Airports and Ground Handling - Essay Example

AIRPORTS AND GROUND HANDLING By Airports and Ground Handling Introduction Traditionally, airports across the world were owned and operated by the respective governments. However, with time the practice changed resulting in the commercialisation and privatisation of the airports. The emergence of commercialisation and privatisation of airports has been widely embraced throughout the world with the United Kingdom being at the forefront (Zakrzewski, Juchau, & UWS, 2006, p. 5). For instance, the former British Airports Authority became privatized through public floatation in 1987. Evidently, commercialisation and privatisation of airports has become a major norm and trend for improving the efficiency and effectiveness of operations. Various studies suggest that privately owned firms can realize higher levels of operating efficiency compared to state owned firms (Megginson et al., 2004). In the UK, there are various ownership structures of airports which include complete private ownership, local government ownership and public-private ownership. While there are several airports which are individually owned, there are also many airport operator groups in the UK. The privatisation of the UK airports is not an isolated case since the move has been embraced by other governments globally. For instance, Austria commercialised and privatised the Vienna International Airport; Australia privatised Melbourne or Tullamarine (Baird, 1996) while New Zealand privatised the ports of Wellington and Auckland international airports. Ideally, many governments globally have leased out their airports on a long-term basis to private entities to operate them to enhance their efficiency and effectiveness (Assaf, Gillen, & Barros, 2012). It is also crucial to note that this kind of arrangement has been extended to the management of sea ports and terminals across the world to enhance efficiency by easing congestion in the port facilities. A good example was the privatisation of nine UK ports in 1983 that formed the Associated British Ports (Haarmeyer, &Yorke, 1993). The privatization enabled the ports to increase capital investment, diversify assets and adopt efficient practices (Haarmeyer, &Yorke, 1993). Thus, it is evident that privatisation of government owned entities is crucial in improving their operational efficiency and effectiveness. It is important, however, to note that privatisation of airports has not taken place in all parts of the UK and the world. Some airports such those in the Islands of Scotland, which are not busy or desirable are usually funded by the state to facilitate the movement of people from one point to another. Therefore, in such cases the airports remain under the ownership of the state because they are not commercially viable to guarantee privatization. As mentioned, there are various types of ownership of airports. Some airports are owned by government agencies or governmental departments. Typically, government agencies are not autonomous from the central government since their operations are regulated by the state, thus they operate under state budget for the interest of the people. There is also the mixed type of ownership in which a government enters into a partnership with private entities to run and manage its airports. This is arguably the most common form of airport ownership since the government incorporates the private sector to increase productivity, efficiency and effectiveness at the airports while it retains some stake in maintaining and exercising an oversight role in critical decision-making (Starkie, 2008). The mixed type of ownership is twofold. The first type is one in which the government is the majority shareholder. The second type involves the private sector owning a significant stake in the airport. The extent of ownership by each part is crucial since it affects the manner in which major decisions are made concerning the operations and management of the airports because often the entity with a significant stake has an upper hand in terms of policy formulation and critical decision making. Thus, the two forms of ownership arrangements tend to perform variedly due to the difference in influence both parties have in decision-making and policy formulation (Civil Aviation Authority, 2011). There are also airports which are entirely owned by private firms. This often occurs through a takeover in a situation where a government disposes of an airport to a private investor who owns it and operates it as a private entity. For this reason, such airports are considered like any other business entities since their primary objective is to create wealth for their shareholders. An example of this type of ownership is the case of Heathrow International Airport in the UK that is owned by Heathrow Airport Holdings Ltd (Assaf, Gillen, & Barros, 2012). Governments usually own airports but often lease them out on a long-term basis to private airport authorities that run and manage the operations of the airports. Thus, this has become an emerging trend in the aviation industry since most government-run airports have been found to be significantly less productive due to the bureaucratic practices common with the governments. A majority of the airport authorities are primarily not for profit organisations, but others are semi-commercial in nature; thus, they undertake their operations with profit maximisation as the primary objective. The change of ownership of an airport often results from a number of issues that a government faces at any particular