Journal of Air Transport Management 16 (2010) 7480

Contents lists available at ScienceDirect

Journal of Air Transport Management

journal homepage: www.elsevier.com/locate/jairtraman

An evaluation of yardstick regulation for European airports

Annika Reinhold a, *, Hans-Martin Niemeier a, Vanessa Kamp a, Jurgen Muller b
a
b

University of Applied Sciences Bremen, Germany

Berlin School of Economics, Germany

a b s t r a c t
Keywords:
Airport economics
Policies
Airport performance
Regulation
Privatization of airports

The European airport industry is subject to various forms of economic regulation and there is debate as
to which of the systems provides the best incentives for allocative and productive efciency. This paper
deals with the applicability of benchmarking as a regulatory tool for airports. This form of regulation
aims at evaluating the cost level of a rm by comparing it to the mean marginal cost structure of all other
rms in the market. The paper investigates the difculties arising from airport benchmarking as well as
the benets that might be derived from it by drawing lessons from benchmark regulation in other
industries and the few cases where it has been applied to airports. In particular, it assesses whether
yardstick regulation is a feasible alternative to the existing forms of economic regulation or whether
yardsticks are more useful for internal management purposes.
2009 Elsevier Ltd. All rights reserved.

1. Introduction
Regulation of airports ranks high on the agenda of air transport
policy in Europe. After many failed attempts in the nineties the EU
Commission has nally succeeded in getting the directive on
airport charges approved (Council of the European Communities,
2007). The draft on airport charges has caused a erce debate
between airports and airlines on issues of cost-relatedness of
airport charges, single versus dual till, fair prot margins and so on.
The role of incentives implied in different regulatory arrangements
has been largely neglected or has only been discussed as a side
issue.
This is in sharp contrast to the perspective emphasised by
regulatory economics. How to set incentives for cost efciency and
for an efcient price structure that allocates scarce resources efciently is the central topic of regulatory economics. It was doubted
in the seventies and eighties that the traditional organization of
public utilities either in the European type of a state owned and
managed entity or in the US type of a private but cost related
regulated industry provides strong incentives for efcient
outcomes. These types of public utilities were largely seen as being
x-inefcient and having a price structure based on an arbitrary
historic cost method.
In the airport sector, the infrastructure remains in many cases
the monopolistic bottleneck and regulation instead of competitive

* Corresponding author at: University of Applied Sciences Bremen, Germany.

E-mail address: annikareinhold@yahoo.de (A. Reinhold).
0969-6997/$ see front matter 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jairtraman.2009.10.005

markets has to set incentives for efciency. But the traditional form
of cost-plus regulation was seen as inadequate and should instead
be replaced by incentive regulation. This regulatory reform is progressing at different speeds in each of the public utility sectors and
in different jurisdictions. The UK took the lead and adopted a price
cap regime for all public utilities, sometimes combined with cost
control and yardstick regulation,1 as for example in water regulation. Continental Europe followed but very often only partially and
with long time lags. This is in particular the case for airports where
we observe a slow trend towards incentive regulation. The concept
of yardstick regulation has so far largely been neglected with a few
exceptions.
Airports are public utilities because they share the cost and
demand characteristics of other industries like energy, water and
telecommunications. The provision of these utilities goes along
with cost subadditivities, i.e. the cost of producing a certain
output or combination of outputs is lower with one rm than
with several rms. Furthermore, the investment in the network
to provide these services is associated with high sunk cost. Given
this common background most studies on the regulation of
public utilities have tended to conne itself to one or two
industries. While there are certainly economies in specialisation,
we also think that there are economies of learning from each
other. In this paper we would like to focus on the issue of
incentive regulation, and in particular how a certain form, namely

1
The terms yardstick
interchangeably.

regulation

and

yardstick

competition

are

used

A. Reinhold et al. / Journal of Air Transport Management 16 (2010) 7480

yardstick regulation, can be applied to the airport industry given

the experience in other network utilities.
We focus on the following questions:
 What can airport regulation learn from the few examples of
yardstick regulation of airports?
 What are the problems arising from the heterogeneous environment of the airport sector? Do these limit the application of
yardstick regulation to this particular sector?
 What can airport regulation learn from the theoretical concept
of yardstick regulation and from the practical experience of it in
other public utilities?

