Panel: Are Australian/New Zealand airport charges “fare”? Unpacking the economic reality of airport privatisation

Transcript

Peter Harbison:What I think we might do, and I think the obvious differences are pretty well known between airports and airlines, but let's— we want to try and get a bit deeper than that in terms of getting beyond the rhetoric, really. What are some of the serious issues that we need to address? And, you know, even where can we look forward to in terms of finding some resolution of some of the most outstanding problems? Or is there any solution? Is it always going to be this sort of family? Because I think Geoff talked about a family. Is the family always going to be at each other's throats? So maybe if we could just start, perhaps I could ask each of you just a couple of basics that you think are really important in this relationship between airports and airlines. Maybe, Andrew, if I start with you.

Mark Young:Sure.

Peter Harbison:We'll work around this way.

Andrew Parker:Thanks, Peter. And I— look, I'd echo what Geoff said yesterday, which is, of course, I think in the interests of not only our industry and airports, but the travelling public, you want and we want airlines and airports to be as harmonious and productive together as possible. And I think, you know, Mark from Adelaide here is a good example. The Qantas Group and Adelaide Airport have a strong relationship and collaborate Collaborate well. So it is not personal, and I know this debate at times flares up, and we've got the Productivity Commission process now ahead of us, and so that's a natural juncture to have what we hope is a policy debate, because we do believe, whilst we have some very strong relationships, there is a policy problem. And at its heart is airports in Australia are natural monopolies, and they're not regulated. And I think the ACCC confirms that whilst they produce their monitoring report every year, it is of no substance. And our issue is, uh, whilst there are strong relationships, there are very problematic negotiations that we have week in, week out, month in, month out, where It is extremely difficult in many of these cases to negotiate and secure a reasonable economic commercial outcome that we can live with. And if you look at Qantas, and I guess the final point I'd say is we've done a fairly extraordinary transformation of our business in the last few years, and it's produced results, but it came—

Alison Roberts:Yeah.

Andrew Parker:Uh, with a, with a fair amount of pain. And for every one of our major input costs that we can control, uh, and oil is creeping up, so that's one that we can't other than hedging, we have to stare deep into those costs. And airport costs are about our third largest. And we just want to secure, because, uh, the long-term trend is that airfares are coming down. And to continue that, those input costs—

Warren Mundy:Yeah.

Andrew Parker:like airport charges, we want greater scrutiny, greater transparency, and fairer outcomes to help moderate those financial pressures.

Peter Harbison:Okay, thanks for that kickoff, Andrew. It's a good start. I mean, I take 3 things from that. What's— what does make a strong relationship? I've got to look at the cost, and we've got to have transparency. You were singled out for being The good guys, apparently, Mark. What makes you the good guys? But what— more seriously, what are the issues that you see from— in terms of the airport-airline relationship?

Mark Young:I think every relationship is bespoke to each airport. We all go through different capital investment cycles. In our case, or as an overarching statement, I think that sensible deals If they make sense, they get done. And in our case, we've just recently announced a, in our context, a very significant terminal expansion project, the single biggest capital investment by our shareholders since we built Terminal 1. And that took a long time to negotiate, and a lot of discussion. And Andrew talked about the need for— Transparency. The legitimate need by airlines to have and understand in a very transparent way what's driving investment and the costs of that investment. And I know in our case, the amount of time and the resources that it took to work with each of our airlines and provide the sort of information that was required was quite exhaustive and took a very long time, about 3 years to get us to the point where we could announce the project terminal expansion that we have. But, you know, airlines have a legitimate right to understand that. But I think it does get to a point where each of our shareholders, and all of our airlines have shareholders, we have shareholders, have to make that decision about where will they invest their money.

Peter Harbison:Yeah.

Mark Young:They're capital. And as I say, if you can arrive in the middle where it makes sense, deals do get done.

Peter Harbison:Yeah, I mean, most of the discussions do tend to take quite a long time. We might try and dig in a minute into just why yours came out as a sensible deal, as it were. Alison, if I can come to you.

Warren Mundy:You—

Peter Harbison:and to be formal in this— you represent not just Australian but also New Zealand airlines. From that basis, how do you, how do you see the big issues facing Australian and New Zealand airlines?

Alison Roberts:They're actually quite similar, Peter, um, and the— as Mark's pointed out, these prolonged negotiations have a productivity cost associated with them on both sides, so they take up an extraordinary amount of staff time. But I think if we just take a step back and look at this— I have a background in science, and so I always come at this from Mm-hmm. You know, what does the evidence tell us? What are we actually looking at here in terms of the policy challenge? Um, and the evidence is that if you are entering into a negotiation with a monopoly operator, it's not like any other kind of negotiation where the parties can come to the table with, with equal, equal weight in that argument. And I think we can also step away a little bit from pitching it as airlines versus airports. There are other airport users users who also have to access monopoly airports, car rental companies, retailers, all of whom also face the challenges of being faced with negotiating in that environment. And if any of us were operating a monopoly asset, we would be incentivised and have, in fact, disincentives to do anything other than maximise profitability. And so, in a sense, there's nothing wrong with what's happening, but there is a cost to society, there's a cost to consumers, to travellers, there's a cost to the economy of that environment.

