues on airport charges was viewed by the Australian Productivity Commission as a major factor when it recommended the removal of formal price-cap regulation from major Australian airports in 2002, ironically, at the time that the imposition of such controls was being considered for Schiphol. Overall, the extent to which Schiphol, if unregulated, would seek to exercise market power is an important issue because economic regulation also has costs and dis-benefits; it is not a seamless process imbued with perfect information, although some bureaucrats and many politicians appear to think otherwise. 

Market definition 
A second issue is one of market definition. The study aptly unbundles the market for the provision of infrastructure services to airlines into four sub-markets and for each a geographical market, defined by the respective catchment areas, is analysed. This is a major advance on the analysis conducted in 2001 (de Wit, 2004³) but arguably the unbundling into four sub-markets namely the provision of infrastructure: to airlines serving O-D passengers; to airlines serving transfer passengers; to airlines providing for cargo; and the market for local and instructional flights, does not go far enough. What is particularly arguable is to treat all passenger-serving airlines as being, de facto, in the same market for infrastructure services and to argue in this context that: “[T]here exists no alternative airport comparable to Schiphol capable of taking over almost all traffic at short duration in the case of a price increase” (21) (emphasis added). This is to ignore the fact there is now a single European market in aviation so that a commercially driven airline will now operate on a pan-European basis and seek out the best financial return across Europe as a whole. As a consequence, airlines e stablished (or largely so) since liberalisation of European aviation, such as easyJet, have operating bases throughout Europe; Ryanair for example has no less than 36 bases across 9 nations⁴. The longer established airlines are following suit: Lufthansa has recently established a base at Milan Malpensa and Aer Lingus has a base at London Gatwick. Thus, Schiphol as an operating base for downstream airlines is, in effect, in competition with hundreds of airports across Europe.

Counter arguments
The counter argument is to emphasise, as the report does, that airlines have sunk costs at particular airports, that they are faced with high switching costs and therefore are vulnerable should an airport exercise pricing power. But aiports too have sunk costs and are potentially vulnerable in the new era to possible capricious behaviour by airlines exercising their new found freedom of establishment. Fortunately, the world of commerce has development a mechanism for dealing with this problem. It is for the respective parties to negotiate a contract securing their respective long-term positions and there are now many examples of contracts between airports and airlines which stipulate prices, qualities of service and a commitment to invest on the part of the airport and to base aircraft on the part of the airline⁵. As for switching costs, about which the report states: “It is well known that [they] are high” (162), there are numerous examples of the new European airlines closing bases and transferring aircraft to alternative locations in Europe. And some of Europe’s legacy airlines have also switched substantial operations between bases: BA moved a large tranche of its operations from London Heathrow to London Gatwick in the early part of the last decade and then, after a few years, moved back again. More to the point, the alliance between Air France and KLM has seen the realignment of long-haul services between Schiphol and Charles de Gaulle on a significant scale. Bear in mind here that economic behaviour responds frequently to changes at the margin; pricing discipline can come from relatively small changes in market share (or even from threats that such changes might occur)⁶.

If it can be argued that for the downstream airlines the relevant geographic market is Europe-wide the same cannot be said for O&D passengers using Schiphol and it is in this market that market power might have greater significance. For passengers the study identified as many as nine substitute airports for Amsterdam, two of which were large and three of which had emerged as competitors relatively recently. The latter development emphasises the dynamics of the market and suggests that too much focus on whether competing airports currently have competing routes is not particularly helpful in the final analysis. Of greater significance is the marked reaction to the introduction of the recent ‘Air Passenger Tax’ which can be viewed as a proxy hike in Schiphol’s charges. The tax take was 220mn. euros but the economic damage to the airport as a large proportion of the O&D traffic moved elsewhere, was estimated at close to 1bn. euros (262). This speaks volumes about the limited ability of Schiphol to exploit market power. Moreover, the ramifications would have been that much greater if this quasi-price increase had applied to Schiphol only and not to all Dutch airports equally and also if Eindoven and Rotterdam, jointly owned by the Schiphol group, were in a position to compete freely and effectively with Schiphol. But, as the study noted, the joint ownership “...limits potential competitive pressure from these airports...leaving Schiphol with a certain amount of market power” (363; see also 200,274). Before deciding upon the continued regulation of Schiphol, therefore, a review of industry structure would seem to be an imperative.

Conclusions
Finally, the conclusions of the study have an intriguing implication. Schiphols supposed dominance in the provision of infrastructure services is mirrored by the KLM group’s apparent dominance of air services at the airport, where it has a 60 per cent share of the market. This begs the question, to use the economics jargon: is there here a case of double marginalisation? If Schiphol acts as a monopolist is it not reasonable to suppose that KLM does so too, bearing in mind that the market power of both derives from the same final product market? Therefore, should not NMa commission a further study addressing airline market power? If such a study was to use the tools of analysis and prescriptions used in this study, I have a good idea of what the outcome would be.

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1. Numbers in parenthesis denote paragraph numbers in the report.

2. Note, however, for companies offering ground handling and other services, “Schiphol Airport controls access to infrastructure and has significant market power, although it currently charges no access fees (with the exception of concession fees for refuelling)” (55). Thus, in this domain at least, market power does not appear to be exercised.

3. Jaap de Wit, The privatisation and regulation of Amsterdam airport Schiphol, London, in: Peter Forsyth, David Gillen, Andreas Knorr, Otto Mayer Hans-Martin Niemeier (ed.) The economic Regulation of Airports, Ashgate 2004

4. The so-called Low Cost Carriers now account for about half the passengers carried within Europe.

5. Let it be thought that that such contracts are restricted only to low cost airlines using small airports, it was reported in 2009 that the major Australian gateway airport, Sydney, had 5 year contracts in place with all its major users. Many similar contracts are in place at major European airports such as Manchester.

6. Hence emphasis added to the quote above taken from 21. See also 525 where it is said to be “...unlikely that a critical mass of airlines would leave Schiphol...in case of a charge increase...” (emphasis added).