2. European airport privatisation and regulation

In 1987, the British government privatized the three London
British Airport Authority (BAA) airports Heathrow, Gatwick and
Stansted together with the BAAs Scottish airports: Today the
majority of UK airports are fully privatized (Graham, 2004). Though
BAAs performance was widely seen as a success in the nineties,
most European governments were rather reluctant to give up the
control over their own airports completely. The vast majority of
major airports are still publicly owned and in the case of privatization, airports were only partially privatized with a minority
stake for the private sector. Only Budapest, Brussels, Copenhagen,
Malta and Vienna are majority privately owned. No major airport in

75

Continental Europe has been fully privatized without any ownership restrictions (Gillen and Niemeier, 2008).
The start of the privatization process, however, has helped to
change the business model of public airports in mainland Europe. It
has also made these airports more prot-oriented. At the same
time, it shows the need for a more systematic regulatory structure,
because from the view point of the users, many publicly owned
airports are using their market power as much as their partially
private counterparts.
In Europe, airport charges have traditionally been regulated on
a rate of return or cost-plus basis, along with a single till (Fig. 1).
Charges should generate just enough revenue to cover total costs,
including the depreciation of capital and a normal rate of return on
capital for the whole airport. The structure of charges should also
be cost related, namely each charge should reect its costs.
This way of regulation changed with the new style of regulation
of UK airports. The Civil Aviation Authority (CAA) is an independent
regulator that is responsible for a few large airports. Like other UK
regulators it has adopted a hybrid price cap. The price cap is set for
the regulatory period of ve years according to the CPI-X formula
for the average of regulated charges based on the cost of the airport.
The single till principle is applied so that rising non-aeronautical
revenues lower charges via a higher X. Price cap regulation has also
been copied by some other European authorities. In 2000, the price
cap for Hamburg airport was the rst one to be set on a dual till in
Europe reecting the view that regulation should be conned to the
monopolistic bottleneck and incentives for developing the non-

Fig. 1. Type of regulation at European airports. Source: Gillen and Niemeier (2006).

76

A. Reinhold et al. / Journal of Air Transport Management 16 (2010) 7480

aviation business should not be lessened. In 2001, Malta airport and

in 2005 Budapest airport followed with a dual till price cap (Gillen
and Niemeier, 2008).
Cost-based regulation and price cap regulation set different
incentives for airport management. Unlike cost-based regulation,
price caps do not regulate prots but instead set incentives for cost
reduction and revenue generation. The gains from cost reduction
and additional revenues can be kept by the regulated airport within
the regulation period and might then be passed on to the users via
lower charges in the next period. Cost-based regulation sets the
incentives in the opposite direction. It leads to incentives for high
costs, gold plating, and to price structures which do not increase
passenger throughput. A hybrid form such as the UK system lessens
the incentives for cost reduction since the management has an
incentive to have relatively high costs at the end of the regulatory
period in order to have a higher price cap base. For this reason the
CAA discussed the adoption of a benchmarking approach to set the
X independent of the rms costs and behaviour.

Table 1
Comparison of DEA and SFA properties.
Attribute

DEA

SFA

Parametric method
Accounts for noise

No
No

Yes
Yes

Types of measurement:
Technical efciency
Allocative efciency
Technical change
Scale effects
TFP change

Yes
Yes
Yes
Yes
Yes

Yes
Yes
Yes
Yes
Yes

Data that can be used:

Cross sectional
Time series
Panel

Yes
No
Yes

Yes
No
Yes

Basic method requires data on:

Input and output quantities
Input and output prices
Conduct hypothesis testing

Yes
No
No

Yes
No
Yes

Source: adapted from Coelli 2005.

