REGIONAL AIRPORT USERS’ ACTION GROUP AND G J BREUST SUBMISSION TO THE PRODUCTIVITY COMMISSION’S INQUIRY INTO THE ECONOMIC REGULATION OF AIRPORTS About the Respondent Regional Airport Users’ Action Group is an ad hoc social media group of some 300 members with interests associated with airports as aircraft owners, operators, pilots, engineers and as citizens. The group was established in early 2018 to assist with exchanging information and to lobby airport owners. Geoff Breust is a retired regional airline senior executive, currently private aircraft and hangar owner and private pilot with over 30 years direct involvement in aviation from Australian Government senior aviation industry regulator to large regional airline Managing Director / Chief Executive. He is convenor of the Regional Airport Users Action Group and chaired the recent General Aviation Summit attended by delegates of 34 Australian General Aviation associations held in Wagga Wagga on 8 – 10 July 2018. Geoffrey James Breust FCILT, GAICD Focus of this Submission This submission focuses on issues associated with the economics and management of regional and local airports (ie; those which are not Capital City or significant other International Airports like Cairns and Coolangatta). It also makes limited comment regarding the financial performance the major capital city airports and certain activities of the capital city secondary airports. It further comments and makes recommendations concerning security at regional and local airports and the regulatory burden imposed on general aviation. Principal Submission Regional and local airports are unviable on a fully commercial basis. The high cost of infrastructure development, heavy repair and maintenance, compliance and general operating costs cannot be covered from the charging levels needed to maintain Australia’s regional and local air transport system. A new approach to the funding of major refurbishment and development of Australia’s regional and local airports is required. Background Up until the 1980s and 90’s almost all airports were owned, operated and funded by the Commonwealth Government. At this time a concerted effort was made to privatise the major capital city international and secondary airports. Long term leases were eagerly acquired by Australian and multi-national corporations. Some have changed hands since initial privatisation, including investment now by major institutional and superannuation groups. 2 Since privatisation the significant expansion in domestic and international air travel has provided the major privatised airports with substantial increases in throughput (flight movements and passengers) and the accompanying increase in aeronautical revenue, but more particularly, massive increases in non- aeronautical revenue from retail activities, car parking, land side leasing, advertising and other sources. Major airports in Australia are almost the equivalent of small cities including large retail food and shopping facilities and associated services, hotels and conference facilities, automotive dealerships and direct factory outlets. This traffic expansion and the significant move to non-aeronautical activities have provided these airport corporations with major increases in revenues and profits – far exceeding profit levels experienced in the general economy. For example, Sydney Airport Corporation’s annual passenger throughput has increased from 12m in 1990 to 44m in 2017. Its aeronautical derived revenue was $671m for FY 2017 (an increase of 9.2 percent on the previous FY) while its non-aeronautical revenue for the same period was $812m, also showing a substantial increase. Sydney Airport’s EBITDA was $1,198.9m representing an 80% return on revenue. Its Net Operating Profit of $789.8m is a 53% return on revenue. Dividends paid by Sydney Airport have risen from 21 cents in the five years from 2012 to 2017 to 34.5 cents – an increase of 64%. For FY 2018 the dividend return is forecast at 37.5 cents representing a 78% increase over the six years. (Source: Sydney Airport Corporation Annual General Meeting Report 2017.) Even given the airport’s large asset base, these returns are considered exceptional, if not outrageous. Similarly, Melbourne Airport’s annual passenger throughput for FY 2017 was 25.2m with total revenue of $953.4m of which $391.1m was aeronautical revenue and $562.3m non-aeronautical revenue. It had an EBITDA of $702m (73.6% return on revenue) and a Net Profit of $297.5m (31.2% return on revenue). (Source: APAC Annual Report 2017.) Brisbane Airport in FY 2017 had annual passenger throughput of 22.8m (involving substantial increases in recent years) annual revenue of $680m of which $272m was aeronautical revenue and $418m non-aeronautical revenue. EBITDA was $504.1m (74% return on revenue) and a Net Profit of $180m (26.4% return on revenue). Brisbane’s Annual Report for 2017 states: “BACH has demonstrated a strong operating performance as it focuses on maximising profitability.” Given its wide cross section of institutional shareholders, Brisbane is required and is directly focussed on achieving high financial returns. One suspects the same vision and mission applies at the other major capital city airports. Air service operators now provide the major capital city airports with large numbers of captive consumers for retailers, other leasehold businesses and the airport owners themselves. 3 Aeronautical charges levied on airlines by the major capital city airports vary significantly. For regional airline services, the range is from around $7.00 per passenger to $13.00 per passenger including charges for security screening. Some airports, such as Brisbane and Perth levy a large peak period charge per landing – in the realm of several hundreds of dollars. For regional operators conducting services with smaller capacity aircraft in the 30 to 50 seat range, which are required to operate at peak times to provide the schedule demanded by their regional community customers, the peak period additional charge can be as much as $15.00 per passenger. Given the throughput at these airports, the ability to generate large revenues from aeronautical charges is clear. Major domestic and international air transport is forecast to expand at an even greater rate, especially international air travel in the Asian and sub -continental markets. This is expected to flow through to even greater revenue streams and returns for these airports as higher throughput reduces unit costs and provides greater return on investment. Capital city airports are highly lucrative enterprises and are considered relatively low risk with high rates of return. On the other hand, the general consensus in the investor community is that airlines are high risk perhaps a reflection of how airline costs are difficult to manage given the market power of airports (and the low unit returns available to airlines given the high level of competition and low fares). Regional and local airports present a different story. The larger regional centre airports have enjoyed growth but not to the same extent as the major capital city airports. Local airports have seen little or negative growth. Alongside privatisation of the major airports, regional and local airports were subject to the Aerodrome Local Ownership Program which handed over the ownership and ongoing funding of airports to local government across the country. As a carrot for such transfer, some not insubstantial grant funding was provided initially to undertake upgrading works and major maintenance as part of the deal. Local government was encouraged to accept the transfers and in so doing thought they would be able to determine the future of their airport and operate it without it being a burden on ratepayers. Over time, however, local government has found the reality has been an effective cost shift from the Commonwealth and they now face an ongoing substantial cost burden. While larger regional airports such as Wagga Wagga, Albury, Tamworth, Mount Isa, Mildura, Port Hedland, Port Lincoln etc have seen increases in throughput, they have also been subject to substantial increases in infrastructure and operating costs flowing from greater operational compliance requirements, introduction of larger regional aircraft including jet aircraft and 70 seat turbo- props in some cases, substantial increases in security requirements both infrastructure and operating and, of course, ongoing time based wear and tear on their critical assets – runways, taxiways and hard-standings. Charging regimes at regional airports vary considerably but generally involve a fee per passenger (head tax) for regional airline services as well as weight based landing charges for other aircraft movements. Lease rentals and rates are also charged. 4 Passenger charges at such airports range from around $7 per head to around $13 per head depending upon security requirements. The larger regional ports in Queensland and Western Australia are conspicuous for their significantly higher charges – perhaps as a reflection of the mining boom. Mildura Airport charges over $15 per head plus security screening probably reflecting the high overhead of its corporate structure and over capitalisation in infrastructure both terminal and runway. Local airports (those without a Regular Public Transport (RPT) air service) are in an even worse situation. They have little ability to generate any real revenue. Most consider their airport as a mandatory community facility and fund it from ratepayers. While a few impose aircraft