Battle Lines

On top of that, the first sod has been turned at Badgerys Creek in Sydney’s west, where a new airport is expected to be operational by the mid-2020s.

Figures from the Australian Airports Association (AAA), the industry group representing the nation’s airports both large and small, show airports have invested $15 billion since 2002, including some $10 billion on aeronautical improvements.

“Australian airports rate well against their global counterparts and have maintained high-quality facilities for passengers even as they’ve invested to support significant growth,” AAA chief executive Caroline Wilkie said in early September.

‘Australian airports rate well against their global counterparts.’

“This is a great endorsement of our industry and the regulatory approach that has supported robust commercial agreements with airlines to support efficiency and improve the travel experience of passengers.”

However, the billions spent and the expected $20 billion to be invested over the coming decade, according to an AAA survey, represented only part of the story.

Airlines who use the nation’s airports are unhappy with what they are being charged to use the facilities and argue the levels of service at a number of airports are not up to par.

Their frustrations, along with the views of the airports and industry bodies, have been expressed through the Productivity Commission’s inquiry into the economic regulation of airport services that the federal government launched in June.

“The purpose of this inquiry is to determine the effectiveness and efficiency of the current arrangements and determine whether they remain appropriate,” the Productivity Commission says on its website.

The terms of reference show the inquiry will consider the “appropriate economic regulation of airport services, including the effectiveness of the price and quality of service monitoring” to promote the economically efficient operation of, and timely investment in, airports and related industries; minimise unnecessary compliance costs; and facilitate commercially negotiated outcomes in airport operations.”

Further, the scope of the inquiry also includes an examination of aeronautical services and facilities provided by airport operators; passenger-related aeronautical services and facilities provided by major airline tenants; and the provision and quality of land transport facilities providing access to the airports.

It is the Productivity Commission’s first look at airport regulation since 2011.

The AAA, whose membership includes about 280 airports and aerodromes and some 120 aviation stakeholders and organisations, said in its submission to the inquiry the current regulatory framework had led to better quality of service outcomes, cheaper airfares for passengers and increased discounts to airlines on international charges.

It also offered a full-throated defence of airport privatisation and the light-handed regulation that has been in place since 2002, when it replaced a system of price controls.

“Despite the recent campaign of disparagement by sections of the airline industry, the Australian airports industry is regarded as one of the most customer-focused transport and economic and social infrastructure sectors in Australia,” the AAA said.

Monopoly power?

Air New Zealand, Jetstar, Qantas, Tigerair Australia and Virgin Australia, usually fierce competitors for supremacy in the skies, formed their own lobby group Airlines for Australia and New Zealand (A4ANZ) in 2017.

A4ANZ has former ACCC chairman Graeme Samuel as its inaugural chairman and Dr Alison Roberts is its chief executive.

Its submission said the current regulatory model was “powerless to curtail airports’ market power”.

“While airports reasonably expect not to have to operate in a regulatory environment that is overly burdensome or significantly impacts their profitability, so too is it reasonable that consumers are afforded some protection from the consequences of monopoly airport power, as they are in other sectors,” A4ANZ said.

“The current regime is clearly not fit for purpose, neither through its coverage of airports nor through practical access to remedies when a breakdown in negotiations occurs.”

A4ANZ has proposed a model where airports and airlines that do not reach agreement on a pricing regime during negotiation are able to have a decision arbitrated on their behalf.

Its submission said this was most likely to result in genuine commercial negotiations between airlines and airports to effect fair outcomes for airport users.

“A pathway to negotiate-arbitrate would create a credible regulatory threat and, coupled with information disclosure and consultation requirements, would encourage good-faith negotiations. It would not, as has been suggested by airports, create instability in the sector.”

A4ANZ said Australia’s current light-handed approach to the economic regulation of airports was based, in part, on the implicit assumption that the majority of Australia’s airports did not have significant market power.

“This can no longer be accepted as the case,” it said.

Under current national competition rules, airlines can seek to have an airport “declared” under Part IIIA of the Trade Practices Act, which provides a right of access to monopoly services. It also provides the Australian Competition and Consumer Commission (ACCC) with the power to arbitrate in disputes over access, price and other terms of access for airport users.

