the succeeding Liberal government of John Howard. Even with a new ... percentage of GDP it exceeded even the UK (though New Zealand led the pack by this ...
Australian Airport Privatisation: Impacts on Operations and Customers Authors: Cameron Gordon, Mark Hughes and Andrew Read University of Canberra (significant research assistance provided by Jason Chow) Abstract Australia is a country where privatisation of major passenger airports is now complete. Yet the airports are not all owned and operated by the same entity, nor were they privatised in the same way. This research conducts a preliminary review of various quantitative and qualitative data pertaining to Australian airport operations and customer impacts to assess (1) how operational outcomes changed pre- and postprivatisation; and (2) to see if there was any variation in such outcomes according to owner and deal structure. In particular the authors examine the role that privatization plays in operational efficiency and costs to airport users, both travelers and air carriers. Initial findings are that privatization's role in increasing traveler costs is mixed. NOTE: THIS IS A WORK-IN-PROGRESS DRAFT, HENCE INCOMPLETE AND CURRENTLY UNDERGOING MAJOR REVISION. PLEASE DO NOT CITE OR DISTRIBUTE. ALL COMMENTS ARE WELCOME
Introduction Australia is a country that has privatised many of its public services. Started in earnest by the Labor government, the process continued with the succeeding Liberal government of John Howard. Even with a new government the privatization program is well established and well entrenched; over the period of 1990-1997, the total value of Australian privatizations was below only that of Thatcher’s Britain, while in terms of percentage of GDP it exceeded even the UK (though New Zealand led the pack by this measure). (Reserve Bank 1997). There as of yet have been no significant rollbacks of privatizations. For various reasons some sectors have been more fully privatised than others. The transport sector has been somewhat unevenly impacted largely because of the role of State governments though many of these, especially Victoria and Western Australia, have wholeheartedly embraced the program. Almost completely turned from public to private has been the airport sector. The arguments for privatisation, including for airports, come down largely to the following: 1. Efficiency and Competitiveness: private sector managers are thought to adopt a more strategic and flexible management approach than public agencies; 2. Infrastructure development and investment: privatisation allows expansion of the funding base by tapping into pools of private capital that would not otherwise be available; this is especially important with the building of new facilities. 3. Revenues resulting from asset sale: where existing assets are turned over, properly structured sales can yield very high infusions of new funds for the public sector. 4. Political strategy and objective – the neo-liberal ideology: finally there is the notion of ideological motivation; this is present in Australia but not as pronounced as it was in places like Thatcher’s England or free market Chile. This paper focuses on a subset of these justifications, mainly the effect that Australia airport privatisation has had on the tourism industry in that country. Focusing on the seven major capital airports, the privatisation process will be reviewed and the business models employed by the different privatising entities will be examined with respect to how they may have affected overall airport performance and distribution of resources across different airport users, especially flyers.
Airport privatisation process The privatisation of airports in Australia took place in a number of steps. The first stage involved corporatisation, the second outright privatisation. Corporatisation refers to a process where “government functions are spun off into a separate nongovernmental or quasi-governmental entity” (Gordon 1995, p.1). Seeking cost recovery from the airports that continued to be under Commonwealth ownership, the federal government transferred 17 airports with an asset base of $1.27 billion to the Federal Airports Corporation (FAC), an entity that commenced formal operations on January 1, 1988. A further six airports were added to the FAC portfolio in April 1989. A significant number of airports, including the largest ones, were now off of the Commonwealth Government books, transferred to an entity charged with operating its assets with recovering costs, earning reasonable rates of return, and paying dividends to the government (Freestone et. al. 2006, p. 495). This phase lasted only for around 5 years when airports were transferred back to Commonwealth books in order to have them actually privatised. Privatisation is “a broad term referring to transfer of control, management, ownership and/or financing from a government to nongovernment parties” (Gordon 1995, p. 1). Actual privatisation occurred in 2 phases, referred to as phase 1 and phase 2. Phase 1 included the sales of Melbourne, Brisbane, and Perth airports. Phase 2 included most of the remaining FAC airports, except for Sydney, which was handled in a separate sale (Hooper et. al, p. 189). The government could have spun off the airports directly to the sharemarkets in public floats, which was the approach taken in New Zealand. Instead all airports were sold through a trade sale using a public tender process. The government continued to own the airports but transferred control of the airports to private third parties through long-term leases. Moreover the government set limits on foreign ownership (49% maximum), requirements that directors of the ultimate lessee be Australian citizens or residents and restrictions on crossownership of airports and airlines amounting to 5% of airport operators (Hooper et. al., p. 189). The government also continued to exercise regulation over prices and other aspects. The Airport and Regulation Branch of DOTARS is the Commonwealth Government administrative unit responsible for the development of policies intended to protect community interests. The
Airports Act 1996 dictates public policy objectives, e.g., protection of the environment and control of airport building activity. The Australian Competition and Consumer Commission (ACCC) has the primary responsibility for implementing and administering the framework of economic regulation e.g., price monitoring. (In 2002, direct economic regulation of charges which was part of the initial privatisation process was removed) (Forsyth 2003). Because the privatisation program involved leasehold rather than freehold, the Commonwealth has a retained an ongoing involvement in the airport operations, buttressed by the aforementioned airport planning, pricing and operational regulations. Ultimately, the Commonwealth is the actual controller of the airports and the private sector is more of an operator or manager. Privatised operators After privatisation the Australian Productivity Commission examined what might happen after price caps on airports were due to expire in five years. The Commission reported that the four largest airports – Sydney, Brisbane, Melbourne and Perth – possessed strong market power while Adelaide, Canberra and Darwin possessed moderate power. Gold Coast/Coolongatta Airport had Brisbane Airport 90 minutes away and was seen as having more competition but nonetheless had significant traffic (Forsyth 2003, p. 26). Table 1 shows the ownership structure of these eight major airports. Figure 1 shows the location of these airports.
