The Infrastructure Challenge – Making The Most Of Investment

Transcript

Peter Harbison:The topic here is the infrastructure challenge. There's always an infrastructure challenge and the financing challenge, of course. Making the most of investment. I suggest we kick off with maybe if you'd like to just introduce for 5 minutes, what your general thoughts on the topic are, and then we can pick up some, some other questions as we go along. So maybe Graeme, if you'd like to start.

Graeme Samuel AC:Okay, well look, you know, infrastructure, obviously airport infrastructure, is fundamental to the operation of the airlines. Um, people ask why has APRA and ZED been set up. I think it's pretty clear. And why am I there? Um, probably because I've had a, an intense knowledge of the way airlines and airports operate for many years in relation to competition policy. Let's state a very simple fact. It's not a claim, it's a fact, and that is that I think without exception every airport in Australia, domestic, uh, or regional, is a monopolist. Now, um, to someone who comes from competition policy, um, monopolies have certain consequences in general, and I have a, you'll understand, instinctive aversion to monopolies, because monopolies generally result in monopoly rents being paid, uh, they result in, uh, potentially a gold-plating of infrastructure, And, um, a complacency in terms of service. So that's the general rule relating to monopolies. From anyone that's involved in competition policy, you'll understand that that, um, is, is the general rule. Um, the real issue, um, in relation to, uh, airports and airport infrastructure and the like is to ask ourselves, um, are they exercising monopoly power? Um, if so, how's it affecting not just the airlines, but in fact every consumer? Because— every element of complacency in quality, or every element of charging of prices, if they're monopoly rents, flows through to consumers. It'll flow through either in airline charges, uh, or it'll flow through in terms of car parking charges, or retailer charges, uh, at the airports. And all this is shown in the reports that, you know, I was involved in, I guess, for 8 years. Rod Sims is now doing the airport monitoring reports for the ACCC. So they're the issues. Um, they're issues about How we pay for infrastructure. Do we pay for it upfront, prepayments, which frankly I have a bit of a bewilderment about, I must say, but I'll talk about that in a few minutes. Or do we pay for it when we can use the infrastructure and actually gain some revenue from it, which seems to me to be a logical position that we ought to be taking. But let me use that just as an introduction. Statement, airports are monopolies. Question, what's the impact and how does that affect the consumer? through the flow-through that occurs, um, as we all know.

Peter Harbison:Thanks, Graeme. One, one exception might be to that monopoly situation in Brisbane, which has got 2 quite close-by airports, Gold Coast and Sunshine Coast.

Graeme Samuel AC:Yeah, and that probably reflects in part, um, or is reflected in part in the reports that are constantly coming from the ACCC that Brisbane is the best performing airport, certainly in terms of quality of service, um, that we see now. So you might well say, well, That is the impact of that competition. Whether it's real competition or not in terms of international airlines and the like is another issue. But you'll see that, well, golly, going back, I think, to 2005, Brisbane has always ranked as the best in terms of service of any of the airports in Australia.

Peter Harbison:So Caroline, there are a few challenges there for you. What would you like to say to kick us off?

Caroline Wilkie:So in terms of everyone in the audience, you may not realise that at the AAA we represent over 300 airports now. internationally, from Streaky Bay right through to Sydney and the major airports. First of all, I'd say that the story's not the same for all airports in the country. We've recently undertaken some research that actually showed that more than 60% of the airports in the country run at a loss, and of those, 40% are not expecting to make any profit over the next decade. We also know that regional airport prices in terms of running an airport are going up by around 40% each year. So in terms of the regional airport market, we've got some major challenges for them in terms of operations, meeting the demands of local communities and their economies. So I think that's an important issue that we probably should talk about while we're here today as well. In terms of infrastructure and the major airports, we've had 3 successive Productivity Commission inquiries which have looked at this issue, and we certainly don't dispute that a number of our airports do have an element of market power. Um, but I certainly would dispute that, uh, the claims that there would be monopoly behaviour and that that's led to, uh, negative incomes for the consumer. I think if you look at the past decade in particular, we've seen nothing but, uh, wonderful growth at our airports. I mean, if you look at, uh, some of the terminals and new infrastructure that we have in place in Australia, I mean, we're celebrating— last month we celebrated 20 years since privatisation, uh, and If you look at where we've come as an industry and you compare that globally, I mean, the benchmark— we're doing brilliantly well. If you look at the commercial arrangements between airlines and airports, I think those are very positive. I think we've proven by the commercial negotiations that have taken place so far that we are a maturing industry, and I think that maturity can be seen by the fact that the negotiations have been successful. We have seen things like the Brisbane runway take, you know, take shape. We've seen new terminal in T1 in Perth. We've seen the new T4 in Melbourne. And we've seen a lot of growth, and that capacity has— and the growth from the airports has led to growth for the airlines. And I think the success story of the airports can also be attributed directly to some of the success of the airlines, and I think we forget that. One of the things I did want to say too is I think, I want to say I welcome the creation of A4ANZ. I think it's, there are a lot of areas in common that we, the AAA, can work with A4ANZ moving forward, whilst obviously we have some disagreements in areas of economic regulation. I think what the incident that's occurred on the weekend has shown that there's great opportunity for us to partner in areas of security, border, you know, some of the initiatives in the environment. I think it's—

