Chapter Four
THE PRICE OF LANDING AT KINGSFORD SMITH
AIRPORT
4.1 During the course of this Committee's inquiry, proposed new prices for aeronautical services at KSA
went through a consultation period, culminating in the presentation of a pricing regime to the ACCC
different to that initially proposed by the FAC in early 1998. After the 1998/99 charges were “approved”
by the ACCC, the proposed pricing system was subsequently altered by the Minister for Transport and
Regional Affairs, reducing the proposed price increase of the minimum landing charge from $140 to $100
(increased from the original fee of $27.50).
4.2 The dynamic nature of negotiations associated with the determination of aeronautical charges at
KSA, and the influence of stakeholder views expressed in fora such as this inquiry, has made some of the
evidence and some views expressed in submissions redundant. Nevertheless many of the views put
forward by witnesses are unaffected by the amount charged, going rather to the principles of what should
be considered in determining charges at KSA. The Committee considers that, for the purpose of future
discussions of pricing at KSA, it is valuable to represent in this report the views of witnesses on what
principles should underpin pricing at KSA.
4.3 To recap the new pricing arrangements, in proposing changes in aeronautical charges FAC gave its
objectives as:
- The need to support a $700 Million capital improvement program;
- Removal of elements of cross-subsidisation between international and domestic aeronautical
services;
- Movement toward location and service specific charges;
- Establishment of a more “realistic” level of minimum aircraft landing charges.
4.4 The following changes were implemented on 1 October 1998:
- An increase in the international terminal charge from $2.48 per tonne to $5.72
- Reduction of the general landing charge from $5.72 per tonne to $2.82 per tonne. (NB: This
charge comes into effect only once the minimum landing charge has been reached);
- An increase in the minimum landing charge from $27.50 per landing to $100 per landing (the
original proposal being $140 per landing).
- The removal of the peak ($250) and shoulder surcharges.
- A rebate system for small operators. [1]
4.5 On 19 February 1999, in follow up correspondence to Federal Airports Corporation's evidence,
Sydney Airports Corporation provided further information on Aeronautical pricing at KSA. They
outlined the rebate system as follows:
…the following rebates will be available for landings of scheduled regular passenger
transport (RPT) services by regional airlines.
| Aircraft size | MTOW* | Charge per landing | Rebate per landing** | Effective Charge |
| Small | 0-5 tonnes | $100 | $60 | $40 |
| Medium | 5-10 tonnes | $100 | $17.50 | $82.50 |
| Large | 10-20 tonnes | $100 | $0 | $100 |
* Maximum take-off weight.
**Operators whose overall average charge per landing in 1997-98 was greater than $100 will pay a
minimum charge of $100 per landing regardless of aircraft type. [2]
Summary of the Impact of Landing Charges on Sectors of the Airline
Industry
4.6 Larger aircraft are generally unaffected by the minimum charge, which will only apply where an
aircraft weighs less than 36 tonne (35.46 tonne X $2.82= $100.02). With the removal of the peak and
shoulder surcharge and the decrease in landing charge, domestic and international airlines are the
beneficiaries of a significant reduction in landing charges. For international airlines these benefits are offset
by an increase in terminal charges.
4.7 Without a rebate system, many regional airlines would have faced steep increases in landing charges.
In June 98, Kendell Airlines, while supporting maximum take-off weight as a method raised concerns
with having a fixed charge. While the following is based on $140 charge and is mathematically no longer
relevant, it illustrates the dilemma for small aircraft:
As previously stated in our earlier submission we believe that the Maximum Take-off
Weight is a fair and equitable method of allocating charges to airlines and passengers and
therefore a consistent rate per tonne should be adopted. The FAC have used this in
allocating fees to both domestic and international airlines, however they have created the
“fixed” amount for the regional airlines.
4.8 For affected regional airlines operating at peak and shoulder times, the removal of the surcharge will
have offset increases that might have occurred due to the minimum landing fee. These operators are not
eligible for the rebate because they were paying more than $100 prior to the introduction of the new
arrangements and may in some cases not benefit as much as domestic aircraft will have from the new
arrangements.
4.9 From the evidence available it would appear that the group most affected by changes to the minimum
landing charge are regional airlines operating out of peak and shoulder times. Even with the rebate many
will have had an increase in charges, regardless of whether they paid only $27.50 minimum landing
charge or the general landing charge of $5.72 per tonne. A summary of this impact follows:
| Aircraft
size | MTOW* | Charge per landing @ $5.72 per
tonne(Min landing charge $27.50) | Charge per landing @ $2.82 per
tonne(Min landing charge $100) | Actual Charge from
1/10/98 (after rebate) |
| Small | 0-5 tonnes | $0 - $28.60 | $0 - $14.10 | $40 |
| Medium | 5-10
tonnes | $28.60 – $57.20 | $14.10 - $28.20 | $82.50 |
| Large | 10-20
tonnes | $57.20 - $114.40 | $28.20 - $56.40 | $100 |
4.10 The Committee notes that the off peak group is that group which market forces relating to the peak
and shoulder surcharges, now abolished, have encouraged to operate outside of peak periods. These
operators went into these timeslots to reduce their costs, and forewent the benefits of operating at peak
times. Due to the Slot Management Scheme, even were it desirable, they are also a group who may find
it difficult to move into timeslots that are more commercially viable given their increased costs. It concerns
the Committee that while domestic and some regional operators will have benefited from the new
arrangements, regional operators in the off peak periods will have been disadvantaged by the new
arrangements.
Price sensitivity of regional/rural passengers
4.11 A number of airlines and community representatives have argued that rural and regional passengers
are particularly price sensitive. This may be for a number of reasons including:
- competition between air transport and road and rail transport, particularly where the regional
centre is within three or four hours drive of Sydney.
- Reduced capacity to pay.