Peter Harbison:Right.

Alison Roberts:And, you know, the analysts document it. They talk about the unregulated revenue stream that the airports enjoy. So we do need to look at that from a fact-based policy debate, and I think the Productivity Commission gives us a great opportunity to do that and to bring in the perspectives of all airport users, not just airlines.

Peter Harbison:Thanks very much. Um, so Warren, uh, the monopoly issue comes up quite frequently in these discussions inevitably. Um, but, but aside from that, what, what sort of couple of kickoff points would you like to make?

Warren Mundy:Look, I think there's a— there's— and I've been in this industry now since, um, the time the legislation was passed in the Parliament in 1997. There's been a tremendous investment and traffic growth outcome throughout the industry. I think— and I have been an airport executive, and I've advised on a lot of these negotiations. And without this being a hard and fast rule, the parties seem to get on best when they're trying to work together to get something together. So, you're saying that the industry is working together? There's an expansion in capacity that's going to allow their businesses to grow together. Um, the development of the Virgin Pier in Perth is a very good example of this. Um, it was pretty straightforward. And it's interesting to note, um, earlier in this week that airlines using that facility and the adjoining Terminal 2 at Perth Airport experienced a 25% reduction in their aviation charges as a result of negotiations between Perth Airport and the regional carriers that use that facility. So the notion that airport charges are just continually growing is simply, is simply not true. Airport charges in Australia since the last Productivity Commission inquiry have grown by about 2.5% in real terms over that period. BITRA's measure of restricted economy airfares over the same period has grown by about 5.3% over the period.

Peter Harbison:So which period are we talking about?

Warren Mundy:The restricted economy airfare series.

Peter Harbison:Yeah, but which period?

Warren Mundy:2011 till now. So the last 7 years. The last PC review occurred in—

Peter Harbison:Is that true?

Warren Mundy:Yep. Pretty certain it is.

Peter Harbison:I'm not sure that— yeah, I would have thought I thought it was more of a downtrend.

Warren Mundy:No, it's been a significant uptick.

Peter Harbison:Tipped back up a bit.

Warren Mundy:There's been an uptick recently.

Andrew Parker:Well, you're not talking about overall airfares. You're picking one carrier.

Warren Mundy:I'm picking one carrier.

Andrew Parker:I don't think it's the fairest.

Warren Mundy:Peter, I think— I mean—

Peter Harbison:Yeah, anyway, sorry I interrupted.

Warren Mundy:I think the issue ultimately becomes, though, what are the outcomes for consumers? And there has been a significant downtrend in international fares.

Andrew Parker:Mm-hm.

Warren Mundy:Primarily because of increased competition in the international market.

Mark Young:Mm-hm.

Warren Mundy:The market's become less concentrated, well, over a very long period of time. But the reality is, is that the cost of airport infrastructure is rising. The terminals that Sir John Gorton built in Melbourne in 1970 are of their specification and their cost much cheaper than the ones we have today. And as we're trying to do work around operating aerodromes with all the security requirements, the natural trend is for costs to rise. Now, I'm not quite sure that airports in Australia are able to make take-it-or-leave-it offers. The law in New Zealand, as Alison will well know, permits an airport after having undertaken consultation to determine a pricing outcome, and it can enforce it by law. Similar things exist in the United Kingdom and in a range of European jurisdictions. Australian airports can't do that. They have no unilateral right to charge as a statutory mechanism. And there are examples around Australia today where airports have been issuing invoices and they have not been paid. Paid in full, and that has persisted. So this notion of take-it-or-leave-it offers simply doesn't exist as a legal fact. So the real challenge, I think, and as I say, when people want to do a deal and they want to get out and done with things, I mean, even recently in the case of the Qantas arrangements at Perth Airport for Terminal 3, things get done. My sense is when things go least well is when there's essentially a fight over rent, you know, or returns. And the challenge we have is, is what is a rent? What are these rents? Are they monopoly rents or are they location rents? And I'd just say one other thing about airports using their monopoly power when they can. And this is an issue that was first raised when Graeme Samuel was the chairman of the ACCC. And it's the issue about charging people to access the front of the terminal.

Mark Young:If the—

Peter Harbison:This is airside— landside, rather.

Warren Mundy:Yeah, so the front of the terminal. So off-airport car parks are a particular cause célèbre. The behaviour that is described in that case is of itself illegal. And not only has the ACCC never brought a prosecution, they haven't even issued a notice under their own act to gather information. And indeed, the 4th largest airport in the country, which has these rights, doesn't charge its competitors to use the front of the terminal. So, you know, and a lot of these arrangements for licensing were put in after September 11th because airports, and the one I worked at the time, wanted to secure the place, to manage congestion, and to know who was there. So I think we need to step back and look at this. And in any event, these revenues are, in the great scheme of a major airport like Melbourne Airport, um, de minimis.

