Economic Regulation of Airport Services

458 Pages·2011·3.29 MB·English

by  Productivity Commission

Economic Regulation of
Productivity Commission
Airport Services
Inquiry Report
No. 57, 14 December 2011
 Commonwealth of Australia 2011
ISSN 1447-1329
ISBN 978-1-74037-382-1
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An appropriate citation for this paper is:
Productivity Commission 2011, Economic Regulation of Airport Services, Inquiry Report
no. 57, Canberra.
JEL codes: L93, R4.
The Productivity Commission
The Productivity Commission is the Australian Government’s independent research
and advisory body on a range of economic, social and environmental issues affecting
the welfare of Australians. Its role, expressed most simply, is to help governments
make better policies, in the long term interest of the Australian community.
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wellbeing of the community as a whole.
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[phone] or email: [email protected]

Terms of reference

I, Bill Shorten, Assistant Treasurer, pursuant to Parts 2 and 3 of the Productivity
Commission Act 1998, hereby refer the current economic regulation arrangements
for airport services to the Commission for inquiry and report within twelve months
of receipt of this reference.
Background
In 2006, the Productivity Commission conducted a review of the regulatory
arrangements for pricing airport services. The review examined the price
monitoring regime that had replaced the price capping regime in 2002. The review
found that the price-monitoring regime had delivered important benefits, and
recommended that the existing arrangements continue.
The Australian Competition and Consumer Commission (ACCC) has continued to
prepare Airport Monitoring Reports for public release on an annual basis. In 2008,
the Government directed the ACCC to formally monitor prices, costs and profits
relating to car parking at Australia's five major airports.
In the 2009 National Aviation Policy White Paper, the Government announced that
it would continue with the existing regime including the price and quality of service
monitoring conducted by the ACCC with a review to be conducted by the
Productivity Commission in 2012. The Government reserved the right to conduct
the review earlier. In addition, the Government announced that a second tier self-
administered price and quality of service monitoring regime would be introduced
for Canberra, Darwin, Gold Coast and Hobart airports. Other airports will also be
encouraged to adopt web-based reporting of customer satisfaction measures and
outcomes. The airports in the second tier scheme are expected to commence
reporting in this financial year.
The purpose of this inquiry is to examine the effectiveness and efficiency of the
current economic regulation and quality of service monitoring regime for airports
and whether new arrangements are needed. It is also to make recommendations in
relation to the requirement for future regulation and monitoring of services and the
scope and appropriate mechanism for the provision of greater transparency and
accountability in airport infrastructure provision and services.
IV TERMS OF
REFERENCE
Scope of Inquiry
1. The Commission is to report on the appropriate economic regulation of airport
services, including the effectiveness of the price and quality of service
monitoring, in achieving the following objectives:
 promoting the economically efficient and timely operation, use of and
investment in airports and related industries
 minimising unnecessary compliance costs
 facilitating commercially negotiated outcomes in airport operations.
2. The inquiry is to focus on the provision of passenger transport services at and
surrounding main passenger airports operating in Australia's major cities.
3. The Commission is to examine:
 aeronautical services and facilities provided by airport operators
 passenger-related aeronautical services and facilities provided by major
airline tenants
 the provision and quality of land transport facilities providing access to the
airports.
4. In undertaking its assessment, the Commission is to examine the economy wide
costs and benefits and distributional impacts of the regime. As far as practical,
the Commission should seek to quantify and provide evidence for these costs
and benefits. It should also seek to provide international comparisons of the
performance of the airport operators.
5. The Commission should consider:
 whether the existing regime is effective in appropriately deterring potential
abuses of market power by airport operators
 whether the existing range of remedies is effective in dealing with potential
and suspected abuses of market power
 the effectiveness of the monitoring regime conducted by the ACCC,
including the methodology used and the adequacy of the information
collected
 whether the current regime impacts on the ability of airports to price, operate
and invest in airport infrastructure in an efficient and timely manner
 whether the coverage of the current regime is appropriate
 any improvements or enhancements that could be made to the existing
regime