4.12 Tamair, who unfortunately ceased to trade in 1998, indicated from their experience with other price
increases that:
Regional passengers that are not government funded are extremely price sensitive,
historically when we have increased our fares beyond CPI there has been a noticeable
decline in numbers. In 1997 Tamworth City increased charges by $3 to my company's
passengers, this was a 45% increase or a $100,000 per year increase, the net effect was
a 5% overall downturn or loss of $240,000 in revenue. We do not have the capacity to
increase costs above CPI. [4]
4.13 This price sensitivity would appear to have implications for the viability of regional operators if KSA
charges are increased significantly. This may be more so for airlines operating out of peak and shoulder
times, who may have moved originally to these times to reduce costs because of peak and shoulder
period surcharges. They are now faced with an increase in charges, where as peak and shoulder period
operators may have had their charges reduced.
Summary of impact on rural and regional passengers and economies
4.14 While some regional airlines may have had a reduction in their costs related to landing charges
because of the removal of the peak and shoulder surcharges, others will have inevitably incurred
additional costs. In these cases, particularly small operators without the ability to absorb added costs
across other services, will have been forced to pass the price increase on to their rural and regional
passengers.
4.15 Yanda Airlines, in their letter to the Committee dated 17 February 1998, indicated they felt the
increase in the minimum landing charge would increase ticket prices, compared with interstate and
international passengers.
The end result is that intrastate travellers will pay approximately 3 times the amount
interstate travellers pay. [5]
4.16 The Committee was unable at this time to verify the extent and impact of any increases that have
occurred for rural and regional passengers. However, Yanda's claims are of concern. It is this Committee
view that the Minister and the Department of Transport and Regional Services need to identify, assess
and closely monitor airfares in these areas to ensure that intrastate travellers reliant on air transport to
Sydney are not disadvantaged, compared with interstate and international passengers.
Impact of increasing prices on regional and rural economies
4.17 During the course of the inquiry regional operators and local government representatives raised the
issue of how essential access to reasonably priced air travel was to the health of regional and rural
economies. A large number of letters from businesses who utilise regional air services were supplied by
regional airlines that indicated their concerns over the potential impact on their businesses of increased
landing charges being passed on as increases in airfares.
4.18 Regardless of whether or not the 1998/1999 changes to landing charges meant an increase,
decrease or no change in airfares for regional and rural communities, the concerns raised by rural and
regional stakeholders remain current in the light of new negotiations soon to start between SAC and the
airlines for charges in 1999/2000 and 2000/2001. The Committee believes it is important that these
concerns are not overlooked in setting landing charges at KSA in the future.
4.19 Bathurst City Councils comments in their submission are representative of the majority of concerns
expressed by similar bodies.
Council's immediate concern is the likely impact this will have on the current Regular
Passenger Transport (RPT) and Charter Operations, and the ability of Operators to
provide a reliable and efficient passenger service to Sydney. Operators may well be
forced to use Bankstown Airport or, alternatively, cease business, as Bankstown does
not provide the necessary access to Sydney to effectively compete with road transport.
In the medium to long term, Council is concerned for the future sustainable development
of its community. This is related to its ability to attract commercial development,
economic growth and therefore job opportunities, if it is unable to provide the complete
range of transport and commuter facilities. [6]
4.20 Murray Regional Development Board concerns are also indicative:
Business, professional, industry, Local Government and Government agency staff are
regularly required to travel to Sydney. It is for many an essential part of operating their
business. The region boasts a number of corporately owned ventures that are vital to the
economy. Access to the region by air is essential to the operation and management of
those facilities. Economic and accessible air-services are vital to the local community and
the capacity of the region to attract investment and expansion of employment and the
economy. [7]
The Board went on to say:
The cost structure adopted must not impact on the carriers ticket prices to the
disadvantage of the regional community. Pushing fares to excessive levels will quickly
exclude many people in country areas from access to air travel and disenfranchise them
from their Government, Courts and many services, businesses and cultural activities taken
for granted in major cities.
The pricing for regional carriers access must also represent the cost of providing that
access and not some punitive charge constructed to ease the complexity of quality
management. [8]
4.21 Hazelton Airlines, in their submission, linked the issue to competing globally:
Safe reliable and efficient air services are vital to the development of regional Australia. In
1994 the consulting firm, McKinsey & Company was commissioned by the then Federal
Government to undertake a comprehensive study of growth potential of Australia's
regional areas. The subsequent report to the Government entitled “Lead Local Compete
Global” of July 1994 identified the critical role of air services both for regional
communities to achieve their growth potential and the importance of access to domestic
and international airports as a consideration in selecting a regional centre for a business
relocation. [9]
Hazelton went on to state:
The people of regional NSW have a fundamental right to continue to be able to afford
access at KSA. It is their capital city airport and access to it is essential to the continued
growth of regional NSW. [10]
Social Impact – access to medical care.
4.22 Also affected, according to a number of witnesses, are people visiting Sydney or flying out from
Sydney (eg Specialists) for medical reasons. As Mr Russell of Hazelton indicated at the public hearing on
24 April 1998:
Overwhelmingly, the purpose is business of one type or another. It might be people on
private business, as much as people working for governments or those sorts of things.
The other key aspects of that business category are people travelling on medical cases to
Sydney for treatment, and specialist medical practitioners coming out to the
country,again, that is a very important issue in regional New South Wales. [11]
4.23 Impulse Airlines, in their submission, gave an example of the percentage of those travelling to
Sydney for medical reasons:
On a survey done about 3 years ago on the Inverell service, Impulse found that as much
as 22% of the traffic was coming to Sydney to seek medical treatment. The longer routes
and unfortunately thinner routes tend to have quite a high proportion of intrastate traffic
choosing to travel by air because they are physically unable to travel by car or by bus.
