Airport regulation: the case of slot restriction in Linate Airport

Ugo Arrigo Andrea Giuricin

WCTR 2010 SIG 4

Lisboa, 13 July 2010 Airport regulation: the case of slot restriction in Linate Airport

AGENDA

1. Evolution of market in Europe and in Italy after the liberalization 2. Slot restriction in Milan Linate Airport 3. Abuse of dominant Position in Milan Linate Airport 4. Domestic Routes: Alitalia’s monopoly 5. Milan – Rome Route: a real problem for the competition? Objective

• This paper analyses a particular airport regulation case. Milan Linate airport had to face a decrease of its capacity to political purposes instead of economic reasons. Ten years after this decision, the reasons for that slot restriction have run out. This choice has been worsened by Italian Parliament's act 166 in 2008, which, de facto, bottled up the competition in air transport branch. The so called “Alitalia Save” act as well as the slot restriction actually led to a lack of competition in the Milan City Airport. Introduction

• Air traffic often had to face a reduced slot capacity.

• Despite of a growing demand, political decision took the opposite direction, which meant a capacity reduction. This is the situation for Milan Linate, which by law had to undergo an important decrease of its capacity.

•This slot restriction choice had also been worsened by act 166 of 2008, which, in order to save Alitalia, had suspended the Antitrust rule for a 3 year period. Now the Authority for Market Competition cannot intervene in case of abuse of position. 1. Evolution of market in Europe and in Italy after the liberalization

• European air transport has been undergoing an important growth over the last years, because of complete liberalization which took place on the 1st of April 1997. • Italian market registered an increase in the number of passengers higher than 100 per cent in 10 years. • Financial crisis happened in 2008 had partially reduced the air traffic. • Spain, Ireland and Italy had mainly profited by the development and had encouraged the set of low cost companies both national and international. UK also registered a more than 90 per cent growth in the decade following the liberalization. • In France, the defence of the champion ntional Air France, limited the growth compared to the other state in matter of number of passengers. 1. Evolution of market in Europe and in Italy after the liberalization

Font: Elaboration from Eurostat Data 1. Evolution of market in Europe and in Italy after the liberalization

• Italy in 2009 registered the second year of market contraction, following the peak reached in 2007 with more than 108 million passengers. • The flagship company bankruptcy, which took place in August 2008, had favoured the low cost company growth. New Alitalia, after the fusion with Airone, had lost more than 10 per cent points of market share between 2007 and 2009. • Ryanair is the second player with more than 18 per cent of the market share, close to Alitalia which controls the 21 per cent. • Easyjet had instead barely reached the 10 per cent of the marked, by doing so, becoming the leader company in Milan Malpensa hub, after the de-hubbing by Alitalia. 1. Evolution of market in Europe and in Italy after the liberalization

Font: Elaboration Data from Assaeroporti and Carriers 1. Evolution of market in Europe and in Italy after the liberalization

Font: Elaboration Data from Assaeroporti and Carriers 1. Evolution of market in Europe and in Italy after the liberalization

• When we analyse exclusively the domestic market, the situation is completely different. • Alitalia’s position is really strong, with more than 50 per cent of the market share. • This strength comes from the fusion between AirOne and Alitalia, desired by the politicians during the save of the flagship company . • The second operator in the local market is Meridiana with a market share of 15 per cent, while low cost companies Ryanair and Easyjet do not reach the 10 per cent of carried passengers. • Thus this highlights the prevailing position of Alitalia and this comes out to be particularly strong in Rome Fiumicino, where the company placed its own hub, and in Milan Linate. 2. Slot restriction in Milan Linate Airport

• In order to develop the new Malpensa airport and to help Alitalia’s hub settlement (and the merger with KLM), with the consequent transfer of most of intercontinental flights from Fiumicino and of several national and European flights previously performed by Linate, it had been triggered a strict regulation of the global air traffic over Linate airport . • This choice goal was to avoid slots now released by Alitalia on Linate to be assigned to European competitor carriers, which would have used them to route over their own hubs the Milan area passengers departing to long range destinations. • The first version of the regulatory measure planned that from 15 th January 2000 Linate would have been available only for the link with Rome. 2. Slot restriction in Milan Linate Airport

