Competition Between Australian Airports: Focus on Brisbane Airport
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Competition between Australian airports: focus on Brisbane Airport Prepared for Brisbane Airport Corporation 23 August 2018 www.oxera.com Competition between Australian airports: focus on Brisbane Airport Oxera Contents Executive summary 1 1 Introduction 3 2 Conceptual framework 5 2.1 Introduction 5 2.2 Competition for airline services 6 2.3 Competition for passengers 8 2.4 The effect of competition on airports 9 2.5 Conclusion 12 3 Overview of Brisbane Airport and developments in the Queensland and Australian aviation markets 14 3.1 Overview of Brisbane Airport 14 3.2 Overview of Australian aviation market 20 3.3 Conclusion 26 4 Competition for airlines 28 4.1 Countervailing buyer power 28 4.2 Case study: negotiations between airlines and airports 30 4.3 Analysing route churn 31 4.4 Conclusion 35 5 Competition for passengers 37 5.1 Competition for passengers in the local area 37 5.2 Competition for leisure passengers 42 5.3 Connecting passengers 42 5.4 Conclusion 44 6 Conclusion 45 Figures and tables Box 2.1 Key messages 5 Table 2.1 Critical loss analysis 11 Table 2.2 Passenger traffic from one ‘standard’ aircraft 12 Oxera Consulting LLP is a limited liability partnership registered in England no. OC392464, registered office: Park Central, 40/41 Park End Street, Oxford OX1 1JD, UK; in Belgium, no. 0651 990 151, registered office: Avenue Louise 81, 1050 Brussels, Belgium; and in Italy, REA no. RM - 1530473, registered office: Via delle Quattro Fontane 15, 00184 Rome, Italy. Oxera Consulting GmbH is registered in Germany, no. HRB 148781 B (Local Court of Charlottenburg), registered office: Rahel-Hirsch- Straße 10, Berlin 10557, Germany. Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, Oxera accepts no liability for any actions taken on the basis of its contents. No Oxera entity is either authorised or regulated by the Financial Conduct Authority or the Prudential Regulation Authority within the UK or any other financial authority applicable in other countries. Anyone considering a specific investment should consult their own broker or other investment adviser. Oxera accepts no liability for any specific investment decision, which must be at the investor’s own risk. © Oxera 2018. All rights reserved. Except for the quotation of short passages for the purposes of criticism or review, no part may be used or reproduced without permission. Competition between Australian airports: focus on Brisbane Airport 3 Oxera Box 3.1 Key messages 14 Figure 3.1 Passenger traffic and ATMs at Brisbane Airport: 2000 to 2017 15 Figure 3.2 International destinations offered from Brisbane Airport 16 Figure 3.3 Brisbane Airport route map 17 Figure 3.4 Top five routes at Brisbane Airport: 2010–2017 17 Figure 3.4 ATMs by hour of day at Brisbane Airport (2017) 18 Figure 3.5 Australian airports, by size category 20 Figure 3.6 Map of Australian airports 21 Figure 3.7 ATMs by state and territory, 2017 21 Figure 3.8 Map of airports in Queensland 22 Figure 3.9 Market growth (spa), 2010–2017 23 Figure 3.10 Destinations offered from Australian airports 24 Figure 3.11 International destinations offered from Australian airports 25 Figure 3.12 Airlines in Australia, by business model (mspa) 26 Box 4.1 Key messages 28 Figure 4.1 Airlines shares at Brisbane Airport: 2010 to 2017 29 Figure 4.2 Route churn rates at Australian airports, 2011–2017 32 Table 4.1 Average route churn rates by airport size, 2011–17 33 Figure 4.3 Route churn rates at Australian airports: FSCs vs. LCCs (2011–2017) 34 Figure 4.4 Route churn rates at Brisbane Airport, 2011–2017 35 Box 5.1 Key messages 37 Table 5.1 Drive times and distances from Brisbane Airport 39 Figure 5.1 Proportion of flights departing from Brisbane Airport with alternative departure airports available within 200km 41 Table 5.2 Share of routes where BNE faced competition from an alternative within 200km, 2017 41 Table 5.3 Breakdown of connecting passengers at Brisbane Airport (2017) 43 Table 5.4 Analysis of competition on popular connecting passenger flows at Brisbane (2017) 43 Competition between Australian airports: focus on Brisbane Airport 1 Oxera Executive summary Brisbane Airport Corporation (BAC) has commissioned Oxera to undertake an assessment of the degree of competition faced by Brisbane Airport, as well as the competitive environment between airports in South East Queensland and Australia more generally. Since 2010, the aviation market in Australia and at Brisbane Airport has grown, with an increase in the proportion of international traffic and low-cost carriers. There are currently five airports in Australia with more than 10 million passengers per annum (mppa), two of which (Sydney and Melbourne) are