 the appropriate future role of the regime

TERMS OF V
REFERENCE
 the adequacy and arrangements for the control of planning, operation and
service quality monitoring of land transport access to major airports
 whether existing arrangements for the planning and operation of land
transport linkages to the airports are effective.
6. To the extent applicable, the Commission is to have regard to the ACCC's
Airport Monitoring Reports. This includes the matters raised by the ACCC in
these reports such as:
 the quality of service at major Australian airports
 land side access to airport terminals such as car parking and its alternatives,
and the cost and quality of car parking facilities
 the extent to which monitored airports can act strategically to raise costs of
on-airport car parking by controlling the conditions of landside access to
terminal facilities.
7. The regulatory price cap and price notification regime for regional air services
into and out of Sydney Airport (Declaration 92 under section 95X and Direction
32 under section 95ZH of the Trade Practices Act 1974) is not within the scope
of this inquiry.
8. The second tier self-administered price and quality of service monitoring regime
is not within the scope of this inquiry.
Process
9. The Commission is to undertake an appropriate public consultation process
including holding hearings, inviting public submissions and releasing a draft
report to the public.
10. The Government will consider the Commission's recommendations, and the
Government's response will be announced as soon as possible after the receipt of
the Commission's report. The Government will release the Commission's report.
Bill Shorten
Assistant Treasurer
[Received 15 December 2010]
VI TERMS OF
REFERENCE
Contents
Terms of reference IV

Abbreviations and explanations XI

Glossary XIV

Overview XXI

Findings and recommendations XLVI

1 About the inquiry 1

1.1 Background to the inquiry 2

1.2 The Commission’s task 4

1.3 The Commission’s approach 6

1.4 Conduct of the inquiry 8

2 Australia’s major airports 9

2.1 Australia’s major airports: an introduction 10

2.2 Inside a major airport 11

2.3 Developments in the air travel market 16

3 The institutional environment 21

3.1 Airport sale and lease conditions 22

3.2 Price and quality of service monitoring 25

3.3 Other relevant competition legislation 27

3.4 Other regulation of airports 32

3.5 Airport planning arrangements 35

3.6 Land access infrastructure and services 38

CONTENTS VII
4 Performance of Australian airports 41

4.1 Benchmarking in the airport sector 42

4.2 Benchmarking and regulation 43

4.3 Performance of Australian airports 46

4.4 Conclusion 60

5 Market power and regulation 63

5.1 Economically efficient airports 64

5.2 The market power rationale for airport regulation 70

5.3 Which airports have market power? 73

5.4 For which services do airports have market power? 82

5.5 Other rationales for regulating airport services? 85

5.6 Optimising regulation to address airports’ market power 88

6 Investment and capacity 97

6.1 What is investment and capacity? 98

6.2 Investment determinants 99

6.3 Investment at Australian airports 108

6.4 Concerns about investment at Australian airports 112

Annex on investment and pricing 124

7 Airside and terminal: monitoring outcomes 131

7.1 Reported price outcomes 132

7.2 Reported quality of service outcomes 146

8 Commercial negotiation 157

8.1 The slow path from regulation to negotiation 158

8.2 Airport users’ views on commercial negotiation 165

8.3 Where to now? 177

VIII CONTENTS
9 Options for future airport regulation 179

9.1 The anecdotal evidence is contradictory 180

9.2 How is the light-handed regime performing? 183

9.3 What remedies exist now? 185

9.4 The regime would benefit from a credible threat 188

9.5 Is an arbitration mechanism also needed? 200

9.6 Future role for price and quality monitoring? 214

10 Improving the monitoring regime 215

10.1 Objectives of monitoring 216

10.2 Administrative and compliance costs 219

10.3 Specific components of monitoring 221

10.4 Reporting and interpretation of monitoring results 231

10.5 Coverage of quality of service monitoring 237

10.6 Is monitoring effective? 240

10.7 Improvements to the monitoring regime 241

11 Airport car parking and ground transport access 251

11.1 Market power in ground transport access 252

11.2 The broader ground transport market 254

11.3 Car parking prices reflect more than cost of supply 267

11.4 Car park investment 277

11.5 Evidence of misuse of market power in car parking 280

11.6 Ground transport access fees and conditions 283

11.7 Future regulatory arrangements 291

12 Broader land transport access and integration issues 297

12.1 The state of play ‘on the ground’ 298

CONTENTS IX
12.2 Coordination of planning systems 306

12.3 Government funding of road infrastructure 313

12.4 Funding infrastructure on and around airports 316

13 Broader aviation issues 325

13.1 Conduct of rural and regional airports 326

13.2 General aviation at major capital city airports 334

13.3 Aviation security charges 337

13.4 Noise management at airports 341

13.5 Fuel throughput levies 345

A Conduct of the inquiry 351

A.1 Submissions received 352

A.2 Visits and discussions 354

A.3 Roundtables 356

A.4 Public hearings 358

B Airports and related information 359

B.1 Statistical information 359

B.2 Airport information 360

C Economic regulation of airports: an international comparison 367

C.1 Ownership forms 367

C.2 Regulatory regimes 373

C.3 Empirical research 385

C.4 Summing up 391

References 393

X CONTENTS