Graeme Samuel AC:Yeah.

Caroline Wilkie:Thanks, Caroline.

Peter Harbison:Stephen, it's probably appropriate for you to take a bit of a bow there in terms of preparing our airports for privatisation and the whole process that went into that.

Stephen Borthwick:Thanks. I'm not sure whether I've been strategically positioned between the airports and the airlines. I hope this is not a precursor to the Government intervention. But look, I think if you look back to where the airports were pre-privatisation and where they were now, it's chalk and cheese.

Graeme Samuel AC:Mm-hm.

Stephen Borthwick:I mean, we have a very well-run aviation system. And about the same time, I mean, Qantas was privatised as well. We shouldn't reflect that. The input of private investment into the aviation industry, both at the airline and airport level, has driven significant gains in efficiency and productivity that would never have happened under government ownership in any way, shape, or form. So I think, I think the privatisation system has, has proven successful, and I think one of the keys to unlocking any investment was— is having a strong, stable regulatory system that sits over the top with, with appropriate checks and balances where they're needed. Certainly, in relation to development, that master plan process and major development plan process, which is a highly public consultative process, enables all the stakeholders to have a say in, in the future development of the airports. Certainly, from a departmental perspective, we're strongly in favour of commercially negotiated outcomes. 'Cause we think that delivers the best. And I think my secretary is fond of saying that if you, if you want a system to go backward, get the government to intervene in it. So I strongly encourage the maintenance of commercially negotiated outcomes, because at least then both sides own the outcome. But picking up on Caroline's point, there is a good story around the federally leased airports. But even within the federally leased airports, there are some at the smaller general aviation end that aren't doing so well. Some of our regional airports, as Caroline mentioned, face financial pressures. And certainly as a government, certainly my minister is very interested in the future of regional aviation and connectivity, and hearing directly from industry about—

Peter Harbison:Yeah.

Stephen Borthwick:what can be done to help improve the performance of the regional end.

Peter Harbison:Well, I was gonna, I was gonna mention that because it follows straight on from, from what Caroline was saying. If you've got 60% of the airports in Australia, in terms of number, not in terms of passenger or aircraft movements, but 60% of the airports loss-making, would they not have been better off under the sort of internal cross-subsidy system of government ownership had the major airports not been privatised? In other words, are they suffering for the good fortune of the big cities?

Stephen Borthwick:Look, I think at the, the process of, if you like, handing airports back to local owners really commenced through the Aerodrome Local Ownership Plan, and the government at the time withdrew from that in the late '80s, early '90s, and the intention was for for local communities to take ownership over the future direction of their airports. One of the downsides to having a centralised system is you're not always responsive to the needs of local communities. And the idea behind the scheme at the time was to enable local communities to take control, to take ownership, and to drive the airport in the direction they wanted to.

Graeme Samuel AC:Which may have something to do with the lack of profitability, because you combine local ownership that may or may not be efficient, combined with potential lack of utilisation relative to the infrastructure investment that has to be made, that invariably in any business is going to lead to some difficulties. And so the statistic you quote, Caroline, about what, 60% are loss-making, I can well understand that could well be the case in the context of what Stephen's Yeah, I guess, Graeme, I mean, that's looking at the airport bottom line.

Peter Harbison:If you look at it as a community bottom line, maybe the equation is a little bit different.