TABLE 1: AUSTRALIAN AIRPORT PRIVATISATION AND THE CURRENT PRIVATE OWNERSHIP ARRANGEMENTS (AS OF DECEMBER 1997) Adelaide Airport Acquired by Adelaide Airport Ltd (AAL) Owners are: National Nominees Ltd (38.5%) Motor Traders Association of Australia Superannuation Board (28.3%) Local Government Superannuation Board (16.2%) Others (17.0%) Brisbane Airport Acquired by Brisbane Airport Corporation Pty Ltd (BAC) Holding owners of BAC are: Amsterdam Airport Schipol (15%) Port of Brisbane Corporation Brisbane City Council Other institutional investors Canberra Airport Acquired by Canberra Airport Pty Ltd. Darwin Airport & Alice Springs Airport Acquired by Northern Territory Airports Pty Ltd Which is fully owned by Airport Development Group Pty Ltd Owners are: BAA Australia Pty Ltd (10%) RBC Global Services Australia Nominees Pty Ltd (Perpetual Investments) (14.55%) Industry Funds Management Ltd (35.5%) National Asset Management Ltd (14.55%) Hasting Funds Management Ltd (Australian Infrastructure Fund) (25.4%) Gold Coast/Coolongatta Airport & Townsville Airport Acquired by Queensland Airports Ltd. Owners are (major): Hastings Funds Management Ltd Hastings Funds Management as Trustee Perron Investments Pty Ltd. Hobart Airport Acquired by Macquarie Airports (MAp)
Melbourne Airport Acquired by Australia Pacific Airports Corp Ltd (AAC) (in partnership with) Launceston City Council Holding owners of AAC are: AMP Capital Investors Ltd (40.99%) Deutsche Asset Management (26.06%) British Airport Authority (BAA) (19.82%) Hasting Funds Management (13.13%) Perth Airport Acquired (100%) by Australia Airports Corporation Pty Ltd (WAC) Which is wholly owned by Airstralia Development Group Pty Ltd (ADG) Owners are: Utilities Trust of Australia (UTA) (32.01%) Australian Infrastructure Fund (AIF) (24.88%) Perth Airport Property Fund (PAPF) (14.50%) British Airports Association (BAA) (15.00%) Westscheme Pty Ltd (WS) (5.00%) Officers Superannuation Fund (OSF) (3.17%) Colonial First State Private Capital Ltd (CFS) (1.87%) Queensland Infrastructure Trust (QIF) (3.57%)
Figure 1: Australian Airports Studied Source -- http://www.aic.gov.au/publications/crimprev/transport/air-t.html Overall impacts of privatisation Especially given the fact that there is now no price regulation (only monitoring), a key issue is how these new operating entities are making decisions regarding prices and other factors. Prior to corporatisation and privatisation, Australian airports were largely loss-leaders. One inquiry in 1982-83 estimated that only 55% of costs were being covered through charges to industry. (Hooper et. al. 2000, p. 186). The Commonwealth government decided that it wanted to change this situation and thus began a regime of increased cost-recovery, especially once the trade sale route had been decided upon. Landing fees were increased by the FAC resulting in a 10.8% increase in total airport revenue in 1997-98 (after a period from 1991 where such fees had been held constant). New fees were imposed at Sydney in 1998 (though with some
flights, mainly international, seeing increased costs and other smaller domestic and freight aircraft seeing lower costs) (Hooper et. al. 2000, p. 190). FAC reports prior to privatisation show that all but Darwin, of the seven airports studied here, were making accounting profit in 1996/97 (FAC cited in Hooper et. a 2000, p. 186). The Commonwealth government had aimed for receiving good prices on its airport assets and it seems that they got them. Net proceeds for the Phase 1 sales of Melbourne, Brisbane and Perth amounted to $3.16 billion, well in excess of book values and of expected sale prices (ANOA 1997/8, p. 1). Total Phase 1 and Phase 2 sales of 17 airports, including the eight already mentioned but not including Sydney, totaled $8.5 billion (ANOA 2003-4, p 79). The key to getting such prices was at least in part significant price increases approved by the government prior to sale as well as expectation that pricing freedom after sale would be substantial. This was particularly the case for Sydney Airport that was allowed 100% price increases prior to its transfer to private ownership. Airports that were already in private hands were in late 2001 the right to charge prices