Every few months the outrageous prices charged for refreshments at Israeli airports find their way into the news. The subject recently surfaced again after Deputy Finance Minister Mickey Levy was forced to pay NIS 12 at Eilat Airport for a small cola. Levy rushed to complain to Israel Airports Authority CEO Yaakov Ganot, who then ordered a thorough check into the prices of staples sold at food counters. Ganot was said to have gone as far as considering imposing price controls on airport coffee, pastries and soft drinks.
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The incident again raises the question of why prices at Israeli airports are so high. The answer is probably related to the IAA’s questionable tender system. The authority, with its monopoly over licenses, can dictate draconian terms that raise costs for vendors, which are ultimately passed onto the public through exorbitant prices.
Here’s how it works. The authority puts out a tender calling for bids for licensing fees to operate stores or sales counters at the airports. The factors that go into deciding the winner are more related to the fees the bidder is offering to pay than to other considerations, such as the final price to customers. For example, in a 2011 tender for a hamburger chain at Ben-Gurion Airport, the tender committee gave an 80% weighting to the licensing fees the bidder was prepared to pay and a weighting of just 20% to factors such as reputation and quality. As a result, the licensing fees for the concession nearly tripled to NIS 8.5 million.
For some tenders, the IAA sets a minimum threshold for licensing fees, which often escalates at the end of the concession contract. In a tender released for an electronics store in 2012, for instance, the minimum fees jumped 40%, from NIS 15 million to NIS 25 million, which would almost certainly force the winner to raise shelf prices as time goes on.
The situation is sometimes exacerbated further by the licensee’s exclusivity, particularly at small airports like Sde Dov or Eilat, where the number of concessions is small. In such cases the concessionaire can take advantage of his position and raise prices even more than the fees dictate. The authority is lax in monitoring concessionaires, as in the case in Eilat.
The IAA insists there is supervision over prices of some products sold at airports, especially basic items like coffee and drinks. It says the regulated products are listed in the tenders and ultimately included in the contract. But the authority refused to provide copies of tenders on the pretext that they aren’t made public but are “distributed only to those paying an initial fee.” The authority also refused to detail what products are subject to controls, saying an examination of the policy is underway.
50% jump in revenues
The escalating fees paid for licenses have contributed to a rise in the IAA’s revenues over the years. Today, an estimated 50% to 60% of the authority’s revenues are derived from licensing and commerce while the remainder comes from passenger fees, aircraft, cargo and parking. According to its financial statements, revenues rose from NIS 1.75 billion in 2005 to NIS 2.66 billion in 2012, an increase of over 50%.
And as in other government-owned companies and monopolies in Israel, the jump in revenues was accompanied by a sharp rise in payroll costs. According to figures from the Finance Ministry’s wages director, the average cost of employing a worker at the IAA was NIS 18,465 a month in 2011 – the latest year for publicly available figures – compared with NIS 12,364 a decade earlier, also about a 50% increase.
To put this in perspective, the average wage in Israel rose 21% over the same period – from NIS 7,072 in 2001 to NIS 8,563 in 2011. This means that pay at the airports authority increased 2.5 times more than the nationwide average. It should be pointed out that all wage agreements are approved by the treasury.
The authority’s financial statements reveal that not only the average wage rose sharply but also that overall payroll costs ballooned. Between 2005 – the first year the authority published its statements – and 2012, its labor costs jumped 46% to NIS 1.1 billion, while its workforce grew by just 22%, from 3,072 employees to 3,748. The increase in payroll expenses reflected, among other things, a wage agreement signed in 2011, which included a 10% annual pay hike for employees and management while establishing various perks for tenured workers such as a long, annual, all-expenses-paid trip abroad.
The huge gap between the average wage of NIS 18,465 at the airports authority in 2011 as published by the wages director, and the median wage of NIS 11,538, indicates that the authority’s higher paid employees earned much more than the rank and file.
Moreover, hundreds of the authority’s managers and professional staffers are regularly featured in the wages director’s list of the top paid civil servants. In the last report, from 2011, three made it onto the list of the 100 best paid public sector employees with average wage costs of NIS 81,000 to NIS 85,000. The wage director’s report also reveals that from 2001 to 2011 payroll costs for the authority’s 10 top earners jumped by 50%.
So that’s how the price for a little bottle of cola got uncorked. With its payroll costs sharply climbing, the airports authority needs to increase revenues to cover the rising expense. Licensing fees are ratcheted up and the added cost to concessionaires is reflected in their prices to customers. Some exploit their monopolistic power and jack up prices more than necessary. And the deputy finance minister, along with the 13 million travelers passing through Israel’s airports in 2012, is forced to pay through the nose.
“The authority’s tenders are subject to open competition in a free market, and the tender bids from commercial entities weigh the inherent economic advantages of operating at Ben Gurion Airport,” the IAA explained in response. “The offers submitted by contenders exceed the minimum tender requirements by tens of percent due to the economic feasibility. Café and restaurant concessions are subject to supervision involving price checks and are prohibited from charging more than the prices in the contract. On the instructions of the authority’s CEO, a committee is currently examining food and drink prices charged at border crossings and airports.”
The IAA also stressed that its labor force hasn’t grown despite an increase in passenger traffic through Israel that is 7% greater than the worldwide average.
“As a result of the IAA’s responsible and proper budgetary and business conduct, budgets exceeding NIS 5 billion are now earmarked for the development of aviation in Israel - for large-scale projects without any government support,” the authority stated said. “Furthermore, the IAA subsidizes operations at the domestic airports – Mahanayim, Sde Dov, Herzliya, Haifa, Ovda, and Eilat – and funds operations and security for over 1 million customers a year. These are economically unfeasible airports where passenger fees normally charged throughout the world aren’t collected. There is no precedent worldwide of an authority subsidizing money-losing airfields and financing the establishment of new airports from its own sources. The authority is also subject to corporate taxes, payments to the Israel Lands Authority, and royalties to the state.”