Graeme Samuel AC:But of course it is, and that's why, you know, in any of these areas, leave aside the major domestic airports, but in terms of regional airports, there's a social imperative. But it's the social imperative that governs a whole range of different factors that we deal with in the economic structure of the Australian community, the broad geographic spread spread, the fact that the population is spread in a very, very significant fashion across a whole diverse range of regional areas, that's where government steps in and makes up for what otherwise would be a normal economic structure.

Caroline Wilkie:I think the interesting point Stephen made too is about local ownership, and I think you've seen that in the success of privatisation as well. I mean, if you look at a number, or all of the major airports, and you look at how actively their teams are pursuing international growth into their markets, how they've been able to develop a sense of place and look at their airport individually. I mean, they were never able to do that under the FAC. I mean, it's— you wouldn't have had the growth that we've had if they didn't have that level of independence, and it's led to a really good competitive tension.

Peter Harbison:Well, it's certainly my feeling from the outside as an observer. Graeme, you've had the opportunity at various stages in your career of influencing the way airports are regulated. And we now have what's generally called a light-handed regulatory approach. Some of the airlines might suggest it's a light-fingered regulatory approach. Why haven't you made things different from the way we are now? What's wrong with it?

Graeme Samuel AC:Sorry, when you say I've made things different, in what sense?

Peter Harbison:How would the regulatory system be improved?

Graeme Samuel AC:Oh, how would it be—

Peter Harbison:yeah.

Graeme Samuel AC:Look, I think it's early days for AFRA and Zed in looking at the regulatory process. I, I have a view, just a personal view just at the present time, that the threat of regulation is actually a very, very useful tool. Now we saw that with Sydney Airport, and when Virgin applied for declaration of the airport, or the airside services, uh, and there was a long debate with Sydney Airport and Virgin and Qantas over landing charges. And I can tell you literally at the last minute, and it was, we're about to issue an arbitration to the ACCC on That issue the next day. That night before, at about midnight, we got advice that Virgin and Qantas had reached an agreement. The threat of regulation is a very powerful factor. I think what we need to be aware of is this, is that the Productivity Commission's got a review coming next year. The ACCC has been expressing stronger and stronger views that it believes that the monitoring process that's there at the moment is not very effective. There's 2 reasons for that. The first is that no one looks at any part of the monitoring report except for car park charges. I mean, I used to laugh every year Kerry Mather would highlight the report in a most wonderful way for me. It was terrific because she got a lot of publicity to it. And I kept on trying to say to her, stop talking about it and that we won't be able to respond. But it didn't matter. So it got highlighted. But the, the issue in terms of the monitoring report is that it actually does little more than give you the ACCCs Um, slightly in-depth but more superficial view about the quality of service based on a, a fairly superficial survey, and the charges and profitability and things of that nature. I'm not sure that actually has any impact. It has no impact at all upon what airlines do in negotiations with airports, or what the airports do in terms of their charges. So, um, you'll have seen the ACCC has been tightening up and saying, look, we think the monitoring is not good enough. You'll see that the Productivity Commission in its 2002, 2006, 2011-12 reports has started to tighten up and start to say we're just not sure that the monitoring process set in place when privatisation took place in the early part of the century, we're not sure that it's adequate. Uh, and so we've got a review coming next year. Now if you see the trend of tightening up by the ACCC, by the Productivity Commission, You might well expect that that trend will continue, and I think that's something we need to have a look at. Um, certainly the threat of regulation is very important. Of course, unfortunately, in the context of regional airports, there is no threat of regulation. It doesn't exist, and, and the department of the government are keeping out of it. In terms of the domestic airports, the threat of regulation is always that someone might then proceed to seek declaration of airside services in respect of all the domestic airports in much the same way as they did with Sydney. And the Sydney threat, I think, has probably been quite interesting.

Peter Harbison:Just going back to the time of the first privatisations back in the mid-1970s— 1990s, there was a lot of consideration at that stage of single-till pricing. In other words, All of the revenue of the airport gets lumped in, in terms of measuring their profitability, as opposed to segregating the aeronautical and the land side and retail. In a review that's coming up, is that the sort of issue that may be raised again? Are we ever likely to go to a single till process for regulating airports?

Stephen Borthwick:Oh, all eyes looking at me.

Caroline Wilkie:Certainly, there—

Peter Harbison:It's on the table, maybe.

Stephen Borthwick:Yeah, yeah, it is. I don't think the terms of reference for a possible Productivity Commission review have been done yet. But certainly this was a discussion point at the time of privatisation, and certainly part of the considerations which drove the development of the aeronautical pricing principles, for example. But, I mean, from the department's point of view, I think the current system is working well and, and has contributed to significant aeronautical investment through, through treating airport revenues as a whole. So, you know, happy, happy to, to see what, what comes out of a PC review, obviously.