larger than Brisbane Airport. In addition to these large airports, there are many small and medium-sized airports that act as secondary and regional gateways. A number of these airports are located near Brisbane Airport and have increased their traffic over the last several years. Brisbane Airport has begun work on a new runway, which it is planning to open in 2020. This new runway will allow the airport to double its current capacity. A number of nearby airports have also recently expanded or are currently expanding their capacity. This indicates that these airports are likely to compete fiercely for passenger and airline traffic going forward in an effort to fill up their capacity. In this report, we consider the key ways in which Brisbane Airport competes with other airports—through competition for passengers and competition for airlines. The largest airlines at Brisbane Airport—Qantas, Virgin, Jetstar and Tiger, which make up 79% of the capacity—have a number of outside options in terms of other airports at which they could locate existing or new capacity. These airlines may consider locating capacity at airports near to Brisbane Airport in order to tap into the same passenger demand. Indeed, this has been the case with a number of low-cost carriers, who have set up operations at Gold Cost Airport rather than at Brisbane. For airports that are further from Brisbane—such as Sydney and Melbourne—airlines may still consider them in competition for either existing or new airline services. Our analysis indicates that one airline moving just four aircraft would be sufficient to make a 10% charge increase unprofitable for the airport. We find evidence of routes consistently being ‘churned’ in the overall Australian market, and that Brisbane Airport has the highest churn rate of Australian airports with more than 5mppa. This demonstrates that airlines can and do relocate capacity. Therefore, airlines’ threats to relocate capacity to other airports in response to an increase in price or reduction in service quality must be treated by the airport as credible. If airlines were to reduce their operations at the airport rather than remove them altogether, this would have a significant impact on Brisbane Airport, and the switching costs to the airlines would be lower. As a result, Brisbane Airport expends a significant degree of effort in demonstrating the commercial case for airlines to operate routes from the airport, and finds that they are often required to provide incentives or support to airlines. Brisbane Airport faces competition for passengers from nearby airports, including Gold Coast Airport, Sunshine Coast Airport and Toowoomba Wellcamp Airport. There is evidence that passengers from Brisbane’s catchment area use these airports and vice versa. Indeed, there was at least Competition between Australian airports: focus on Brisbane Airport 2 Oxera one alternative service available within 200km for 69% of departures from Brisbane in 2017. For Sydney and Melbourne airports, the corresponding figures were 44% and 52%. For Adelaide and Perth, there were no competing services within 200km for any departures from those airports. There may be some passengers—for example, those living in the immediate vicinity of the airport—who are travelling to destinations not offered by other airports in the catchment area, for which the airport faces limited competitive constraints. However, Brisbane Airport also competes in a wider geographic market to attract certain types of passengers—such as leisure passengers, who are willing to switch between destinations. Leisure passengers account for over 50% of the traffic at the airport. Transfer passengers, who make up 8% of the airport’s traffic, also look beyond airports in the local catchment when deciding where to fly to and from. These types of passengers are likely to act as a constraint on Brisbane Airport in terms of its ability to raise charges and/or reduce service quality. The extent of competitive constraints faced by an airport is an important consideration in determining whether to apply economic regulation and, if so, in what form. Economic regulation should be applied where there is a concern about the potential for firms to abuse their dominant market positions due to a lack of effective competition. However, where regulation is not needed, or where there is more regulation than required, it can be costly and lead to poor outcomes for customers. Our analysis of the degree of competition, and hence the extent of competitive constraints faced by the airport, indicates that a light- handed regulatory regime, such as the current regulatory regime in place, is appropriate. Competition between Australian airports: focus on Brisbane Airport 3 Oxera 1 Introduction Prior to 2002, Brisbane Airport