Economic Regulation - IATA
Economic Regulation - IATA
Economic Regulation - IATA
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AUSTRALASIA<br />
Australia<br />
revenues received, leading to the situation where several<br />
US airports (e.g. New York JFK and Newark) are among<br />
the most expensive in the world (see Appendix A), even<br />
though they provide fewer facilities and are less profitmaximising<br />
than elsewhere.<br />
Cost-plus, rate-of-return regulation can also lead in many<br />
cases to excessive investment in runway and terminal<br />
capacity bearing little relation to potential commercial<br />
returns. It does not provide a great incentive for dynamic<br />
efficiency in terms of timely and cost-effective new<br />
investment, as there are no clear signals or incentives to<br />
demonstrate the need for and value of new investment.<br />
Canada<br />
Greater commercial practices were first introduced<br />
for Canadian airports in the 1980s, removing active<br />
government participation in their management. The<br />
National Airport Program (NAP) transferred the<br />
operation of 26 major airports to local airport authorities<br />
(LAAs), with the federal government retaining ownership,<br />
while ownership and operation of smaller airports was<br />
transferred to provincial or municipal authorities. The<br />
NAP assumed that the 26 major airports would have<br />
the fiscal capacity to attract new investment capital and<br />
strong enough markets to generate sufficient revenues<br />
from their activities.<br />
The major national airports operate as “not for profit”<br />
entities, with any profits reinvested in terms of new<br />
investment. As such, they operate under a similar costplus<br />
system to US airports, with similar advantages<br />
and disadvantages as noted above. However, the reinvestment<br />
mechanism, as opposed to a change in<br />
charges if revenues are higher than costs, can exacerbate<br />
the ‘gold plating’ problem associated with investment<br />
and further reduce dynamic efficiency. For example,<br />
charges at Toronto airport remain among the highest in<br />
the world, even though it nominally operates on a “not<br />
for profit” basis, as they are used to finance expensive<br />
and inefficient investment in new facilities which are far<br />
in excess of airline needs.<br />
Australia’s major airports (except for Sydney, due to major<br />
investment in advance of the 2000 Olympic games) were<br />
privatised in the 1990s, with Sydney airport eventually<br />
privatised in 2002. All of the major airports now operate<br />
on a commercial, profit-maximising basis, under a longterm<br />
lease of the airport facilities from the Federal<br />
Government.<br />
The privatised airports were initially subject to price-cap<br />
regulation on aeronautical services (i.e. a dual-till system)<br />
by the Australian Consumer and Competition Commission<br />
(ACCC) for the first five years after privatisation. The<br />
structure was reviewed by the Australian Productivity<br />
Commission (PC), with the intention to replace price-cap<br />
regulation with a price monitoring regime(for a probationary<br />
five year period from 2002), unless significant monopoly<br />
pricing behaviour was found. The PC undertook a second<br />
review in late 2006 that proposed maintaining the price<br />
monitoring system for a further five years. Following<br />
its privatisation, and significant increases in charges,<br />
Sydney airport is also subject to the light-handed price<br />
monitoring regime, though with price-cap regulation on<br />
its regional air services.<br />
The PC’s justification for a change from price-cap<br />
regulation to price monitoring was based on three<br />
perceived problems of price-cap regulation:<br />
Airport profit volatility.<br />
Airports were largely unprofitable under price-cap<br />
regulation and the collapse of the airline Ansett in<br />
2001, which accounted for 42% of the domestic<br />
market, imposed an additional financial crisis upon them.<br />
However, in some cases unprofitability can be attributed<br />
to operational inefficiency as well as, for some such as<br />
Perth and Adelaide, a tight regulatory settlement. At the<br />
time of the Ansett collapse, there was a few months left<br />
of the first regulatory period so the Government allowed<br />
an immediate charges increase of 6-7% before moving<br />
to the price monitoring system in 2002. However, by<br />
replacing price-cap regulation, any additional flexibility<br />
was gained at the expense of removing strong incentive<br />
properties for greater efficiency.<br />
Weak investment incentives.<br />
Price-cap regulation was viewed as a potential barrier<br />
against new investment, yet there was little evidence of<br />
this especially after just five years of the price-cap system.<br />
Indeed, under the price-cap system airports could (and<br />
did) seek approval from the ACCC for charges to increase<br />
for compulsory regulatory changes and Necessary New<br />
Investment, subject to support from airline users.