There are only two countries on earth that decided to fully privatise their airport systems, driven by the idea that governments have no place running commercial businesses.
Both countries, Australia and Britain, have created disasters of high costs and poor service for consumers. The British airports monopoly is being dismantled to separate the previous common ownership of London’s Heathrow, Gatwick and Stansted airports.
Most of the rest of the world understands that, by their nature, airports are naturally lucrative monopolies that can make a valuable contribution as a promoter of the destination they serve and a contributor to local or state government revenue.
It’s an irony that nowhere is this sense of public purpose more pronounced than in America, where not a single major airport is privately owned.
The Australian Competition and Consumer Commission earlier this year summarised the frustrations of airport users in a scathing report dealing, among other things, with the major consumer gripes with items like car-parking charges.
So the federal government brought forward an inquiry into the airports system by its main economic think tank, the Productivity Commission, by nearly two years.
You’d be forgiven for not noticing that the PC report sank without a trace last week, given little coverage in the media beyond this publication that earlier this year was as outraged as ordinary people were about the way the airports were behaving.
That’s because the PC’s academic panel found the Australian airports system was working fine, that allegations by airlines and consumers of price-gouging and out-of-control monopoly behaviour couldn’t be substantiated and that, compared with overseas airports, their pricing was reasonable. The PC sided almost entirely with the airports.
“The divergence in the observations and assertions made by airports, on the one hand, and their customers on the other, seems to reflect ‘positioning’ to either protect or change the distribution of profits between them,” the PC report says. “While not surprising, testing the veracity of opposing propositions is difficult. Ultimately, the claim and counter claim nature of the evidence means that it is not possible to make a definitive call that greater regulatory intrusion is warranted.”
The PC’s only concession to the airports’ critics was to point out that the ACCC had many powers of intervention in pricing issues that had not been used.
The airports will be jubilant that their army of lobbyists has deflected the latest attack on their rivers of gold.
Airports are more profitable than banks and the fuel companies, whose operating margin – the percentage of revenue that’s gross profit – is 40-60 per cent, a return not available to businesses in competitive industries, where 1-2% is accepted by some (like airlines), 10 per cent is OK and 30 per cent is heroic.
The most lucrative of Australia’s airports, Sydney, last year made an operating profit of $773 million on $943 million in revenue. That’s an operating margin of 82 per cent; the airport had to spend only $170 million to make nearly a billion. Through the miracle of accounting, Sydney airport last year lost $131 million after allowances for depreciation, debt servicing and other devices it is able to use.
Sydney airport will always be a lucrative monopoly – and that’s the way it should be. Airports are primarily shopping centres where the customers are in a big-spending mood. However, they are still getting around half their revenue (Sydney $394 million), from charging airlines to use them for services that cost a fraction of that to provide. You will notice those fees in discount fares to Sydney, which are generally dearer than for other domestic destinations.
When our airports were owned by the government Federal Airports Corporation in the 1990s, an airline paid about $2.70 per passenger ($6.50 per tonne per landing) in airport charges for a flight from Sydney to Melbourne. And the FAC was returning about the same margin (45%) as the banks to the government each year as a dividend.
Now it’s about $22 - $14 for the Sydney departure and $8 for the Melbourne arrival, not including gate and equipment rentals and security (a gate now costs $3-$4 million a year to lease at Sydney).
By contrast, US airports aren’t allowed to charge more than $US4.50 per arriving and departing passenger.
One of the things the PC report did was to buy the airports' propaganda that airport charges are only a fraction of air fares. But the air fare data it relied on were the full fares and limited discount fares only a minority of people pay. Inexplicably, the data on “best fares” that most people use was specifically excluded. Those figures show airport charges as a percentage of best fares are astronomical.
You can be fairly sure that the federal government will do nothing to curb the power of the airports. The current Labor government doesn’t want to upset business any more than it already has. And John Howard was the prime minister who freed the private airports from price controls in the first place in 2002, just before the secretary of his department left to become the chief executive (now chairman) of Sydney airport.
Though some, including me, consider the ACCC has been toothless in many areas, I think our best hope is the ACCC’s new chairman Rod Sims, a champion of competition, who wrote in these pages today that “where we have monopoly assets ... effective regulation is needed”.
He will need our support in taking on the airports, which, like all monopolies, consider their customers an easy touch.
The only other way the government can prevent excesses by private airports is to encourage competition. The cheapest airport for airlines in Australia is Tullamarine, which has direct competition from Avalon 55 kilometres away. The next cheapest is Brisbane, which has the Gold Coast 95 kilometres to the southeast.
What would you have told the Productivity Commission? Do you have confidence in the ACCC to police the airports?