Running an airport in Australia: a licence to print money?

The big business of running an airport in Australia: In 2016-2017, the country's four biggest airports reported just over A$2.1 billion in combined revenue from aeronautical and car parking operations.

Is running an airport a license to print money? Australian airports are so profitable, there are calls for greater regulation.

By Stephen Corby 

Business is good for Australia’s major airports, and only getting better. People are travelling, parking, eating, drinking and spending more at airports than ever before. 

In 2016-2017, the country’s four biggest airports (Sydney, Melbourne, Brisbane and Perth) reported just over A$2.1 billion in combined revenue from aeronautical and car parking operations. 

The operating profit from aeronautical activities was A$757 million (each of the airports did increase profits from actual aeronautical activities – the money they make from carriers taking off and landing – over the previous year). Another A$280.4 million of operating profit was earned though car parking. 

Sydney Airport generated A$97 million in operating profit from car parking operations during 2016-2017. Melbourne earned A$86.7 million, Brisbane returned A$63.7 million and Perth A$33 million. 

"Unconstrained monopolies often have an incentive and ability to charge excessive prices, while lacking strong incentives to improve services." Ros Sims, ACCC

The numbers were released earlier this year by the Australian Competition and Consumer Commission (ACCC) in its 2016-2017 Airport Monitoring Report. The regulator has been ordered to monitor airport profits until 2020. 

In June 2018, then treasurer Scott Morrison announced an inquiry by the Productivity Commission, the fourth since the government began privatising airports in the 1990s. 

It is tasked not just with examining airport pricing and efficiency, but also the effectiveness of the ACCC’s price monitoring program. ACCC chairman Rod Sims is openly pushing for stronger legislation of airport finances.

“It is not surprising that the airports are so profitable, given that they face little competitive pressure and no price regulation,” Sims says. 

“Profits per passenger have also risen at each of the four airports and travellers are paying for this through higher ticket prices. 

“We remain concerned that the current regulatory regime, which is limited to monitoring the covered airports, doesn’t constrain the market power of four of Australia’s major airports. Unconstrained monopolies often have an incentive and ability to charge excessive prices, while lacking strong incentives to improve services.” 

Show me the money 

A woman walks past a Victoria's Secret store in the departure hall of Sydney Airport.“We think it better for private organisations to run airports with governments regulating safety and air traffic control,” was the explanation given by then Australian Prime Minister John Howard, for privatising airports. 

“I mean, there are good economic reasons for those airports to be operated by private industry.” 

The airport servicing Australia’s most populous city – Sydney Airport – was always going to be the jewel in the federal government’s privatisation crown. By the time negotiations were complete, the ink was drying on a cheque for A$5.59 billion from Southern Cross Consortium, which at the time was majority-controlled by Macquarie Bank. 

In its first full year of operation post-sale, Sydney Airport turned over A$8 billion in revenue. The consortium had purchased an airport that annually serviced 15 million passengers (five million of them international passengers). In 2016, Sydney Airport processed 41.9 million passengers, 15 million through its international terminal. 

According to a report by Airlines for Australia and New Zealand (A4ANZ) – a lobby group formed last year comprising every major airline in the region that aims to secure tighter regulation around how airports are managed – Australia’s major airports are now collecting over 25 per cent more revenue for every passenger than they did 10 years ago, with passenger numbers up 20 per cent over the same period. 

Is running an airport a licence to print money? 

Freight being loaded at Melbourne Airport.Sydney Airport CEO Geoff Culbert declined to be interviewed for this article, as did Australian Airports Association (AAA). However, AAA CEO Caroline Wilkie has gone on record as welcoming the review of the economic regulation of airports by the Productivity Commission and said her organisation looks forward to working with it. 

“In the last 20 years, airports have worked tirelessly to encourage new airlines to Australia and build better facilities to make it easy and affordable for passengers to travel more often,” Wilkie stated. 

“Airports continue to work constructively with airlines to invest to meet growing demand and provide passengers with better airport experiences and even more travel options in the future. Recent evidence of this includes the announcement of major infrastructure investment by Adelaide Airport. 

“Unlike other infrastructure around the country, these outcomes are being achieved without a cost to the taxpayer.” 