Graeme Samuel AC:Well, it's ironic, isn't it, that, that in many respects the airlines might well say, charge what you like for car parks, charge what you like for retail rents, Because that meant you got less pressure to charge us to land our aircraft. So, so, you know, it's—

Peter Harbison:well, it's not so silly. I mean, at the time, I know I was very much involved in the privatisation process, and I was working for Schiphol at the time. And at that stage, Schiphol were just venturing out internationally to buy into international airports, and their, their, their key consultancy group were looking at free air services, free aeronautical charges. on the basis that this would stimulate growth enormously. I'm not sure if that's the case. But that was where the thinking was back at that stage. And we've gone a long way away from that, haven't we?

Caroline Wilkie:I think it'd be interesting to see whether A4A and Z want to pursue this as part of the Productivity Commission process. I mean, certainly from an airport perspective, we're very comfortable with the current regime and the pricing principles. And I think the non-aeronautical revenue that has been developed is critical for capital borrowings and capital expenditure that's going on at the airports. And if you want to continue to see, you know, widely developed facilities that are of benefit to travellers, then the current model is the way to, to remain.

Graeme Samuel AC:I think there's an important issue there, Peter, if I can just sort of take the conversation a bit wider than, than aeronautical charges, because, you know, I say charge what you like for car parks and all, but of course The airlines' customers are those that fly with them. And they have a fundamental interest in ensuring that from the point at which they leave their home or their office to get to the airport and then to board the plane, that the experience is as seamless and is as comfortable and facilitative in terms of using airlines as can possibly be the case. So, um, You know, the focus of the airlines is not just on the airline charges. That's a really important issue. But it's also on, you know, how do you get to the airport? Is Uber or rideshare legalised, for example? Are the transport modes that take you to the airport satisfactory or unsatisfactory? This brings us into issues like, you know, your Southeastern Distributor here in Sydney. In Melbourne, the widening of the Tullamarine Freeway.

Peter Harbison:Mm-hmm.

Graeme Samuel AC:rail services to and from airports, things like that. When you get to the airport, you know, how congested is it for the taxi or the rideshare or your own car to actually get to, um, you know, the, the departure ranks? And so all of those are really important elements of the consumer experience, that is from their starting point to the point at which they board the aircraft. Uh, and they're relevant factors that, uh, yeah, we'll, we'll be considering, you know, not the least of which is in relation to Badgerys Creek. You can build Badgerys Creek— what is it, 50 56 kilometres from Sydney. But if the means of getting there is so difficult, then the competitive tension involved in Badgerys Creek being owned by a party other than Sydney Airport starts to lessen. It becomes a really remote factor. We see this with Avalon down in Melbourne. Avalon is not a competitive airport to, to Tullamarine, and can't be, because the means of access to it are just so hard.

Caroline Wilkie:I think you've seen with the airports around the country that the importance of the consumer Yeah, I think the role of the consumer and the consumer experience has very much been front of mind, and you can see that with all of the arrangements that have been made now, particularly with public transport access, Uber access, taxi access. There are some fantastic examples around the country where that new infrastructure has been in place, and also the role that airports have played in terms of developing road access. I mean, we saw that in Brisbane, the road access that the airport actually provided, with the work that they're doing here in Sydney Airport to try and improve the access to the airport. So it's certainly an interesting one, and it's a funny one too when you look at it in terms of who actually owns the customer. And I think that's a really interesting discussion to be had these days, because I think in the past perhaps the airlines felt that, well, they're our customers and they just happen to be using your facility. But, you know, airports very much see the travelling public as our customers too, and we want to make sure that they're getting the best experience they possibly can.

Graeme Samuel AC:But Caroline, can I just put a question to you? And I know you're not Sydney Airport, but, you know, I use Sydney Airport a lot every week, and I know when I get off the plane, I've got about a 350-meter walk to get to the Uber pickup area, and I actually can't book my Uber until I get there. Now, I know it's a cheaper ride if I can get Uber, providing there's no surge pricing at the time, but why is it that we make it so difficult to pick up an Uber or rideshare relative to getting a taxi? Is there, is there a factor in it? No, I don't know what Melbourne Airport might do. I know, for example, Canberra Airport make it really easy. You know, there's a sign there, Uber pickup, and you can zap out there and you can be there in 2 minutes and order your Uber and you're on your way. So, you know, this is the convenience factor that, that you're just sort of, as a user, makes me wonder every now and then, what is it that's going through the thought process?