3. Theory of yardstick competition

Yardstick competition is also a form of incentive regulation since
it aims at inducing the regulated rm to improve both its allocative
as well as its productive efciency. This form of regulation implies
that the regulator is placing similar rms in competition with each
other with respect to their cost levels (Baldwin and Cave, 1999).
Shleifers (1985) model illustrates the way in which the regulator determines the prices for the regulated rm. In implementing
yardstick competition, the regulator employs the cost levels of
identical rms to settle on a regulated price on the basis of these
costs. Assuming that there are two or more rms operating in the
market, there will be a so-called shadow rm each rm i will be
measured against. The estimated efcient cost level and the
investment in cost reduction of rm i are determined by the mean
marginal cost (or average cost) of all other rms (j) in the market. If
the rms considered exhibit external heterogeneities the regulator
can use regression of costs on those characteristics that determine
heterogeneity in order to adjust for it. Shleifer states that yardstick
regulation is likely to outperform cost-based regulation even if
diversity is not adequately incorporated in the price formula.
With this kind of regulation, there is no link between the costs of
the rm and its allowable price level. The principal-agent problem
between regulator and regulated rm is circumvented by referring
to accounting data which is publicly provided by the rms.
According to Shleifer, the data used in order to determine the
guidelines is exogenous to the particular rm but endogenous to
the whole industry. Moreover, rms have an incentive to provide
information for the benchmark study since they do want the
outcome to be to their advantage and thus based on the correct
data. In present regulatory schemes there is often some form of
partial yardstick regulation used such as the so-called relative
performance price cap. This specic form of yardstick regulation
regulates the rms price level by comparing the cost and demand
functions of the rms in the concerned sector, i.e. the price cap is
based on relative performance (Kunz, 2003). Furthermore, there are
regulatory schemes where the X factor in price cap regulation plans
is set by the benchmarking of similar rms. Hence, benchmarking is
only a part of yardstick regulation since it helps to detect the
relative performance of the rms. In turn, these performance levels
are used to determine efciency guidelines, such as the X factor, for
the rms within the yardstick competition regime (Canoy et al.,
2000).
In practice, there are different benchmarking methods applied
such as the frontier approaches data envelopment analysis (DEA) or
stochastic frontier analysis (SFA). Both methods can be used to

determine the relative technical and allocative efciency of airports

and have different strengths and weaknesses Table 1. DEA is
a non-parametric approach which uses linear programming to
construct a piece-wise linear frontier which is determined by the
efcient decision making units (DMU) of the sample. Unlike
weighting factor quantities as is done in total factor productivity
analysis (TFP), DEA optimises the weights without the need of price
information (Coelli et al., 2005). An advantage of this approach is
that it can easily handle multiple inputs and outputs within a single
analysis. In contrast to DEA, the SFA approach is a parametric
method which requires the specication of a functional form.
Classical algebraic forms are a Cobb-Douglas or a translog function
that are, taking the logarithm, both of a linear form. Other than
DEA, SFA not only explains deviations from the frontier with inefciency but also accounts for measurement errors or random noise.
This random error indicates a non-observable but stochastic relation between the inputs and the output.
The choice of model to use depends on several factors that in
turn yield different outcomes. First of all, it has to be considered
what the regulators objectives are and what the results are used for
(Riechmann and Rodgarkia-Dara, 2006). Furthermore, in different
industries there might be different sets of data available as well as
diverse structural environments which require different benchmarking techniques.
When applying yardstick regulation to the airport sector the
different heterogeneities that this particular sector faces have to be
taken into account. In his basic model, Shleifer assumes that the
environment the benchmarked rms operate in is identical.
However, this is not true for airports. They face different types of
heterogeneity. First, there are external heterogeneities, which again
can be split up into exogenous and endogenous ones. These are
different from internal or managerial heterogeneities which are
under control of the company. The former, on the other hand, cannot
be inuenced by the regulated rm (Bouf and Leveque, 2004).
4. Yardstick competition and the airport sector
Applying yardstick regulation in the airport sector requires the
benchmarking of different airports in order to transfer the results
into possible efciency guidelines. However, various factors
contribute to airports operating in different structural and institutional environments in Europe. External heterogeneities can be
adjusted for in the benchmarking process, as already outlined by
Shleifer, and the differences in internal management can help to