time. That is the reason some governments opt to privatise an airport fully while other lease out the assets to third parties or delegate them to government agencies and corporations. As such, the decision to transform the form of ownership depends on a number of varied factors or the situation at hand during a particular time. The decision to change the ownership of a fully owned government airport to a private entity primarily arises from the operational point of view. Studies suggest that that private entity operated airports are operationally more efficient and effective compared to state-owned organisations (Starkey, 2008). Thus, governments opt to place airports under the ownership of State Corporations or lease them out to private entities to improve their operational efficiency to conform to the common believe that government enterprises can perform better under private ownership management structures lieu of the bureaucratic departments of the government (Civil Aviation Authority, 2011). At times, governments, especially in the less developed nations face financial constraints due to lack funds to finance expansion, improvement and development of the airports. Such situations often drive the governments to change the form of ownership of the airports to enable them source funds through leases or by entering into public-private partnerships to raise funds to finance development and expansion projects of their airport facilities to stimulate a country’s economic growth and development and boost the country’s global position in the industry. For instance, with the dynamism of global trade, airports that were irrelevant to the global travel map are becoming essential routes to various business destinations. The increased number of traffic through these airports has prompted expansion activities in such airports to enable them to accommodate more travellers and cargo and conform international standards. Such activities require billions of pounds, thus necessitate the respective governments to consider various alternatives such as ownership change to enable them source funds for such developments activities and projects (Starkie, 2008). Therefore, the privatisation of government-owned airports can be regarded as a form of strategy for governments to raise funds to finance its expansion activities. Zakrzewski, Juchau, & UWS (2006) argue that governments have a limited incentive to concentrate and run airports in an efficient and effective way in the modern marketing environment where competition thrives. They go ahead to argue that it is, for this reason, imperative that airports are privatised to change their core business objective to profit maximisation, which is the foundation upon which efficiency and effectiveness are anchored due to competition. For instance, they state “Leading airports such as Frankfurt, Schiphol, Manchester and Copenhagen, as well as merged airport operator groups, have realised the potential of the airport business in both the domestic and global markets”. Therefore, another significant factor for privatising or placing airports under state corporations is to improve their effectiveness and efficiency in regard to service delivery, capacity and throughput time. However, the Aviation-Strategy (1999) argues that despite all the benefits associated with privatisation of airports, the change of ownership often leads to the commercialisation of airports and thus brings in new challenges resulting from increased business activity. For instance, “The new commercial orientated approach to airports has attracted more traffic movements, increased congestion and pollution, encouraged public transport and expanded the business environment surrounding airport sites” (Zakrzewski, Juchau, & UWS, 2006, p. 5). However, it is important to note that privatisation of airports removes the bureaucratic process associated with government agencies and departments and thus improves the planning, service delivery and management of airports. The following is a comparison between Heathrow Airport and Luton International airport based on their performance. The parameters for comparison will include the quality of service delivery. In this case, the number of passengers and cargo handled by the two airports will be compared, in addition to, how well they manage their services in general through the measure of the level of satisfaction obtained by the passengers. The growth perspective will be based on a historical analysis of how the two airports have progressed from the previous years in terms of the volume of cargo and passengers that they handle together with other elements such as inclusion of new routes or value added services to their portfolio. To begin with the two airports are among the top five airports in the larger London area. Luton Airport is owned and managed by Luton Borough Council and thus remains a public entity. However, the airport is managed by London Luton Operations Ltd., a private consortium. On the other hand, Heathrow International Airport in the United Kingdom is owned by Heathrow Airport Holdings Ltd. The company was formed in 2006 after the Competition Commission forced BAA Plc. to dispose some of its airports. BAA plc. had been formed from the privatisation of BAA in1987 by the government through a public floatation that generated a £1.2bn market capitalisation, thus resulting in its takeover by the Spanish led firm, Ferrovial Company (Thomas, 2012). The company rebranded in 2006 to Heathrow Airport Holdings Ltd after it was delisted from the London Stock Exchange. Heathrow