above the price cap (before all price regulation was lifted in 2002) with Brisbane and Melbourne permitted 6.2% to 7.2% increases about the cap and with price caps removed for Adelaide, Canberra and Darwin. For those airports still price-capped, these new allowances amounted to substantial increases since price was regulated by the CPI-X formula, i.e. consumer price inflation plus an airport-specific productivity factor allowed by regulators. The airports released from the price-caps raised prices as much as they could: Adelaide raised charges by 22%, Darwin by over 100%, Canberra by 113% and Coolongatta/Gold Coast by 113% (Forsyth 2003, p. 28). Figure 2 shows the latest available information for seven of the eight airports that are monitored by the ACCC. It can be seen that substantial price increases have occurred since the period of privatisation and that the most recent annual rates of change are above the inflation rate.
Figure 2: Price changes at major Australian airports. Source: ACCC 2008a. Focusing on tourism: has privatisation hurt Australian tourism? The Productivity Commission’s report recommending price deregulation for airports did receive comment from the Tourism Industry Working Group an industry group set up after a turbulent year for the Australian aviation sector, i.e. 2001 which encompassed both the 9-11 attacks in the US and the collapse of Ansett. While generally nonspecific the industry expressed concern that price increases at airports would flow into fares and hence reduce tourism into Australia. The group expressed support for both continued price monitoring (which is continuing) and price-capping (which has not). Was the industry right to be concerned? Impacts of airport fees on tourism is a difficult question to get a handle on but it must be noted that although privatisation has clearly resulted in large relative increases in airport fees, this is not necessarily bad. For one thing a good portion of the increases were necessary to cover existing costs. For another, the evidence suggests that the government maximised the revenue that it received from the airport sales. To the extent that this revenue went into initiatives that helped the tourist trade, this could be a gain not a loss to the industry (though it seems that the revenue went mainly to general revenue). Having said this, where did increased airport fee revenue go and who bore most of the fee increases? And has this change in airport revenue structure caused a change in visitation to or visitor spending in Australia?
Figure 3 shows the latest data from the ACCC on airport passengers. Clearly passenger throughput at the major Australian airports has grown at a substantial pace. It is difficult to know whether there would have been more or less such throughput without privatisation (and assuming that charges were kept lower) but it can be said that growth seems to be likely only minimally affected.
Figure 3: Passenger Numbers at Major Australian Airports, 1997-2007 Source: ACCC 2008b The ACCC does conduct a rough measure of airport quality with users surveyed on a scale from 1 (very poor) to 5 (excellent) on various airport services. Figure 4 shows those rankings for the period 2002-2007. As can be seen from these numbers the major Australian airports consistently rank between “Satisfactory” and “Good”, though the relative rankings shift around (except for Brisbane which has consistently led the others). Given the limitations of the time-series, it is not possible to say how or if privatisation has affected customer perception of quality but the data do indicate that quality is at least acceptable.
Figure 4 Available information indicates that air passengers bear a significant portion of the increase in charges brought about by privatisation. Figure 5 shows that aeronautical revenue increased substantially per passenger from 1997-2007 and Figure 6 shows that the margin per passenger also increased roughly indicating that the increases were not returning to passengers in the form of increased airport expenditures that might be benefiting them. This inference is perhaps loosely confirmed by the quality perception data that is roughly consistent and which has shown substantial increase overall.