[12]
4.24 Impulse and other groups argue that landing charges could have serious social implications,
particularly where access to KSA is no longer available because an airlines ceases to operate a less
viable route or it is a serious financial burden for those using the service. The issue of access to adequate
specialist medical care is of concern to many communities, whether in coming to Sydney or the Specialist
travelling to regional areas. As the Local Government and Shires Association wrote in their submission:
The Associations believe that any change to the administration of aircraft operations at
KSA needs to be sensitive to the external costs that may be inflicted on regional and rural
communities served by the regional airlines. Often in the drive for economic efficiency the
needs of smaller users are ignored or dismissed, with little appreciation of the external
social costs. [13]
4.25 The committee agrees that the external social costs and the impact on regional NSW's ability to
maintain and grow its economy needs to be considered when setting fees at KSA for regional airlines. It
has not seen evidence of these issues being taken into account when setting the fees at KSA by the FAC
or SAC, unless the rebate is being used to address these issues. These issues were not discussed by the
ACCC in their public statement. These are clearly issues that require monitoring and if necessary,
intervention from the Minister and the Department of Transport and Regional Services to ensure that
regional and rural communities are not disadvantaged.
Recommendation
The Committee recommends that the Minister ensure that the impact of current price changes
on regional and rural communities is assessed and taken into account when charges are set for
1999/2000 and 2000/2001. Further, it recommends that the social costs and issues of economic
growth and access to markets by rural and regional communities are assessed and taken into
account in setting future charges for regional airlines.
Model used by FAC to set prices at KSA
4.26 The FAC utilised a “single till” approach to setting its charges. In effect this means that aeronautical
charges are subsidised by non-aeronautical charges. As stated in the FAC's submission:
Under Section 56 of the Federal Airports Corporation Act 1986, the Corporation is
entitled to recover the cost of providing aeronautical services through aeronautical
charges. As well, in accordance with Government policy, aeronautical charges at Sydney
Airport are determined with reference to the single till principle, which means that charges
are set to recover the airport costs which are not recovered by non-aeronautical revenue.
As well, the Corporation recovers an acceptable level of profit. At the moment
aeronautical charges only recover 91% of aeronautical operating costs (these do not
include finance costs or profits) and this figure has fallen from 97% since aeronautical
charges were last determined in 1996. [14]
4.27 In an attempt by the FAC to continue to move toward service specific charges, changes to
aeronautical charges at KSA included reduction in the price of some aspects of these charges and an
increase in others. For example, the changes addressed the issue of cross-subsidisation by other users of
the international airline users and more service specificity by decreasing the general landing charge of
$5.72 per tonne to $2.92 per tonne and increasing the international terminal charge from $2.48 per tonne
to $7.92 per tonne.
4.28 The FAC use an activity based costing system to allocate their costs to specific services. Services
are split into non-aeronautical and aeronautical services. Within these categories costs are separated into
fixed and variable costs. Depreciation contributes to the unit cost of a service. The FAC are required by
government policy to have an Earnings Before Interest (EBIT) target rate of return, this return is achieved
through the “single till” approach to charges.
4.29 For minimum landing charges, estimates of landing movements were utilised to arrive at a per
movement cost. Fixed costs (including depreciation) were allocated equally across all landing
movements, regardless of the nature of the aircraft, to arrive at the $140/movement minimum landing
charge. This minimum landing charge was then reduced to $100 by the Minister.
Criticisms of the pricing model
4.30 A major issue that has been the focus of concern by carriers and other stakeholders has been the
increase in the minimum landing charge. Criticisms of the model include issues such as the approach used
to depreciation, the degree of return being generated by the airport and the allocation of costs equally to
all movements regardless of aircraft size.
Depreciation
4.31 The growth in depreciation costs for the years 1999/2000 and 2000/2001, according to the
ACCC, comprise:
Charges applicable to assets proposed as part of the investment program coming into
service over the financial year …and a 3% allowance for inflation. [15]
For 1999/2000 this represents a 40.9% increase in depreciation and for 2000/2001 a 13% increase, to
which the 3% allowance for inflation is added.
4.32 A wide range of industry groups had concerns with how the FAC calculated their rate of
depreciation and the very large increase in depreciation for the 1999/2000 and 2000/2001 financial
years. For example, on 9/6/98 Kendall Airlines in an update of their submission wrote:
Although the Government has removed the peak period charge the minimum landing
charge affecting all Regional Airlines remains the same ($140). Information from the FAC
indicates that 65% of the minimum landing charge is made up of depreciation. We believe
the rates of depreciation being used have been accelerated which in turn is inflating the
amount of the minimum landing fee. A change in the depreciation rates, to reflect normal
business practice, could result in the minimum landing charge being reduced below
$100.00. [16]
4.33 Similar views were expressed to the ACCC by airport users, resulting in the ACCC obtaining
consultancy input from KPMG on the issue of depreciation.
Consultants KPMG prepared a survey for the ACCC which compared the depreciation
rates used by the FAC with those employed by eight foreign international airports. It
showed that, on average, the FAC used significantly higher depreciation rates (ie
assumed shorter useful lives) for certain airport assets. [17]
ACCC went on to state:
In the process of assessing the various claims made by the airport users, the FAC and
other parties it has become apparent to the ACCC that the depreciation charges issue is
one that cannot be satisfactorily resolved within the time frames of the current notification.
Nevertheless, it would appear that the FAC assumes lives for some assets which are too
short; that is, shorter than their useful lives. [18]
4.34 The ACCC then went on to conclude that greater transparency concerning depreciation rates and
greater industry consultation on depreciation would assist in resolving the issues the industry have with
FAC's depreciation model. It recommended that:
Depreciation rates, including rates applicable to components of larger assets, should form
part of a future review of prices. [19]
4.35 The evidence received by the Committee supports the ACCC view that the way the FAC
calculated it depreciation is contestable. It is of the belief that the SAC should take the concerns of its
customers and stakeholders with regard to depreciation into account in reviewing and setting prices for
1999/2000 and 2000/2001.
