Airport Leases: ‘Caravan Deregulation’

Earlier articles have argued that the prospects for real change under deregulation are severely limited – mainly as the legacy of nearly 40 years _ of tightly regulated domestic airline duopoly. Some clearly believe that the long-term domestic terminal leases renegotiated in December 1987 between the Commonwealth, Ansett and Australian Airlines provide the final coup de grace against any hope of effective deregulation. Is this the case, or is it merely political posturing aimed at gaining a soft landing for new entrants?

Without doubt there is an element of both involved. No one has ever denied that aviation was a political football, least of all in Australia. Enormous popular, political and commercial interests are involved in air transport. But, arguably, over the years, the Australian public has not benefited as it might have from the interplay of these factors.

With the advantage of hindsight, it would for example be difficult to justify the extension of the Two Airline Policy in the early 80’s as being in the public interest. But that’s water under the bridge. When Senator Evans ushered in the new era in his October 1987 Ministerial statement, he was however well aware of the constraints imposed by the series of agreements (and legislation) making up that Policy. Not the least was the threeyear notice period which had to be given to unwind the Policy; three years is a lifetime in today’s fast moving aviation world. So 1 November, 1990 was selected as D day. Then there was the heavily dominant position of the big two – later further reinforced by the East-West takeover. Finally, there was the question of access to domestic terminals built on Commonwealth property. Largely overlooked was the existence of terminal leases held by Ansett and Australia at the majority of airports which would not expire until 1993. To solve this, something had to be done quickly. The FAC was to be established on 1 January, 1988 and legislation was already being rushed through to set it up; the Government was in the throes of a privatisation debate (Ansett had offered to buy the terminal space earlier in 1987, which caused the Government to back off into a fruitless debate about selling only the international terminals); and staff dissatisfaction in the Department of Transport and Communications was growing in inverse proportion to morale, over uncertainty about staffing in. the proposed FAC and CAA.

Amidst this turbulence, the terminal leases were renegotiated only a few days before the FAC officially came into being. The primary objective was gained: some temporary terminal access was to be made available in 1990, rather than having to wait till 1993. But the price was high; Ansett and Australian are tough negotiators and they held all the cards.

,:he new leases are generally for a period of 20 years, with options to renew for up to 20 years further in some cases. The laws are to be “on fair and equitable terms which make provision for new entrants to the airline industry and commuter and regional airlines”. This provision translates to access to:

• Two Ansett and two Australian gate positions at both Sydney One Ansett and one Australian gate at Adelaide, Perth and Coolangatta; and

• One Ansett gate at Launceston.

(Other facilities are available at Hobart and Brisbane – although not up to the spectacular standards of the new Ansett and Australian terminals. )

From there? The more complex. Interpreting the likely. Well nigh impossible. But one thing is clear: there will be tremendous pressure on the FAC to provide access for new entrants, either by providing new sites

for airlines to build on, or constructing new terminals themselves. And, until those facilities are in place, any new entrant will be at a substantial handicap in competing with the two major airlines.

The Timetable for Terminal Access.

1 January, 1990: Under the terms of the leases, Ansett and Australian must advise the FAC of the ‘third party carrier facilities’ (ie for both new entrants, commuter and regional airlines) they will specifically make available.

1 February, 1990: the OTC Secretary then has one month to advertise the available facilities publicly. All applications for space, received from eligible candidates, are to be kept – unopened and in safe custody.

1 March, 1990: The applications will be opened, in the presence of representatives of both Ansett and Australian (but no others). This melo?ramatic procedure is presumably to stop deals being done which would undermine the possibility for equal opportunities.

The DTC Secretary will then allocate priorities to the applicants in the following descending order:

1st priority: interstate RPT applicants for post October, 1990. 2nd priority: intrastate RPT applicants for post-October, 1990. 3rd priority: interstate RPT applicants which began service between 1 January, 1988 and 1 February, 1990.