Peter Harbison:Yeah, well, let's step back a bit, and, and without getting too much into specifics. Alison, there are a couple of points that Warren brought up there too, several points that Warren brought up, but, um—

Alison Roberts:That I'm waiting to respond to, yes.

Peter Harbison:One, well, I mean, there are two sides. Several sides, more than 2 sides of this story. One point I would like to sort of clarify, which is coming to a later stage in our discussion, I think, but when we look at Australia— Warren pointed to the difference between Australia and New Zealand in terms of regulation and the operation of the airports. Do you see either of those schemes being preferable from an airline's point of view? And Angela, I'll follow up with you on this too.

Alison Roberts:Look, the basis of any kind of threat-based regulatory model, which is what exists in both Australia and New Zealand, and that is that you have some kind of regime that requires the parties to report on either pricing or quality or both, as the case is here, is there needs to be an avenue to access an arbitration in order for that to exist as a threat. And that's— the science behind threat-based regulatory models is that that needs to be there.

Peter Harbison:Mm-hm.

Alison Roberts:We've heard from analysts, we've seen from behaviour that that threat is nonexistent in Australia. Um, it also doesn't clearly work in New Zealand because although there's a pathway to negotiate arbitrate, as Warren quite rightly said, there's also a piece of legislation that says the airports can price as they see fit. So they can, they can charge whatever price they want and there's really no, no repercussions for that. So I think that for both of those models to work more effectively, there needs to actually be a threat. And that's actually all we're talking about, making the current regulatory model work better. When you look at countries where they do have that type of model, like in Canada, it's used in a range of the transportation sectors there, in about 80% of cases, the parties come to an agreement without ever having to call in the arbitrator.

Mark Young:Hmm.

Alison Roberts:Which means there's limited cost, it sits there as a way to bring the parties to that midpoint that Mark talked about that is a more reasonable negotiating point.

Warren Mundy:Mm-hmm.

Alison Roberts:And so I guess I would say to the airports who've, who've said to me, but we're, we're the good guys, like we do okay, we don't want any kind of heavy-handed regulation coming down on us. A, this is not heavy-handed, and B, there's nothing to fear if the offer is reasonable. But You know, upwards of 70%, 80% profits.

Peter Harbison:Well, that's—

Alison Roberts:yeah, we'll get to that. You know, you can question whether that's reasonable or not.

Peter Harbison:Just going back though, sorry, I mean, the Canadian airports aren't privatised, of course. They're locally run, basically.

Alison Roberts:No, and I was not talking about the airport sector. Sorry, this is used in rail and other sectors. Oh, okay.

Peter Harbison:Fair enough. But, I mean, going back to the threat issue, okay, if there's a threat, there's a repercussion, and if there's a repercussion, we've seen in the history Historically in New Zealand, some of the problems with that were cases actually went right through the courts as well, and that was, going back to your point about being costly, that was massively costly to everybody involved. Can you have that threat without the risk of repercussion and then that whole court process?

Alison Roberts:Well, you can build a smart system that actually means that the, you know, you can curtail the periods for appeal, you can, ensure that the information disclosure requirements at the time of making the offers, the final offers if you like, um, are specified. Um, and it doesn't, it doesn't stop a commercial negotiation going on. So it still allows the parties to negotiate.

Peter Harbison:What we're saying actually— So it's got to be a very focused and calculated threat.

Alison Roberts:Yes, exactly.

Peter Harbison:Very quite sophisticated.

Alison Roberts:And we don't, we don't have that at the moment because the avenue to do that can stretch out. I mean, if you look at the Virgin and Sydney Airport example, it can stretch out years and years and years.

Mark Young:Mm-hm.

Alison Roberts:And now that would be even more, more so. So I think, you know, in order for it to work effectively, that's got to be there. The other point that I would make is on this issue of sort of working collaboratively, is that I don't doubt the intention, and in fact, in many cases, as Andrew said, the reality is there is good collaboration. But there's not an incentive to do that in every case. So while we can hear isolated examples of it, there's in fact a disincentive. And the AAA's own research showed that, you know, less than half the regional airports consult before they do any capital works with the main airport users, the airlines. So if you've got that scenario, where do you go from there? And there's no leverage against that.

Peter Harbison:Andrew, I'll come to you in a moment, but I just want to go back to Warren on this issue of the I mean, is there any sort of threat in Australia? Is there? And if so, what is it?

Warren Mundy:Alison accurately describes the extraordinary length of time that it took in the Sydney Airport matter. The law has changed since then. There are now strict requirements on the council, the minister, and the tribunal. So that length of time now, as a matter of fact, is simply not going to happen. The second The second point that I'd make is that until recently, between the time of the Sydney Airport decision in 2006 and very late last year when the law was changed, the interpretation of Part 3A was such that it is highly likely that an airport would have got declared for Exactly the same reasons as the Port of Newcastle got declared.

Peter Harbison:Sorry, I missed that. That an airport would?

Warren Mundy:Would have got declared for exactly the same reason, because it was an essential input. I'd make the observation in that—

Peter Harbison:That's a big hurdle though, to be declared, isn't it?