Recommendation
The Committee recommends that the Ministers responsible take appropriate steps to ensure
that Sydney Airports Corporation review the model used for depreciation, taking into account
the ACCC comments and those of the industry.
Issues with the rate of return
4.36 A number of issues were raised by industry concerning a perceived excessive rate of return being
generated by FAC. For example in evidence to the Committee on 24 April 1998, Mr Oldmeadow from
Qantas raised concerns that the return was very high:
The FAC has an obligation, as we understand it, to achieve an economic rate of return of
11.9 per cent, which translates to a return on assets of about 9½ per cent—the
difference being appreciation of assets, which is taken into account in the economic rate
of return. That was built up on the basis of the long-term bond rate plus a risk premium.
When it was established, the long-term bond rate plus the risk premium of 2.9 per cent
took the economic rate of return up to 11.9 per cent to be achieved; and that was the
hurdle for the FAC.
Of course we all know that, with long-term bond rates coming down significantly, when
you apply the same formula for the long-term bond rate plus a risk premium, you end up
with a rate of return to be achieved of significantly less than 11.9 per cent—over three
per cent less. That is the hurdle, but the actual returns that the FAC has been making
have been in the order of 20 per cent. [20]
4.37 In a follow up letter, dated 14 May 98, Qantas wrote:
The 1996/97 FAC annual report shows that the organisation's profits increased from $94
million in 1993/94 up to $201.8 million in 1996/97, an average increase of 38 per cent
per annum. Few non-monopoly providers of services could demonstrate such a dramatic
increase in earnings. [21]
4.38 In response to Qantas' claim that they were making a 20% return, the FAC wrote to the Committee
on 19 May 98 stating:
In fact, from 1991/92 to 1994/95 the Corporation's actual average performance on an
economic rate of return basis was 7.4%. The Corporation's target, as set by the
Government over that same period was, on average, 13%. This indicates the
Corporation underperformed its targe by 5.6% on average over those four years.
The problem with the analysis of economic rate of return performance is that it cannot be
reasonably measured in advance and, for accurate year by year measurement depends
on frequent revaluation of an entity's assets. The Federal Airports Corporation revalued
the assets in its balance sheet at June 30, 1996, which was the first such revaluation since
June 30, 1991. Therefore the apparent large return mentioned by Mr Oldmeadow was
arrived at by including a significant step change in value in a year in which the
Corporation's assets were revalued to account for asset growth over the previous five
years. If the assets had been revalued each year, the Corporation's annual performance
over the six years from 1991 to 1996 would have averaged around 12.6% compared to
an average target of 11.8% over the same period. [22]
4.39 There would appear to be a high degree of confusion across the industry concerning what return is
actually being received by the Government from KSA. This would be consistent with other areas where
transparency of pricing methodology remains a concern. Even the ACCC indicated there were problems
with the FAC's approach to the rate of return:
There is a significant degree of uncertainty surrounding the derivation, the quantum and
the application of an appropriate required rate of return for Sydney airport. The issue is
complicated by the prospective transfer of those assets to the Sydney Airports
Corporation and a review of an appropriate weighted average cost of capital by the new
owner, the Department of Finance.
This is a further factor leading the Commission to conclude that is not in a position at this
stage to making a prudent decision on the proposed price increases for the 1999/2000
and 2000/2001 financial years. [23]
Allocation of fixed costs to all movements equally
4.40 There are differing views on who should bear fixed costs resulting from infrastructure such as
landing strips and terminals, including expansion and upgrade of those assets. The basis of FAC's, and
now SAC's, landing charges is a view that all aircraft use the landing infrastructure equally, regardless of
size. Qantas and BARA have similar views:
BARA rejects the argument advanced by regional carriers in seeking decreases in
charges that small aircraft do not require the same amount of runway and taxiway space
as a larger aircraft. In the absence of dedicated facilities for regional carriers, their smaller
aircraft use at least the same amount of runway time for each landing for each landing at
Sydney Airport as a large jet. [24]
4.41 Regional airlines and some community groups disagree with this view on the basis that the
investment in aeronautical infrastructure is driven by the size of aircraft, not the time use of the
infrastructure. Also raised was the issue that those who benefit from the enhancements to the airport
should be the ones to pay. For example, the Lane Cove Airport Action Group summarise the issue as
follows:
The continued expansion and upgrading of facilities at Kingsford Smith Airport are of
greatest benefit to Qantas and Ansett and the International Airlines. It is unfair to expect
the Regional Airlines to subsidise enhancements which are almost solely for the benefit of
the major airlines. Thus it follows that the major beneficiaries must pay. [25]
4.42 The submission by Avmin on behalf of several industry groups, while supporting the use of an
activity based costing system (ABC), summarises general regional airline views that they believe that the
FAC has got the allocation of costs to users of services wrong:
Using the ABC methodology we ask the question “what causes this cost to be incurred?”
in relation to the costs of providing the landing service. FAC's documents show these
costs to total $52.8m, the major components being taxiways ($13.8m),
runways($11.9m), security ($6m), roads ($5.5m) and grounds ($4.7m). FAC has
determined that $24.7m of these costs are fixed (i.e. fixed relating to the number of
aircraft movements) and therefore relate equally to all aircraft movements. This treatment
completely ignores consideration of cost drivers which is the basis of ABC.
ABC dictates that the cost drivers of these fixed costs should be assessed to determine
their allocation to service users. This analysis will find that the reason the major costs
(taxiways, runways etc) are incurred at that level is due to the size of the largest aircraft
using those facilities. A properly conducted ABC would assess the level of costs required
for different sized aircraft and allocate costs to aircraft movements accordingly. [26]
4.43 In his evidence, Mr Beech of Avmin went on to add to this:
Anyone without any costing background can quite clearly see that Sydney airport's costs,
their fixed infrastructure costs, are there to support large aircraft. The costs of very long
runways and the very heavy duty runways and taxiways are incurred because of large
aircraft, not because of small aircraft, and the costs of that infrastructure basically vary
exponentially according to the size of the aircraft that use that infrastructure.
