ACCC Decision on Sydney Airport Prices

The Australian Competition and Consumer Commission today issued its final decision on proposals by Sydney Airports Corporation Limited to increase aeronautical charges at Kingsford Smith Airport.

"The ACCC's decision relates to aircraft landing charges, international terminal charges, apron use charges, helicopter charges and general aviation parking charges", ACCC Chairman, Professor Allan Fels, said today.

"The ACCC's decision is to object to the increase proposed, but not object to a lower increase. The decision will increase SACL's aeronautical revenue in 2000/01 from around $93 million to around $183 million, an increase of $90 million or 97 per cent. This compares to the increase sought by SACL of around 130 per cent.

"The price increase adopted in the final decision is higher than the increase proposed in the ACCC's draft decision. The $183 million in 2000/01 revenue in the final decision compares with $160 million in the draft decision, an increase of around $23 million or 13 per cent. Taking into account changes in traffic volume projections the 97 per cent price increase approved in the final decision compares with 79 per cent in the draft decision.

"The higher charges will be levied on airlines. If passed on to airline passengers, the increases will add around $3.00 to a domestic return flight from Sydney Airport and around $14 to an international return flight from Sydney Airport.

"The main reason for the higher prices in the final decision relates to the application of the 'dual till' methodology. Adjustments to traffic volume forecasts, operating and maintenance costs, asset valuations and depreciation also have some impact on the final price (a summary of the changes is provided in appendix 1).

"The revised approach to the dual till adds around $15 million per annum to SACL's revenues, an impact of around 50 cents per domestic return flight and $2.00 per international return flight.

"As in the draft decision, the ACCC's final decision adopts a dual till methodology as distinct from the 'single till' methodology proposed by airport users. The ACCC considers that the methodology has considerable merit. It focuses regulation on areas where the airport has market power and is more likely to promote efficient pricing outcomes than the single till. Those services which are relatively contestable, such as duty free, are not subject to prices oversight.

"However, the ACCC has reservations about SACL's application of the dual till methodology.

"In its draft decision the ACCC took SACL's financial performance in providing 'aeronautical-related' services into account. The rationale for taking this approach was that the resulting aeronautical prices would yield better economic efficiency outcomes and more effectively constrain market power than SACL's proposals. The aeronautical-related services taken into account included aircraft refuelling, check-in counters and car parks. They are already subject to monitoring under the existing regulatory framework.

"The ACCC's final decision moves away from this position. It adopts SACL's application of the dual till and does not take the financial performance of aeronautical-related services into account.

"The move from the position taken in the draft decision was taken after the Minister for Financial Services and Regulation issued a new direction on April 19 2001 (Direction no. 22) pursuant to section 20 of the Prices Surveillance Act 1983. This new direction is supplementary to the earlier Direction 18, which along with the provisions of the Prices Surveillance Act 1983 set a framework for the conduct of the inquiry.

"The Prices Surveillance Act 1983 allows the Government to direct the ACCC to give special consideration to certain matters in making its decisions. Section 20 of the Act requires the ACCC to comply with such a direction. In this case the ACCC considers that the direction warrants a departure from the approach taken in the draft decision.

"Previous price notifications relating to Sydney Airport have adopted a single till approach. Until now the Government has not clearly stated its position on the dual till or the boundary of the till.

"Direction 22 clarifies the Government's policy intent in relation to this issue. It states that 'the Commission should not take into account the revenue generated, or costs incurred, in the provision of services other than aeronautical services'. In effect the Government's policy intent is to apply the dual till approach on a narrower basis than proposed by the ACCC in its draft decision. In practical terms this means that aeronautical-related services and in particular car parks (where the ACCC identified an issue of market power) should not be taken into consideration in setting aeronautical charges at Sydney Airport. Implementation of the policy intent results in higher price increases than proposed by the ACCC in its draft decision.

"The ACCC notes that the Productivity Commission is currently considering these and other matters in its current inquiry into price regulation of airport services".

Background

Aeronautical services at Sydney Airport are declared under the Prices Surveillance Act 1983. As a result, SACL must notify the ACCC if it wants to increase prices for these services.