Caroline Wilkie:Um, so I have my AAA view and I'll have my personal view on this one. AAA view would be I would let the airport speak for themselves. And I think you would very much see it depending on the infrastructure at the airport and how much they've got terminal airside. My personal view would be we should all be supporting the taxi drivers because they've paid a lot for their plates, and the disruption of Uber is, you know, all well and good, but anyway. So yeah, I think it depends on the airport and where they're at, but I mean, we have seen some of the airports responding in very interesting and innovative ways. I mean, Canberra Airport now has a beautiful heated taxiway. I don't know, it does. And I don't know if anyone here remembers the old Canberra Airport shed and the Arctic conditions that you used to wade in to get a taxi, but it's certainly, uh, very palatial now.

Peter Harbison:Mind you, my favourite airport is still Avalon because you, you get here and 20 metres away you're in the car park. Best airport is one you can't see. Let's go back to a point Graeme raised at the beginning. incidentally, and it's one that Willie Walsh is kicking up about in the UK at the moment with the potential new runway at Heathrow. We don't want to pay for what we don't get for another 10 years. How do you resolve that issue? I mean, if you— if the airlines who are using it now aren't going to pay for the infrastructure you've got to build for 10 years from now, who is going to pay for it? How do you do it? Let's— Caroline, maybe you start.

Caroline Wilkie:I acknowledge that we have a lot of building that's going to happen over the next decade or so. We have got to a point where just because of the success of the aviation sector, we do have a lot of runways that are going to need to be built. I think the argument— I don't know, I mean, you look at it from a personal perspective. If I want to build a house, I've got to start paying for the land and building the house straight away. I don't get to live in it for 2 years. You know, I think it is reasonable, and we have seen that it is reasonable in terms of the arguments that played out for Qantas and Virgin in Brisbane. I think if you are looking at funding at this scale, and to be able to get that money available to be able to build that type of infrastructure, that this is the best method to move ahead. But those are up to commercial negotiations for each of the airports, and I think they'll handle those.

Peter Harbison:That's a very diplomatic answer.

Graeme Samuel AC:Yeah, I couldn't disagree more.

Peter Harbison:Graeme, just before you do Could you just explain for, for the audience the difference between A4NZ and BARA?

Graeme Samuel AC:Well, A4NZ is the major domestic airlines including Air New Zealand, so it's domestic airlines for, uh, New Zealand and, and Australia. Um, BARA is the collection of all the airlines, if you like, including the international airlines, and there is, um, some crossover, but BARA and the particularly international airlines often have a a difference of position, policy position, to that of the major domestic airlines. Keep in mind that the airlines that are parties to A4ANZ, I think, have about 80% of the total capacity of our major domestic airports. So they've got a particular interest in, you know, airport infrastructure development, payments, and the like, which Barra also has, but is perhaps somewhat different. Do you want me to go on with that?

Peter Harbison:So that leads well into, I think, your answer. Yeah.

Graeme Samuel AC:You talk about the house. Look, forgive me, but I've also developed factories and warehouses and supermarkets. I don't ever think I've ever had a situation where I've been to Woolworths and said, Woolies, 3 years' time, this way, this, this supermarket will be built. I'm going to build it. You'll take an agreement for lease, but will you start paying your rent now?

Stephen Borthwick:Not on.

Graeme Samuel AC:Won't happen in any commercial position at all. But let's not get too hung up about all this because it is ultimately a financing exercise. And the simple fact of the matter is this. Let's take my supermarket and Woolies. So I have a, a design that I put together as a developer. Woolworths comes in and says, yes, I like that, but I want some changes, etc. And we do it. We estimate— I'd estimate as a developer what it's going to cost, how long it'll take to build, what the holding costs will be. I'll say to Woolworths, I will proceed to the first sod the moment you sign an agreement for lease that says at the end of 3 years when it'll be finished, you'll pay a rental as follows. The rental will be gauged as a return that I want on my total investment including holding costs. I then go to my bank. I say, I've got a balance sheet as follows, but add to that balance sheet the Woolworths commitment under the agreement for lease to pay a rent. The bank says, fantastic, I love your balance sheet, but what I even love more is Woolworths' commitment to lease the property once it's finished. That's no different for airlines involved in airports. Airports say, we're going to build a runway. They've got their own balance sheet. They've also got, if they structure it this way, an agreement to use in 5 years, 6 years, whatever it might be, by airlines, all of which adds to their financial capacity to go to the lenders and say, please lend us the money to enable the infrastructure to be built. And that's the way it should be. The airlines then start paying user fees once the runway is able to be used, whether it's the runway or the terminal, whatever the case might be. It is so simple, and I would have thought fairly obvious, but then I come from a commercial background and probably don't understand the way these things work.

