The triangular business relationship among Regional Authorities, Airport and Airlines

Content

1. Introduction

2. Literature Review
2.1. Regional authorities - airports interaction
2.2. Ownership and governance
2.3. Regulatory and financial support
2.4. Regional authorities - Airlines interaction
2.4.1. Regulation
2.4.2. Aid to airlines
2.5. Airports - Airlines interaction
2.6. Airlines-Airports empirical analysis

3. Case Study - The Relocation of the DHL Hub to Leipzig/Halle
3.1. The parties of the triangular
3.1.1 The state of Saxony
3.1.2 Leipzig/Halle airport
3.1.3 DHL
3.2. The relocation process
3.2.1. Background
3.2.2. The components of the relocation agreement
3.2.3. Success Factor

4. Discussion
4.1. Evaluation of the triangular business relationships
4.1.1. Benefits and criticism
4.1.2. The Interdependencies of the triangular relationship
4.2. Triangular negotiations
4.2.1. Positive triangular negotiations
4.2.2. Roadmap for future triangular negotiations

5. Conclusion

References

The triangular business relationship among Regional Authorities, Airport and Airlines

Doron Levy¹

Frankfurt University of Applied Sciences

ABSTRACT

This paper evaluates the triangular business relationship among regional authorities, airports and airlines by analyzing the business relationship between the state of Saxony, Leipzig/Halle airport and DHL. The case study under investigation is the relocation process of the European hub of DHL to Leipzig/Halle airport known as ‘project Pegasus’. The paper contributes to the existing literature by offering a model of interdependencies of a triangular business relationship and by arguing that constructing interdependencies is crucial for successful and positive business relationships among regional authorities, airports and airlines. The interdependency of each party on its counterparts creates commitment, builds trust and constitutes strong governance mechanism for executing joint investment initiatives. During negotiations, the three parties should incorporate each party’s individual strategy into the triangular group’s overall strategy, thus achieving a positive end result for future collaborations.

Keywords: Triangular, relationship, Airports, Airlines, Authority

1. INTRODUCTION

Aviation has a vital role in facilitating economic growth worldwide. Everyday more than 8,6 billion passengers travel by air on more than 99,700 flights and 17,5 billion USD worth of goods are carried. It is assumed that 58,1 million job vacancies worldwide are supported by aviation. Establishing air transport services enhances both regional and international connectivity and boost the development of the region surrounding the catchment areas of airports (Air Transport Action Group 2014). The European Union (EU) indicates the importance of member state to support airports and airlines using public funds (Anon 2014a).

The objective of this paper is to evaluate the triangular business relationship among regional authorities, airports and airlines. The research questions are what constitute the business relationship among the three parties, how negotiation processes could be better conduced and what end result could prove to be beneficial for all involved parties in the future.

The research design of this paper is set by reviewing the existed literature and applying it on a case study which involves a specific business relationship between a regional authority, an airport and an airline. The triangular business relationship chosen for this case study is the relocation process of the European hub of DHL to Leipzig/Halle airport. The paper begins with literature review of dual business relationships between each two parties of the triangular and stating the main findings of various scholars. It continues by elaborating the interaction model between airlines and airports of Götsch et al. (2009). The case study is then presented following an analysis of the interactions between the three parties of the triangular. Findings and arguments are drawn and a recommendation for a positive negotiation process with an end result benefiting all parties is then given.

2. LITERATURE REVIEW

2.1. Regional authorities - airports interaction

Regional authorities capitalize on the success of air transportation in their territories. Regional airports and air services provided by Low Cost Carriers (LCC) are strategic assets for the development of a region by attracting investments and generating employment for locals (Carballo-Cruz and Costa 2014). Baum (2008) quantifies the economic impacts of airports on the regional economy and concludes that the region surrounding the airport enjoys direct, indirect and induced effects from the airport’s operation; (i) direct - income and employment of workplaces located at the airport.; (ii) indirect - income and employment generated by companies providing business to the different workplaces at the airport; (iii) inductive - income and employment resulting from the direct and indirect spending of income (Baum 2008). Grahams (2014) adds in this respect, that airports support business and tourism activity. Airports providing both passenger and freight services enhance the competitiveness of the regional economy and can be the lifeline to local economies in remote regions (Graham 2014).

2.2. Ownership and governance

Graham (2014) discusses the structure of airports control and explains the shift from public to private ownership. Traditionally, airports were owned by the public sector. The ownership of airports was varied from either exclusive full national or local government control to a joint control of national government, regional authorities and local municipalities. Airports were considered as public utilities and were managed as public entities. This has gradually started to change towards privatization of airports, with airports reducing their links to the governmental owners and the establishment of airports authorities or companies with public sector shareholders or airports owned fully by private investors. Privatization in Europe and the extent of government control over privately owned airports is a difficult political issue. The fears of favoring private investors’ interests over public interests have been strongly demonstrated in Europe. This has led to the emerging partial privatization of airports, in which the ownership of airports is divided between both the public and private entities (Graham 2014).

2.3. Regulatory and financial support

Graves (2008) addresses the regulatory role of regional authorities in the triangular relationship by addressing the amendment of the Airport Noise Pollution Act (ANPA) (Gravens 2008). ANPA was ruled by the European Commission (EC) in 2002 and describes the measurements member states are allowed to impose in their territories to overcome environmental and health hazards to communities surrounding airports (Eur-lex.europa.eu 2014). Graves claims that an amendment of the act by regional authorities in member states could result in restrictions on night flights, thus causing fatal business consequences to airports (Graves 2008). A research conducted by Oxford Economics (2011) on the impact on restricting night-flights displays these consequences to actual figures. Restricting night-flights in the United Kingdom would result in reducing the country’s Growth Domestic Product (GDP) by 813 million British Pounds and a fall of 11,900 job vacancies (Anon 2011).

