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PC News - May 2019

Economic regulation of airports

A Commission draft report found that existing airport regulation remains fit for purpose, although reforms are needed to enable greater scrutiny of airport performance.

The Commission’s task

The Australian Government asked the Productivity Commission to assess the effectiveness of the current regime for airport regulation against the following objectives:

  • promoting economically efficient operation of, and investment in, airports and related industries
  • minimising compliance costs
  • facilitating commercially negotiated outcomes between airport operators and users.

The inquiry was to focus on aeronautical services at airports in Australia’s major cities. The Commission was also asked to examine access arrangements for regional flights into Sydney Airport and competition in markets to supply jet fuel.

The Commission has conducted inquiries into the economic regulation of airports approximately every five years since 2002.

Soaring demand for air travel

Australia is heavily reliant on air transport – it has the highest number of domestic airline seats per capita in the world. The number of passengers travelling through Australian airports has doubled over the past 20 years to about 160 million in 2017, and the volume of international air freight has also increased by around 80 per cent. Australia’s airports are critical infrastructure and their performance depends on a regulatory regime that promotes efficient operation and timely investment.

What did the Commission’s draft report find?

The Commission considers that existing airport regulation benefits the community and remains fit for purpose. The regime facilitates commercially negotiated outcomes and the four airports monitored by the Australian Competition and Consumer Commission (ACCC) – Sydney, Melbourne, Brisbane and Perth – have not systematically exercised their market power to the detriment of the community.

The Commission assessed the performance of the four monitored airports using a range of indicators in three areas where performance could be affected by the exercise of market power.

  • Operational efficiency – whether an airport provides services at relatively low cost and uses its inputs efficiently, with a level of service quality that meets users’ reasonable expectations.
  • Aeronautical revenues and charges – whether the prices of aeronautical services (as measured by revenues and charges) reflect efficient costs.
  • Profitability – whether an airports’ returns are reflective of the cost of capital, accounting for the long-term nature of airport investments and operational constraints.

Monitored airports have not systematically exercised market power in aeronautical services

Most indicators of the monitored airports’ operational and financial performance are within reasonable bounds, although some could present cause for concern if considered in isolation (figure 1).

  • Melbourne Airport has relatively low costs and, on balance, good service quality when compared with overseas airports. Its aeronautical charges are in line with overseas airports and its returns on aeronautical assets are not excessive.
  • Brisbane Airport has invested heavily in international capacity. It has good service quality and low costs compared with the other monitored airports, and its returns have been lower than other monitored airports.
  • Perth Airport invested in terminal expansions during the mining investment boom. While supported by airlines at the time, there is now excess capacity which has led to declining operational efficiency and falling returns. Perth Airport has relatively high operational costs per passenger, although this likely reflects the recovery of costs for major investments.
  • Sydney Airport has relatively high returns, but this is less concerning in the context of land constraints that have limited growth in its asset base more than at the other monitored airports. Further, returns should be assessed over a long time period, and on that basis Sydney Airport’s returns are not indicative of the systematic exercise of market power.

Figure 1: Summary of airport performance

  • This figure summarises analysis of the performance of Sydney, Melbourne, Brisbane and Perth airports. Additional information is detailed in the text surrounding the figure.

Further scrutiny of some aspects of airports’ performance is warranted

Aeronautical charges for international services at Sydney and Brisbane airports are high compared with overseas airports and this warrants further attention (figure 2).

Many consumers resent the cost of car parking at the monitored airports. However, the price of at terminal parking can largely be explained by the value passengers place on convenience, the limited amount of land close to the terminal, and the need to manage congestion.

Airports could exercise their market power in land-side access services, such as those used by taxis and shuttle buses, to encourage people to use airport-owned car parks, but more data is needed to determine whether this is the case.

Figure 2: Australian and overseas aeronautical charges

  • Airport turnaround costs in USD (current published schedules)a

    This figure shows Australian and overseas aeronautical charges for a Boeing 737-800 aircraft adjusted for purchasing power parity. Additional information is detailed in the text surrounding the figure.

    a Schedules published as at October 2018. The domestic charge at Melbourne Airport (MEL: AI) is for airfield and infrastructure services only (it excludes terminal services).

Tailored reforms are needed to address specific areas of concern

  • Monitored airports should provide more detailed information on their performance

    In addition to current requirements, monitored airports should be required to provide data on:

    • costs and revenues in relation to the provision and use of aeronautical services for domestic flights and for international flights, to determine whether charges are the result of an airport exercising its market power, or the higher costs of providing international services
    • access charges, terms of access, costs and revenues and for landside services, given that an airport operator could discourage the use of some transport services that compete with its own car parks
    • costs and revenues at Sydney Airport in relation to aeronautical services for flights to regional New South Wales, to more easily assess the costs and benefits of regional access arrangements in future.

    The ACCC should also update current quality of service monitoring to reflect outcomes that are valued by airport users, drawing on the indicators that airports and airlines use in service level agreements.

  • Sydney Airport
    Regional access regimes should be more flexible

    Sydney Airport’s regional access arrangements facilitate access for airlines flying to regional destinations, but elements of inflexibility in slot management can limit airlines from developing or expanding regional routes. Amending the regime to allow airlines to use non regional aircraft movement slots for regional or non-regional flights would enable airlines to test and grow regional routes, and use their aircraft more efficiently.

    More efficient options for meeting noise control objectives should be considered

    Sydney Airport’s cap on aircraft movements restricts the effect of aircraft noise on local residents, although this reduces the airport’s efficiency. Options to meet current noise objectives at lower cost will be considered for the final report.

  • Anticompetitive clauses should be removed from all agreements

    Some agreements between airports and airlines contain anticompetitive clauses. This includes clauses that constrain an airline’s access to regulatory remedies for the exercise of market power. Airports also reported that some agreements contain clauses that restrict an airport’s ability to offer incentives to airlines other than the signatory airline.

  • Options to promote greater competition in markets for jet fuel should be considered

    Jet fuel accounts for the largest single source of airline operating costs. A one cent per litre reduction in the fuel price could result in a $90 million reduction in those costs per year. Prima facie, the characteristics of markets to supply jet fuel have enabled incumbent fuel suppliers to restrict competition, leading to a small number of fuel suppliers at some airports. This has likely led to higher prices to access infrastructure services and higher fuel prices. In the final report the Commission will further investigate options to promote competition in jet fuel markets.

Economic Regulation of Airports

  • Read the Draft Report released February 2019
  • The Commission’s final report will be presented to the Australian Government in June 2019.

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