International airport tends to have an advantage over Luton since it attracts more international and long haul flights compared to Luton. In 1990 Luton airport served 4% of the total number of passengers that travelled by air in London but this has exponentially improved and by 2010, the airport accommodated and registered nearly 24% of the total number of passengers in London. It is evident that the airport exhibited a steady growth trajectory over a decade and this can be attributed to the fact that the airport was able to expand its capacity due to availability of ample space and resources for expansion (Great Britain & National Statistics, 2004). On the other hand, Heathrow as remained the primary passenger destination in London. Statistics indicates that in 1990 the airport commanded 24% of the total number of passengers in London a figure that slightly rose to 31% in 2010. Furthermore, Heathrow accounts for approximately 23% of air traffic movements (ATM) in London, with 54% of revenue passenger kilometre over the same region (RPK) (Great Britain & National Statistics, 2004). The impressive performance associated with Heathrow can be attributed to the fact that the airport accommodates majorly large aircrafts that carry significantly more passenger and over long travel hauls. Luton Airport commands 2.8% ATM with a 0.3% RPK mainly because it handles lighter planes with reduced number of passengers that operate short-haul flights. The past five years has seen Heathrow increase the number of long haul flights that are accommodated at the airport with its RPK increasing by 2.3% with 0.2% passenger volume growth (Great Britain & National Statistics, 2004). Similarly, Luton experienced a 5% RPK growth with a corresponding 2% increase in the number of passengers handled by the airport. Heathrow has been operating in its full capacity for a long time now a reason it has not recorded any notable growth in its volumes since the airport has no extra space to expand its facilities. Conversely, over the same period Luton has demonstrated an impressive growth trajectory since major expansion operations were conducted, at the facility, to accommodate more volume. In a nutshell, Heathrow is a busier airport compared to Luton based on both capacity and the volume of passengers and cargo that it handles and most international travellers prefer it over Luton as it handles a considerable number of long haul flights (Great Britain & National Statistics, 2004). There are also plans to develop a third runway in north-west of the airport. It is expected that the runway will enable the company to address issues raised by the society at local, national and even regional level (Heathrow Airport, n.d.). This plan is possible because of its private ownership arrangement, which can enable it to float more shares in the market and attract more customers because of the viability of the expansion in terms of increasing the airport’s carrying capacity up to 740, 000 planes annually implying more activity and better and increased revenues (Heathrow Airport, n.d.). On the other hand, Luton has also received an approval to for expansion that is to be completed in three phases. However, unlike the case of Heathrow, Luton expansion aims at modernising the airports facility such as building of a multi-storey parking centre. Conclusion It is evident that there exists different forms of ownership of airports and reasons governments opt to privatise or place airports under the management of state corporations. However, among the different forms, privatisation improves efficiency and operational effectiveness of airports because it eliminates the bureaucratic processes related to the management of airports. Privatisation enables the privatised entities to adopt best operational and management practices; improve their investment capital and diversify their assets. References Assaf, A. G., Gillen, D., & Barros, C., 2012. Performance assessment of UK airports: evidence from a Bayesian dynamic frontier model. Transportation Research Part E: Logistics and Transportation Review, 48(3), 603-615. Aviation-Strategy, 1999. "Airport privatization: Competition for management project intensifies." AviationStrategy (October). Baird, B., 1996. Airport Privatisation: Australias Potential as a tourist destination. Airport PrivatisationConference, Hilton Hotel, Sydney. Civil Aviation Authority, 2011. UK Airports markets- General context: Working Paper. (2011). Available at: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB4QFjAA&url=http%3A%2F%2Fwww.caa.co.uk%2Fdocs%2F5%2F20110905%2520Market%2520Context-FINAL.pdf&ei=FD42VcPuA8i2ygOC04CoAg&usg=AFQjCNGQuj7vOhlK36i6NBCldZCMzWglwQ&sig2=qyye1nSgFMyS3ASPklKlZQ&bvm=bv.91071109,d.bGQ [Accessed on 21 Apr. 15]. Great Britain & National Statistics (Great Britain)., 2004. Transport statistics Great Britain: 2004. London, TSO Publications. Haarmeyer, D., &Yorke, P., 1993. Port privatization: an international perspective (No. Policy Study No. 156). Los Angeles: Reason Foundation. Heathrow Airport, n.d. Our Third Runway Proposal. Available at: http://www.heathrowairport.com/about-us/company-news-and-information/airports-commission/our-proposal [Accessed on 21 Apr. 15]. Starkie, D., 2008. The airport industry in a competitive environment: A United Kingdom perspective. Joint Transport Research Centre, International Transport Forum. Thomas, N., 2012. BAA Rebrands as Heathrow. Available at: http://www.telegraph.co.uk/finance/newsbysector/9610486/BAA-rebrands-as-Heathrow.html [Accessed on 21 Apr. 15]. Read More