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CAA Benchmarking Proposal & Responses to the CAA Paper Presented by Sylvana Thiele & Lori Palotas PowerPoint PPT Presentation


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CAA Benchmarking Proposal & Responses to the CAA Paper Presented by Sylvana Thiele & Lori Palotas. Main reason for Benchmarking. 2 main problems with setting regulation: Regulators don‘t have sufficient info Therefore the firm has an incentive to influence the system

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CAA Benchmarking Proposal & Responses to the CAA Paper Presented by Sylvana Thiele & Lori Palotas

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Caa benchmarking proposal responses to the caa paper presented by sylvana thiele lori palotas l.jpg

CAA Benchmarking Proposal & Responses to the CAA PaperPresented by Sylvana Thiele & Lori Palotas


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Main reason for Benchmarking

  • 2 main problems with setting regulation:

    • Regulators don‘t have sufficient info

    • Therefore the firm has an incentive to influence the system

  • Benchmarking suggested as an alternative to overcome these problems

    • CAA proposes that benchmarking could be used to set price caps


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Benchmarking for Price Cap Setting

  • A firm‘s future and present price cap would not be set by its own costs

    – incentive gone to ‘game‘ the system

  • Setting price caps by this method would be challenging

    • Difficulty in finding the right comparators, do not have complete information and need to find a way to be able to take differences of airports into account

    • Benchmarking doesn‘t have to be used alone

    • Benchmarking must be sustainable over time


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Benefits of Benchmarking

  • Reduces asymmetries of info between regulators and firms - therefore reduces scope of game playing

  • Increases incentives for firms to reduce costs through price caps

  • Incentives for making appropriate investment decisions

  • Comparison is not restricted to cost and efficiency – can be used to compare other factors

    In terms of other Economic Regulation:

  • To estimate a fully specified cost function for airports and their services

  • To benchmark costs of major investments

  • To estimate long-run incremental costs

  • To assess performance on service quality standards


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Criticisms of Benchmarking

  • Could provide poor incentives for firms to try to meet the needs of users and customers

    • Methodology might not be robust over time

    • Benchmarking could set the price incorrectly

  • Depending on whether price is set below or above costs could lead to problems

  • Price cap setting should be limited to quality of the benchmarking and the potential of its benefits should outweigh the negatives


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Problems that are acknowledged in Benchmarking Airports

  • Outputs have to be defined

  • Airport data is often limited

  • Data adjustments have to be made, therefore a degree of judgement is unavoidable

  • Airports have different strategic objectives

  • Lumpy investments / different investment cycles

  • Unexplained differences could be wrongly concluded as an efficiency gap


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CAA Assessment and Next Steps

  • If benchmarking is not robust enough to set price caps, it could still be valuable

    • E.g. Projecting average or incremental costs or to improve understanding of key cost & revenue drivers

      CAA plans to:

  • fully estimate airport efficiency, performance and cost functions using quantitative techniques

  • Make an assessment of the main partial productivity indicators

  • Make a case study comparison between each of the regulated airports and appropriate comparators


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Comments on using top-down approach to cost benchmarking?

  • a) key factors which differentiate airports

Source: BAA response – Use of benchmarking p. 7.


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Comments on using top-down approach to cost benchmarking?

  • b) factors which cannot be meaningfully

  • address:

    • Capital intensity

    • Service standards

    • Operating costs link to revenue

    • Product innovation

    • Airport investment is lumpy

    • Indirect cost


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Comments on using top-down approach to cost benchmarking?

  • Conclusion:

    • not enough adequate data

    • too many fundamental differences

    • large number of external variables affecting results

    • unreliable results

    • wide error range


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Comments on using top-down approach to cost benchmarking?

  • Proposal:

    • bottom-up approach

      • assessing investment projects

      • specific areas e.g. service level agreement

    • examination of key processes

      • Identification of Material and controllable costs

      • Identification of inefficiencies

      • quantifiable improvements due to a target setting approach


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2. In what areas is benchmarking likely to be of greatest value?

  • Benchmarking alternative to regulation for setting price caps?

    • instability of the results may not provide a sound basis for setting the price cap

    • regulatory risk for the company


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2. In what areas is benchmarking likely to be of greatest value?

  • Proposal:

    • focussing on key processes

    • complementary tool:

      • measuring operational and economic efficiency

      • providing explanatory data

    • Helpful:

      • as a performance guideline for regulator

      • for judging the optimum price and service quality


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3. Comments on quantitative techniques and benchmarking?

  • Conclusion:

    • Econometric Analysis:

      • need a clear understanding of how to interpret and use data

      • limited to sample sizes

      • are error prone

      • too complicated

    • Reasons:

      • fundamental differences between airports

      • cost data is not available


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3. Comments on quantitative techniques and benchmarking?

  • Proposal:

    • use partial statistical and qualitative measures


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  • Thank you for your attention!


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  • References:

  • Civil Aviation Authority: The Use of Benchmarking in the Airport

    Reviews, Consultation Paper, December 2000.

  • BAA plc: BAA Response, The Use of Benchmarking, February 2001.

  • others: Airtours, BARUK, BATA, BMI, British Airways, Gatwick

    Consultative Committee, Heathrow AOC, IATA, Manchester

    Airport plc, Monarch airlines, Ryanair, Virgin Atlantic Airways.

  • Papers online at:

  • http://www.caa.co.uk/docs/5/ergdocs/benchmarking/benchmarking.zip


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