Licence to build, licence to charge? Market power, pricing and the financing of airport infrastructure development in Australia

Abstract

In 2017, airport privatisation in Australia reached a 20-year milestone, with its regulatory framework been shifted to a light-handed regulation in 2002. The light-handed regulation (LHR), as in place at Australia's top four airports, has been suggested as the 'frontier of international policy', leading to increasing interest among transport policymakers and researchers. This article offers an in-depth examination of the LHR with focus on a) the market-power of the regulated airports, b) the commercial price negotiations between airports and airlines, and c) the airports' behaviour towards infrastructure investment. The article reports on data from 21 semi-structured interviews conducted with key stakeholder groups affected by, or with expertise in, the LHR. Findings suggest that despite airports possessing significant market power, particularly in the domestic market, the light-handed approach seems to balance the forces in a market where an airline duopoly prevails (Qantas and Virgin Australia groups). In addition, both airports and airlines perceive that commercial price negotiations are improving and refrain from a return to a stronger regulation environment. For airlines, value-for-money is the primary concern in new infrastructure investments. Interviewees also outlined specific recommendations for improving the LHR framework, including a more accessible arbitrator and improved methodologies to monitor prices and quality of service. The findings point towards the significance of vertical relationships, long-term arrangements, and transparency as key aspects of the LHR and the development of airport infrastructure.

Airport Service Quality: A Reconceptualization and a Practical Application on the Non-Aeronautical Services

“…The competitive advantage of an airport strongly relies on the ground services. Because, the cost of a negative comment about ground services from one airline company is high (Lohmann & Trischler, 2017). Moreover, passengers expect improvements in ground-services (Rhoades et al, 2000).…”

Monitoring quality of service at Australian airports: A critical analysis

“…A key mechanism of the LHR is an independent regulatory body imposing a 'credible threat' of stronger regulation to cases of abuse of market power (Forsyth, 2008;Gillen, 2011;Lohmann and Trischler, 2017). While the Australian Government reserves the right to reimpose stricter controls in cases where the abuse of market power is evident (Littlechild, 2012;Arblaster, 2014), it is unlikely that these controls can be enforced by the ACCC.…”

“…A main objective of the LHR is to overcome the drawback of conventional regulation frameworks imposing few incentives for the regulated enterprise to pursue productive efficiency (Vogelsang, 2002). Specifically, in Australia, the LHR aims to a) foster commercial negotiations between airport operators and their customers; b) decrease the costs of administration; and c) encourage airports to undertake infrastructure investments that ensure both efficiency of ongoing airport operations and appropriate levels of service quality (Arblaster, 2014;Lohmann and Trischler, 2017). The present article focuses on airport quality of service, including its monitoring approach as used by the ACCC.…”

Passenger representation within the light-handed regulation – Insights from the Australian air transport market

“…The Australian air transport market is subject to an LHR framework (Adler et al, 2015), which "...places no immediate constraints on aeronautical charges but monitors prices intending to 'taking action' if prices are judged to be too high" (Gillen, 2011, p.9). This means that the airport operators and airlines negotiate prices in the form of commercial relationships (e.g., major infrastructure developments, service improvements, airport charges) without the intervention of a regulator M A N U S C R I P T A C C E P T E D ACCEPTED MANUSCRIPT (Arblaster & Hooper, 2015;Lohmann & Trischler, 2017). The intention of the Australian Government is to keep administrative costs low while facilitating an environment that allows good economic outcomes (Arblaster, 2014).…”

“…In turn, airports are monitored regarding their quality of service levels owing to their market power position. Airports must negotiate and reach an agreement with airlines on any possible fee increases related to quality-improving airport investments (Lohmann & Trischler, 2017). If no agreement is M A N U S C R I P T A C C E P T E D ACCEPTED MANUSCRIPT 3 reached, airports must either delay the investment or find alternative sources of funding (as was the case with the construction of the new runway at Brisbane Airport).…”