So if activity based costing was properly used by the FAC in allocating their fixed costs,
they would be allocating those costs much more heavily to the large aircraft that to the
small aircraft. [27]
4.44 Mr Beech went on to echo a comment from a number regional airlines and community
representatives that, given its basis:
The pricing proposed appears to be a mechanism to deter small aircraft from using the
airport at all. [28]
4.45 The Committee can see the logic in the view that under a “user pays” regime, where all users are
paying the same rate, that all should be able to derive a similar level of benefit from the service. Impulse
Airlines argues that regional passengers and airlines do not receive the same benefits and are “second
class citizens” at Sydney Airport.
We believe that infrastructure appropriate to regional aircraft needs should have been
constructed and still needs to be constructed in order to efficiently use the Airport. This
will have the added benefit of allocating cost structures to regional airlines that are fair
and equitable.
Impulse goes on to identify as issues the lack of regional terminal infrastructure and, of particular
relevance to this discussion:
The use of the 4,000 metre main runway and second and third runways by regional
aircraft is a poor use of that infrastructure. Almost all regional aircraft require no more
than 1200 metres for take off and landing. A dedicated regional runway at the eastern
end of the Airport could be constructed at minimal cost as no land or bay reclamation
would be necessary. It would service all current regional aircraft and the infrastructure
required to build a 1200 metre runway with the associated common user terminal for
regional aircraft would be a fraction of the cost of any other strategy to increase capacity
at Sydney Airport. [29]
4.46 The Committee pursued the option with witnesses and found general support from the airlines for
the idea of a dedicated regional runway at Sydney Airport, although some, like Qantas, felt its view
would depend on the impact on the movements cap:
Our view is that the issue essentially comes down to how one interprets the cap on
movements. That is a matter we have not given enormous consideration to. We would
want to know what the impact was on the cap because, unless there is a different
interpretation of the cap, it may not achieve any objectives. [30]
4.47 The Committee commends Impulse and other regional airlines willingness to look for solutions
rather than simply complain or criticise. It believes this type of innovative solution to pressures on KSA
should be investigated further. However, given evidence discussed elsewhere in this report that the
community surrounding KSA look to regional aircraft as a respite from noise pollution from domestic and
international jets, there may be resistance to increasing movements of jet aircraft. This may, as suggested
by Qantas, defeat one of the objectives of providing a regional runway at KSA. Nevertheless, the
Committee believes the ideas presented to it by the regional airline industry concerning better usage of
KSA should not be dismissed lightly.
Recommendation
That the Minister for Transport and Regional Services, along with Sydney Airports
Corporation, examine the potential for dedicated regional runway and other infrastructure as
an option for better serving regional communities and airlines and for increasing capacity at
KSA.
4.48 Returning to the issue of the model used by the FAC to develop its prices, the ACCC in it's
Statement for the public register on proposed aeronautical charges at Sydney (Kingsford Smith)
Airport, made the comment concerning the activity based costing model:
ACCC staff examined the model and consider the approach taken to the allocation of
costs between aeronautical activities to be defensible. [31]
It goes on later to acknowledge the concerns raised by industry over the assumptions underlying
aeronautical costs, but does not discuss these in much depth other than to raise the issue:
The FAC determines all costs which would be required to operate the aeronautical side
of the business to be aeronautical costs regardless of the degree of commonality. An
example is that the FAC regards the cost of landside roads as wholly aeronautical even
though it is used by non-aeronautical operators. It is important to note however that the
FAC has excluded costs of capital from its current forecast of aeronautical costs. The
FAC has argued that any adjustment to allow for a redistribution of what may be
considered common costs would be overwhelmed were costs of capital to be taken into
account. These differences in points of view may be resolved if the distinction between
aeronautical and non-aeronautical activities is removed and the operation of the airport as
a whole is assessed.
4.49 The Committee can see the logic in an argument for allocating costs in a higher proportion to those
who cause them to be incurred – this is surely part of the philosophy behind service specific prices. The
FAC's own model looks at the cost of the infrastructure and utilises a unit cost based on the weight of an
aircraft, rather than the time spent using the infrastructure. This suggests a pricing philosophy based on
wear and tear on the asset, not an opportunity cost based view (like that of BARA and Qantas) where
time used by one aircraft at the expense of another is the concern.
4.50 Were KSA only serving regional and rural NSW it no doubt would have infrastructure of a very
different nature. Regional airlines, as argued in their evidence and discussed in chapter four, are in a
business where they have a small customer base, who are most sensitive to price increases. That this
small regional and rural customer base are being asked to bear costs incurred because of international
and domestic travellers to a higher degree than those international and domestic travellers is of concern.
4.51 The Committee acknowledges that potentially higher rates for some regional travellers are reduced
by the introduction of a rebate system. However this is a less than perfect method of approaching the
issue of reducing the impact of the changes on rural and regional communities.
4.52 The comments from stakeholders and the ACCC leads the Committee back to the view that the
method of allocating costs and pricing services at KSA is less than perfect and warrants careful review
by those responsible with the aim of increasing transparency and allocating costs fairly to those who
cause them to be incurred.
Suggestions for alternative method of charging
4.53 Of concern to many of the regional airlines was the fact that a flat rate for a landing charge
discriminates against smaller aircraft, who have to increase price per passenger more than a larger carrier
would need to. Impulse airlines in their submission identifies this as a problem and then goes on to suggest
a per passenger charge as an alternative (the following is based on a $140 charge).
Any flat landing charge will favour the larger aircraft….. The per passenger impact of this
type of charging system is obvious with an interstate traveller enjoying a $6 cost impost
for landing and a passenger arriving on a Piper Navajo would pay as much as $78. This
sort of price discrimination would severely impact almost all regional routes and would
make the cost effectiveness of regional traffic beyond the resources of most of the
market.