Warren Mundy:No, it is a big hurdle, but the point is, is that hurdle at the time was very low. All you had to do was prove that the airport was essential. This was the argument that Mm-hmm. There was, with the exception of an application, I think, by Tiger, in relation to access to terminal facilities at Sydney Airport, there were no such applications. So I don't think, you know, that we've got this period of time, which I would assert is no particular difference to the world as we know it, but it's a find period of time in which it today, where airlines did not seek to use that framework that was available to them. Airports, to be frank, were absolutely petrified and were just waiting for it to be brought on.

Peter Harbison:You missed a chance, obviously.

Warren Mundy:And so I think—

Andrew Parker:You need some smelling salts.

Warren Mundy:But I think the other thing is that part of the problem with this debate is is that I see lots of agreements getting done, and I don't think they're the exception. I think they're the rule. I don't think we should place too much store in the fact that councils which are poorly resourced and who are just indexing at CPI and whose capital works are largely funded by grants from states and federal government. Um, haven't got the resources to conduct these consultations. As Alison says, these consultations are incredibly resource-intensive. They take a hell of a lot of time.

Mark Young:They do.

Peter Harbison:Which is a bit of a threat in itself. Andrew, I mean, I can see you're champing at the bit. Um, there are a few points that, that have come across since you last spoke. Do you want to pick up some of those in, in order that you wish?

Andrew Parker:Yeah, look, uh, I, I just don't accept Warren's premise. premise that there is nothing to see here, move on. Can I ask a question? It's quite extraordinary that for the first time Qantas, Air New Zealand, Virgin, Rex have come together on an issue to try to seek a policy improvement. And the fact that Alan Joyce and Christopher Luxon and John Borghetti and Kim Hyer and John Sharp have been on the stage together for the first time, I think suggests to you the seriousness in which we believe this issue is impacting us and is impacting the wider economy. So, number one, we most definitely reject the premise there's no issue here and these negotiations by and large are easy, straightforward, and settle in a place that everyone should be happy with. Warren talked about Perth. That was an extremely long and difficult negotiation. And all I would say, uh, in trying to establish, uh, the terminal that we developed, the cost in which the airport put forward to do that modest development was almost double what we said we could do it for, and were prepared to take the full risk on, and ultimately delivered at that price. And the other caveat example I would use in that negotiation is, with the airport, will also decide the routes in which you can fly from this new facility. So when we sought to launch Perth to Johannesburg, we were denied by the airport. If ever there's an example of market power at play, surely it's a monopoly airport saying where Qantas can or can't fly. So day in, day out, we, we are faced with these sorts of difficulties at the coalface. of small negotiations, medium, and large. And it is not just the 4 gateways. Whilst some of these regional airports are smaller, less significant in terms of profitability, as Alison said, the lack of consultation, the often dramatic price rises and increases means that we are faced, and with no practical outcome to go to a third party or a regulatory mechanism to solve. The point was also made by Warren about, but invoices just aren't paid. But at the end of the day, they're contracts. And so if there's a dispute and an invoice by an airline is not paid, it accrues interest and ultimately will be sued. So of course they get settled. But the final point I'd just make, Peter, is Uh, there is no effective regulatory model in this country. New Zealand is looking at one. Um, we believe what we've got on the table, this negotiation arbitration model, uh, is the smallest of the possible regulatory options available, and the ACCC agrees. Uh, Rod Sims has said, uh, if you look at the full gamut of possible options here, negotiation arbitration is the smallest of least impact. And that's why, to Alison's point, I'd just say 2 parties that bring in an independent umpire, you both have something to lose.

Alison Roberts:Mm-hmm.

Andrew Parker:The risk is there for both parties. But why is it that the airlines are saying we're willing to take that risk and sign up, but the airports are not? That, I think, suggests where the balance of power lies in this, uh, this policy issue we're having.

Peter Harbison:Okay, well, I mean, we talked a bit about— Mark, I'd like to come to you too— the issue of resources and, and, and sort of what is involved in these negotiations. And, and I— 'cause I want to come back to you about what is a sensible deal and how you get to a sensible deal later on. But, but first of all, I mean, and, and, uh, the, the, the last point that was being made there by Andrew, It sort of goes to that issue as well. I mean, who's got the biggest resources? Who's got the biggest guns to fight in this?

Mark Young:Well, I won't go to who's got the biggest guns, because that's sort of not what it's about. It's about what's fit for purpose, and what suits each organisation. I take Warren's point about regional airports not having capacity to really grapple with sophisticated pricing and capacity discussions is absolutely true.

Warren Mundy:Mm-hmm.

Mark Young:I mean, we're a, you know, we're 5th or 6th largest airport in the country. We do 8 million passengers. That's a good-sized airport, but, you know, we still have fairly tight resources. And I asked our guys just to sort of run out what it took us to get our current announced terminal expansion project up and running. And it was something like 75 meetings took place between us and all of our airlines. There was 400 hours in direct discussion. There was over 1,000 hours in travelling time, 260 flights, 120 hotel nights.

