Exploratory analysis on LCC potential to influence airport efficiency António Sérgio de Azevedo Domingues Dissertação para obtenção do Grau de Mestre em Complex Transport Infrastructure Systems Júri Presidente: Prof. Dr. Luís Guilherme de Picado Santos Orientador: Prof. Dr. Maria do Rosário Maurício Ribeiro Macário Vogal: Prof. Dr. Paulo Manuel da Fonseca Teixeira July 2011 Abstract The aim of this study is to perform an evaluation of the Portuguese airport infrastructure’s efficiency performance. It will be undertaken an extensive literature review of methodological approaches in airport performance research in order to understand which techniques are the most meaningful to be used in this case study. Then, airport efficiency will be object of study in the different areas that characterize it: airside, landside and within the airport-airline relationship. Finally, we will choose one of the methodologies to perform the analysis of the Portuguese airport efficiency performance in order to withdraw and analyse the results. Keywords: LCC, Airports, DEA, efficiency 1 Acknowledgments I would like to thank Professor Rosário Macário for supervising my thesis dissertation. Moreover, the development of this dissertation would not be as valuable without the contributions of Professor Richard deNeufville’s priceless advices and Professor Carlos Pestana Barros’ support regarding the DEA methodology. In addition, I would like to thank all CTIS’ faculty, lecturers and colleagues, responsible for some of most the interesting discussions I had in the last two years. I am also indebted to ANA’s marketing directors Renata Tavares, Andreia Pavão and Jocelyn Ferreira for their availability in providing useful data. I want to address a special thank you note to Nuno Costa for his personal availability and explanations concerning Lisbon airport’s operations. Last but not least, I want to thank my family and closest friends for their enthusiastic support on this stage of my academic experience. I am truly grateful to have you all in my life. 2 List of Contents 1 Introduction ................................................................................................................................ 8 1.1 Deregulation of the air transport market ............................................................................... 8 1.2 The background of no-frills airlines ..................................................................................... 10 2 Literature review ...................................................................................................................... 13 2.1 First steps on efficiency research: Farrell’s contribution .................................................... 13 2.1.1 Efficiency measurement: Simple Case ........................................................................ 14 2.1.2 The efficient production: Simple case.......................................................................... 15 2.2 The development of Farrell’s ideas .................................................................................... 17 2.2.1 Estimation processes for parametric frontiers ............................................................. 17 2.2.2 Linear programming methods ...................................................................................... 18 2.3 Methodological framework on airport benchmarking .......................................................... 19 2.3.1 Partial Measures .......................................................................................................... 19 2.3.2 Total factor productivity ............................................................................................... 20 2.3.3 Malmquist index of productivity change....................................................................... 21 2.3.4 Data Envelopment Analysis (DEA) .............................................................................. 22 2.3.5 Stochastic Frontier Analysis (SFA) .............................................................................. 24 2.4 Literature on airport efficiency research ............................................................................. 26 3 Main Drivers of Airport Efficiency ............................................................................................ 30 3.1 Airside ................................................................................................................................. 30 3.1.1 Airfield design .............................................................................................................. 31 3.1.2 Capacity and delays of airfields ................................................................................... 38 3.1.3 Demand management ................................................................................................. 43 3.2 Landside ............................................................................................................................. 44 3.2.1 Passenger buildings .................................................................................................... 45 3.2.2 Security and check-in processes ................................................................................. 51 3.2.3 Low-Cost Airports ........................................................................................................ 53 3.3 Airport-Airline Relationship ................................................................................................. 54 3.3.1 Airport privatization and management ......................................................................... 54 3.3.2 LCC’s implication on airports’ revenues ...................................................................... 60 3.3.3 Regulatory environment .............................................................................................. 61 4 Analysis of Portuguese airports’ efficiency .............................................................................. 67 4.1 Institutional setting .............................................................................................................. 67 3 4.2 Data Collection ................................................................................................................... 68 4.3 Model formulation ............................................................................................................... 72 4.3.1 Selection of Inputs and Outputs .................................................................................. 74 4.4 Discussion of results ........................................................................................................... 77 4.4.1 Approach 1: Monthly analysis ...................................................................................... 77 4.4.2 Approach 2: Each airport in each year as an individual firm ....................................... 79 4.4.3 Approach 3: Five year panel data ................................................................................ 81 4.4.4 Overall results .............................................................................................................. 82 5 Conclusions ............................................................................................................................. 84 Bibliography ....................................................................................................................................... 87 Appendix 1 – Airport efficiency performance research ..................................................................... 95 Appendix 2 – Compilation of Data ................................................................................................... 101 Appendix 3 – DEA scores on Portuguese airports .......................................................................... 109 4 List of Figures 1-1: European Seat Capacity by Service Type between 2002 and 2006 AND annual variation (Source: RDC, 2007) .................................................................................................................................. 11 1-2: Evolution of passenger traffic structure in portuguese airports (Source: ANA, 2009) .............. 11 2-1: Farrell's Technical Efficiency (left) and piecewise Production Frontier (Right) (Source: (Farrell, 1957)) ......................................................................................................................................................... 15 2-2: Farrell's original diagrams on Increasing and Diminishing Returns to Scale (Source: (Farrell, 1957)) ......................................................................................................................................................... 16 2-3: ATRS TFP for world airports (Source: (Graham A., 2008)) ...................................................... 21 2-4: Scale efficiency in the BCC-dea MODEL (source: (Civil Aviation Authority, 2000)) ................. 23 3-1: New York LaGuardia Airport Layout (Source: (FAA, 2003)) ..................................................... 35 3-2: Denver International Airport layout (Source: (FAA, 2003)) ....................................................... 36 3-3: Left-Conventional exit taxiway (source: (FAA, 2007) ) Right - high-speed exit (source: (ICAO, 2004) ) ........................................................................................................................................................ 37 3-4: Potential congestion points at boston Logan (Adapted from (de Neufville & Odoni,