The only equitable approach to landing fees at Sydney Airport is to propose a per
passenger charge for regional carriers.
In Impulse's evidence to the Committee, Mr Dawson, Director, went on to say:
We argue the case for a per passenger charge on the basis that it is transparent to the
marketplace and it reflects the unique operational issues that regional airlines have to
face. Oftentimes, a regional airline cannot operate to the same load factor as an interstate
or even as an international aircraft. [32]
4.54 The Committee canvassed the option of a per passenger charge with several witnesses, while some
were non-committal, Mr Russell of Hazelton Airlines indicated:
In principle, we agree with that approach. It adopts a similar pricing methodology to
what is in place in most of the network that we operate to in regional New South Wales.
The thing about it is that it is transparent. You would be aware that most of the airlines in
Australia are differentiating on the ticket the price of these sorts of charges. That is
certainly an approach we are adopting. As a matter of principle it is something that we
are generally happy with. [33]
4.55 Comments in the press by the Anthony Stuart, Chief Executive of SAC suggest there are some
indications that this may be explored in the future by the SAC. Even though such a charge would not
reflect the concerns that regional airlines and their customers are paying for more than they use, the
Committee encourages such an examination of a per passenger charge as a more equitable approach to
spreading the cost of the airport equally across all passengers.
Concerns over the monopoly power of Sydney Airports Corporation
4.56 Almost all the airlines expressed concerns over the unequal position they are placed in when
negotiating with the owner of KSA because of the monopoly power it holds. Operators do not believe
they have a choice in using KSA, and as discussed in chapter four they do not believe there is a
commercially viable alternative in the Sydney area. Monopoly power was also of concern to airlines
because of trends they saw emerging at recently privatised airports. For example as Impulse Airlines
state in their submission:
There is evidence emerging that a number of recently privatised airports, Brisbane in
particular, are creating new charges such as 0.4 cents per litre tax on fuel through put.
We are alarmed that these charges can emerge with no recourse available to seek
alternative suppliers due to the monopoly enjoyed by airport owners.
4.57 Ansett Australia sees a critical need for certain principles to apply because:
…airports are by and large, monopolies with respect to the markets they serve and
normal disciplines resulting from competition do not operate to the same extent as in
other markets. [34]
Ansett's principles include:
- The need for costs to be appropriately allocated between non-aeronautical and aeronautical
activities.
- The need for costs to be efficiently incurred.
- That users only pay for the services they require.
- That airport profits are not excessive.
4.58 In their follow up submission, dated 17 February 1999, Yanda Airlines expressed a strong view
that Federal Airports Corporation and now Sydney Airports Corporation had abused its power in the
new charging system. They state:
In regard to the charging system all I can say is that it is an abuse of the monopoly
powers of the Federal Airports Corporation and the now Sydney Airports Corporation.
The end result is that intrastate travellers still pay approximately 3 times the amount
interstate travellers pay. Negotiations with the FAC and the SAC were a travesty of the
word. However I must also comment when Ms Ruth Martin from the SAC entered the
discussions significant progress was made in a spirit of goodwill. [35]
This response may be a reflection of the size of Yanda's operation:
The company operates nine passenger Piper Cheiftain aircraft to Sydney from small
towns in rural New South Wales. We are able to provide this service by mixing and
matching capacity e.g. we operate two aircraft to Sydney. One from Coonabarabran and
Gunnedah and one from the Hunter Valley. If the passenger numbers are less than nine
total each way we only send one aircraft to Sydney thus increasing load factors and
decreasing costs. Our survival is dependant on our ability to decrease costs in this
fashion. [36]
4.59 In their letter of 19 May 1998 FAC responded to Mr Oldmeadow's comments on aiports as a
monopoly:
I also note that Mr Oldmeadow refers to airports as monopolies that have the power to
pass on cost increases. This is correct, but it is thoroughly controlled by the Government
through the agency of the ACCC and the Minister for Transport and Regional
Development. The Corporation cannot raise its prices more than it can justify through
cost increases. [37]
4.60 It is obvious, despite the control of “the ACCC and the Minister” that some airport users are not
reassured by these controls. Some obviously still perceive themselves to be at a disadvantage when
dealing with the SAC.
Infrastructure investment costs and their relationship to the 2000 Olympics
4.61 Concerns were raised in a number of quarters that regional and rural passengers and airlines would
be disproportionately subsidising the costs of capital investment resulting from the Olympics. For example
Dubbo City Council wrote:
The view has been put to Council that part of the fee increase is designed to help pay for
Federal Airports Corporation's capital works programme related to infrastructure work
for the handling of international visitors coming to the 2000 Sydney Olympics. It is
arguable whether New South Wales will receive much benefit from this infrastructure, yet
regional airlines and their passengers are being asked to contribute disproportionately to
this capital expenditure. [38]
4.62 The Committee raised these concerns with the Federal Airports Corporation at the public hearing
and received the following reply from Mr Murphy of the FAC.
The overall intent of the adjustment is to fund the improvements at the airport. The
Olympics is obviously a part of that. It is important to make the point that we are catering
for what we call the underlying demand, whether the Olympics happens or not. We have
to look out into the future and make our plans accordingly. We are working on the year
2003 as our planning year for this purpose and we are planning the additional gates,
roadworks and other improvements that are required. We are bringing some of those
forward because of the Olympics. That is really the thought process we are going
through. It is not as simple as saying, `Everything we are doing is for the Olympics. [39]
4.63 The Committee accepts the explanation that these capital works would have ultimately occurred to
maintain KSA as a competitive airport. It still has some concerns that, regardless of the reasons for the
infrastructure investment, passengers from rural and regional NSW may be paying a disproportionate
contribution to this infrastructure development.