• Anyway this decision hadn't been put into effect and after some postponement the DM 3rd March 2000 became effective, know has Bersani Decree, which planned that the Linate City Airport could cover also the routes towards UE States capital cities which in 1999 had shown at least 350 thousand passengers. • A Decision by European Commission dated 21 st December 2000 , considered compatible with dispositions from article 8 of CEE Regulation n. 2408/92, the modifications Italian authorities were going to improve on the decree, yet keeping the goal to ensure the development of Malpensa as an Hub Airport while assigning Linate airport as an infrastructure for point to point routes, consequently restricting its operable routes by type and number. 2. Slot restriction in Milan Linate Airport

• Bersani bis decree of 5th January 2001:

1.Connections without bonds with airports complexes or single hubs which have a global traffic to and from Linate higher than 2,8 million passengers per year (that actually meant Rome); 2. Use of 3 couples of slot each carrier to perform three daily round trip connections towards airports complexes or single hubs which have a global traffic between 1,4 and 2,8 million passengers per year (in substance London); 3.Use of two couples of slot each carrier to perform two daily round trips towards: (a) airports complexes or single hubs which have a global traffic between 700 thousand and 1,4 million passengers per year (Paris, Catania and Naples); (b) communitarian hubs which in 1999 registered a global passenger traffic higher than 40 million units (Frankfurt). 2. Slot restriction in Milan Linate Airport

4. Use of one couple of slot each carrier to perform one daily round trip towards: (a) airports complexes or single hubs which have a global traffic between 350 thousand and 700 thousand passengers per year (Madrid, Barcelona, Bruxelles, Amsterdam, Athens and Cagliari, Bari, Palermo); airports complexes or single hubs which have a global traffic lower than 350 thousand passengers but located in communitarian zones part of target 1 (Portugal, Spain, Greece, Corse, Southern Italy and ex East Germany) or in capital cities of States part of the Union (Lisbon, Copenhagen, Wien, Stockholm and Berlin)

Still in 2001 the maximum operable traffic over the Milan airport complex was set in not more than 120 movements per hour, 70 of which assigned to Malpensa, 18 to Linate and the rest 32 to Orio al Serio. 2. Slot restriction in Milan Linate Airport

• The bounds over Linate was particularly strict, as it was demonstrated afterwards by a study for the European Commission, performed in 2004, which established that the theoretic capacity of the runaway was in reality 32 movement per hour. • Let's just consider that 18 hourly movements (landing or take off) correspond , accounting to the normal daily use of the airport, to 280 maximum movement per day (140 take offs and 140 arrivals). • In 1997, the last year before the opening of Malpensa, the medium daily movements over Linate were around 200 more than those allowed after the regulatory restriction. • The realized limitation represents on consequence a reduction around 43% of the operable airport capacity. 3. Abuse of dominant Position in Milan Linate Airport

Table 1 - Milan Linate Airport Traffic 1998-2009

Movements Passengers Year Th. Index Th. Indice 1999=100 1999=100

1999 78,5 100,0 6.664 100,0 2000 73,9 94,1 5.986 89,8 2001 90,8 115,7 7.073 106,1 2002 86,6 110,3 7.814 117,3 2003 93,8 119,5 8.756 131,4 2004 94,5 120,4 8.945 134,2 2005 93,9 119,6 9.086 136,3 2006 100,1 127,5 9.693 145,5 2007 100,5 128,0 9.925 148,9 2008 96,8 123,3 9.265 139,0 2009 93,7 119,4 8.295 124,5

Data: Enac and Assaeroporti 3. Abuse of dominant Position in Milan Linate Airport

• In 1998, more than 13 million passengers passed through Milan Linate. After some traffic growth years it can be registered, starting from 2008, a contraction of the same. • In 2008 Alitalia declared bankruptcy and Italian Government decided to impose the “Alitalia Save” law, which suspended for three years the antitrust regulation . • Alitalia and Airone were the main carriers in Linate airport and the merger caused a abuse of dominant position. • From 2008 Milan Linate hasn't been allowed to substitute Alitalia’s flights with those from other companies as there is no slot availability. 3. Abuse of dominant Position in Milan Linate Airport

• More than 40 % of the airport capacity that has been used until 1997 had been blocked by the restriction on the number of flights realised in 2001 on decision of ENAC. • If we add to this capacity the number of flights cancelled during 2008 because of Alitalia’s crisis and unrestricted in the beginning of 2009 with the new company, we reach about the half of the Linate airport capacity resulting not used during the first months of 2009. • The used half instead resulted to be occupied for more of the 70% by new Alitalia and for less than 30% by all the other carriers. • The dominant position of the new Alitalia is even more noteworthy if we consider only the local flights part. 3. Abuse of dominant Position in Milan Linate Airport