Warren Mundy:And—

Mark Young:The equivalent in our business of about 3 full-time equivalent people just around getting this thing to the line.

Peter Harbison:So that's the price of being sensible, in other words. The outcome, which was a sensible— As I said earlier— Presumably, though, has a lot to do with the negotiation.

Mark Young:Our stakeholders have legitimate grounds for asking for and diving deep into the information, and we have an obligation to provide it in a transparent way, hopefully to arrive at a point where each can equally invest, or disagree, agree to not agree on what type of infrastructure or what type of development needs to take place. In our case, in our terminal expansion, there was a large element of that. But it does take time, and I think any Anything that adds onto the top of that really will not result in any better outcome when actually what all we're trying to do is invest and enable continued capacity growth, because ultimately that's to the benefit of the consumers.

Peter Harbison:So when you say something that comes on top of that, you're talking about regulation that would create procedures for going through it.

Mark Young:It would bring a whole other paradigm in information provided. It'll bring a whole other paradigm into the way that all the components of a deal that get put together are just not about the, you know, the cost of capital. It's— there's a whole lot of massive amount of other things that come into play.

Peter Harbison:But everybody at least talks about the need for transparency. I mean, and that presumably does require Taking the lid off and having a good look inside. Absolutely.

Mark Young:You've got to get down to your administration costs. How much do you pay your people? What do you spend on advertising? What do you spend on marketing? Line-by-line analysis of your passenger forecasts, line-by-line analysis of your capital expenditure with cost consultants, line-by-line review of your cost of capital with experts at, you know, 20 paces. That all takes a lot of time. Now, I'm not saying that that's not time That is properly spent. It should be time that's properly spent, because then real sensible deals get done. But there is— in all of that, you can't possibly believe that there isn't any aspect of a deal that an airline signs up to that is gold-plating or not fit for purpose. And in some case, investment doesn't take place.

Andrew Parker:Because—

Mark Young:You just can't meet in the middle. So airports will go off and do one thing, and airlines will go and do another.

Peter Harbison:So this works both ways. I mean, we have what we call light-handed regulation in Australia. Is it actually going to be to the airlines' benefit if you do start creating these massive procedures? I mean, it does seem as if there is a reasonable level of transparency at the moment.

Alison Roberts:Well, that's the thing.

Peter Harbison:Reasonable level.

Alison Roberts:I feel like Mark's story is an argument for a change in the regulatory model.

Warren Mundy:Oh.

Alison Roberts:Because it actually suggests And that suggests that the way in which a deal is being made is taking an inordinate amount of, you know, people hours, of time, you know, hotel nights, all of that. And I think, you know, that is one story. Andrew's told another story about infrastructure that was not going to be fit for purpose or at the right price.

Mark Young:Mm-hm.

Alison Roberts:That's another story that is possible under the current regulatory model. But I think this idea that That's right. And I think the point that Warren raised, that airports have been scared over the last, you know, since the last productivity review or since the Sydney Airport declaration, it's a furphy, because if they were scared, we would have seen different behaviour. And what we've seen is year on year the ACCC reporting exactly the same thing and exactly the same behaviour. And when you look at the science behind threat-based regulatory models, they actually have to perceive that threat. And you look at all the investor market reports, they talk about unregulated. They call Australia an unregulated market. If you look at Australia compared to the rest of the world, the profitability of our airports here and in New Zealand is off the charts compared to the rest of the world. So that doesn't happen if the airports are fearful of an imminent, you know, threat of challenge by the airlines to the courts. So I think we just need to— you know, that gets thrown around a lot. thrown out there a lot, but it just hasn't happened that way. It's not factual.

Peter Harbison:Let me change tack a little bit, because, I mean, we're all— when it comes to the crunch, we're all human beings dealing in this, and obviously the leadership in each of the organisations makes a difference to the way you enter into negotiations. And I was sort of impressed yesterday— Merryn made the point this morning that this is an incestuous industry that everybody stays in and you get appointed and promoted within. We've got a new CEO sitting Sydney Airport, who, who was talking yesterday in a very conciliatory, conciliatory way, recognising that we need to work very closely. Um, I mean, is, is that not a better way to go, just to, to try and make sure you've got those relationships, rather than going to, you know, putting it in the hands of an external body? And, and once, I mean, let's face it, once you get into the hands of federal government regulation of things—

Mark Young:Well—

Peter Harbison:It does get awfully legal and awfully expensive, and you get consultants and lawyers and you name it. Does anybody really want that? Why don't we just sort of try working with Geoff, for example, and follow that model?