A. Reinhold et al. / Journal of Air Transport Management 16 (2010) 7480

identify inefciencies of the benchmarked rms. The use of some

form of yardstick regulation in the airport sector in the UK and
Ireland elaborate the challenges of this kind of regulation.
4.1. Exogenous heterogeneities in the airport sector
First of all, airports are subject to exogenous heterogeneities
which are caused by the environment and which inuence costs
but which the regulated rm does not have any control over. These
include, for example, geographical constraints, demographic
differences, or social particularities (Bouf and Leveque, 2004). The
location of an airport and its surrounding infrastructure development determine whether it is possible to build new runways or
terminals and at what cost. If an airport grew historically and is
situated in a constrained area there might not be any possibility to
extend the existing airport infrastructure beyond a certain level.
This may restrict airport operations up to a certain limit, and this
has to be taken into account when benchmarking different airports.
Furthermore, the location of an airport also plays an important role
regarding the demand for air travel. If the area an airport is located
in is densely populated the demand for this kind of travel might be
higher than for airports situated in areas with a low population.
Thus differences in trafc volume must be accounted for when
airports are compared against each other since the size of an airport
matter regarding cost reductions due to scale economies. Furthermore, larger airports have more options to obtain commercial
revenues. A hub airport with a lot of international trafc might offer
more commercial activities than a small regional airport with
a focus on domestic trafc.
In addition, the size of an airport might place a erce constraint
on the application and use of benchmarking results because the
steepness and the turning point of the long run average cost
function are not known. Economies of scale might exhaust at level
of between three and 12.5 or even up to 90 million passengers,
depending on the sample of airports and analysis performed. There
is even some evidence of diseconomies of scale at large hubs (Kamp
et al., 2005).
Political aspects have to be considered as well, since they may
inuence the objective functions and the managerial choices that
can be realised. In Finland, Sweden, Portugal and Spain, airports are
publicly owned in one national airport company, with restricted
protability and signicant cross subsidization. In contrast, the
strategic objective of a stand alone privatised airport will certainly
differ to that of a national public airport company, which in turn
affects their relative performance. Further political differences in
the allocation of government subsidies or other nancial sources as
well as legal restrictions will inuence the airports cost structure
(Mackenzie-Williams, 2005).
4.2. Endogenous heterogeneities in the airport sector
Endogenous heterogeneities, on the other hand, are due to
differences in the regulatory framework an airport faces. This is
particularly relevant for the regulation of European airports, where
regulation differs in the different member states. As the national
sample for airport benchmarking is small in each EU country, such
yardstick regulation has to include airports from other European
countries. This brings in an element of endogenous heterogeneity, as
there are differences in the national requirements an airport has to
full.
First of all, it is important to notice which kind of economic
regulation an airport faces in each country. Rate of return regulation and price cap regulation set different incentive structures
regarding the airports managerial choices. The scope of regulation
might be different if an airport with single till is compared to an

77

airport with a dual till. Secondly, different regulatory authorities

require airports to full different standards regarding the safety
and security, and the quality of services, for example, and thus
affect an airports performance. These heterogeneities can be
adjusted for by including the particular characteristics in the
regression analysis that determines best practice.
4.3. Internal heterogeneities in the airport sector
Internal heterogeneities are due to managerial decisions. Since
this is also the focus of incentive regulation, it should therefore be
analysed in more detail in order to detect inefciencies. Firstly,
technical and quality differences that are not all under managerial
control must be sorted out. Since much of the airport investment is of
a lumpy type and exhibits different investment cycles, especially for
runways, aprons, and terminals, capacity utilization can differ widely
over the life of the investment. This aspect must therefore be taken
into account. A lumpy investment such as a new runway would
change the ratio of capacity and utilization that in turn inuences
their level of efciency. Seasonality in capacity utilizations, for
example at tourist destinations, also must be accounted for.
In addition to these, quality differences are important since
airports that want to take advantage of non-aeronautical activities
will plan their terminals in a very different way than the functional
approaches that we know from the past (Odoni and de Neufville,
1992).
Another important aspect is the degree of outsourcing offered at
an airport. The operation of ground handling or terminals, both
very labour-intensive activities, could either be provided by the
airport or outsourced to an independent party or the airlines. Also,
the degree of commercial activities at an airport, such as retailing
and restaurants, the operation of hotels and car parks or consultancies often differs from airport to airport, often depending on the
size of the airport. Such activities may also be carried out by the
airports itself, or outsourced to specialist companies. As a result, an
airport with low outsourcing activities will face substantially
higher operating costs and revenues compared to an airport that
leaves the operation to specialist providers and collects only
a concession fee on the revenue side (NERA, 2001).
Hence, airports act as multiproduct rms and thus the choice of
output parameters used in the benchmarking analysis has to be
considered carefully. Output variables are therefore not just the
passengers and movements, but also include the services offered in
the terminal building like check-in facilities, luggage transfer, and
non-aviation services. These variables have to be well dened
before a benchmarking analysis can be conducted.
4.4. Benchmarking of airports
Apart from the heterogeneity problem, the collection of data
poses a difculty within the benchmarking process. Different
reporting techniques, such as depreciation methods and reporting
periods, often require the transformation of data to the same
standard. For this reason, the UK regulator requires the same
accounting standards for the regulated airports. Otherwise, standardizing such data for the benchmarking exercise can in turn be
very costly.
Since there are few airports of the same kind within one
country, European regulators would need to use international
airport comparisons, concentrating on other airports with similar
structures (Brunekreeft and Knieps, 2003). Further, the choice and
plausibility of the methods used in such a benchmarking investigation have to be chosen so that the airports can rely on the
transparency of the regulatory process. This will also allow the
airports to detect the efciency differences by themselves and then

