Competitive Structure of British Airports - Essay Example

College: Competitive Structure of British Airports Introduction Most business sectors in the UK have experienced a numberof changes since the Second World War. The changes have been more drastic during the last three decades, and as a result, the British Airports Authority has witnessed positive developments. BAA, has undergone a transformation that has seen it change its operations, financial and capital structure, organizations design, management and employee roles and authority as well as its expansion programmes. Some of the changes have been prompted by recommendations from the regulatory authorities while others from scholars and research from organizations such as the Competition Commissions. More particularly, the Competition Commission has made are geared its findings towards making the BAA to be more competitive. Background BAA was privatized in 1980. This was in response to proposals by the Governments Review of Economic Regulations that sought to bring changes to operations of UK Civil Aviation Authority. Furthermore, the proposed amendments have been for the sake of widening the scope of competition at the airport as well as making the ground be more even. In the recent past, due to these proposals, the sector has seen major changes in terms of structure and becoming more flexible to respond to market demands and competition. Competition has also been necessitated by BAA’s disposal of Gatwick airport to Global Infrastructure Partners. Besides, there is a wider legal framework that is being applied in all other sectors to encourage free hand in business. For instance, the Competition Act 1998, Utilities Act of 2000 and the Communications Act of 2003 have created a platform that promotes fair competition.. This has further gone a long way to diminish its share of passengers and airlines in the South East. To make the market perform optimally, there is more need for BAA to divest some of its holding in other air business corporations so as to completely free up the market. Nevertheless, the future of airports business is likely to be better due to the changing market environment (Doganis, 1992). The present competitive structure of British airports Since the process of liberalization of the air industry gained progress, the sector has witnessed tremendous rise in domestic flights as well as demand for flights for European and intercontinental routes. Despite this space of freedom, there still exists some of form of regulation. Therefore, it is of paramount importance to establish the level of competition that truly exists as well as explore the precise consequences to the current and future air market. Types of markets Theoretically, there are three types of market as far as competition is concerned. Firstly, there is monopoly. This is one of the oldest forms of market where there is only one seller or buyer who has power to control the prices of commodities. In this market, he is the price setter and shall invariably do that to his advantage. This market is characterized by a number of imperfections that typically result in to negative social costs to consumers. It is also a common feature for traders in this market to report abnormal profits. Due to liberalization, in UK there is a limited number of industries that have monopolistic tendencies. According to Competitions Commission, there is need for economic regulation in such conditions so as to reduce the economic excesses that result from monopoly. Secondly, there is an oligopolistic market, that is a market that is controlled by a few market players (sellers or buyers), who habitually, agree on the price to charge for their goods and services. Just like monopoly, this market system can be quite oppressive. The British airports market can aptly fall under this category. Scholars and policy formulators do converge to a verity that in this condition, there is need for regulator intervention to make the ground fairer. Finally, there is a perfect competition that, incidentally, has dominated the majority of UK markets. This is a market that is controlled by many sellers and buyers. Furthermore, this market requires a perfect flow of information, homogeneity of products and there should be no geographic restrictions that can isolate some players in the market. It is the onus of traders to endeavor and keep costs at the minimal level so as to be profitable. It is also worth noting that businessmen in this market are merely price takers and usually make only normal profits (Doganis, 1992). It is clear that although there is competition, there is no perfect competition in the airport industry. This is owed to the fact the government has maintained its presence in the airport industry, as a trader on one hand, and as a regulator on the other. Indirectly, the UK government can manipulate the operations of other competitors. For instance, the law allows the government to make an emergent intervention to solve disputes that arise between the airlines and passengers. The law state that, in so doing, the government as a mediator, is ought to evaluate the legitimate reasons being advanced by both passengers and the airline so as to strike a balance. While this protects the interests of both the airline and passengers, it has brought some imperfections in the air market. Secondly, the government, through CAA sets price caps. In a perfectly competitive economic environment, price must purely be controlled by forces of the market. Furthermore for the market to be perfect, no form of regulation must have existed in the market of the input or factors of production that are consumed by the airlines. Given that these conditions are not fully met at the air industry, it has sporadically created a situation that warrants CAA to set price caps. Thirdly, one aspect that has made it difficult to achieve perfect competition at the British airports is the interconnected ownership structure that of the airlines at the port. It is evident that the airlines are owned and controlled only by a few investors who interfere with the prices. Amazingly, there is a vertical ownership relationship between key stakeholders in the airports industry as well as telecommunications and energy companies. As a result, there is need for policy makers to consider all key factors in making economic regulations (Graham,2008). Given that historical developments point to the fact that deregulation of airports have yielded optimistic prospects for the industry, the Competitions Commission has recommends that there is need for CAA to evaluate economic consequences before formulating any regulatory rules. Furthermore, House of Lords has varied its stand on the level of control. However, in this approach, it is guided by tenets that good regulation should be informed by need to foster accountability, transparency and proportionality in ownership of airlines and airports. Informed economic regulations, divesture of BAA’s interests in Heathrow and Stansted is likely to bear fruits not only for the general passengers but to BAA as well. For instance, evidence shows that these changes will reverse its losses in the near future. For instance, revenue increased by 4.9 between 2009 and 2010, that is, from 1977.6 to 2074.3 British pounds. Furthermore, it reduced debt from 8579 pounds to 9921. Just like any other company, the BAA being a going concern has to take control of its future in relation to completion among other aspects of the airports growth and development. The Competition Commission of BBA believes that the airport has to undergo some changes in order to remain competitive in the market .For instance, the Commission has advised that BAA needs to sell, Gatwick, Stansted and Edinbugh airports in order to improve the level of services and competiveness in the service delivery. The three airports have been owned by BAA for the last forty years and this has created laxity in service delivery on the regions of South-east England and central Scotland. The lack of competiveness brought about by common ownership are largely to blame for the current situation in the BAA’s business in the region .Further more ,lack of competiveness in any given service delivery BAA included reduces the chances of the service provider to come up with incentives for improvement because there is no competitor in the market to attract customers at a greater level of from it. Other problems that were related to the poor performance was sluggish approach in investing in new routes and developing extra runaways. To improve the competitiveness of these report in future, BAA plans to sell tow of its airports in South East England and the one in Scotland .More over, the airport at Heathrow among others that are now performing well will start being sensitive to customer’s needs and preferences by stabling viable customer relations management. This type will ensure that the level of services in the entire BAA points meet customers expectations. However, will there be potential buyers for the airports, the Competition Commission is assured of getting a long list of buyers among them Virgin Atlantic Manchester Airports Group ,German firms among others have all indicated interest in buying the proposed airports. It is believed that the airports can be able to collect one billion pounds if successfully sold. Experts also indicate that the BAA may benefit more in the future if it sold more of its airports to increase competiveness around the UK .The only problem that may crop up is the fact that a new runway can only be constructed in the year 2019. In conclusion, BAA is headed in the right direction because the proposed sale of the three airports Gatwick, Stansted and Edinbugh will improve the overall performance of the county’s airports and also lead to increased returns. With the era of globalization around, airports are bound to become lucrative business only if he are strategically managed (Graham,2008) . 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