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Sydney Airport Submission to the Productivity Commission (excluding confidential information) Economic Regulation of Airports 3 September 2018 Please direct any comments or questions to: Georgina Dorsett Head of Customer and Stakeholder Engagement Sydney Airport Copyright © Sydney Airport Corporations Limited ACN 082 578 809 September 2018 This publication is copyright. Other than for purposes of and subject to the conditions prescribed under the Copyright Act 1968 (Cwlth), no part of this publication may be reproduced, or transmitted in any form or by any means (electronic or mechanical, including photocopying, microcopying, recording, by information storage and retrieval or otherwise), without specific prior permission from Sydney Airports Corporation Limited. page 1 List of Abbreviations and Glossary ................................................................................................... 5 Part A: Executive Summary ............................................................................................................. 10 Executive Summary 10 Part B: Sydney Airport: a complex and growing ecosystem ...................................................... 16 Developments in the aviation industry since the 2011 PC Report 16 2.1 Importance of the aviation and airport industry 16 2.2 Changes in the aviation and airport industry 18 2.3 Pressure on Sydney Airport to remain competitive 19 Sydney Airport and its stakeholders 23 3.1 Sydney Airport's customers and stakeholders 23 3.2 Sydney Airport adopts a 'total system' approach 25 3.3 Sydney Airport is best placed to balance competing stakeholder product needs 28 Part C: The Regulatory Regime ...................................................................................................... 30 Current regulatory regime: objectives 30 4.1 Background - Rationale for the current regulatory regime 30 4.2 Evidence that the current regulatory regime is working 31 4.3 Airports are constrained under the current regulatory regime 33 4.4 Proposals for further economic regulation of airports should not be adopted 36 Countervailing power of airlines 41 5.1 Introduction 42 5.2 The mutually dependent relationship between airports and airlines 42 5.3 The ability of airlines to bargain collectively 43 5.4 The commercial size and sophistication of airlines 44 5.5 The commercial need for airline approval of major airport infrastructure 44 5.6 Airlines can and do refuse to pay 45 5.7 Competition between airports: airlines' ability to switch, withdraw or reduce services46 5.8 Airlines' ability to threaten, seek and lobby for increased airport regulation 47 5.9 The impact of airlines' countervailing power 48 Part D: No evidence of Sydney Airport exercising market power ............................................... 50 Consultation and negotiation of commercial agreements with airlines 50 6.1 Introduction 50 6.2 Experience under the current regulatory regime 51 6.3 Sydney Airport’s approach to commercial negotiations 54 Investment in capacity, efficiency and the passenger experience 59 7.1 Continuous improvements at Sydney Airport 59 7.2 Measuring outcomes for passengers 75 Charges for Aeronautical Services 79 8.1 Aeronautical pricing 79 8.2 Aeronautical pricing: the Commission's findings in 2011 82 8.3 Sydney Airport's returns are reasonable 83 page 2 8.4 Measures of revenue and profit in the ACCC's monitoring reports 84 Part E: The ACCC Monitoring Regime ........................................................................................... 86 ACCC Monitoring 86 9.1 Background 86 9.2 Principles of an effective monitoring regime 87 9.3 Demonstrated effectiveness of a monitoring regime 88 9.4 Improvements to the monitoring regime since 2011 inquiry 88 9.5 Issues with the monitoring regime and recommendations 89 9.6 The objective criteria is misleading 90 9.7 The financial reporting should reflect the size and operations of an airport 93 9.8 The calculation of the return on capital employed can be improved 95 9.9 The reporting of aggregate revenue for domestic and international passengers is misleading 96 9.10 The airline survey is flawed 96 9.11 Service quality at airports is the responsibility of a range of suppliers 97 9.12 There is limited transparency in the ACCC's quality of service methodology 98 9.13 Additional views sought by the Commission 99 Part F: Sydney Airport Specific Regulatory Environment ......................................................... 