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A. Reinhold et al. / Journal of Air Transport Management 16 (2010) 7480

use this knowledge as a chance to further invest in their infrastructure and to aim to further increase their efciency. Otherwise,
using a biased benchmarking process poses the danger that the
benchmarked company will be judged incorrectly by this process
although its seemingly inefcient operations are due to other
reasons and to external effects, which the rm cannot inuence
(Coveney, 2006). If these inefciencies are translated into regulatory objectives by the regulator the danger of misallocation of
resources occurs. Therefore, it is important to analyze which of the
inefciencies are caused by managerial strategies.
Another issue is related to the missing link between the costs of
an airport and the prices it is allowed to charge. The detachment of
the airports costs from its revenues might not allow for a reasonable rate of return on capital that will give rms an incentive to
conduct further investment. If the regulator does not take this
relation into account, the policy recommendations on the basis of
a benchmarking analysis will therefore not be appropriate and
cannot be translated into meaningful efciency guidelines.
4.5. Examples of yardstick regulation in the airport sector
There are examples in the European airport industry where
benchmarking studies have been used in regulatory proceedings.
Dublin Airport Authority plc (DAA), for example, has been subject to
a form of yardstick regulation to determine the prices an airport is
allowed to charge. In 2001, the Commission for Aviation Regulation
(CAR) (2001) commissioned Infrastructure Management Group, Inc.
(IMG) to conduct a benchmarking analysis of Aer Rianta (ART),
a subsidiary of Dublin Airport Authority plc to assess the efciency
of ART from an operational and nancial standpoint. Therefore, the
collection of data, as well as the performance measurement that
were used in the analysis, aimed at identifying performance
targets for Dublin, Shannon, and Cork Airport. There was a group of
peers chosen for each airport according to volume of services (e.g.
annual passengers, aircraft movements) and airport characteristics
(e.g. terminal capacity, CAPEX levels, number of stands) and it was
also taken account of the fact that there would be no direct
comparability between the investigative airports in the peers.
The key performance indicators selected by the CAR to measure
the cost efciency included the operating expenses per work load
unit (WLU) and per employee, as well as the labour expense per
employee. Financial performance was measured by taking revenue
results and protability of the different airports into account
(Commission for Aviation Regulation, 2001). The benchmarking
study conducted in 2001 used these key performance indicators to
determine efciency guidelines for the three airports. For Dublin
Airport, the study identied an inefciency of about 30% concerning its OPEX per WLU. CAR in turn set an efciency improvement
target of 15%, which resulted in an efciency guideline of 3.5% per
annum for ve years.
The resulting criticism by the airport concerned the choice of
peers that it was compared against, as well as the translation,
although not direct, of the observed differences into efciency
guidelines. Due to that criticism, CAR requested international
comparative information on the performance of Dublin Airport in
2005, i.e. a further process benchmarking was conducted (Commission for Aviation Regulation, 2005). The results acquired from this
subsequent analysis were however not transferred into efciency
guidelines as was done in 2001. Instead, this was taken as informal
information supplement in the decision making process concerning
the determination of the price cap for the next regulatory period.
This example shows that efciency differences from a benchmarking analysis cannot always be easily explained and therefore
such results have to be treated cautiously when applying them to
regulatory decision making. Otherwise airports might end up