Support for some aspects of the pricing model
4.64 In principle support for service specific charges, and movement away from cross subsidisation was
expressed by several of the airlines represented in this inquiry. Despite some agreement to the idea of
service specific charges there is still disagreement about to what degree some airlines benefit from the
level of infrastructure at KSA, and hence whether they should be forced to pay for functionality not
required by them. This is discussed in more detail above.
4.65 Ansett Australia, in discussing the principles it feels are relevant to in this context, indicated:
As mentioned, the FAC's proposals went a long way to satisfying these principles. As the
consultation process continues their fulfilment is being further enhanced.
4.66 The FAC in their submission suggested that there was also a positive bye product of reducing the
general landing charge:
This will represent a major cost reduction for domestic airlines in the order of $280 per
landing. International freighters may also benefit by savings in the order of $1000 per
landing. [40]
4.67 As discussed, in the initial part of this chapter, some savings for regional airlines could be implied
from a reduction in the general landing fees. Given the size of a regional aircraft versus an interstate
carrier it is unlikely that regional carriers would receive the same order of savings when compared to
carriers using larger aircraft with larger passenger loads.
4.68 The ACCC gave support to the principle of user pays:
The Commission's view is that there is a strong case for the move to user pays. The new
charges will send appropriate pricing signals for efficient use of airport services and
appropriate signals for new investment decisions. [41]
Pricing at other airports in NSW
4.69 While it was clear from the Committees questioning of regional airport owners that in some cases
landing costs were higher at some regional airports and lower at others than at KSA, the Committee
does not believe that this is a matter of comparing apples to apples. Regional airports pricing structures
often incorporate non-aeronautical and other aeronautical charges in landing fees, where as these are
separated in KSA's pricing regime. In addition to this the fixed costs of a regional airport are spread
across a much smaller volume of traffic. The way in which the landing fees are applied also differ, often
being paid by the airline as a per passenger cost
4.70 Mr Bott, President of the New South Wales Shires Association, summarised this issue in his
evidence:
There are a number of instances where the regional charge would be greater than that
proposed for Kingsford Smith airport. We have got to recognise that, quite obviously,
Kingsford Smith airport, simply by the volume of traffic that is going through it, is able to
generate a great deal of income in order to be able to service the airport facility as such.
When you move out into regional New South Wales, where you have limited traffic, the
opportunity to generate income in order to be able to maintain the airport and the facility
is going to be considerably reduced. That has been the situation. I am not certain
historically of when it was, but all funding was withdrawn from airports by the
Commonwealth. It is funded totally now by local government, where they are the owners
and managers of the airports.
Quite obviously, in that regime they have to be able to generate sufficient income to be
able to maintain the facility, and their charges reflect the volume of traffic that is going
through and the need to maintain that facility. [42]
4.71 While it is natural to try and draw comparisons between airports, there is very little similarity
between KSA and a regional airport. Volume of traffic and economies of scale, as well as subsidisation
of aeronautical charges by non-aeronautical charges, make KSA more able to charge less than some
regional airports. KSA's unique circumstances make it difficult to make comparisons to anything but an
airport of similar size and traffic.
4.72 Additionally, KSA is, in theory, attempting to stay as competitive as possible to meet its aims. Using
other airports higher charges to excuse higher charges at KSA is a dangerous precedent for the future
competitiveness of the airport. The Committee believes it is more effective to focus on how the KSA
pricing structure is developed, than what other airports choose to charge. That is, in the absence of a
competitive market, to understand what is a fair price it is necessary to look at what costs are to be
covered and the return on investment being gained by the “owner”. To quote Qantas from their
correspondence to the Committee dated 14 May 1998:
What is often forgotten, not the least by airport operators, is the importance in the
national interest of keeping aeronautical charges as low as possible, as this reduces travel
and shipping costs and promotes tourism, travel and exports, and ultimately investment
and employment across the economy. [43]
Degree of acceptance of the 1998/99 changes to charges.
4.73 Unfortunately, as a number of witnesses declined to add to their evidence, the Committee was
unable to test the degree to which the airline industry or its sectors accepted the final charging
arrangements for 1998/99. The two responses from the regional sector that commented on this subject
were at opposite ends of the spectrum. For example, Kendell Airlines wrote on 22 February 1999:
The new pricing arrangements that came into effect from October 1998 are acceptable
to us and we are lead to believe that the negotiations for the period beginning 1 July 1999
are about to commence. [44]
4.74 On the other hand Yanda Airlines had a very different view of the new pricing arrangements:
In regard to the charging system all I can say is that it is an abuse of the monopoly
powers of the then Federal Airports Corporation and the now Sydney Airports
Corporation. The end result is that intrastate travellers still pay approximately 3 times the
amount interstate travellers pay. [45]
Pricing for 1999/2000 and 2000/2001
4.75 As a result of the ACCC conclusion that:
The ACCC is not in a position to make a decision at this point in time regarding the
proposals for the second and third years for the reasons set out below. [46]
Further negotiations by SAC with the airlines will be required to determine charges for 1999/2000 and
2000/2001.
4.76 The ACCC concerns with the FAC's approach to charges for 1999/2000 and 2000/2001 can be
summarised as uncertainty concerning:
- rate of return,
- traffic volume forecasts,
- allocation and determination of costs (particularly depreciation charges), and
- uncertainty over actual costs of capital expenditure.
4.77 In the Committee's view the concerns raised by the ACCC and those expressed by the airlines, as
discussed above, need to be taken into account in any further negotiations of prices in order to have an
equitable outcome. The monopoly powers that SAC clearly have require a level of transparency, rigour
and accuracy in price setting beyond that of a supplier in a more open market that will, in theory, control
excess prices through market forces.
4.78 The Committee notes that a review mechanism was proposed by the FAC to the ACCC to adjust
prices depending on variations between forecast and actual landing costs. The Committee considers a
review mechanism is a positive attempt to make more flexible the management of charges at KSA.