Nonetheless, A4ANZ chairman and former ACCC chair Professor Graeme Samuel says airports in Australia have been allowed to run as monopoly businesses, charging both airlines and passengers whatever they want without repercussion. 

“I think it is fair to say that every airport in Australia is a monopoly – not just the four majors, but the whole lot,” Samuel says.

“[They] wield extraordinary power in dealing with their customers, because they can effectively offer a take-it-or-leave-it ultimatum and, with airlines, it’s not a question of leaving it – you need to land in Melbourne or Sydney.” 

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Samuel’s main focus is, of course, securing a better deal for his member airlines, but he maintains that a reduction in airport gouging would have a positive, natural flow-on effect for all customers. 

In the ultra-competitive Australian aviation market, international ticket prices have fallen between 10 and 20 per cent over the past five years, while the rise of budget airlines puts continued downward pressure on the cost of domestic flights. 

Regardless, Samuel and Sims agree that prices could and should be lower. With a budget carrier’s cheapest fare, for example, as much as 40 per cent can go to paying an airport’s take-off and landing fees, Samuel says. 

In the US, where most major airports remain publicly owned, the maximum payable cost per passenger for aeronautical services is capped at around US$4.50. A push to see that figure lifted – a move airports say would help them fund infrastructure upgrades – has stalled. By comparison, Sydney Airport collects more than A$18 per passenger. 

“You’d like to think a change to legislation would [push prices down],” Samuel says. “Airport costs are reduced, prices are reduced. Airlines are exposed to vigorous competition and that competition will force prices down if costs are lowered.” 

Legislating for change at Australia's airports

A Virgin Blue Boeing 737-700 Aircraft at Adelaide Airport.What can be done? Monopolies will always exist where legitimate competition doesn’t, and many argue that is currently the case with airports.

Even as new facilities are built to cater to growing cities, they are unlikely to offer true competition. For example, a second major Sydney airport in Badgerys Creek capable of handling large aircraft will only benefit a small slice of the city’s population when, as proposed, it opens in 2026. In fact, it will be so far from the CBD that it could create a micro-monopoly of its own. 

As mentioned, the federal government, aware of growing public disquiet over airport operations, has directed the ACCC to monitor the profits of the four major airports until 2020. However, in effect the regulator has been monitoring prices since privatisation, but with no power to act on concerns about airport prices for parking and aeronautical activities. Samuel believes it’s a toothless tiger. 

“Price monitoring is a pointless exercise, frankly, and one that results in 24 hours of publicity before we all move on,” he says. “Unless something actually flows from [the ACCC’s] findings, then it doesn’t achieve anything at all. 

"[Airports] can effectively offer a take-it-or-leave-it ultimatum and, with airlines, it's not a question of leaving it – you need to land in Melbourne or Sydney." Professor Graeme Samuel, A4ANZ

“Why do them? The primary purpose of price monitoring programs is to give the sense that politicians have done something.” 

The raw numbers support his point. In 2008, the ACCC’s price monitoring regime was expanded to specifically study the costs and profits of airport parking. 

The outcome A4ANZ is pushing for is to enable the ACCC to do more than simply monitor pricing. It hopes the ACCC will be given the power to intervene in disputes – be it with airlines, taxi operators, food outlets or any other provider – and enforce a form of mediation known as final offer arbitration. 

The idea is that in pricing disputes the ACCC could demand a final or best offer from both parties, with a mediator then able to enforce one offer or the other, or a combination of both. If an airline disputes airport charges, for example, both sides would be forced to submit their ideal outcome, with the government choosing the fairest version. 

“We would need a discrete provision put into the Airports Act that says where an airport has a substantial degree of market power in providing a service, whether it be a retail area, a cargo holding bay, a rental car location or, in the case of the airlines, an aeronautical service, a dispute can then go to the ACCC for arbitration, which it can’t at the moment,” Samuel says. 

“It would be a process that’s not been adopted in Australia before, but there are only two things that will bring a monopoly to account. One is new competition and the second is threat of legislation.

“We can’t go building more airports, so that leaves us with legislation.”

Read next: The woman future-proofing Sydney Airport

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