In 2002, the then Virgin Blue sought to have Sydney Airport “declared”. The application was later withdrawn.

Virgin Australia, as the airline is now known, said in its submission the current regime had the potential for significant delays in the resolution of disputes, citing its experience from 2002.

“While there is a time limit of 180 days for the ACCC to determine an access dispute under Part IIIA, it may ‘stop the clock’ in a range of circumstances, including where the ACCC requests information or submissions from the parties,” the Virgin Australia submission said.

“Altogether, there is real potential for this process to take four-five years if the process plays out in full.

“The process for Virgin Blue to gain access to airside services at Sydney Airport took almost five years from the application for declaration in October 2002, to resolution of the terms of access to the airside services in May 2007.”

Consensus position

Anyone who has visited an airport in recent times is all too aware they have become more than simply a place to get on or off a flight.

Among the boarding gates, luggage belts and premium passenger lounges are rows of designer boutiques and duty-free shops, as well as restaurants bearing the imprimatur of celebrity chefs, even swimming pools and movie theatres. There is seemingly something for everyone to pass the time.

Ultimately though, airports at their core facilitate the movement of passengers and cargo from one place to another.

On this front, the Board of Airline Representatives of Australia (BARA), which represents 32 international airlines that fly into and out of Australia covering about 90 per cent of all international passenger services, says airports could do better.

“The consensus position of member airlines is that the airport operators are not delivering value for money in airport services for international flights,” BARA said in its submission.

“There are underlying issues with management focus and the availability and quality of services for the prices paid.”

BARA surveyed its member airlines for their views on airport management, service standards and representations, and value for money in airport services at Australia’s four major gateways of Brisbane, Perth, Melbourne and Sydney.

The results of the survey showed, on average, eight out of 10 airlines thought airport operators were not proactively doing enough to support their efficient operations while 69 per cent did not believe they got value for money in airport services.

“The survey results signal a significant disconnection between the performance assumed by airport management and the actual quality of services delivered to international airlines, including accurate representation of what will be delivered for the prices paid,” BARA said.

“BARA considers the disconnection from actual performance stems from the fact the airport operators are financially insulated from their service delivery capability within a generous price- setting environment.

“The airport operators are obtaining the financial benefits of strong international passenger growth, but the commercial and operational challenges of this growth remain largely with airlines.”

BARA said it supports A4ANZ’s call for a negotiate-arbitrate framework, arguing it would “shift the emphasis from BARA seeking to improve upon the unfavourable commercial terms put forward by the airport operator through protracted negotiations to one where BARA could negotiate with the potential to achieve its desired commercial benchmarks”.

‘The commercial and operational challenges of this growth remain largely with airlines.’

Complex and often difficult

Airports Council International (ACI), which is the global trade association for the world’s airports whose members include operators of about 2,000 airports, told the Productivity Commission airports in Australia had a “significant degree of dependence on two airline groups –  Qantas Group and Virgin Australia Holdings”.

It noted Qantas and its Jetstar unit had more than 50 per cent market share, while Virgin Australia had about 25 per cent share.

“Airlines are consequently able to exercise a potential buyer power that fully offsets or countervails any market power the airport might enjoy,” the ACI submission said.

“These factors have de facto prevented the airport operator from applying a monopolistic behaviour and setting excessive charges.

“Taking into consideration the limited market power of the airport industry in Australia, ACI’s position is that there are objective reasons to continue applying a light-handed regulation of airports.”

Brisbane Airport acknowledged in its submission to the inquiry charges for the use of the runways, terminals and associated infrastructure had increased as it invested in the facility.

However, it said the “average price increases have not been excessive in light of these investments and the considerable volume risk” borne by the airport.

“This is evidenced by BAC’s modest rate of return on assets over the past 10 years,” Brisbane Airport said.

Melbourne Airport described its negotiations with airlines as “complex and often difficult”.

“They involve agreements that not only include an agreed level of service, but detailed plans for the future development and investment of the airport,” Melbourne Airport said.

“Consultation on planned investment forms a key part of the negotiation process, which results in the most efficient solutions being found to what are complex challenges, particularly when growth in demand has been so strong.”

Further, Melbourne Airport said that as a federally leased airport, it was required to provide access to airlines that requested it.

