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How to break the vicious circle? Monopoly bidding for public service obligation route networks in Norway

How to break the vicious circle? Monopoly bidding for public service obligation route networks in Norway. Branko Bubalo GAP Research Project branko.bubalo @ googlemail.com. GAB Final Project Meeting Berlin, June 20 th 2012. Contents. Introduction Problem description and available data

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How to break the vicious circle? Monopoly bidding for public service obligation route networks in Norway

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  1. How to break the vicious circle? Monopoly bidding for public service obligation route networks in Norway Branko Bubalo GAP Research Project branko.bubalo@googlemail.com GAB Final Project Meeting Berlin,June 20th2012 GAB Meeting Berlin – 20.06.2012 – Branko Bubalo

  2. Contents • Introduction • Problem description and available data • Set up of the matrices • Iterations and results for case study on Finnmark and North-Troms Network • Conclusions and further research GAB Meeting Berlin – 20.06.2012 – Branko Bubalo

  3. Introduction • Norway has the largest PSO network in Europe • The Norwegian Ministry spends increasingly more subsidies for PSO routes each year (More than it receives from Dividends) • For the majority of the tenders there is only one bidder (with two minor bidders for individual city-pairs) • Tender for 16 separate Networks • There are two main limitations for competition: • Mostly STOL runways (<1200 meters) • Demanded level-of-service in the tender documents (minimum aircraft size/number of seats and pressurized cabin) GAB Meeting Berlin – 20.06.2012 – Branko Bubalo

  4. Motivation • Which routes require the most subsidies (per passenger)? • What causes increasing subsidies (with stable demand)? • Are the compensations/subsidies justified and how do the airline costs compare with other carriers? GAB Meeting Berlin – 20.06.2012 – Branko Bubalo

  5. Prerequisites • Tender documents with historic data on O/D passengers and revenues • Annual subsidy paid for each PSO network segment -> Objective: • Calculating operating costs and subsidies by city-pair • Calculating average ticket fare GAB Meeting Berlin – 20.06.2012 – Branko Bubalo

  6. Set up of the Origin-Destination Matrices • Given: PAX-[#]* *[#]: n x n-Matrix Revenue-[#] • Key: Km-Distances-[#] • Formulas: Average Fare = Revenue- [#] / PAX-[#] Revenue-Passenger Kilometer (RPK)-[#] = PAX-[#] x Km-Distances-[#] Revenue per RPK-[#] (RRPK; Yield) = Revenue- [#] / RPK-[#] Profit (“-”) or Subsidy (“+”) per RPK = Cost per RPK (CRPK) - RRPK GAB Meeting Berlin – 20.06.2012 – Branko Bubalo

  7. Overview Finnmark and North-Troms PSO Network • 1/3 of the Total Subsidies • Around 135.000 PAX p.a. • Average Fare about 490 NOK(65 Euro) • 1,500 NOK Subsidy per PAX(200 Euro)

  8. Subsidies per route for two Scenarios Scenario I: Operating costs of 4 NOK per RPK (0.53 EURO per RPK) Result in 17.7 million Kroners (2.35 million Euro) in subsidies. Scenario II: Operating costs of 13.6 NOK per RPK (1.81 EURO per RPK) Result in 199.4 million Kroners (26.5 million Euro) in subsidies. GAB Meeting Berlin – 20.06.2012 – Branko Bubalo

  9. Results for Finnmark and North-Troms PSO Network (Source: Own Illustration) GAB Meeting Berlin – 20.06.2012 – Branko Bubalo

  10. Conclusions • Wideroe may have considerably lower operating expenses, as what is stated in the tender application. • Since Wideroe is the sole bidder, because of its unique fleet of Dash-8 aircraft, it could claim whatever costs. • The current tender rules have no mechanism to deal with monopoly bidders and abuse. -> The Essential Air Services (EAS) system in the US awards new carriers with the tender, in cases where this airline can provide the service with lower or without subsidies, even during the tender period (see Isabel Santana 2007). -> More research needed in direct comparisons of the two systems, the legal background and the required network subsidies. GAB Meeting Berlin – 20.06.2012 – Branko Bubalo

  11. Thank you for your attention! Questions? Suggestions and Comments are welcome. branko.bubalo@googlemail.com www.gap-projekt.de GAB Meeting Berlin – 20.06.2012 – Branko Bubalo

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