Andrew Parker:I think, you know, we're off to a great start with Geoff. And look, we had a very strong relationship with Kerry as well. I think the coalface where the teams are negotiating, and in Sydney's case, because of the complexity and the scale of the relationship between Sydney Airport and Qantas, 'Cause Sydney's usually called out as the real child of monopoly, isn't it, in profitability? Absolutely, in the sense of it's the only listed airport in Australia. It gets a lot of attention, I think, to Alison's point on what the analysts are saying, et cetera. But I would say Geoff is showing a great amount of leadership leadership in wanting the relationships to be as strong as possible, and that does come from the top, and we're very receptive to that, and we're negotiating well with Sydney. However, as I said at the start, there is a bigger problem here, and we would not be going to these lengths, we would not be encouraging this PC process if we just felt through better relationships We could solve these problems, because for every good intention, there are other airports, and it's the nature of being a monopoly where you are incentivised by your shareholders to extract monopoly rent, and that unfortunately is the all too common practice. And we come from self-interest as airlines. But I think what Why the government is interested in this conversation is because what are the national economic and productivity issues at play here when you have natural monopolies that aren't regulated? And there's not many other elements of the Australian economy that have the uniqueness of the airports model. It was just a big mistake at the start when we privatised to— there was initial regulation and it was cancelled, and now we have light-handed Or frankly zero regulation, where the ACCC themselves say that their yearly monitoring report is junk. And that's unfortunately the reality that we're faced with. And we want a reasonable moderate sort of Damocles that hangs over a monopoly, that if your behaviour and your pricing is so extraordinary, there is the ability to bring in an independent regulator. And I think that's the point. an umpire, and I think that's perfectly reasonable, and it's not the scaremongering of we're going to have a sea of McKinsey consultants coming in to look at salary costs and everything else. It is trying to settle complex negotiations with a fair, middle-of-the-road outcome.

Peter Harbison:I'd like to go back to this word monopoly. I mean, it's a cornerstone obviously of a lot of the arguments about Monopoly pricing, monopoly behaviour. Tell me, is there a difference in the behaviour of Brisbane Airport? Because Brisbane is no longer a monopoly airport, is it? It's got Gold Coast, it's got Sunshine Coast now, and it's also got Wellcamp. Certainly the Gold Coast is the biggest in terms of the impact. Do you see a different form of behaviour from Brisbane Airport these days?

Alison Roberts:I think you've got to look at the elements of market power. So just because it has nearby airports, the elements that make up giving a business market power also include things like substitutability. Is it reasonable, for example, for a business traveller that make up the majority of flights between Melbourne and Brisbane to travel to one of those alternate routes and then make their way to Brisbane for the work meeting? Is it reasonable for a family and friends visit, which again make up the next category. So you're talking then about a small category of the leisure travellers that maybe do have a substitution option. So when you look at those elements of market power together, it's not really working in a fiercely competitive environment, particularly when you look at all of the airlines that are flying those more frequent business routes as well.

Andrew Parker:I think that's a great point, and I'd just say if you look at the European model or even the US model, there is legitimate competition of airports. You can swap out Schiphol and Amsterdam into Düsseldorf on a fast train. Yeah, you could argue within a couple of hours of driving Brisbane has some competitors, but to Alison's point, and we do a lot of market research as all airlines do, our customers aren't going to fly to the Gold Coast to do business in Brisbane or to have a holiday on the Gold Coast or Sunshine Coast and fly into WorldCamp. It's just not the reality. On the periphery, there are some people—

Peter Harbison:But it's not a monopoly airport anymore, is it? It is different to what it was.

Andrew Parker:Well, no, I think it is, because the monopoly behaviour is there, and they don't have that threat of competition built into their thinking and behaviour.

Warren Mundy:Well, I think, Peter, I mean, what the situation we've now seen develop in Southeast Queensland is not dissimilar to the Scottish And all the evidence and all the research in the UK is that about 2 hours' driving time constitutes the reasonable boundary for leisure travellers. So I think that's one point. I think, you know, I think there is growing competition between Melbourne and Avalon, but I absolutely accept it's nowhere near as intense.

Peter Harbison:Yeah.

Warren Mundy:And despite the best intentions of the Busselton Shire Council, I think it's going to be a while until Busselton competes with Perth. But this isn't the only realm of competition. We know that the entry behaviour of carriers from particularly the Middle East more recently, but historically from Asia on long-haul routes, was basically Basically, there will be a competition between where the first service goes between Sydney, Melbourne, and Brisbane, and that competition is incredibly fierce. So there is competition.

Alison Roberts:It—

Warren Mundy:there is one element of competition which is about passenger choice and passenger substitutability, and in Europe there's modal substitution both from rail and also by long-term— long-haul coaches.

Peter Harbison:Thank you. Well, sorry, can I just interrupt you there? No, my question though really on that issue was not is it actually a monopoly. I mean, it's quite clear that it's different from the other major airports, Brisbane. My question was really about do you see a difference in behaviour from Brisbane, whether or not it is a monopoly?

Andrew Parker:Oh, well, I don't want to call out Brisbane. And look, again, it's an example of a pretty good relationship, a new chief executive Mr.