becoming loaded with objectives they are not able to full because
they cannot inuence some of the parameters that drive their costs.
In the UK, the Civil Aviation Authority (2000) also considered
a form of benchmarking analysis when reviewing the regulatory
framework for the BAA airports. The CAA issued rst a draft proposal
highlighting the use of benchmarking as a supplementary tool for
the setting of price caps for BAA airports that are subject to economic
regulation. By highlighting the benets and problems associated
with the use of benchmarking as a regulatory tool, the CAA tried to
give its own evaluation on how such an analysis might be applied.
One of the objectives of the CAA was to estimate a cost function and
thereby identify key cost drivers of an airport, an approach similar to
that used in other regulated industries in the UK. In addition to that,
the CAA highlighted benchmarking as a way of measuring relative
efciency and performance of the various airports and thus identifying inefciencies which can be eliminated by a more stringent
regulatory process. It also looked at the benchmarking of partial
processes such as the level of service quality as an area where such
a tool can prove to be useful (Civil Aviation Authority, 2000).
The approach CAA chose in its draft was similar to the one
applied in the benchmarking analysis by the CAR. For each regulated BAA airport there would have been a set of peer airports
against which the airport under consideration would be compared.
The CAA also highlighted the problems of choosing the appropriate
parameters for the analysis and the fact that there are external
factors that affect an airports performance and that cannot be
inuenced by the airport management.
Criticism of this approach by the airports includes the difculty
of properly benchmarking the costs of different airports as well as
the model chosen by the CAA (British Airports Authority, 2001a,b).
Furthermore, a statement by the International Air Transport Association (2001) argues that differences in quality of services,
investment cycles and planning processes rule out the effective
application of benchmarking as a regulatory tool for airports.
Nevertheless they would consider benchmarking to act as an
explanatory tool when it comes to identifying differences in
airports performance. Although the CAA did not make explicit use
of benchmarking in implementing its regulatory framework for the
four BAA airports in its decision in 2002, benchmarking still plays
an informal role when it comes to assessing the airports performance (Bush, 2007a,b).
5. Yardstick regulation in other network utilities
Yardstick regulation is more advanced in the electricity and
water sector in Europe. Although these sectors exhibit characteristics such as homogeneous products (Table 2) which make yardstick regulation easier to apply than in the airport sector, there are
some features within the regulatory framework that can be useful
for the airport sector as well. For example, economies of scale in
size play an important role as well, as does density of demand. In
addition to that, exogenous and endogenous heterogeneities are
also explicitly accounted for.
The approaches within the different industries outlined above
differ slightly as to what method has been applied and how the
benchmarking results were used within the regulatory framework.
In order to adjust for exogenous heterogeneities, the Norwegian
regulator NVE included factors that account for climate and
topography in the different regions. The same was done by the
Dutch regulator DTe which took account of regional differences
faced by the distribution companies. A major point that the NVE
plans to consider in the new regulatory period is the allocation of
costs to the different activities and thus to try to distinguish clearly
between those arising in the monopolistic sectors and those in the
competitive sectors (Bjorndal, 2006).

UK Adjustment by topography
and density of demand, different
catch up parameters
Differs from airport to airport,
decentralised regulation (regional,
local governments rate of return,
price cap, hybrid forms)
Heterogeneous product
(Multiproduct rm aviation
and non-aviation business,
differences in outsourcing)
Airports

Aviation side
(infrastructure runway capacity)

Homogeneous product
Water

Distribution

UK price cap regulation, centralised

regulation (OFWAT)

NL DEA, annual comparison

of costs
N DEA, comparison
of costs and application
to individual productivity
requirements (informally)
UK DEA, COLS, benchmarking
of OPEX and LRMC to determine
yardstick revenue cap
UK Comparison of rms
performance on a yearly base
(service quality, accounting
and nancial data)
Yardstick regulation not
applied so far

NL regional differences are

accounted for (reduction or increase
in revenue cap if differences are persistent
over time and deter from the sector average
by more than one percentage point)
N climate, topography

Methodology

The Netherlands (NL) Yardstick

regulation for regional distribution
companies, centralised regulation (DTe)
Norway (N) Revenue cap with
hybrid elements, centralised
regulation (NVE)
UK modied revenue cap,
centralised regulation (Ofgem)
Energy (electricity)

Electricity transmission
and distribution

Product

Homogeneous product
or processes (i.e. transmission
with different voltage levels etc)

Industry Sector

Table 2
Yardstick regulation in three European public utilities.

