Spotlight on airport performance

Rather than advocating for greater regulation of Australia’s airports, we seek to highlight the policy discord in how governments are reviewing and responding to perceived concerns about market power in key infrastructure industries, such as airports and more recently, container terminal facilities at our major ports

Introduction

Airports in Australia operate under what is known as a ‘light handed’ regulatory regime, which basically means that while the government doesn’t regulate charges levied by the airport operators on customers, it ‘keeps a close eye’ on these charges as well as on the quality of services provided by the airport operators. The ACCC has administered this monitoring regime since 2002.

The operators of airports — Sydney, Melbourne, Brisbane and Perth — are required to annually provide the ACCC with financial and service quality information on aeronautical services and some non-aeronautical services, such as car parking. The Each year, the ACCC reports on financial and service quality performance for each monitored airport and general trends and developments.

As part of this regime, there is a threat of more invasive regulation for the sector; the issue is the credibility of this threat

The ACCC’s latest monitoring report

The ACCC’s latest report shows an industry, where collectively Australia’s four major airports (Brisbane, Melbourne, Perth and Sydney) overcame weaker passenger growth in 2018-19 to report record profits. A result which the ACCC Chairman reflected on as being illustrative of the benefit of being a monopoly.

The ACCC’s report also found that car parking profit margins remained very high, but consumers had reasonable substitutes (through using alternative, off-site parking services).  The ability and incentive of airport operators to raise car parking fees has been a particulary thorny issue and has raised the ire of the ACCC on many occasions. This year, the ACCC embarked on an information campaign, advising consumers on how to get better rates when parking at the airport. 

Should airport charges be re-regulated?

The latest ACCC report, by itself, is not all that noteworthy or surprising.

What makes this latest ACCC report interesting is that it comes after the latest Productivity Commission (PC) review in 2019 in which the PC found that while airports do have significant market power, they do not exploit this market power in commercial negotiations.  The PC maintains that the current approach to regulating Australia’s major airports remains fit for purpose, with price monitoring providing transparency of performance, which assists customer negotiations regarding prices and service standards.

The Australian Government broadly agreed with the PC’s findings and similarly rejected the need for airport regulation.

The ACCC might be feeling a little frustrated by it all.

The ACCC maintains that the power of monitoring to modify behaviour (eg constrain prices) is limited because the airport operators do not face a credible threat of regulation. In its submissions to the PC inquiry, the ACCC proposed an alternative light-handed regulatory approach where both airports and airlines would have recourse to independent commercial arbitration in the event that negotiations around aeronautical services were not successful. 

This was rejected by the PC and by the Government, although the PC stated emphatically that it would not hesitate to recommend regulatory changes, including price regulation, if airports were found to have systematically exercised their market power. The PC also recommended that airports should provide additional information to the ACCC in order to better inform reviews of airport performance.

So, what does this have to do with container ports?

The question of whether markets should be regulated is a question about whether the benefits outweigh the costs of intervention (remembering that the costs of regulation can easily be systematically under-estimated, largely because they are not obvious or immediate).

Where markets are workably competitive, constraints exist on incumbents to deliver efficient prices for customers.

Where markets are not workably competitive, then regulation may have a greater role to play. Price monitoring can shine a spotlight on pricing practices and help governments assess whether market power is being exercised – but the threat of regulation needs to be a real one in order for this to create any real pricing constraint. This threat was emphasised in the PC’s latest airport inquiry.

Now let’s apply the same rationale to charges imposed by container terminal operators.

For several years, stevedores have been re-structuring terminal charges leading to significant reductions in vessel charges (paid by shipowners who choose the stevedore), accompanied by increasing infrastructure charges to land transport providers (who do not choose the stevedore) collecting or delivering containers to the terminal.  Last week’s decision by DP World to increase access and ancillary charges for its terminals in Melbourne, Sydney and Brisbane from May this year, marks the latest announcement. This decision has been particularly criticised as it comes in the midst of the current crisis when many businesses are under significant financial pressure.

Several state governments have responded to industry criticisms about these increasing land-side infrastructure charges by announcing reviews of these charges.  The loudest calls have come from road transport operators argung that the charges are excessive and unfair as the transport operator cannot avoid the paying the charge when accessing a terminal.

So the question arises, does the current approach to airport operator charges provide any insights to approaches for container terminal infrastructure charges? First, the structure of the airports market and the container terminals market are fundamentally different. Where airports may be regional monopolies, there are multiple container terminals at each of our major capital city ports. The ACCC has another enviable task in monitoring the prices, costs and profits of container stevedores at our major ports since 1999.

The ACCC has previously indicated that competition in the container terminal industry has intensified, with the entry of a third stevedore at Brisbane, Sydney and Melbourne and the incumbent stevedores responding by investing in their own terminals while absorbing shrinking margins (to a ‘new low’ according to the latest ACCC monitoring report).  

Issues of market power are therefore fundamentally different between the container terminal operator market and airports (at least in the larger capital cities). New stevedoring terminals at multiple locations means that the terminal operators have to compete aggressively to retain existing business and win new business – empty terminals and idle equipment is costly for a stevedore, and could, in a downturn, threaten viability.

The ACCC’s previous investigations into ramping up of these infrastructure charges appears to show that transport operators have been passing these costs onto cargo owners (as would be expected given that transport is a highly competitive market and operators have no choice but to pass on the charges).

Faced with the inclusion of these infrastructure charges in their land transport costs, cargo owners have the option of shifting their freight task to a different shipping line, or shipping lines concerned with the costs being imposed on their cargo owners may shift to an alternate stevedore.  In either case, competitive pressure on the stevedores – albeit indirect – continues to be applied. DP World’s most recent price increases, while clearly poorly timed, are still reflective of prices in a competitive environment.  

So with container terminals, we have an industry which is clearly workably competitive, and investment in efficient terminals and supply chain networks are at unprecedented levels.

The case for price regulation is therefore weak (and much weaker than in airports). A good policy outcome will be one that enhances the role for competition, rather than regulation, to constrain stevedore behaviour, supporting the use of commercial solutions to drive efficient outcomes for consumers, businesses, and the nation as a whole.