Economic Regulation - IATA

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