Economic Regulation - IATA

03 - Economic Regulation 19
BOX 1: MARKET CONTESTABILITY
i) United Kingdom Airports:
Airports with an annual turnover in excess of £1 million
must obtain permission from the Civil Aviation Authority
(CAA) to levy airport charges. Once permission has
been granted, the CAA may add conditions to regulate
the conduct of the airport in relation to its users. To
date, the CAA has not initiated any such conditions,
but has added conditions where an investigation by
the UK Competition Commission has found that an
airport has been acting against the public interest. It
has also accepted undertakings from airports in lieu
of a condition as to future conduct.
In addition, in 1986 the Secretary of State for Transport
designated four UK airports (Heathrow, Gatwick,
Stansted and Manchester) to be subject to five-yearly
price cap regulatory reviews. The government retains
the right to designate additional airports or to remove
price cap regulation from any of the existing four
designated airports.
The government’s original basis for designation was
not published, but its review of regulation in 1995
defined four criteria against which the designation of
an airport would be assessed:
• its market position, including the extent of
competition from other airports and other modes;
• prima facie evidence of excessive profitability or
abuse of monopoly position;
• the scale and timing of investments and their
implications for profitability; and
• the efficiency and quality of service.
The original four airports remain designated. The
CAA’s initial proposals for the next regulatory period
from 2008 for three designated London airports
argues for the de-designation of Stansted on the basis
of strong competition with other airports focused on
the LCC market. The Office of Fair Trading has also
called for a review of whether Manchester should
be de-designated. However, the final decision on
designation remains with the Secretary of State.
ii) Australia:
The price monitoring regulatory regime in Australia
currently covers seven airports (Sydney, Melbourne,
Brisbane, Perth, Adelaide, Canberra, Darwin) based
on the Productivity Commission’s (PC) assessments
of market power. These assessments focused
primarily on the ability for airlines, or their passengers,
to substitute away from the services provided by the
airport (towards another airport, another destination
or another mode of transport).
The Productivity Commission has recently proposed a
modified airport price monitoring regime to apply for
five years from July 2007, that is intended to provide
explicit provision for airports and those using monitored
services to comment on the reasonableness of
charging and related outcomes. It proposes excluding
Darwin airport from this regime due to lack of market
power.
However, the PC has consistently failed to provide
definitive criteria for market power and its misuse
that, in IATA’s view, weakens the system. Despite clear
evidence of unjustified price rises, the PC argues that
there has been no misuse of market power without
fully explaining at what level market power would
be considered to have been misused. This is used
to justify the continuation of light-handed regulation
rather than a return to price-cap regulation. Chapter
6 contains further discussion of the Australian airport
regulatory system.