Font: Elaboration Data from SEA 3. Abuse of dominant Position in Milan Linate Airport

• About 70 per cent of the passengers flies with the incumbent company, after the merger between Alitalia and Airone has been admitted. • Linate had been limited in order to allow the Alitalia’s hub over Malpensa but, as Alitalia changed its plans and closed the hub, the regulatory limitation over Linate has no more reasons to exist and should be suppressed. • Alitalia underwent the decrease of its passengers because of the reduction of its own network. • As traffic data demonstrate the substitution has been important in Malpensa thanks to the increase of the offer by the other operator. • The dominant position abuse comes out when the main operator join with the other operators, actually limiting the competition. 3. Abuse of dominant Position in Milan Linate Airport

Table 2 - Passengers in Milan Linate Airport

Jan - Mar Carriers Diff 09-08 Diff 09-08 MS 09 2008 2009

Alitalia 1 585 946 1 265 585 -320 361 -20.2% 69.7%

Others Carrieres 679 354 548 921 -130 433 -19.2% 30.3%

Milan Linate 2 265 300 1 814 506 -450 794 -19.9% 100.0% Font: Elaboration SEA data

• A merger is not to be condemned by itself, but it becomes a prevailing position abuse when the incumbent, mainly reinforce its position. 3. Abuse of dominant Position in Milan Linate Airport

Table 3 – Passengers in Milan Linate Airport: Abuse of Dominant Position

Passeggeri Market Share Carrier Diff. 2007 2008 2007 2008

Alitalia 3 708 202 3 919 539 211 337 37.4% 42.3%

AirOne 2 445 348 2 237 193 -208 155 24.6% 24.1%

Alitalia+AirOne 6 153 550 6 156 732 3 182 62.0% 66.5%

Others Carrieres 3 770 367 3 107 741 -662 626 38.0% 33.5% Total 9 923 917 9 264 473 -659 444 100.0% 100.0% Font: Elaboration SEA data 3. Abuse of dominant Position in Milan Linate Airport

Table 4 – Movements in Milan LinateAirport – Abuse of dominant position

Movements Market Share Carrier Diff. 2007 2008 2007 2008

Alitalia 37 776 42 522 4 746 38.6% 44.9%

AirOne 25 475 23 617 - 1 858 26.0% 24.9%

Alitalia+AirOne 63 251 66 139 2 888 64.6% 69.9%

Others Carriers 34 733 28 538 - 6 195 35.4% 30.1% Total 97 984 94 677 - 3 307 100.0% 100.0%

Font: Elaboration SEA data 3. Abuse of dominant Position in Milan Linate Airport

• After the fusion CAI increases its market share passing from 64,6 per cent to 69,9 per cent of the flight offer over Linate. • Slots were used, even if flights have a much lower load factor, because the value of the slot makes it more convenient to keep them. • The load factor of the new company is decreasing, as the number of passengers remained substantially stable between 2007 and 2008, while the number of air movement had a 5 per cent increase. 4. Domestic Routes: Alitalia’s monopoly

• Data from the following table, which describe Linate's situation before the fusion between Alitalia and Airone (third trimester of 2008 compared to the same period in 2007), document the strong competition restriction which came out in the end of 2008 as a result of the aggregation of the two main national carriers. 4. Domestic Routes: Alitalia’s monopoly

Table 5 – Flights’ offer in Milan Linate Airport (in thousands) Domestic Flights European Flights Total Flights III tr. III tr. III tr. 2007 III tr. III tr. 2007 III tr. 2007 2008 2008 2008

Alitalia 54,8 41,0 18,4 19,1 73,2 60,0 AirOne 34,5 34,3 1,8 0,7 36,4 35,0 New Alitalia 89,4 75,3 20,3 19,8 109,6 95,0

Others Carriers 17,4 16,2 21,9 25,3 39,3 41,5

Total 106,7 91,5 42,2 45,1 148,9 136,6

Market Share (%) Alitalia+AirOne 83,7 82,3 48,0 43,8 73,6 69,6 Alitalia 51,4 44,8 43,7 42,3 49,2 44,0 AirOne 32,3 37,5 4,4 1,6 24,4 25,6 Font: Elaboration of Capstat Data 4. Domestic Routes: Alitalia’s monopoly