Figure 5: Aeronautical Revenues Per Passenger Source: ACCC 2008b, p. 33
Figure 6
It should be noted that this discussion has focused on aeronautical revenues. Australian airports, like those worldwide, have substantially expanded their take from non-aeronautical revenue i.e. earnings from activities that are not derived from aviation functions. This takes two forms. One source of increase is the imposition of new or increased charges on various users of the airport. Clearly, where possible, Australian airports are imposing new charges on the flying public, especially in Sydney where fees on transfers from domestic to international terminals, parking and baggage carts have all increased substantially since privatisation. Data already mentioned indicate as much. Other users, such as taxis and airport retail leaseholders have also been hit. These user costs are largely passed on to flyers and cumulatively these may add to substantial amounts {INSERT EXAMPLE FOR TYPICAL CUSTOMER IN SYDNEY} Data are less clear on how much airlines are absorbing in extra charges. Now that airports are private entities, this kind of information does not have to be reported and is typically not reported for commercial interest reasons. Presumably different airlines are charged different amounts for slot, landing and other fees, with airlines that have more market power gaining at the expense of those with less. To the extent that there are cost savings to some airlines there could conceivably be gains to consumers if these airlines, for competitive reasons, decide to pass some of these on to consumers. Such pass-through is, at this point, purely speculative given limited information available. The other way to raise revenue is to increase the number of services being offered at and through airports. Following worldwide practice, this has been the most significant change in Australian airports since privatisation. Large-scale retail development in the airport precinct, development of factory outlets on airport land (Canberra being the prime and rather controversial example here) and provision of value-added services such as conference centres has become widespread and the trend towards ‘aerotropolis’ is continuing. This sort of development clearly has implications for the local economy of which the airport is a part. How it affects tourism is less clear. Such services could increase tourist travel, especially business travel, as could be the case with provision of business services at the airport. By increasing perception of quality there could be increasing travel to a particular airport, though this would likely be a zero-sum game between Australian centres given the country’s long relative distance from other national markets. Of course there is the possibility that some travelers may not leave the airport, giving revenue to the airport owner and
otherwise depriving the surrounding local area of revenue that it otherwise might have received. At this point these are speculations, but possibilities. A tourism bottom-line? Has airport privatisation hurt Australian tourism? Some preliminary statements can be made, more illustrative than definitive. First there clearly have been some gainers and losers as far as privatisation has been concerned. Aeronautical and non-aeronautical revenue have both increased and some of this money has been put into improvements to aeronautical and non-aeronautical services at airports. This has resulted in increased airport employment due to additional trading activities around the airports, infrastructure development and associated economic growth as a result of these investments. Aeronautical investments such as enlarged runways have certainly benefited at least some international airlines and to the extent this would have been less likely to occur without privatisation, this clearly can be seen as payoff to the change in ownership On the other hand airline customers have seen significant increases in airport charges. This has also been the case for airport leaseholders as there seem to have been significant increases in shop rental charges especially in airports with greater monopoly power. Still debatable on balance but clearly present to at least some degree are losses to local communities because of negative externalities due to airport infrastructure development (e.g. increases in traffic on local roads near the airport due to increased travel to the airport to use new businesses there). How this affects tourism is not entirely clear. Flyers are clearly paying more in charges, direct and indirect and as of yet their perceptions of airport quality have not appreciably changed. However relative to the price of an international air ticket and even for many domestic tickets, this loss is probably too small to have an appreciable impact on travel decisions and is likely more than offset by fare decreases due to increasing competition in the Australian airline industry. More significant could be the increasing development at airports. Travel decisions here may be more elastic and, for the airport’s locality, potentially more significant. The rise of business conference centres and other value-added businesses could raise some concern for local tourist industries as potentially more consumers stay at airport hotels, use
airport meeting rooms and eat at airport restaurants rather than go into town to do the same. To the extent travelers are not altering their destination decisions as far as city location but are altering their travel decisions once they get there in favour of the airport this certainly would be a net loss for local tourism. On the other hand, if travelers are choosing to travel to a location because of the services offered at the airport then some localities might potentially gain. An example of the former scenario is a business traveler who needs to meet clients in Sydney who in the past would have gone into the City to meet them but now meets at the airport and then flies home. An example of the latter scenario would be a sales conference held at Adelaide airport because that offers a relatively equidistant destination for participants who otherwise would have met in Melbourne because of its facilities (or, if we want to move to a positive-sum tourism calculus, would have teleconferenced instead). Of course these dynamics refer primarily to business travelers. Leisure travelers would likely not be much affected by this logic, although there could be very marginal losses to local tourism on the day of departure if travelers are attracted to the airport earlier by the array of fine services and lower hassle of an over-comfortably early pre-flight arrival at the airport. The above scenarios all assume away the possibility that business travelers may still desire to head into town even after conducting business at the airport. REFERENCES ACCC 2008. “ACCC Issues Airport Monitoring Report” http://www.accc.gov.au/content/index.phtml/itemId/813102/fromItemI d/621413. Freestone, Robert, Peter Williams & Aaron Bowden 2006. “Fly Buy Cities: Some Planning Aspects of Airport Privatisation in Australia.” Urban Policy and Researc, 24 (4), 491-508 December 2006. Gordon, Cameron Elliott, "The Inland Waterways - Can They Be Corporatized? How Could it Be Done?" (1995). Available at SSRN: http://ssrn.com/abstract=1089281 Reserve Bank of Australia 1997. “Privatisation in Australia”, Reserve Bank of Australia Bulletin, December 1997, 7-16.
