Australia’s Airport Debate

When former Qantas CEO Geoff Dixon retired in 2008, he told ATWthat the privatization of airports in Australia would, over the long term, be judged a failure. That gloomy appraisal finds support from one of Dixon’s fiercest critics, the Australia Council of Trade Unions, which in a submission to a recent government white paper on the subject claimed that privatization “failed to deliver a higher level of capital investment in aeronautical services and infrastructure; failed to increase traffic diversity from domestic or international destinations; and, failed to improve socioeconomic gains to regional and remote areas.”

A contrasting opinion is offered by the Australian Tourism & Transport Forum. This member-funded organization, which advocates for the public policy interests of 200 corporations and institutions engaged in the country’s transport, aviation, tourism and investment sectors, describes the process as a resounding success.

Taking a middle view is Peter Harbison, chairman of the Centre for Asia Pacific Aviation, who believes the privatization was handled reasonably well but points to the legacy problems inherited at such airports as Sydney, Brisbane and Perth with separate domestic and international terminals.

Australia’s airport privatization program began in earnest in April 1994 when the government announced its decision to sell 22 major and secondary airports owned and operated by Federal Airports Corp., which was established in 1986 as a wholly owned unlisted government enterprise. Complicating the sale process was the use of the lease model common in the US for management of domestic terminals, with some airlines responsible for all operational features and in some cases for maintaining terminal infrastructure and the airport operator providing only the land for the domestic terminals that are under lease. The selloff of the country’s 80 airports actually began in 1987 with the smaller facilities being spun off to regional councils through various measures such as the Aerodrome Local Ownership Plan.

Efficiency Goal

The stated rationale for disposal of the airports was to “improve the efficiency of airport investment and operations in the interests of users and the general community, and to facilitate innovative management.” Duration of the leases is 50 years with an option for an additional 49 years and the total sale netted the government A$8.5 billion ($7.82 billion), nearly half of which came from the privatization of Sydney Airport, which attracted a bid of A$4.23 billion.

The Australian Competition and Consumer Commission is responsible for economic oversight and monitoring of quality of service of the 12 major airports, which are deemed core-regulated entities under the 1996 Airports Act. These include the five busiest so-called capital cities airports of Sydney, Melbourne, Brisbane, Adelaide and Perth. The initial heavily regulated oversight was replaced in July 2002 with a more light-handed approach, with price notification and caps discontinued at all airports and replaced with price monitoring for most. In 2007 this was eased further by introduction of a “show-cause process” whereby price-monitored airports may be required to demonstrate why their conduct should not be subject to more detailed scrutiny.

ACTU claims that the regulation of Australia’s airports is “extremely flawed,” a view shared, it claims, by widespread and expert opinion. Those flaws include:

• Lack of regulation of market power and of incentives to keep prices at socially optimum levels.
• Low incentive to invest in aviation infrastructure and improved safety or aeronautical services.
• Failure to contain rent-seeking behavior.
• Low investment in direct workforce and skills acquisition.

ACTU also maintains that the underlying regulatory framework is flawed in that it only monitors price over cost, so as long as prices increase with costs no intervention is triggered. And no intervention is triggered by car parking costs, which have risen 77% since 2002 at the capital cities airports despite passengers only increasing 41%.

ACTU is not a voice in the wilderness. Airlines have grumbled and ACCC also recently expressed concerns about certain airports’ performance. In a 2008-09 report, ACCC Chairman Graeme Samuel stated, “Indications are that Sydney Airport has increased profits by permitting service quality to fall below that which the airlines reasonably expect. Airport users, including passengers and airlines, rated Sydney Airport last among the monitored airports for the fourth consecutive year and it appears that investment in the international terminal has been slow.”

And while Sydney was the only airport to experience a drop in passenger numbers during the reporting period, its revenue and profit margins still increased. It also recorded the highest average prices at A$13.63 per passenger compared to the lowest of A$7.96 at Melbourne. ACCC found that only Brisbane was rated by passengers as “good.”

Sydney, however, claimed that the ACCC report was “out of date” and pointed out that since the period in review it had commenced construction of the A$500 million upgrade of the International Terminal and surrounding roadway and supporting infrastructure. It also challenged ACCC’s methodology.

Jetstar CEO Bruce Buchanan, responding to the ACCC report, said the aeronautical charges levied by Australia’s airports aren’t related to costs but are a “wealth transfer” from airlines to airports.

MIA In The GFC

Samuel also criticized capital cities airports in general for not helping stimulate travel during the 2008-09 global financial crisis. “While airlines lowered their airfares to attract business in the . . . global economic slowdown, the airports appear to have enjoyed the security of guaranteed prices as well as benefiting from the airlines’ efforts to encourage travel,” he said. Capital cities airports all increased charges, ranging from a mild 1.7% lift at Perth to a 13.6% jump at Brisbane.

By contrast, Singapore Changi, which is owned by Temasek Holdings, the investment arm of the Singapore government, reduced its charges by 25% to help airlines while state-run Malaysian Airports slashed its charges by 50% during the worst of the GFC.

ACCC also surveys airline users on whether they believe they are receiving a reasonable level of service. According to the Commission, “airlines have consistently identified Sydney Airport as the least responsive . . . with respect to service delivery and quality over a sustained period of time.” However, it noted that in 2008-09 the airport reported investment representing 14% of assets, the highest level since 1999-2000. In contrast, Brisbane and Melbourne achieved ratings significantly above satisfactory by airlines and also had high levels of investment.

