Inside story – September 2013

Airlines warn of airfare hikes as infrastructure costs climb

By Ian McMahon

Sept2013INTERNATIONAL airlines operating to and from Australia have spelled out grave concerns over the soaring costs of Australia’s aviation infrastructure. They plan to engage “more actively” with government in a bid for improved policy settings.

The rising costs threaten growth and they could force airfares up to unaffordable levels, the airlines have warned through their association BARA (Board of Airline Representatives Australia). The incremental costs of serving passenger growth are rising so quickly they will soon exceed carriers’ profit margins on current airfares, according to BARA which represents 29 Australian and international carriers serving this country.

In particular BARA has turned the spotlight on escalating airport charges which have doubled in real terms over the past decade, implicitly criticising “light handed” regulation of their “substantial market power” which has enabled them to return “higher than necessary” profits.

And it has cast substantial doubt on the “highly optimistic” assumptions underlying the Sydney Airport draft master plan’s claims that Australia’s major gateway can handle forecast growth.

“Despite an extended period of growth in international visitors, BARA has well-founded concerns about the rising cost of serving future growth,” the association states in this month’s edition of its Airline Views newsletter.

In comments that contrast inter-national airlines’ situation to that of airports, BARA points out they do not have sustained market power in setting airfares. In 2012, global airline profits were around $2.60 per passenger and airline industry returns averaged only about four per cent.

At present, BARA reports, the cost of Australia’s aviation infrastructure is about $35 to $45 for each international passenger (depending on the route flown by the airline).

But the incremental cost of serving additional passengers “is likely to be twice this amount at some $90 per international passenger”, BARA states.

“The $45 increase is well above the current profits per passenger earned by airlines. The rising cost of aviation infrastructure, therefore, represents a serious challenge to airfare afford-ability and continued industry growth.”

A detailed document released by BARA, Vision and Outcomes for International Aviation in Australia, includes a lengthy outline of airport concerns over charges.

“Australia’s major airports have sub-stantial market power in setting the prices paid by international airlines,” it states.

“Successive Australian Governments have, over the long term, maintained a policy of ‘light-handed’ economic regulation of major airports. In this policy environment, airport prices are not subject to arbitration by an independent party.

“Current policy is underpinned by annual monitoring of airport prices and profits by the Australian Competition and Consumer Commission (ACCC). The ACCC, however, has no ability to directly intervene over price and non-price terms.

“Airport operators are willing to, and need to invest, because the growth in passenger numbers generates both revenues from airlines and directly from passengers through retail and car parking.

“The prices charged by airport operators have, however, doubled in real terms over the past 10 years. Security costs have also increased substantially over this time.

“Further, the billions of dollars being invested to service growth will put significant upward pressure on prices.

“Australians, and their elected representatives, expect the costs of travelling by air for leisure and for business to remain affordable over time. Rising airport and security costs, therefore, represent a major challenge to an industry seeking to ensure affordability for consumers and continued growth in inbound tourism.”

Australian airport profits “are higher than that necessary to justify their investments”, according to BARA.

“Airports, like all commercial industry participants, need to remain profitable and provide returns to their shareholders. However, no participant in the market should make profits that drive down returns by other participants while placing upward pressure on consumer prices.

“The last decade has demonstrated the strength and stability in the returns earned by airports. BARA considers that this stability should be reflected in more balanced price outcomes for international airlines.”

BARA pledges that airlines will continue to negotiate with airports in good faith.

At the same time, however, it will be urging the ACCC to take “a more active stance” in assessing airport profits, including its ability to investi-gate the pricing practices of airports. And the airline body will also “promote the airfare affordability/growth paradigm, highlighting the risk that a rapidly expanding airport cost base poses to long term industry growth”.

BARA has also complained that funding for firefighting services at regional airports is being obtained by “overcharging” international airlines operating from the major airports.

At present, BARA claims, the airlines and passengers fund all infrastructure costs, “while the infrastructure suppliers maximise their individual returns”.

The airline body argues: “To maximise the potential contribution of Australia’s international aviation we need a funding model where the value generated by passengers is recognised and contributed to by all beneficiaries.”

While acknowledging the Australian Government has no direct role to play in directly determining profits and financial outcomes for international airlines and industry suppliers, BARA wants “improvement of policy settings by the Australian Government”.

Government policymaking influences the ability of international airlines to reach fair and reasonable outcomes with suppliers that have considerable market power, BARA points out.

For example, the airlines argue: “International airlines cannot create the conditions for effective competition to emerge between jet fuel suppliers.

“This will require active involvement by the Australian Government in opening up jet fuel supply in Australia, and accords with competition policy developed by governments since the 1990s.

“The Australian Government also influences the productivity of Australia’s international aviation through the taxes it levies on inter-national passengers.”

• BARA has now lodged its submission on Sydney Airport Corporation’s Draft Master Plan (DMP).
While supporting its broad direct-ion, the airline body is concerned that the airport’s ability to serve forecast growth “is based on highly optimistic assumptions”.

The DMP assumes the planned development would allow Sydney Airport to serve the forecast doubling of total passenger numbers well beyond 2033. But BARA has highlighted the critical assumptions over the planned increase in slots used by airlines from about 7pm to 11pm.

If critical assumptions fall short, “Sydney Airport is unlikely to be able to service forecast demand,” BARA warns.