Caroline Wilkie:I would probably suggest that the fact that it's a cost of over $1 billion, so, you know, we're talking about different amounts of money.

Graeme Samuel AC:It doesn't matter, $1 billion, whatever it is, you've got a balance sheet amongst particularly the major domestic airports that in most cases will support a billion-dollar investment. But add to that, add to that the balance sheet and the financial position of Virgin and Qantas and Rex and Air New Zealand and all the international carriers enter into an agreement, I'll call it an agreement for lease, an agreement to use, which says when this is finished in 5 years, we'll pay this much for The, the great beauty of all that is it puts pressure on both sides. It puts pressure on the airport to say, I estimate the cost will be $1 billion, or $1.1, or $1.6, whatever it might be. The airlines are going to say, look, you can estimate whatever you like. We're prepared to pay on the basis that we think it should cost you $1 billion. Doesn't matter. When's it going to be ready? It'll be ready in a certain period of time. We don't think it's going to be use— usable in that period of time, but we think that the use might—

Peter Harbison:Yeah.

Graeme Samuel AC:Move up as we go along over a period of time. I mean, these are simple commercial transactions. Stephen, are you aware—

Stephen Borthwick:Don't drag me into it.

Peter Harbison:No, come on. You're the moderate voice in all this. This is a factual question, a factual answer. Are you aware of any circumstance in the world where that's actually happened? Any airport has been funded in that way? Are investors willing to do that?

Stephen Borthwick:Look, I haven't done the research. To be honest, so I'm not personally aware.

Peter Harbison:I just wanted to get you into the conversation.

Graeme Samuel AC:The short answer, Peter, is yes, they are. And I know how financiers think and what they'll do with it.

Peter Harbison:With airports?

Graeme Samuel AC:Yeah, absolutely. Because see, what they're funding against is a balance sheet, as well as the balance sheets and the revenue capacity of, as I say, in Australia, the 4 airlines that formed A4ANZ, plus the 2 Total 31 in, I think it is, in total, at Barra. Yeah, they're all airlines who are going to sign an agreement that says, when the runway is completed, we'll use it, we'll pay the following user charges. That guarantees, in effect, the revenue of the airport to pay the, the financing costs.

Peter Harbison:Oh, look, I think it makes an awful lot of sense. I mean, but common— as we were talking about before, common sense isn't necessarily where we begin in the aviation business. Are there any examples, Caroline, where airports have been funded?

Caroline Wilkie:I have to be honest, I haven't looked into it, but I mean, I would say that the issue of Brisbane and the runway was incredibly more complex than what we're going to have time to get into here.

Stephen Borthwick:Yeah.

Caroline Wilkie:I mean, when you look at the length of the build, the nature of the build, you know, the risks that were involved for Brisbane and why they pursued this particular way, there are greater minds than mine who have looked at this, and if Julie-Ann and her team thought that this was the best way to go, then no doubt this was the best way to go. So, Happy to have this broader discussion in the context of the Productivity Commission process next year, I suspect.

Peter Harbison:I look forward to it a lot. Graeme, can we apply it to Badgerys? Do you think it would work there?

Graeme Samuel AC:Oh yeah, why not? I can't contemplate— you'll forgive me if I say this— I can't contemplate government even having the gall, the chutzpah, to say to airlines, start paying for Badgerys now, even though you won't be using it for 6, 10 years, whatever it might be. It just doesn't seem to me to make sense. As an airline, I would never agree to it. As a Woolworths, I wouldn't agree to it.

Caroline Wilkie:As a Western Sydney Airport perspective, it's a different example because it's a brand new airport and it's got government funding. So I don't see that it would be relevant in that perspective.

Peter Harbison:But, um, but I mean, the basic premise still exists that once that airport is open, it's effectively got guaranteed usage.

Graeme Samuel AC:Yeah.