Qantas Group Executive-Government and Corporate Affairs David Epstein, a former chief of staff to former Labor Prime Minister Kevin Rudd, sums up the situation thus: “It’s a truism that the relationship between airports and airlines should be symbiotic, ideally a loving partnership. More often than not, it resembles Oscar and Felix in ‘The Odd Couple’ rather than Romeo and Juliet. The task is to make airports work for all stakeholders, and to do that we must remember that, above all else, airports are airports. They exist to serve the aviation industry so that it in turn can serve its customers. Sometimes that is forgotten, particularly in Australia and New Zealand. But it is not just airport investors and operators who can be accused of this sin on occasion. It is also governments and local governments, particularly local governments,” Epstein argues.

“In QF’s experience,” he adds, “an overwhelming number of emerging/regional airports have taken advantage of their market power, as no [ACCC] guidelines or incentives exist to prevent them from doing so. Airports have had no incentive to reach a negotiated commercial arrangement, as the outcome achieved by arbitrarily imposing high charges is far more advantageous.”

The numbers appear to bear out Epstein’s concerns. Whereas the head departure/arrival tax, excluding security screening, is A$7.65 at Perth, the figure soars at regional airports within Western Australia. Kalgoorlie charges A$21.76, Albany A$20, Geraldton A$16.36.

Academic View

In a September 2006 paper, “Airport Policy in Australia and New Zealand: Privatization, Light-Handed Regulation and Performance,” Peter Forsyth of the Dept of Economics at Australia’s Monash University claimed that airports in the two countries “do possess market power, and the use of countervailing power by airlines, or commercial negotiations, is not strong enough to eliminate this market power.”

Updating and expanding the work with ATW, Forsyth says that compared with many other developed countries, there is a lack of competition among Australia’s airports. He points to the US, where many metropolitan areas, such as the LA basin, have a number of alternative airfields, enabling airlines to weigh and select competitive offerings.

“But take Perth . . . for example. There is only one airport—for hundreds of miles. While Qantas has some market power due to its size, if Perth Airport raises it charges significantly [which it is yet to do], the airline has few options.” He notes that the major airports face an Australian Productivity Commission review in 2012.

Forsyth also suggests that charges at major airports in Australia and New Zealand are close to the average for similar facilities around the world, with some good and some poor performers. On balance, he believes privatization has been a success. “My reading is that the airlines would prefer more dispute mechanisms, and while they say they are unhappy, they probably can’t tell you why they are unhappy. They have gripes but maybe they will always have gripes.”

Epstein says, “We have concerns about the valuation of assets underlying pricing regimes and the degree to which the capital funding component of operator costs and, thus, pricing can be a charge on incumbent customers that funds infrastructure that is intended to entice new airlines to compete against them. Another issue is whether or not airline customers should bear the costs of ‘gold-plated’ infrastructure or infrastructure that may do more to enhance the nonaviation segments of airport operators’ businesses rather than aviation services.”

However, Harbison gives privatization a tick, suggesting that the airports, and thus airlines, would be no better off under government ownership.

The Tourism & Transport Forum commissioned URS Australia to study the subject and its report, “Assessing the Impact of Airport Privatization,” paints a positive picture. URS, a global consultancy that works with airports, argues that “the privatization of Australia’s airports has been a resounding success, with airports generating significant investment and economic growth at no cost to the taxpayer.” It adds that the privatization policy has delivered improvements in airport operating efficiency, financial performance and investment levels as well as significant benefits to the Australian economy overall.

TTF, while noting that nonaeronautical development has led to controversy, with users claiming that airports were focused on investments such as warehouses, particularly in the years immediately following privatization, maintains that “nonaeronautical development and revenues are fundamental to ensuring that airports remain a bankable proposition” by diversifying the revenue stream, which is particularly important in providing buffers during a downturn.

Lessons from Perth

Privatization can be put under the microscope at Perth Airport, which was sold off in 1997 to Westralia Airports Corp. For the first five years of its lease, WAC had to submit investment plans to ACCC and very few were approved. This limited what could be done with the airport, which had user-leased (Ansett and Qantas) domestic terminals on one side and a poorly designed, dysfunctional international terminal on the other.

After the removal of ACCC from the approval process WAC was able to work directly with the airlines, but air travel was in a savage downturn after 9/11 and the collapse of Ansett. However, by late 2002 investment in improvements started to flow and the initial focus was the international terminal. Despite this, a major A$30 million upgrade was not sanctioned by the major airlines.

Both WAC and the carriers get thumbs down for their slow response to the dramatic upswing in traffic that started in 2003. It took nearly four years for airport and airlines to get on the “same plane” for improvements to flow. Part of the problem is that upgrades must be made on both sides of the airport, including new link roads to speed connections between terminals and improvements needed from QF, which holds the lease on its domestic terminal.

The dominant domestic carrier into Perth, QF proved a laggard in 2007, with local management seeking photos taken by ATW to prove to the Sydney-centric head office that ramp congestion was a serious problem. Funds flowed quickly for a A$75 million upgrade for its terminal.

For its part, WAC needed a blast from the then-state premier to galvanize it into action. It produced a vision document five weeks later that showed a new integrated international and domestic facility with 42 parking bays on the site of the current international terminal on the eastern side of the airport plus an adjacent low-cost-airline building with 32 hardstands.

The airport is now getting ticks from travelers and airlines alike with an aggressive but balanced building program to meet the wide variety of needs among LCCs, full-service carriers and charter operators.