In assessing SACL’s proposals and reaching its draft decision the ACCC conducted an extensive public consultation process. In October the ACCC released an issues paper seeking submissions from interested parties. In December it held discussion forums in Sydney and Melbourne. In February it released a draft decision and called for further submissions. In total the ACCC received 27 submissions.

The main issues to arise out of the process relate to the ‘dual till’ approach to pricing, traffic forecasts, land values and operating and maintenance expenditures.

‘Dual till’ pricing

SACL’s proposal for a ‘dual till’ approach to pricing conceptually separates aeronautical services from other services provided at the airport. The proposal then sets aeronautical charges on the basis of the cost of separately providing the aeronautical services.

The approach differs from the ‘single till’ adopted in the past by the previous operator of the airport, the Federal Airports Corporation (FAC). The FAC adopted a rate of return target for the airport as a whole, and set aeronautical charges at a level required to meet the rate of return target. Since profitability on non-aeronautical services was high, and typically well above the target rate of return for the airport as a whole, this meant that returns on the aeronautical side of the business were low.

The ACCC’s draft decision adopts the approach proposed by SACL. It identifies "allowable revenues" based on the costs associated with providing the aeronautical services listed in Declaration number 89 (including a rate of return on assets). Prices are then derived by dividing allowable revenue by projected traffic volumes.

Traffic forecasts

SACL’s proposal used forecasts provided by an independent body, Tourism Futures. The ACCC considers Tourism Futures forecasts to be the most reliable available. However, the forecasts used by SACL in their proposal were developed over a year ago are now outdated. The final decision adopts the latest available forecasts. These were finalised by Tourism Futures in March 2001 drawing on actual data up to the end of 2000.

Land valuation

SACL has valued aeronautical land by estimating the site’s market value in its best alternative use. The valuation adopted is based on use of the site in mixed residential, commercial and industrial uses.

The ACCC’s final decision follows the approach adopted in the draft decision. This supports the broad principles proposed by SACL in valuing land but questions their application.

Given the difficulties associated with SACL’s approach, the ACCC has used the historic cost of the site indexed by CPI. Historic cost has the advantage that it is readily identifiable and less subjective than the principles proposed by Sydney Airport. It provides compensation to the owner of Sydney Airport for investments into land already made. It also provides incentives for the airport operator to acquire additional land.

Operating and maintenance costs

Based on the experience of the privatised airports to date it is reasonable to assume that Sydney Airport will be able to achieve significant savings in operating and maintenance costs over time. The ACCC has factored real reductions of four per cent per annum into its draft decision. The savings reflect the average saving achieved by Melbourne, Brisbane and Perth airports since privatisation in 1997.

APPENDIX

1 – Comparison of draft and final decisions

Table

A: 2000/01 revenue

1.

Included for comparison purposes. The contribution from aeronautical-related services is included here, based on additional information provided by SACL. These figures can be compared to the final decision to demonstrate the effect of Direction No. 22.

2.

SACL use a post-tax vanilla WACC in calculating their allowable revenue. This requires the explicit modelling of the cash flow associated with taxation, incorporating this into the calculation of the revenue target.

3.

The capital gain on land represents a component of the real return to SACL that is not explicitly captured in the cash flows. Accordingly, allowable revenue is reduced by the capital gains over 2000/01.

4.

SACL’s original proposal (as shown in this table) estimated an allowable revenue, based on the costs included in the building block methodology, of $243.2m. Based on the traffic volumes adopted in this decision, however, the prices proposed by SACL would generate revenues of around $211m (had they been in place for the full financial year). This is effectively an adjustment made by SACL to compensate for future efficiency gains and volume growth. Similarly, the adjustments to the Commission’s draft and final decisions represent the effect of price smoothing, as detailed in chapter 12.

Table B: Approved

prices (GST inclusive)

*The Commission’s draft decision was for prices that were GST exclusive. This was because SACL’s original proposal was for GST exclusive prices. SACL’s formal notification listed GST inclusive prices. Similarly, the Commission’s final decision relates to GST inclusive prices. These are listed above. A comparison of GST exclusive prices is contained in the following table.