Changes ahead for the airline industry? Productivity Commission releases Economic Regulation of Airports inquiry draft report

The Productivity Commission has released its draft report on its inquiry into the economic regulation of airports. If its recommendations are adopted, Australia’s major airports may face an increased regulatory burden. However, some stakeholders have argued that the recommendations do not go far enough to constrain the potential exercise of the airports' market power.

In this article we set out the key findings and recommendations in the report, and examine the changes that may lie ahead for the airline industry.

Background

In June 2018, the Productivity Commission launched an inquiry into the economic regulation of airports. The inquiry was kick-started by the ongoing campaign from airlines against the exercise of market power by Australia’s monopoly airport operators.

The aim of the inquiry was to examine whether the current arrangements for the economic regulation of airport services remain effective in promoting the efficient operation of airport industries.

The inquiry garnered widespread support from various stakeholders, including the lobby group Airlines for Australia & New Zealand (A4ANZ) which represents Qantas, Virgin Australia and their respective subsidiaries. A4ANZchair Graeme Samuel welcomed the inquiry, stating that “the current light-handed regulatory regime allows airports to behave as the privatised monopolies that they are, overcharging airport users who have no choice but to accept what is offered".

The Productivity Commission published its draft report in February 2019.

ACCC’s submission

The Australian Competition and Consumer Commission (ACCC) plays a significant role in constraining the exercise of market power by airports. It administers a price-monitoring regime which requires Australia’s major airports to provide annual reports on their prices, costs and profits for aeronautical services and car parking.

In its response to the Productivity Commission Issues Paper, the ACCC recognised that the four monitored airports in Sydney, Melbourne, Brisbane and Perth have a significant degree of market power in the supply of aeronautical services, due to their natural monopoly characteristics.

Although the threat of regulation may have constrained the exercise of market power in the past, the ACCC submitted that the current regime is no longer effective.

The top four recommendations from the ACCC’s September 2018 submission in response to the Productivity Commission’s Issues Paper were:

1. Airlines and airports that cannot reach commercial agreement on terms and conditions should have access to arbitration. The imbalance in bargaining powers of monopoly airports and airlines, particularly small airlines, could be reduced if both parties had recourse to arbitration. This would promote commercially-negotiated outcomes that balance the interests of both airports and airlines.
   
   
2. Airlines would be better positioned to negotiate with airports if they were provided with additional information. This could be supported by the ACCC having the ability to create record-keeping rules for airports, as it does in telecommunications.
   
   
3. The ACCC’s monitoring of aeronautical services should continue in order to support commercial negotiation and increase transparency by providing the government and stakeholders with information on airport performance, including information on airport quality of service, passenger-related services, car parking services and landside services.
   
   
4. While the ACCC acknowledges the consumer concerns about the high costs of car parking and landside access services, the ACCC does not recommend stronger regulatory oversight. The ACCC considers that there does not appear to be a more effective approach to regulating these services. However, the ACCC maintains that it should continue to monitor car parking services and inform consumers of the range of transport alternatives.

The ACCC’s submission echoes a key concern of the airline industry that the current ‘light-handed’ approach to regulation is no longer fit for purpose.

Key findings and recommendations from the draft report

The Productivity Commission’s central findings in its draft report were that:

• the current ‘light-handed’ regulatory regime is effective in constraining the exercise of market power by the four monitored airports;
  
  
• the four monitored airports have not systematically exercised their market power to the detriment of the community; and
  
  
• each airport has generated returns sufficient to promote investment while not earning excessive profits.

Given its findings, the Productivity Commission made these recommendations:

1. Separate reporting requirements

Sydney, Melbourne, Brisbane and Perth airports should be required to separately report revenues and costs of providing domestic and international services to airlines. Separate reporting would allow the ACCC to determine whether exorbitant charges are the result of an airport exercising its market power, or the higher costs of providing international services.

2. Landside access services

The Productivity Commission found that airports could exercise their market power in landside access services, such as for those used by taxis and shuttle buses, to encourage people to use airport-owned car parks. However, there was ‘insufficient data’ to determine whether this is occurring. It recommended that a data collection regime be introduced to enable it to assess the exercise of market power in landside access services.

3. Car parking at airports

The Productivity Commission acknowledged that many consumers resent the cost of car parking at the monitored airports, but found that car parking charges are not due to airports exercising their market power. Rather, the price of parking at-terminal can be explained by the value passengers place on convenience, the limited amount of land close to the terminal, and the need to manage congestion.

4. Anti-competitive clauses 

On balance, the Productivity Commission found that commercial negotiations between airports and airlines give rise to little cause for concern. However, it found two types of clause to be ‘anti-competitive’:

• clauses that constrain an airline’s access to regulatory remedies for the exercise of market power; and
  
  
• clauses that restrict an airport’s ability to offer incentives to airlines other than the signatory airline.

The Productivity Commission recommended that these types of clauses be removed from all agreements between airlines and airports. 

Stakeholder responses

The draft report's findings were met with heavy criticism from the airline industry. Many stakeholders argued that the recommendations did not go far enough to constrain the potential misuse of market power.

In particular, the A4ANZ has called for the Productivity Commission to urgently reconsider its recommendations. The A4ANZ chief executive, Alison Roberts, stated that none of the recommendations, if ultimately adopted by government, would change the imbalance of bargaining power between airlines and airport operators, and that more unproductive disputes between airport operators and airlines were likely to arise.

Final comments

The Productivity Commission handed its final inquiry report to Australian Government on 21 June 2019, although it has not yet been publicly released.

It will be interesting to see if any of the stakeholders' responses have influenced the Productivity Commission, or if the final report remains in the form of the draft report.