101 Operating restrictions that impede efficient use of Airport infrastructure 101 10.1 Overview: operating restrictions and their rationale 101 10.2 The Regional Ring Fence 102 10.3 The Caps 103 10.4 Slot allocation 104 10.5 Unintended consequences of the operating restrictions 104 10.6 Unintended consequences of the operating restrictions on passengers, airlines, Sydney Airport, local communities, the broader aviation network and national productivity 105 10.7 Need for the slot scheme to provide an effective check on potential slot misuse 107 10.8 Congestion pricing alone 109 10.9 Conclusion 109 Regional Pricing 111 11.1 Background: the current price notification regime 111 11.2 The unintended consequences of the regime 112 11.3 Proposed reform 112 11.4 Conclusion 113 Part G: Airport Accessibility ......................................................................................................... 114 Ground Access 114 12.1 Effective ground access is critically important for Sydney Airport 114 12.2 There is a broad market of transport options that enable airport access 116 12.4 No exercise of market power in supply of car parking services 129 12.5 No exercise of market power in supply of landside access 131 page 3 Part H: Jet Fuel Supply .................................................................................................................. 134 Jet fuel supply 134 13.1 Background 134 13.2 Jet fuel supply chain in Sydney 134 13.3 Conclusions 135 Part I: Appendices ........................................................................................................................... 136 Appendix 1: Economic contribution made by Sydney Airport 136 Appendix 2: Factors explaining the growth in international air traffic 138 Appendix 3: The BARA endorsed 2015 BARA ASA 141 Confidential Appendix 4: Commercial in Confidence 147 Appendix 5: The current regional price notification regime 148 Appendix 6: Sydney Airport advertisements to promote train usage 150 Appendix 7: Sydney Airport advertisements to assist customers to minimise car parking fees154 Appendix 8: Chronology of key car parking developments since the 2011 PC Report 156 Appendix 9: 158 HoustonKemp Economists Report on 'Car parking and ground access – market power assessment' (Commercial in Confidence information redacted) 158 Confidential Appendix 9a: Commercial in Confidence 159 Confidential Appendix 10: Commercial in Confidence information 160 page 4 List of Abbreviations and Glossary List of Abbreviations 2006 PC Report Productivity Commission Inquiry Report on 'Review of Price Regulation of Airport Services', dated 14 December 2006 2011 PC Report Productivity Commission Inquiry Report on 'Economic Regulation of Airport Services', dated 14 December 2011 A-CDM Airport Collaborative Decision Making A4ANZ Airlines for Australia and New Zealand AAA Australian Airports Association ABF Australian Border Force ACA Airport Co-ordination Australia Pty Limited ACCC Australian Competition and Consumer Commission ACI Airports Council International ACICG Aeronautical Capital Investment Consultative Group AFP Australian Federal Police Airport Link Airport Link Company Pty Ltd Airports Act Airports Act 1996 (Cth) AMS Aviation Maritime Security AOC Airline Operators' Committee ASA air services agreement BARA Board of Airline Representatives of Australia Inc BITRE Bureau of Infrastructure, Transport and Regional Economics CAPA Centre for Asia Pacific Aviation CASA Civil Aviation Safety Authority CBD central business district CCA Competition and Consumer Act 2010 (Cth) CEO Chief Executive Officer COU Conditions of Use Commission Productivity Commission CPI Consumer Price Index CSIA Customer Service Institute of Australia Curfew Act Sydney Airport Curfew Act 1995 (Cth) Curfew Regulations Sydney Airport Curfew Regulations 1995 (Cth) DAWR Department of Agriculture & Water Resources page 5 Demand Management Act Sydney Airport Demand Management Act 1997 (Cth) Demand Management Sydney Airport Demand Management Regulations 1998 (Cth) Regulations DFAT Department of Foreign Affairs and Trade DHA Department of Home Affairs DIRDC Department of Infrastructure, Regional Development and Cities DNSW Destination New South Wales EBITA earnings before interest, tax and amortisation FAC Federal Airports Corporation GDP Gross Domestic Product GSP Gross Statement Product IATA International Air Transport Association ICF Industry Consultative Forum ICSS International Customer Service Standard IOC Integrated Operations Centre JUHI joint user hydrant installation KPI key performance indicator LCC low-cost carrier LTOP Long Term Operating Plan NCC National Competition Council NNI necessary new investment OTP on-time performance pax passengers PSC Passenger Service Charge QGCF Qantas Group Consultative Forum Rex Regional Express RRF Regional Ring Fence SLA service level agreement SLRM Service Level Recovery Mechanism T1 Terminal 1 (International terminal) T2 Terminal 2 (Common user domestic terminal) T3 Terminal 3 (Qantas domestic terminal) UK United Kingdom WAC Westralia Airports Corporation WACC weighted
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