Regional authorities engage in supporting expansions and investments of aviation infrastructures in their territories (Wells and Young 2004). The EC has published new guidelines for state aid to airports and airlines in April 2014. The guidelines elaborate the legal and approved operating aid and investment aid to airports in the EU by member states (Anon 2014a). The guidelines have been set in order to promote sound use of public funds while making sure the aviation market is not distorted. State aid is given to airports according to annual passenger traffic volume. By 2024, operating aid to airports is no longer allowed except for airports which facilitates the common interests of the EU, namely (i) facilitate regional development; (ii) reduce congestion at major hub airports; or (iii) increase accessibility and mobility of EU (Föcking 2009; Anon 2014b). Investment aid refers to costs relating to investment in airports planning costs, infrastructures, and ground handling facilities and equipment. It cannot be granted for investment costs for non-aviation activities such as hotels, restaurants, parking facilities and offices (Anon 2014a).

2.4. Regional authorities - Airlines interaction

2.4.1. Regulation

The regulatory interaction between regional authorities and airlines mostly focuses on environmental and noise-related operating restrictions. Night-flight ban has a significant impact on the development of charter or freight carriers. These carriers are dependent on night movements for express operations and long haul scheduling. The case of night-flights restriction at Frankfurt airport, which resulted in reducing the airport’s competitiveness position in the air cargo market, illustrates this exact scenario (Graham 2014).

2.4.2. Aid to airlines

Regional authorities use public funds to attract airlines to operate air services from airports in their territories. The authorities engage in financial and monetary support and sign contracts with airlines, in which a regional authority pays an airline in order to promote the local region and, in return, the airline guarantees the arrival of minimum amount of passengers travelling on board its airplanes to the region (Graham 2014). This kind of agreement is expected to be restricted due to the new guidelines of state aid to airlines. According to the guidelines, an approved state aid to airlines includes start-up aid for launching a new route between two airports in the EU with a maximal annual traffic volume of three million passengers. The start-up aid would cover the airport charges for the airlines. However, the total amount of aid must not exceed the half of the airport charges (Anon 2014a).

2.5. Airports - Airlines interaction

The vast majority of studies in the literature indicate the deregulation of the aviation industry as a turning point, in which the relationships between airports and airlines have shifted from cooperation to competition. According to Wells and Young (2004), prior to the deregulation, airlines and airports had formed negotiating committees which effectively managed to settle conflicts between the two parties. However, the deregulation has created competitive atmosphere between airlines and airports. Airports are no longer dominated by few legacy airlines. The proliferation of airlines and the emergence of new LCC have granted airlines a stronger bargain power on negotiations with airports on future contracts of airport charges. Vertical agreements have been started to dominate the business relationships between airports and airlines (Wells and Young 2004). Starkie (2008) identifies three types of vertical agreements: (i) negotiated charges on long term use of an airport’s infrastructure; (ii) Long term leases of terminals; and (iii) gates leases and giving airlines some control over capital expenditure. Starkie adds that the negotiated charges has led airports to put efforts on convincing airlines and express freight carriers to establish and operate a hub-base with permanently stationed aircraft operating a route of network (Satrkie 2008).

2.6. Airlines-Airports empirical analysis

Götsch et al. (2009) have developed a conceptual framework incorporating the major elements of the airline-airport relationships and their respective dependencies. The model, shown in figure 1, is based on major theories which provide a structure view of the airline- airport interaction and captures the interactions between the following four 4 dimensions and their variables:

1. Environment : market structure, uncertainty.
2. Atmosphere: interdependence, commitment, trust.
3. Interaction process: specific investment, institutionalization², joint action.
4. Strategic outcome: relationship performance, competitive advantage (Götsch et al. 2009).

Figure 1: The interaction model of airlines and airports adopted from Götsch et al. (2009)

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In order to understand the dynamics and the variables’ causality between the dimensions, Götsch et al. conducted a business relationship test using questionnaires sent to managers of carriers worldwide, and measured the level of each variable in the interaction model. Götsch et al. identify three potential success factors in the airline-airport interaction, namely trust, specific investments and institutionalization. (Götsch et al 2009).

Trust facilitates the three elements of institutionalization, namely coordination, incentive and control. This governance mechanism is used effectively for the strategic outcome if airlines and airports agree on extensive set of variables which involve the ability of reaching self- decisions. This can be acquired by a high level of trust between the two players. In addition, Institutionalization contributes tremendously to the strategic outcome by positively influencing specific investments and joint actions. Notwithstanding, the risk for the investing actor in a specific investment, whether it is an airline or an airport, is relatively higher compared to investing in various projects. However, this seems to be overcompensated due to the positive effects a specific investment generates (Götsch et al 2009).

Broader findings also reinforce their hypotheses regarding the causality of the dynamics between the variable in the four dimensions. Positive construct relationships were found between variables of both different and same dimensions, which emphasize the overall interdependency of the interactions between airlines and airports. Figure 2 describes the causality of the relationship, whereas table explains each hypothesis.

Figure 2: Structural model interaction with the causality of the variables adopted from Götsch et al. (2009)

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Table 1: Supported hypotheses of the airline-airport interaction based on Götsch et al. (2009)

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¹ Doron Levy has an academic background in business studies and a MBA degree in Aviation Management from the Frankfurt University of Applied Sciences. His research fields focus on aviation security regulations, the threats posed by insiders and the business interdependencies between airlines, airports and regional authorities.

² Institutionalization is considered by Götsch et al. as relationship governance of coordination, control and incentive mechanism.