“This, alongside the current threat of the light-handed regulatory regime, the countervailing power of airlines, and the incentives for Melbourne Airport to grow, means it is not in the interest of Melbourne Airport to simply adopt a ‘take it or leave it’ approach to negotiations,” its submission said.

It noted an aeronautical services agreement (ASA), which covered the use of the airfield including runways and taxiways, and the use of the international terminal, took about two years to complete, including 12 months of direct negotiations with airlines.

The AAA said there was “no evidence of abuse of market power by major airports”.

Its submission noted that in the domestic market there were some opportunities for airport substitution.

“It is the AAA’s view that the ability of airlines to substitute routes, and therefore airports, is as germane as the ability of individual passengers to substitute airports in their travel choices,” the AAA said.

“Conditions continue to develop in south-east Queensland for competition within the greater Brisbane area, Avalon continues to snap at Melbourne’s heels, and Hobart, Devonport and Launceston compete with each other and the Spirit of Tasmania in the Tasmanian fly-drive market,” the AAA said.

“Badgerys Creek will provide significant competition to Sydney Airport for passengers, especially those in the western suburbs.”

The AAA said domestic market concentration, “and in particular Qantas’s dominance”, significantly reduced airport market power and could facilitate attempts to limit competition in air transport markets.

“Disputes are not evidence of abuse of market power,” the AAA said.

“On the other hand, airlines not entering agreements may be evidence of airlines exercising market power to the detriment of competitors, airports and the travelling public.”

Cap reform

Sydney Airport’s submission to the Productivity Commission called on the federal government to revisit the operating restrictions currently in place.

The airport is limited to 80 aircraft movements in any 60-minute period between 0600-2300, has a 2300-0600 curfew and a “regional ring fence” where a number of takeoff and landing slots between 0600-1100 and 1500-2000 are earmarked for regional services.

The caps were a “blunt and inflexible instrument” and at levels well below Sydney Airport’s capacity of “well above 90 movements per hour”.

“Sydney Airport is increasingly constrained by outdated operating requirements which are not delivering their intended objectives while having significant impacts on the aviation network and national productivity more generally,” Sydney Airport’s submission said.

“The Commission should recommend that the government conduct a comprehensive review of Sydney Airport’s operating restrictions with the scope of any such review to include the unintended consequences of the operating restrictions.”

Sydney Airport said the cap was “artificially compressing the peak” period as airlines who were unable to operate arrival and departure flights in quick succession during peak periods had to schedule its arrival before and its departure after the peak period.

‘Melbourne Airport described its negotiations with airlines as “complex and often difficult”.’

“The result is that aircraft spend more time on the tarmac occupying key infrastructure such as gates,” Sydney Airport said.

Canberra Airport has backed the lifting the restrictions at Sydney Airport, arguing “Australia depends on Sydney”.

“Any disruption there is amplified around the nation, and airlines can take two or three days to recover,” Canberra Airport told the Commission.

“It is beneficial to everyone to maximise the operation of this critical asset.”

The curious case of the “ransomed” 737

The stoush between airports and airlines became very public earlier in 2018 when Qantas accused Canberra Airport of holding a Boeing 737-800 to “ransom” after the aircraft was diverted en route from Auckland to Sydney due to weather.

Canberra Airport denied the charge, describing them as “absolute baloney”.

Speaking at a CAPA –  Centre for Aviation conference in Sydney in early August, Qantas group executive for government, international and regulatory affairs Andrew Parker described Canberra Airport as a glorious terminal.

The description was not a compliment.

“It is one of the most expensive in Australia, and we are expected to cover those costs. They’re the sorts of outcomes we don’t think work for us or the travelling public,” Parker told delegates at the event.

Parker argued for more transparency regarding fees the airports charged their airline customers.

“It has to be dealing with the gold-plated issue of ‘build it and they will come’, we need you to fund our capital projects,” Parker said.

Writing in Qantas’s submission to the Commission, Parker said airport charges were the airline group’s fourth-largest cost after fuel, fleet and people.

Further, Parker said Qantas’s costs excluding fuel and airport charges had fallen four per cent in real terms since 2014/15, while charges it paid to airports had grown 6.5 per cent above inflation.

“As natural monopolies, Australian airports have no effective competition or reason to change or innovate,” Parker said.