Peter Harbison:Denny, I think their new chief executive is in the audience today, so—

Andrew Parker:Yeah, and look, it was a long negotiation on the pre-funding debate on the runway, etc. That is behind us. And I can understand the logic of the argument. I don't know if there's absolute evidence that they see they have competitors, because, you know, the AAA has used the example previously of You know, we could switch out a Cairns for a Townsville, for example, but leisure travellers aren't going to go to Townsville to see the Barrier Reef, just as people going to see the V8 supercars or visiting friends and family are going to go to Cairns to go to Townsville instead of Townsville and drive. We don't have that model in Australia, and I think it's a long way off that Geelong and Avalon is a V8 supercar. very small footprint, and I just don't think the airports believe they have competition, um, because the behaviour by and large doesn't demonstrate they do.

Warren Mundy:Mm-hmm.

Peter Harbison:Okay, well, I think we've pretty much agreed to disagree that we want regulation and we don't want re— or heavier regulation. Let's try and focus now for the last 5 minutes on, okay, when— what are the ingredients of a sensible relationship, which is a word you used, Andrew? before about Adelaide. How do we get to the heart of things? How do we try and sort of defuse this, this, this confrontation— confrontational approach? So can we sort of maybe try and dissect some of the ingredients of that particular relationship as it's been raised? Do you want to kick it off?

Mark Young:Yeah, I guess I'll kick off Adelaide terminal expansion as a case study. We, we had a view around our future capacity growth at Adelaide, both domestic and international. The strength of our international business over recent years has been growing very, very strongly, and so we have a need for expanding our international inbound and outbound facilities. We wanted to, at that time, take the opportunity to do an expansion that would accommodate our immediate international and foreseeable capacity growth on international, but at the same time, in a concept that in our view would also future-proof and provide flexibility for domestic capacity and growth. Fair to say that our major customers have a different view to us about domestic capacity growth, both in the quantum and in the timeframe, but also at what time of the day that capacity growth might come. And as we know, it's peak capacity growth that drives, you know, particularly terminal expansion, not so much apron expansion.

Warren Mundy:Mm-hmm.

Mark Young:So that took quite a while for us to run different scenarios, run different costings, different pricing models, and have all of the various components of your business and the airline's business that need to come together because there's property discussions, there's traffic discussions, there's operating costs, there's capital cost discussions. And you need the best of your, you know, your people to be able to come together and run through all of those things.

Peter Harbison:But who made the running in this process? Did you sort of lead with it or was it just—

Mark Young:Oh, it's an iterative process, as I said, 400, you know, hours and 75 meetings. involves people from both sides.

Andrew Parker:Yeah.

Mark Young:But the point is this. We came to a point, in Adelaide's case, where we agreed to basically disagree about the domestic capacity future, and the way in which it was going to grow. So we redesigned and concentrated more so with the international airlines, and spent some very productive time with Barry Abrams and the the team from Barra to go through the things that international airlines wanted in terms of service level standards and what their expectations of the airport was. And out of that, the project that we're currently underway now was born. So we're addressing our immediate and near foreseeable future international capacity requirements. And I guess time will tell in terms of the domestic capacity.

Warren Mundy:Mm-hmm.

Mark Young:When that comes, what those trigger points are, and what will be required in terms of being able to deliver that. At the moment, for us, that basically revolves around doing some incremental, um, uh, or, or, or, or, or doing apron improvements, because that's the insurance, not, not so much terminal growth—

Peter Harbison:Mm-hmm.

Mark Young:To meet the domestic, uh, capacity growth. But I have to say, even in that, you know, we, through those negotiations, we're sort of getting ground down to doing sort of incremental bits of apron, and that is not the most cost-effective way to go about it. These things should be done in fairly large scale. You get efficiency of construction. You get efficiency in scope in terms of your construction costs and processes. But that's an ongoing discussion that we have at the moment, and we've agreed that with nearly all of our partners.

Peter Harbison:So from the airlines' side, I mean, is that the way you saw the process? Was it a constructive one all the way through, with a few lumpy bits? I mean, in terms of creating a model for future behaviour.

Andrew Parker:Yeah, and look, there's frustration on both sides about longevity, and I think whilst, you know, there's sincerity, you know, in Mark's comments around trying to secure a deal where everyone could sign up to it, you know, we also see airports where we know negotiations are protracted Uh, for many, many years, and, and quite deliberately so. And often Qantas is the largest airline group in Australia. We are the last man standing because some of our competitors, um, and they readily admit this, will have provisions in their contract. If another airline secures a better deal, we get, we get to match that deal. So we will spend the time as the last person standing to try to secure that deal, and we will not fold our cards because of how important the outcomes are. But in Adelaide's case, whilst there was frustration on the length of time, and we didn't sign up to all of the demand views that the airport had, you know, it was a consultative process with good intention.

Warren Mundy:Yeah.

Andrew Parker:by and large, but I think unfortunately there are too many other examples that aren't like that. And I think back to your— just quickly, Peter, your question on what needs to happen as a virtuous model. It's got to be transparency. It has to be dealing with the gold-plating issue of build it and they will come. We need you to fund our capital projects.

Warren Mundy:Yeah.

Andrew Parker:And we have many problems. And to use the Canberra example, it's a glorious airport and terminal. It is one of the most expensive in Australia, and we are expected to cover those costs. And they're the sorts of outcomes we don't think work for us or for the travelling public.