• In the third trimester of 2007 Alitalia, which was the main carrier, had the 51% of the offer over the local flights while Airone had the 32%. • Those two carriers, if considered together, could arrive at almost 84%. In the third trimester of 2008, Alitalia’s offer reduced, because of its financial crisis, but Airone's increased almost to 38 %, leading to a total amount near the 82%. • The 2001 regulatory restriction over Linate, together with the fusion between Alitalia and Airone in the end of 2008 and the exclusion of Antitrust powers in matter of charge of the air transport market competition, led the new carrier to control 4/5 of the local offer from Linate, considered the unavailability of further slot in order to allow the entry of other operators, the activation of a new offer and the restore of the competition. 4. Domestic Routes: Alitalia’s monopoly

Font: Elaboration of Capstat data 4. Domestic Routes: Alitalia’s monopoly

• The merger between the two operators without any slot transfer duty to other carrier lead to a monopolistic offer over half of the routes travelled. • It was only in Catania and Cagliari where Alitalia’s share remained under the 60%, threshold already set by Antitrust during the authorization granted for the join of Volare in Alitalia, situation which couldn't be repeated because of the rules contained in Government decree for Alitalia in the end of September 2008. • On the other hand, before the aggregation, only one of the main routes of old Alitalia had a share over the 60%, and it was Linate- Fiumicino. 4. Domestic Routes: Alitalia’s monopoly

• The monopoly by Alitalia is confirmed over half of the routes, the same routes of the previous chart, while in all the other routes the competition has a good increase only in Cagliari, while it's marginally improved in Naples and Palermo; it slightly worsen instead in Catania. • Over all the national routes from Linate the new carrier achieves the 78% of the market, only four percentage points less the total share of the two companies in the third trimester 2008. • Alitalia’s actual prevailing position over the local routes from Linate is a consequence of the keeping of Linate's capacity restrictions, defined in 2001 with other purposes. 4. Domestic Routes: Alitalia’s monopoly

Font: Elaboration Capstat Data 5. Milan – Rome Route: a real problem for the competition?

• Paradoxically the less problematic route is the most discussed: Milan Linate – Rome Fiumicino. In this case, the entry of the high speed railway took and will always take more and more market shares from the air market, thus leading to a sort of intermodality competition. • The battle is played over the connection timetables, particularly over the most important route : Rome – Milan . • Other important differences are frequency, punctuality, the possibility to keep working while on the train and the general service quality. • In December 2008 the link timing between the main railway station of Milan and Rome has been brought to 3 hours and a half. This timing has been further on reduced in the end of 2009, when the high speed route between Bologna and Florence has been opened, leading the global trip timing between Rome and Milan to 3 hours. 5. Milan – Rome Route: a real problem for the competition?

Font: Elaboration of UVET American Express Data 5. Milan – Rome Route: a real problem for the competition?

• It points out that the market share for the business customer has significantly increased from December 2008. Railway took over the 30 per cent of the market share in March 2009. • First months of the air carrier had been really difficult, with a load factor lower than 50 per cent. • Starting from April 2009 , the new company has started an aggressive marketing strategy which partially lead customers back to the use of the air plane. • In the same period the difference between the medium ticket price of train and air plane has decreased. • The high speed railway transport is conquering market share always bigger, but we shouldn't forget that it takes billions of Euro in State grants every year. 5. Milan – Rome Route: a real problem for the competition?

Font: Elaboration of UVET American Express Data Conclusions

• The strict limitation of Linate, as well as being in opposition to free market, was not bearable at Malpensa's opening as the outgoing Milan customers and the incoming foreigner and Italian customers preference for Linate has shifted to preference towards carriers different than Alitalia, which appealed at the European Community against Linate limitation measures and obtained a substantial restructuring of them . • Linate, which already was sacrificed with a consistent capacity reduction in order to favour Malpensa's hub, should in fact lose 70% of its remaining traffic (30% of which corresponding to European connections and 40% corresponding to local connections apart from Fiumicino). • The slot restriction over Milan Linate causes serious problems and could be solved by increasing the airport capacity. The same AGCM has underlined the possibility to increase the hourly movements from 18 to 25. Thanks for the attention

Andrea Giuricin Fellow Istituto Bruno leoni PhD Student at IAPR

Email: [email protected]