Privatization Opportunities
Monday, December 1st, 2008Someone in Russia understands a thing or two about the benefits of competition. As this article from the Wall Street Journal (www.wsj.com) indicates, the privatization of one of Moscow’s airports, has been positive.
As a frequent traveler to Moscow , the privatized Domodedovo Airport is the preferred choice. Modern, clean and efficient…with decent food for the international traveler, it is a stark contrast to the international terminal at Sheremetyevo Airport. The dark brown paint at Sheremetyevo may have been whitewashed, but the depressing feeling lingers for travelers and airport workers there.
While government investment in Sheremetyevo Airport will certainly improve the overall quality, the privatized Domodedovo Airport will have the edge with travelers, vendors and airlines. It is simply more responsive to the needs of the market.
Privatization of airports is growing. According to Robert W. Poole, Jr. of the Reason Foundation (www. reason.org), “15 major airports were privatized in 2006, the second-highest annual total ever (there were 21 airport privatization deals in 1998).
Despite recent political setbacks, privatizations could continue. Unlike China, Russia and Ukraine lack sufficient resources to fully modernize their infrastructure. Privatization or partial privatization remain the most viable options. The investment, technology and management that foreign companies would bring, could go very far in raising the living standard in these emerging economies.
Moscow Points the Way With Airport Competition
While Most Nations Sport Monopolies, Rivalry Between Two Russian Gateways Ushers in Improvements for Carriers, Travelers
MOSCOW — A heated battle for passengers between the Russian capital’s main airports offers an unlikely model of competition for the aviation industry.
In most cities, airports are monopolies. Even in cities that have more than one, including New York, Paris and Tokyo, airports are usually owned by the same operator. That means airlines can rarely make the kind of choices passengers take for granted, such as choosing an airport for its efficiency, shopping or lounges.
Not so in Moscow, where two international airports, Domodedovo and Sheremetyevo, owned by rival organizations, battle for business. The result is lower fees, better service and fast-improving facilities all around.
Domodedovo Airport, for example, recently convinced several top airlines to make it their Russian base, thanks to a major modernization that added more than 20 new restaurants, jewelry boutiques and a shop where passengers can rent DVDs to watch in booths.
Sheremetyevo Airport responded by building a fast rail link to Moscow, complete with a Starbucks at the airport station.
Moscow’s airport rivalry highlights a paradox of the global aviation industry: Airlines compete fiercely with each other for customers, but they face many monopolist suppliers, such as air-traffic control systems, fuel distributors and airports. Resulting costs and poor services get passed on to travelers.
Regulators world-wide are starting to tackle the issue — and some see Moscow as a paradigm.
Britain’s competition authority, for example, last year considered breaking up BAA, the company that runs London’s three big airports. In testimony before the regulator, officials from the International Air Transport Association, a trade group, cited Moscow as evidence of the benefits that competition could bring London’s airport system. IATA testified that fees at Moscow’s fast-growing, privately owned Domodedovo Airport are as much as 20% lower than at Sheremetyevo, the state-owned hub of flag carrier Aeroflot.
The U.K. listened. Bowing to government pressure, BAA’s Spanish ownerFerrovial SA now plans to sell London’s second-biggest airport, Gatwick. British Airways PLC and other big customers are too entrenched at Heathrow to switch to Gatwick, but airlines say competition could prompt airport managers to trim fees and start to resolve problems such as chronic fuel-supply shortages.
“I’d love to have competing airports everywhere in the world,” says Bruno Matheu, executive vice president for marketing at Franco-Dutch carrier Air France-KLM SA, an Aeroflot partner in the SkyTeam airline alliance. Air France-KLM uses Sheremetyevo in Moscow.
Moscow’s airport market didn’t develop overnight.
Until recently, few big airports world-wide were worse than Sheremetyevo, the Soviet Union’s international gateway, built for the 1980 Olympics. Checking in for a flight could take hours. So could driving jammed roads to the airport, which lacked rail connection.
During Russia’s privatization drive of the 1990s, local investors bought Domodedovo, which was previously Moscow’s airport serving Soviet Central Asia. The investors, grouped into an upstart charter-airline operator, East Line Group, renovated a terminal at Domodedovo and oversaw construction of a train line to Moscow.
East Line charged airlines landing and operating fees that undercut Sheremetyevo by around 30%. For passengers, Domodedovo’s rail link guaranteed a 40-minute trip to downtown Moscow. Private Russian carriers, largely frozen out of Aeroflot’s base at Sheremetyevo, expanded quickly at the spacious Domodedovo.
East Line’s big break came in 2003, when British Airways announced it would switch from Sheremetyevo to Domodedovo.
“The authorities were shocked that a major airline would leave the government airport,” recalls Daniel Burkard, BA’s former country manager for Russia. He says a big factor was that East Line offered a big business-class lounge.
Mr. Burkard, a 41-year-old German, says he was so impressed by Domodedovo’s management that when his BA contract in Moscow ended in 2005, he joined East Line as its business development manager and started wooing other airlines to Domodedovo.
He promoted the airport’s many domestic airlines, which allow foreign carriers to reach small cities across the former Soviet Union, and in 2005 catapulted Domodedovo over Sheremetyevo as Moscow’s biggest airport in terms of passenger traffic. Other attractions include a children’s area staffed with nurses, fast immigration lines for Westerners, and competing vending machines, operated by rival suppliers.
In 2006 Mr. Burkard convinced up-market Austrian Airlines AG to switch from Sheremetyevo. The move prompted other carriers in the Star Alliance to rethink their choice in Moscow. Last year Deutsche Lufthansa AG, one of the biggest foreign carriers in Russia, also made the jump.
When AMR Corp.’s American Airlines decided last year to enter the Moscow market, managers visited both international airports. They were impressed by Domodedovo.
The airport’s executives “were a bit more aware of how we do business,” says Craig Kreeger, American’s senior vice president for international operations. Since flights began this June, Mr. Kreeger says, Domodedovo has fulfilled its commitments better than many airports in more developed markets.
Over the past three years, 28 carriers have either shifted to Domodedovo or started new Moscow service there.
Domodedovo’s success brought it unwanted attention, however. During Vladimir Putin’s recent presidency, many of Russia’s 1990s privatizations were reversed.
At East Line, government security officials repeatedly searched facilities and confiscated property. Government lawsuits against East Line yielded court rulings that threatened the company’s control of the airport. The Kremlin’s objective wasn’t clear, but appeared to be related to battles between powerful clans for control over the lucrative airport business, according to people close to the conflict. Recent appeals-court decisions supporting East Line seem to have ended the problem, although political shifts might prompt new challenges.
Two years ago, Sheremetyevo started to fight back, as a new management team began redeveloping the airport. In June, Sheremetyevo got a 30-minute rail link to Moscow. One new terminal recently opened and two more are slated for completion by 2010. In the old terminal, workers are now repainting brown walls white, modernizing check-in desks and installing more shops.
Anton Olff
Technorati Tags: Aeroflot, Air France-KLM, American Airlines, Austrian Airlines, BAA, British Airways, Domodedovo Airport, East Line Group, Ferrovial SA, Gatwick, IATA, Lufthansa, Moscow, Privatization, Reason Foundation, Robert W. Poole Jr., Russia, Sheremetyevo Airport, SkyTeam, Soviet Union, Ukraine, Vladimir Putin, Wall Street Journal
