The UK Airports Industry - Term Paper Example

UK Airport Industry Introduction The aviation industry of United Kingdom contributes about 18 billion Euros of revenues annually to total economic output of the nation. Present airport operations across UK are almost 75 percent more efficient and quieter when compared to that of 50 years ago. More than 730,000 people are directly employed in the UK airlines sector, making it one of the biggest employers across the nation. The aviation department comprises three quarters of total visitors travelling to UK. In the year 2013, average yearly expenditure of customers was 17.75 billion Euros (BATA, 2014). Looking at the above facts, it is clear that the airport industry forms an integral part of the economy of UK. The objective of the current report is to present a competitive analysis on the UK Airport Industry. The demand and supply conditions of the airport sector of UK will be analysed in terms of location and concentration. Entry and exit barriers will help in determining industry attractiveness and future trends. The report will also take an account of competitive structures surrounding the firms operating under the UK Airport Industry. The report will also throw light on anti-competitive behaviour within the industry. Supply and demand conditions of the UK Airport Industry UK has a history of pre-developed commercial airports located near ex-military airfields. As such, number of airports in UK has grown substantially over years. Majority of these airports are for commercial operations. Most of these airports are located near high population regions such as, North West and North East England, which also lessens distance between them. Concentration and location of UK airports also indicates easy access to majority of population. For instance, almost 70 percent of the total UK population can reach airport within one hour. Also, the average gap between two to three airports across UK is 2 hours. Industry experts suggest that these airports might grow or shrink in future. At the same time, airport trends suggest otherwise. For instance, Durham Airport had served around 0.2 million people in 2010, compared to 0.9 millions in 2006 (Marchant, 2007). Hence, it can be said that while the number of airports have increased significantly, customers count have gradually declined. These can be attributed to the increased competition due to close proximity, more choices among passengers, ease of travel and services offered by different airports. There are multiple ownership structures in case of UK airports, including wholly private, public-private, local government and mixed ownership. An example of private-public partnership is Durham Airport. Cross-ownership can be seen in Bristol Airport, where Ontario teachers hold 49 percent of total share through various pension plan schemes (Marchant, 2007). Extent and nature of barriers to entry and exit As noted above, UK Airport Industry is characterised by highly concentrated airports, which heightens competition. However, the nature of services offered by these neighbouring airports is different, creating certain barriers to direct competition. For instance, the services offered by an international airport will be fairly distinct as well as more equipped compared to those of domestic airports. Nevertheless, factors governing or controlling the UK Airport Industry have evolved over time. Entry Barriers: Few decades back, airport industry was limited to the national government as it was deemed expensive, sophisticated as well as difficult to maintain. This is evident in terms of initial airports established by governments across the globe. Even so, with advent of globalization and privatization as well as FDI in aviation sectors, power control of the UK airports slipped down from government to other private and mixed partners. Currently, aircrafts can be owned and operated with substantially less regulations and policies, minimising the entry barriers. It is not possible for any small or medium enterprise to enter the sector due to huge capital expenditure, economies of scale, accessibility of distribution channels and negative profits during initial years of operations. The huge costs of maintaining airports have been seen to force government to transfer their control and shares to private partners (Barrett, 2000). Exit barriers: Exit barriers are extremely high in case of airport industries. For instance, most private enterprises are in long-term contractual agreement with the government, any violation of which might entail huge costs. Similarly, legal policies and guidelines surrounding airport maintenance and management are usually long-term and cannot be breached. Exit barriers are also high because of huge cost associated with dismissal of employees as well as various contractual obligations including rent and mortgages. In addition, the firm managing airport is associated with various channels and distributors, which might create additional costs to the firm (Graham, 2003). Competitive Environment Competition within the UK Airport Industry has always been considered as monopolistic because of few government sector enterprises controlling the entire management of airports across the nation. However, with improved competition, availability of resource and technology as well as increased commercialisation and liberalization of airports, competition has shifted from being monopolistic to oligopolistic. Similarly, increase in small and medium airports has further resulted in a competitive environment (Jarach, 2001). These features can be understood by the evidences provided below. Airport trading takes place on the basis of takeoff and landing slots. Newly created slots are generally auctioned. Existing airports guard their landing slots due to huge commercial value. Also, airports charge airlines for services such as, ramp services, baggage handling and check-in, generally at competitive prices. Internal competition prevailing between firms in the UK Airport Industry has driven the industry dynamics. The various factors affecting competition within the UK Airport Industry include prices charged and discounts offered by airlines, service quality offered at the airports as well as investment at different airports in order to meet projected passenger growth in future (Starkie, 2002). Due to increased competition between firms in the UK Airport Industry, price and service adjustments have started to occur. In order to stay competitive, airports are implementing quality and service upgrades. Their pricing policies have become more competitive. For instance, airports across UK are aiming to upgrade airline services for increasing their point-to-point traffic. Airports across UK are now offering new