Alison Roberts:And, Peter—

Peter Harbison:So you're saying too there wasn't transparency in that process?

Andrew Parker:Absolutely.

Peter Harbison:Alison, anything to add to that?

Alison Roberts:No, I was just going to add, you asked at the beginning, you know, what, what needs to happen to make these environments, and I think, uh, you've got to get the policy settings right, because otherwise you are reliant on goodwill and, and people with the right intentions, and that's not always the case. Personnel change, a culture can change.

Peter Harbison:Has there always got to be a threat though?

Alison Roberts:So, well, I think, and you talked about it being heavy regulation, I think If we actually look at the what needs to happen when you're negotiating with a monopoly operator that has market power, and you know we've we've we've talked about that. In order for that negotiation to be a genuine commercial negotiation, two things need to need to be in place. Oh sorry, one of two things: either there needs to be competition so that that's hanging over their shoulder, and so they they're more willing to put a more competitive deal on the table, or you need to emulate the effect. effective competition through a regulatory threat. Now we're not talking about price capping, we're not talking about heavy-handed regulation, we're talking about the current system that apparently has a threat, but it's ineffective, and it's clearly ineffective at curtailing some of the behaviour that Andrew's talked about.

Warren Mundy:Right.

Alison Roberts:In fact, it doesn't even apply to a Canberra airport. So, you know, it clearly— the coverage is not there, the threat is not present. So in order to create the environment that everyone says that they want, you know, we're hearing it from airports and airlines, you do need the regulatory settings to be right to allow for that. And that's why, you know, this policy debate that the Productivity Commission have invited is really welcome. We need to be talking about it.

Andrew Parker:Mm-hmm.

Peter Harbison:All right, we'll leave the closing comments with the airport end here. Warren, I need some conciliatory remarks from you. What are the Look, you asked—

Andrew Parker:Come on, you can do it.

Warren Mundy:Peter, you asked before what constitutes a good way to get these things done. And I think— and this will upset some of our members— I have seen from time to time in the time I've been in this industry some really fantastic behaviours, and I've seen some shockers. And I've seen it from airlines, and I've seen it from airports, and it's got a lot to do with people. Putting that aside, I think the best way forward, the best way forward is a few things, and how this is— these things work well. The parties at the start sit down and talk about what they're trying to achieve, and what information they need to share with each other to achieve it, rather than going, there's 100 pages of stuff which we think might be interesting, and then having this dialogue which goes on for months to actually work out what stuff the other people want to know. And that works both ways. I think that's the first thing. I think the second thing, and Andrew alluded to this, at the end of the day, you don't need to agree every In fact, you actually need to agree a few things. You need to agree something that looks like a price path. You need to agree some quality metrics. And I absolutely share the view of Barra that quality is a problem we needed to solve.

Mark Young:Mm-hm.

Warren Mundy:In 2002, in Melbourne Airport's agreement with Qantas, There were quality measures. And the world hasn't moved on. And the world hasn't moved on because everyone's found it too hard. Now, I've sat across the table from airlines and said, what do you want? And I've got a blank face. I know some airports say, we're not interested in quality. I mean, it's just, it's really hard. And part of the challenge is, of course, increasingly with the diversity of the character of airlines in a multi-user environment. I think that's a really good point. If it is a facility, it gets really tricky. And I think the other thing is, is that in all good negotiations, um, and having done more than a dozen of these, at some point you decide, and this is the way a lot of them end, you want to pay $5, I think you should pay $6, and let's agree with $5.50, because what a regulator's going to do is probably land between $5.40 and $5.60.

Mark Young:Mm-hm.

Peter Harbison:So regulation does come with its downsides.

Warren Mundy:No, it does.

Mark Young:Both sides.

Warren Mundy:And I don't think we should underestimate the information requirements that will flow from any sort of arbitration which is going to be meaningful. And, you know, I think— and if you're going to do a lot of the work up front, we've got to have— we've work really hard on those arbitration frameworks. I'd just make one other option. I am aware of a number of cases where airports have offered to have disputes mediated, and airlines have turned down the offer of a voluntary mediation and arbitration framework— outcome to try and work through the issues.

Mark Young:Yeah.

Peter Harbison:Okay, well, I think we've teased that fairly well. I mean, I would like to I think we've got some airport CEOs in Australia now who do seem to be much more focused on getting resolution rather than confrontation. And I think from the airline side, there seems to be a lot more sort of acceptance of, well, we do have to live together. Maybe I'm trying to be too sort of holistically optimistic about this. I think you're right. But, uh, let's hope that's the way it is. Thanks very much, uh, for your discussion this morning and for being so candid. Hopefully you enjoyed that. Thanks very much to the panel. Thanks, Peter.

Copyright policy: All transcripts on this site are the copyright of CAPA - Centre for Aviation. Our reproduction policy is as follows: you may quote up to 400 words of any transcript on the condition that you attribute the transcript to CAPA - Centre for Aviation and link to the original video page. All other use is prohibited. While we aim for 100% accuracy in the transcript, there may be some minor transcribing errors.