“There is no effective regulation to contain airport price increases and price gouging, or to encourage operational efficiencies or improved quality of services.

“While we negotiate successfully with other suppliers to reduce costs and ultimately deliver better airfares and travel experiences for passengers, charges by Australian monopoly airports are largely non-negotiable.”

High hopes

The terms of reference also include the question of the effectiveness of the monitoring regime conducted by the ACCC, whether the current regime impacts on the ability of airports to price, operate and invest in airport infrastructure in an efficient and timely manner and whether the existing regime is effective in appropriately deterring potential abuses of market power by airport operators.

The ACCC advocates continuing its monitoring of the major Australian airports, as it does currently with an annual report on price and service quality monitoring for Brisbane, Melbourne, Perth and Sydney airports, alongside an arbitration regime.

“Monitoring would support commercial negotiations, help to assess whether the arbitration regime is achieving the desired results, and continue to provide stakeholders with information on the airports’ quality of service,” the ACCC said.

‘That all the players let fly in their submissions suggests there is a lot at stake.’

But the ACCC also backed a new regulatory model, telling the Commission commercial negotiations between airports and airlines would be “further supported if the parties are provided with a fall-back option of seeking arbitration”.

It would also address the imbalance in bargaining power between monopoly airports and airlines, particularly small airlines.

Privatisation of Australia’s airports began in the late 1990s, when the government sold off most of the nation’s major airports in the form of long-term operating leases.

The 20-year history of privatisation has shown higher charges that have not resulted in a commensurate improvement in service levels, the ACCC said.

The issue was debated at the recent International Air Transport Association (IATA) annual general meeting in Sydney, where its member airlines passed a resolution calling on national governments to take a cautious approach on privatising airports.

Further, the resolution encouraged governments to “prioritise the long-term economic and social benefits delivered by an effective airport ahead of the short-term financial gains provided by a poorly thought-out privatisation”.

“Airlines had high hopes that private sector investment and business acumen would bring benefits,” IATA director general and chief executive Alexandre de Juniac told delegates in his opening address on June 4.

“There were some quick wins. But they were outnumbered by disappointments. As customers of many airports in private hands, airlines have far too many bitter experiences.”

de Juniac has said previously the conclusion from three decades of airport privatisation showed it has been a failure, with airports performing better in public hands.

Regional distress

Away from the major capital city airports, the Productivity Commission has also heard from the Regional Aviation Association of Australia (RAAA), which had regional council-owned aerodromes in its sights.

The RAAA said “all too often council-owned regional airports regard their local airport as a cash-generating unit rather than an essential community transport service”.

Regional Express (Rex), which is a member of the RAAA, said regional airports needed to be regulated to “dissuade the local councils from acting in a myopic manner that could end up destroying the local community”.

“Rex would recommend a framework whereby the airline and the regional airport owner would negotiate in good faith but if agreement could not be reached then either party could request the ACCC to make a decision as to which of the two positions to accept and such a decision would be binding on both parties,” the airline group’s submission said.

“Such an approach would be the most cost-effective as the very threat of intervention by the ACCC and the negative publicity that would generate in the local community would be sufficient in most cases for the local councils to act responsibly.”

Campaigns of disparagement

That all the major players let fly with strong criticisms in their submissions suggests there is a lot at stake in the outcome of the review.

The AAA’s submission hit back against the ACCC’s “ill-founded slurs”, described sections of the airline industry’s push for change as a “campaign of disparagement”, accused IATA of leading an “ill-informed global debate” on the topic and described the ACCC’s commentary as “inflammatory and misleading”.

It said policy reform designed to reduce prices, as opposed to enhancing efficiency, would “place future investment at risk”.

The airlines have not been shy either. As noted earlier, Qantas said Australia’s airports display monopolistic behaviour and have been “price gouging” everyone from the airlines to the cafes that rent retail space in the terminal to the taxis that pick up and drop off passengers kerbside.

And Regional Express’ said the examples shown in its submission “clearly demonstrated” that the “airport owners, councils for the majority, are often misguided, political and myopic and would not hesitate to abuse market power for their self-serving purposes even if that would result in long-term damage to the local community”.

The Productivity Commission is due to release a draft report in 2019.