products on the basis of airline traffic, shorter turnaround and expansion of the catchment area. Another competitive feature that describes the perfectly competitive nature of firms in the UK Airport Industry is increasing significance of smaller airports. In an oligopolistic environment, larger airports have access to many resources. Nevertheless, firms in the UK Airport Industry are facing a dynamic transformation as well as rapid growth, irrespective of base. For instance, the Liverpool airport has been facing stiff competition from a newly launched airline operation, which was established using stranded military bases (Niemeier, et al., 2012). In addition, airport firms whose consumers are increasing rapidly and popularity are growing at a faster rate are often funded by external parties and gather support from distributors and suppliers on account of competitive pricing. Hence, competition within the UK Airport Industry is fairly high with major airports in the busy terminals catering to most of the national and international customers. However, this competition is mainly on grounds of catchment area and ease of access to tertiary facilities such as, transportation and dining facilities (Thelle, Pedersen and Harhoff, 2012). To gain competitive advantage, many airport firms are investing over expansion of the catchment areas, with an objective to increase the volume of potential travellers, especially from neighbouring airports. For instance, Copenhagen Airport funded the metro and constructed an exclusive terminal for airline travellers by way of integrating metro terminal to the airport, thereby reducing time needed to reach airport to 14 minutes (Thelle, Pedersen and Harhoff, 2012). Likewise, competition has been enhanced by upgrading quality of transfer and reducing the traffic time. Here an oligopolistic competition can be observed among 18 of Europe’s largest airport hubs, majority of them being in UK itself. The transfer time can be shortened by increasing speed of travel and reducing ground operations, which in turn can be achieved through better equipped staff and more advanced equipments. As a result, this type of competition is mostly witnessed among top firms in UK Airport Industry. Anti-competitive Behaviour and Regulations Anti-competitive practices are those business or government practices, which reduce or prevent market competition. Anti-competitive activities can range from dumping, exclusive dealing, price fixing; limit pricing, territory division to tying, refusal to deal and maintaining a fixed resale price (Norton Rose Fulbright, 2012). Anti-competitive practices can take place among firms in the UK Airport Industry through various sources. For example, airports can form intra-community mergers and alliances and in turn limit competition by applying pre-fixed pricing, distribution and supply chain strategies. Lack of proper procedural framework and jurisdictions often presents these firms with loopholes, which they utilise by establishing collaborative partnerships, generally at the expense of suppliers, distributors and even customers (Norton Rose Fulbright, 2012). As a result, the UK government has set mandatory guidelines and policies, which monitor work and activities of firms in the UK Airport Industry. Competition in the airport industry is extremely crucial for the economy of UK as it significantly impacts businesses as well as customers. The aviation authority regulated the airports and their operations through economic regulation, safety regulation, airspace policies as well as consumer protection acts. Anti-competitive agreements prohibit vertical and horizontal associations between firms, particularly when these associations prevent or distort competition within the UK Airport Industry (BBC News, 2006). Price cap is a type of price regulation implemented by regulation authorities so that airports are not able to pass on their expenses to the customers through various airport charges. For instance, a maximum cap is set per passenger, above which the airport cannot charge him or her (Civil Aviation Authority, 2013). In order to avoid insider trading among firms while allocating landing and take-off slots, the European regulatory bodies usually appoint a third-party or independent coordinator for slot allocation. Companies should publish information regarding their accounts to the government in order to further avoid or minimize price cartels. Conclusion The objective of the report was to analyse competitive features of firms in the UK Airport Industry. With increasing commercialisation and liberalization as well as lessening of entry barriers, UK airports have emerged in significant numbers. Most of these airports are situated across busy and populated towns of UK. Similarly, competition is moving from monopolistic market to an oligopolistic one. While most big and medium firms in the UK Airport Industry are equipped with latest features and services, few of the bigger firms have competitive advantage due to heavier investment and better distributors and suppliers. Anti-competitive behaviour within firms in the UK Airport Industry is generally established by forming a cartel, thereby reducing competition. These practices are regulated through proper monitoring as well as establishment of strict guidelines and policies by the aviation regulatory bodies in UK. Reference List Barrett, S., 2000. Airport competition in the deregulated European aviation market. Journal of Air Transport Management, 6, pp. 13-27. BATA, 2014. The British Air Transport Association. [online] Available at: [Accessed 5 June 2014]. BBC News, 2006. UK airports in competition probe. [online] Available at: [Accessed 5 June 2014]. Civil Aviation Authority, 2013. Airport regulation: Looking to the future-learning from the past. [online] Available at: [Accessed 5 June 2014]. Graham, A., 2003. Managing airports: An international perspective. Oxford: Oxford University Press. Jarach, D., 2001. The evolution of airport management practices: Towards a multi-point, multi-service, marketing-driven firm. Journal of Air Transport Management, 7, pp. 119-125. Marchant, J., 2007. The UK Airports Industry. [pdf] The University of Bath. Available at: [Accessed 5 June 2014]. Niemeier, H.M., Forsyth, P., Müller, J. and Gillen, D., 2012. Airport Competition: The European Experience. London: Ashgate Publishing Norton Rose Fulbright, 2012. Economic regulation of UK airports - An overview. [online] Available at: [Accessed 5 June 2014]. Starkie, D., 2002. Airport regulation and competition. Journal of Air Transport Management, 8, pp. 37-48. Thelle, M.H., Pedersen, T.T. and Harhoff, F., 2012. Airport Competition in Europe. [pdf]. Copenhagen Economics. Available at: [Accessed 5 June 2014]. Read More