The Australian Competition and Consumer Commission today issued a draft decision on proposals by Sydney Airports Corporation Limited to increase aeronautical charges at Kingsford Smith Airport.
"The ACCC’s draft decision relates to increases in aircraft landing charges, international terminal charges, apron use charges, helicopter charges and general aviation parking charges", ACCC Chairman, Professor Allan Fels, said today.
"SACL sought price increases which would increase annual revenues by $116 million per annum, from $89 million to $205 million. This represents an increase of around 130 per cent.
"The ACCC’s draft decision objects to the proposal, but approves lower price increases. The prices accepted would increase SACL’s annual revenue to $160 million, an increase of $71 million or 79 per cent. This is approximately 60 per cent of the increase sought by SACL.
"The higher charges will be levied on airlines. If passed on to airline passengers, the increases will add around $2 to a domestic return flight from Sydney Airport and around $10 to an international return flight from Sydney Airport.
"The ACCC received 15 submissions from interested parties, including the Board of Airline Representatives of Australia (BARA) which represents Australian and international airlines. Even though BARA opposed SACL’s proposals it suggested a price increase of 30 per cent.
"SACL has proposed large price increases. The draft decision approves a substantial part of the increases sought. The ACCC considers that the increases are required to give SACL a reasonable return on its investments (its current returns are low) and to compensate SACL for major new investments undertaken in the lead up to the Olympics.
"Nevertheless the draft decision has not approved all of the increases sought. This is because the ACCC has concerns about a number of aspects of the proposal. It considers that the land valuation used is too high and has concerns about the way in which SACL has applied the ‘dual till’ approach to pricing, even though it has accepted that basic methodology (see below). It also considers that SACL’s proposals do not take into account the impact of future traffic growth and likely cost reductions.
"The draft decision addresses these issues by making three main changes to SACL’s proposals. The first is to use an inflation-adjusted historic cost valuation of land acquired as recommended by independent consultants. The second is to modify the ‘dual till’ approach proposed by SACL. The third is to model costs and revenues over a five-year period instead of the one year period used by SACL, factoring in growth in traffic volumes and reductions in operating and maintenance costs".
Details of the ACCC’s approach are as follows.
New investments undertaken by SACL
The draft decision takes into account the substantial investments undertaken by SACL in the lead up to the Olympics. The aeronautical investments undertaken amounted to around $500 million. The draft decision allows recovery of the costs (including a rate of return) associated with the investments.
‘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 (including a rate of return on assets) of 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. 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 proposes an alternative application of the ‘dual till’ which takes into account SACL’s financial performance in the provision of ‘aeronautical related services’. The ACCC considers that the approach adopted will yield better economic efficiency outcomes and more effectively constrain market power than SACL’s proposals.
The services taken into account in the ACCC’s alternative application of the ‘dual till’ are already subject to regulatory scrutiny under the existing regulatory framework. They include car parking and aircraft refuelling services.
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 draft decision 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 accepted advice from independent consultants to use 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. 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 five 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.
ACCC assessment process
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. The ACCC sought submissions from interested parties and held discussion forums in Sydney and Melbourne.
The ACCC now seek submissions in response to the draft decision by March 5. After further assessment the ACCC will release its final decision in late March.