4th priority: existing or proposed passenger charter operators. . Where demand exceeds supply in any category, the Minister will determine priorities ‘in the public interest’. 30 April, 1990: By this date, the two major airlines are to have neg?tiated “in a bona fide and timely manner with (successful) applicants . . . to endeavour to finalise” sub-leases, with a view to providing access on 1 November f990 – or, if later within 6 months of conclusion of a sub-lease.

If the negotiations warms the heart of every lawyer in Australia, they will gain further comfort in the FAC’s role: where a dispute arises, the FAC shall determine whether or not it should take steps to resolve the dispute “having regard to the need to have equitable utilisation of facilities for new entrants”.

Moreover, there is no express sanction for failure to meet the 30 April negotiating deadline. One – rather remote – sanction available to the FAC is to terminate the head lease on the grounds of breach of agreement. It is not difficult to predict the political and legal repercussions of such an action!

The leases do however provide a groundwork formula for rates to be charged to the third party airlines. These are essentially to be “on reasonable commercial terms at cost plus a reasonable return on capital value” of the facilities provided – not a concept dear to the heart of deregulationists.

What Does Access Mean?

Let us assume now that our new entrants and second and third level operators have successfully negotiated their leases. On 1 November, 1990 they can begin operations at the Ansett and Australian terminals. But just how extensive is the access which must be provided?

First, the new carrier is only guaranteed a minimum lease term of 12 months with one (only one) option to extend for a period no longer than the initial term.

Secondly, the guaranteed access provisions extend to the year 2000 – although, in certain circumstances, may terminate in 1995.

Thirdly, the new carrier must operate the facilities “in a manner consistent with (Ansett or Australian’s) terminal operations”.

Fourthly, Ansett and Australian, respectively, retain the right to use the sub-leased gates for their own operations “subject to the operational requirements” of the new carrier.

Fifthly, the two major airlines will not be obliged to “adapt or otherwise modify (their) normal operations at or through the Premises or to effect any alterations to, or refurbishment of, (their) normal facilities in order to permit the (new carrier’s)

operations”.

In short, the position of a new entrant, probably sharing a gate with other competing airlines – including its much larger landlord – is not likely to be a comfortable one. It will find it harder to establish an operating identity using common facilities; it will be subject to the ‘normal’ practices which anyone familiar with the industry would anticipate in this unequal situation: it will pay at a cost plus rate for expensive facilities.

A View for the Future

The list goes on. There are nonetheless some provisions favourable to the new carrier. For example, it can (subject to reasonable consent of Ansett, Australian) sub-let its space – perhaps to a post November 1990 new applicant whose name may be put forward by the Minister.

And it must be said also that any serious new operator would not place total reliance on gaining access to facilities built by its two major airline competitors. While history has placed Ansett and Australian in dominant positions in Australia’s domestic aviation market, their unique public service role will change dramatically on 1 November, 1990. They will for example, become fully exposed to the Trade Practices Act (and, hopefully, to a Commission better equipped to perform a new, de facto, regulatory role).

This is not to say that they will not be able legally to steamroller their competition: but they will no longer be given preferential treatment – and therefore arguably should not be expected to play grandmother to their younger competitors. Their role is to compete within the law and to the best of their capabilities. They may have a moral obligation to operate in the public interest – arising from their dominant roles, gained over the years – but the legal responsibility to secure the public interest will rest in future fairly and squarely with the Commonwealth Government (and, to a much lesser extent, State Governments).

If the Government has lagged behind in this respect over the last 1 O years, then it must bear the blame. If, in Senator Evans’ words in October 1987, “the existing constraints on the entry of new domestic operators to trunk routes will be removed”, then it is for the Commonwealth Government to ensure that that will be the case.

There will inevitably be a bevy of buck passing on this issue in the next few months and the FAC will, often undeservedly, carry much of the burden of the faults of its ancestors. In this exercise, the interests of the travelling public will probably not feature highly.

But where does this leave the new entrants – our hopes for a new era of competition?

The serious contenders, while challenging the existing structure, will be rapidly putting together their own facilities, either independently or jointly. And meanwhile – if some deregulation and realistic access is not to be postponed until 1992 or beyond – it should be a bull market for caravan salesmen.