Peter Harbison:Now, whether it's the same airlines or not.

Caroline Wilkie:You know, we have this problem time and time again, and certainly not for from a capital city perspective so much, but certainly from smaller regional airports, you know, quite frankly, airlines signing a piece of paper to say that they guarantee they'll fly there in 5 years probably ain't really worth what it's written on. I mean, we've seen this time and time again with regional centres where airlines, you know, they are— will come in, they will fly there, if it works for them then it works, and if it doesn't they're gone. And we've had regional airports who invested hundreds of thousands of dollars in security to be able to process certain types of aircraft. And now that's just sunk assets that has just been a complete loss for that local community. So, you know, I would query how much you could actually rely on, in some airport instances, guarantees from airlines that they would be flying there.

Graeme Samuel AC:Which is why, in respect of many regional airports, government has to intervene. It's part of the social fabric of Australia because of its geographic diversity. Um, but, um, uh, you know, look, to give you an example of how this was used very effectively, it's a different industry altogether. Hunter Valley, um, Coal Services, and, um, the problem with it was the port. Port was inadequate to take the volume of coal that the, um, uh, particularly BHP and others, uh, anticipated might be coming through the, uh, the port. So what did we do? We negotiated a take-or-pay arrangement, and that put Port Waratah in a financial position where it was able to deliver.

Stephen Borthwick:Um, Graeme?

Graeme Samuel AC:develop the port to a particular level of tonnage, and thus it was able to proceed. But there was a stalemate up until that point because Port Warrenne said, well, why am I going to develop a port if I don't know if anyone's going to use it? And, you know, it— look, I have to say, it's a really basic financing principle. I've just never understood why it hasn't been adopted in respect to the airports. Now, that goes back to the time long before A4NZ, but going back to the time when it was with the ACCC. It just bewilders me.

Peter Harbison:Airlines do go broke, of course.

Caroline Wilkie:Can I pick up one point that was mentioned earlier too? And I guess it's just around the dynamics between airports and airlines. And I would say, not to keep harping on about regional airports, but I think we also need to be very conscious of the monopoly role that the airlines have to play in a lot of these markets, and that the regional airports are very much at a disadvantage in those negotiations. So it's, you know, it's one of those conversations that we also need to have about how our regional airports can maintain the facilities that they need to with the current regime in place.

Graeme Samuel AC:I'm sorry, we don't want to be in constant disagreement. We'll talk over lunch. But let me say—

Peter Harbison:It's not good for the model, is it? I mean, you're supposed to be cooperating. I thought that was the idea.

Caroline Wilkie:No, I listed all the other things that we're not talking about.

Graeme Samuel AC:All right. But let me say to you, with great respect, that The airlines don't necessarily have a monopoly position, or they don't have monopoly power with respect to regional airports, for a very good reason, and that is that there is a fundamental obligation to serve and to service regional areas of Australia. You can imagine the National Party or government if the airlines decided to pull out of regional areas and just simply say, we're not going to service you anymore. So the so-called monopoly power is not really there in a political sense. Um, and, and so, you know, let's, let's forget all that. It brings me though to the other area, because, you know, you can throw the, the word monopoly around, and I know one of the questions, Peter, that was on the, um, the agenda for today was, is there a, a prospect of a partnership, um, between airlines and airports and consumers and all? Well, forgive me, I think it sounds really nice, but we've got to remember that there's a vertical relationship. Airports are suppliers of a service. Infrastructure and a service. Airlines are the buyers of that, and that vertical relationship rarely leads to a, quote, partnership, which is much more a horizontal type concept. The airlines then work with consumers who are buyers of services from them. That again is a vertical relationship. And although we use the word partnership loosely, we've got to remember partnerships are when you're on an equal position and you're sitting on a horizontal level in terms of commercial negotiations. I think what is far more important is to focus on that vertical relationship. Forget the, the sort of nice-sounding words and the, um, the woolly words of partnership, but focus on the vertical relationship and say, how is it that that vertical relationship between the supplier, the airport, and the purchaser, the airline, can be better structured? That might be commercial negotiation. It might be the threat of regulation. It might be regulation itself. That'll be the discussion over the next little while.

Peter Harbison:Well, I think that discussion's probably going to be quite interesting, frankly, and I look forward to the outcome of it. Thank you very much, Caroline and gentlemen. That's a very interesting discussion. I wish we had another half hour at least to do it, but thank you. Thank you very much, Graeme.

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