Monopolistic Bottleneck

Regulation

Heterogeneity (adjustment)

A. Reinhold et al. / Journal of Air Transport Management 16 (2010) 7480

79

Recently, there have also been some changes to put more

emphasis on innovation and dynamic efciency. Ofgem, the UK
electricity regulator, initiated a scheme that spurs investment in
innovations such as new technologies or capacity enhancing
procedures (Ofgem, 2003). Both the schemes in Norway and the
Netherlands include a quality component in their formula in order
to avoid a deterioration of quality and spur investments in it
(Riechmann and Rodgarkia-Dara, 2006)
One main difference between the countries applying yardstick
regulation to the electricity sector is the incorporation of the
benchmarking results into the regulatory framework. The UK and
the Netherlands use the obtained results and directly transfer them
into efciency guidelines for the regulated rms. Norway, on the
other hand, uses its results rather informally as a supplementary
tool to the existing revenue cap. The problems arising from a direct
transferral of results into efciency guidelines have already been
outlined above. The detected inefciencies might not be just due to
managerial failure but to external characteristics the rm is not able
to inuence. Therefore, the above regulatory regimes are constantly
enhancing their schemes by including different components that
take into account those external variables.
Including a quality component in the regulatory framework of
the airport sector was also considered in the UK price cap regulation plans and might be relevant for yardstick regulation in this
sector. Furthermore, the Norwegian approach to allocate common
costs to the monopolistic as well as the competitive sectors is
a good example of how proper benchmarking can deal with the
complexity of costs of the airport sector in particular. As can be seen
from Table 2, the regulators, both by country and sector, make
either direct use of yardstick regulation or indirect use of benchmarking results and performance levels.
6. Discussion
The comparison with those other network industries, which are
subject to yardstick regulation, shows that the airport sector faces
a higher degree of heterogeneity than the water or electricity
sector. While airports are multiproduct rms, energy and water
providers offer a more or less homogeneous product. Airports
provide aeronautical as well as non-aeronautical services.2 In
addition to that, airports exhibit relatively more heterogeneous
features in regard to their political objectives, or the operating
environment. Another problem with airport benchmarking arises
from the data availability. To estimate costs of an airport, access to
disaggregated nancial and physical data is necessary. But such
data is currently not available, and especially difcult to obtain if
airports belong to an airport group. If there is a larger regulatory
area with a sufcient number of similar airports, airports can be
obliged to publish a certain set of standardized data that may
enable a meaningful comparison. This is not yet the case in Europe
as the sample in even the largest member states is not sufcient.
National regulators then have to rely on cooperating airports in
other member states, over which they have no jurisdiction.
Applying benchmarking results for yardstick regulation is not the
solution at the moment. The complexity of the airport business and
operating structures, as well as data availability, prevent the veriability and assessment of the reliability of results that is necessary to
regulate price levels. This can also be seen from the examples where
the high degree of heterogeneity induced the regulators to steer
away from yardstick regulation. In order to enhance the existing
methods in the airport sector, there can be lessons learned from the

2
Non-aeronautical services are often indirectly regulated by the single till
principle applied at most European airports.

80

A. Reinhold et al. / Journal of Air Transport Management 16 (2010) 7480

water and electricity industry that have been outlined above.

However, the higher degree of heterogeneities in the airport sector
requires a more detailed and sophisticated analysis. Therefore, the
different external heterogeneities have to be identied and taken
account of, only then is one able to attain a level playing eld where
a comparison of airports becomes feasible. Adjusting for exogenous
as well as endogenous heterogeneities allows the regulator to detect
those inefciencies that are due to managerial failure and thus
subject to different measures to enhance efciency.
For now, one may use benchmarking results informally. Firstly,
a benchmarking analysis might yield information that is of use for the
existing regulatory framework i.e. for price cap regulation. Such
studies can help to enhance the existing methods of regulation by
providing evidence on the general efciency levels at an airport and
thus highlight efciency differences. Discrepancies from the established frontier require further investigation by the regulator, airport,
and the airlines to explain the existing inefciencies. Thereby
benchmarking analyses can help to close the informational gap
between the regulator and the rms in the market and maybe set
stronger incentives regarding the level of service or quality, for
example.
Secondly, while we have seen that benchmarking the whole
value chain of an airport proved to be rather difcult, a benchmarking analysis used for partial processes within the airport such
as service, quality, or safety procedures does seem to make more
sense. The data concerning these separate airport functions can be
obtained more easily than that concerning the whole cost structure
of an airport and will therefore yield a more accurate outcome,
even for less complex questions. With these partial benchmarks the
regulator is able to better assess the cost basis of an airport.
Acknowledgements
The paper originates from the research project German Airport
Performance (GAP) that is supported by the Federal Ministry of
Research and Technology, see www.gap-projekt.de for further
details. The Erich-Becker Foundation supported the project as well.
We like to thank Doug Andrew, Gert Brunekreeft, Achim Czerny,
Peter Forsyth and Cathal Guiomard for their comments and several
GAP team members for their help on earlier versions of this paper.
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