However, it also notes the ACCC's belief that while a review mechanism goes someway to addressing
uncertainty in aeronautical costs, traffic volumes and other forecasts used in the setting of prices:
the ACCC does not regard the FAC's review mechanism sufficient for the purposes of
this notification. There are two reasons for this. In particular it does not provide for
further consideration of issues of the rate of return and depreciation. Secondly, there
would be no scope under the PS Act for the ACCC to enforce price decreases if this
was an outcome of the review. Under the PS Act the ACCC has a role in assessing
proposed price increases.
4.79 Despite the review process proposed not being adequate for ACCC's purpose, it may be worth the
SAC considering, as a demonstration of fair dealing, a rebate or reduction in prices should the
assumptions made in setting prices lead to a much higher gain than forecast.
4.80 The Committee notes the SAC's intention to address the concerns of its customer base. In its letter
to the Committee dated 19 February 1999 it wrote:
Sydney Airport is currently assessing aeronautical prices that will apply in future. This
process will involve addressing the concerns expressed by airlines during the 1998
process conducted by the FAC. Sydney Airport is committed to consulting widely with
all sectors of the industry and has commenced preliminary discussions with groups
including the Regional Airlines Association of Australia. [47]
Despite this reassurance, the Committee is concerned that these discussions are starting so late in the
financial year. The pressures that will inevitably come from working to a 1 July 1999 deadline should not
be allowed to rush vital consultation and negotiation with industry. In particular, it believes that the SAC
should take care to ensure that the most vulnerable group of its customers, small regional operators and
their passengers, are not overlooked in the process because of time pressure to conclude negotiations.
Recommendation
- The Committee recommends that the Minister ensure that negotiations undertaken with
the airlines for price changes in 1999/2000 and 2000/2001 address the concerns raised by
the airlines and the ACCC with regard to the accuracy of assumptions in the
Corporation's pricing model, in particular those assumptions that may lead to high rates
of return and high depreciation rates on the new investment resulting in unnecessarily
large price increases.
- The Committee also recommends that the Minister ensure that the most vulnerable parts
of the industry, the regional airlines, are represented in negotiations and that their
interests are not neglected due to size or scale of operations.
Footnotes
[1] Fair Deal for Regional Users, Press Release1 July 1998, Minister for Transport and Regional
Affairs
[2] Correspondence 19/2/99, Sydney Airports Corporation, Attachment A.
[3] Correspondence, Kendall Airlines (Aust) Pty Ltd.
[4] Submission, Tamair, p. 5.
[5] Correspondence, Yanda Airlines.
[6] Submission, Bathurst City Council, p.1.
[7] Submission, Murray Regional Development Board, p. 1.
[8] Submission, Murray Regional Development Board, p. 1.
[9] Submission, Hazelton Airlines, p. 4.
[10] Submission, Hazelton Airlines, p. 5.
[11] Evidence, Hazelton Airlines, p. 38.
[12] Submission, Impulse Airlines, p.5.
[13] Submission, Local Government and Shires Associations of NSW, p. 1.
[14] Submission, Federal Airports Corporation, p 9.
[15] Statement for the public register on proposed aeronautical charges at Sydney (Kingsford
Smith) Airport, Australian Competition and Consumer Commission, p. 4-5.
[16] Correspondence, Kendall Airlines.
[17] Statement for the public register on proposed aeronautical charges at Sydney (Kingsford
Smith) Airport, Australian Competition and Consumer Commission, p. 8.
[18] Statement for the public register on proposed aeronautical charges at Sydney (Kingsford
Smith) Airport, Australian Competition and Consumer Commission, p. 8.
[19] Statement for the public register on proposed aeronautical charges at Sydney (Kingsford
Smith) Airport, Australian Competition and Consumer Commission, p. 9.
[20] Evidence, Qantas Airways Ltd, p. 84.
[21] Correspondence, Qantas Airways Ltd, p. 2.
[22] Correspondence, Federal Airports Corporation, p. 1.
[23] Statement for the public register on proposed aeronautical charges at Sydney (Kingsford
Smith) Airport, Australian Competition and Consumer Commission, p 7.
[24] Submission, BARA, p. 3.
[25] Submission, Lane Cove Airport Action Inc, p. 1.
[26] Submission, Avmin, p. 2.
[27] Evidence, Avmin, p. 103.
[28] Evidence, Avmin, p. 103.
[29] Submission, Impulse Airlines Pty Ltd, p. 8.
[30] Evidence, Qantas, p. 89.
[31] Statement for the public register on proposed aeronautical charges at Sydney (Kingsford
Smith) Airport, Australian Competition and Consumer Commission, p 2.
[32] Evidence, Impulse Airlines, p. 113.
[33] Evidence, Hazelton Airlines, p. 38.
[34] Submission, Ansett Australia, p. 2.
[35] Correspondence, 17 February 1999, Yanda Airlines.
[36] Submission, Yanda Airlines, p. 1.
[37] Correspondence, Qantas Airways Ltd, p. 2.
[38] Submission, Dubbo City Council, p. 1.
[39] Evidence, Federal Airports Corporation, p. 61.
[40] Submission, Federal Airports Corporation, p 10.
[41] Statement for the public register on proposed aeronautical charges at Sydney (Kingsford
Smith) Airport, Australian Competition and Consumer Commission, p 1.
[42] Evidence, New South Wales Shires Association, p. 95.
[43] Correspondence, Qantas Airways Ltd, p. 2.
[44] Correspondence, Kendell Airlines (Aust) Pty Ltd.
[45] Correspondence, Yanda Airlines.
[46] Statement for the public register on proposed aeronautical charges at Sydney (Kingsford
Smith) Airport, Australian Competition and Consumer Commission, p 1.
[47] Correspondence, Sydney Airports Corporation.