Our updates, free in your inbox:

or click here to talk to us about securing a better financial future

The Biggest Winner – Airlines vs Airports

It’s a symbiotic relationship between airlines and airports but occasionally, the airlines try to depict it as predatory. After announcing a $1.6 billion profit before tax for the 2018 financial year, the largest in its history, Qantas is rallying its competitors to plunder the profits of the Australian airports that it calls home.

The Productivity Commission is presently conducting another review of the airport sector, which coincides with a period of high growth for international travel and a fundamental shift towards longer-range, quieter and more fuel efficient aircraft. Submissions to the PC review are as varied as the 38.6 million international passengers that travelled to and from Australia last year.

Competition up the creek

The PC review also coincides with perhaps the single biggest change in Sydney’s airport history since Mascot aerodrome first saw aircraft activity begin in 1924 at what is now Kingsford-Smith Airport.

In 1995 when the Keating Government opened Sydney’s third runway, no-one thought it would take another 22 years before the Turnbull Government would finally commit to Badgery’s Creek as the site for Sydney’s second airport. Of course, it will take a further 10 years to build it before opening in 2026 to a potential 10 million passengers each year.

Sydney Airport declined the opportunity to build the airport and is thus now in de facto competition with the government-funded airport without any curfews.

Prior to the Federal Government’s decision on Badgery’s Creek, the Sydney Airport Masterplan forecast that by 2033, its passenger volumes would rise to 74.3 million, an increase of 32.4 million or 77% over current levels. It also predicted that aircraft movements would increase 18% to 409,500.

The airport’s new Masterplan for 2039 (it is required to update these plans every five years) now incorporates the impact of the Badgery’s Creek decision and shows it is now expecting total passenger numbers to increase 51% to 65.6 million in 2039.

These figures were prepared independently in consultation with major domestic and international airlines to ensure the projections were robust.

It clearly shows that, despite continued good growth, the second airport will have a substantial impact on total passengers moving through Sydney Airport, even disregarding the 5-year difference in forecast period.

Airlines unite

The airlines should be rubbing their hands at the prospect of playing the two airports against each other for their business, but instead are playing victim to the supposed monopoly charges bestowed on them by the airports.

A coterie of airline associations including BARA, IATA and the newly formed A4ANZ is vigorously lobbying the PC and duping any unwitting media outlet that will lend a lazy ear to its lamentations. A4ANZ has rolled out former ACCC boss, Graeme Samuel, to lambast the dreadful state of services at Australia’s airports whilst simultaneously bemoaning the lack of regulatory oversight of the price-setting arrangements between the airlines and the airports.

It’s all quite predictable really, and totally self-interested.

Curfew conundrum

Fortunately, among the more level-headed submissions so far is one from the Tourism and Transport Forum (TTF), which provides a high-level view of the state of Australia’s airport infrastructure as it pertains to tourism and transport.

The TTF focuses heavily on Sydney Airport as Australia’s largest air transport hub and its importance to the NSW and national economies. The submission referenced a report from Deloitte which equated the value of Sydney Airport’s economic contribution to 2.2% of Australia’s GDP in 2018 and 6.8% of the NSW economy.

But Sydney Airport has a weighty set of handcuffs that severely restrict its operating ability. These include the well-known curfew between 11pm and 6am but also include a raft of other restrictions that do not apply to any other airport in Australia.

For example, there is a rolling hourly cap of 80 aircraft movements per hour which means the airport is at capacity for several hours each day during peak periods – something the airlines themselves would surely like to see removed.

Up to one third of landing slots is allocated to regional airlines during peak periods placing a further choke on the more valuable international flights and the high density Sydney-Melbourne and Sydney-Brisbane domestic corridors which are among the world’s busiest domestic routes.

Each day, the airport must use nine different flight paths to spread the noise footprint across Sydney. This takes no account of the substantial reduction in aircraft noise achieved by newer aircraft or the continuous descent approach now being used rather than the noisier stepped approach.

US aircraft manufacturer Boeing says the modern 787 Dreamliner is 90% quieter than the 707 jets that filled the skies in the 1960s.

The approval and construction of the Western Sydney Airport perhaps now provides the most compelling reason to adjust or remove all the restrictions on Sydney Airport’s operating parameters.

As with Melbourne and Brisbane Airports, The Western Sydney Airport will no have no such restrictions. This suggests that there is clearly no longer any justification to apply restrictions to Sydney Airport.

This would particularly apply to the hourly cap on landing slots. Both Brisbane and Melbourne have plans underway to increase runway capacity and thus, the number of landing slots. Brisbane is building a second parallel runway that will allow up to 100 aircraft movements per hour without restriction. Melbourne is considering a third runway, to be operational by the early 2020s, which would also double runway capacity allowing up to 100 aircraft movements per hour.

And don’t fret about the safety aspect of landing more aircraft. Sydney Airport was the first in Australia in 2014 to install a satellite-based system called SmartPath that can land an aeroplane within one metre of the runway centreline in low visibility by sending GPS data directly to the plane’s flight management system.

Unfair process, say airlines

The airlines argue that the process of negotiating landing prices is unfair and biased towards the airports. They claim the proposals are put to them on a take it or leave it basis leaving little room for a fair outcome.

The process is indeed an unregulated one, with the price monitoring status of the ACCC potentially an impotent factor with no real bearing on the outcome. There are other regulatory approaches that the airlines could pursue but are also fraught with large costs and uncertain legal success.

But the airlines play down the very significant amount of investment made by the airports, often in conjunction with the State and Federal Government (roads, airport security, Customs and Immigration facilities etc).

If Sydney Airport always seems to be in a state if disarray, it is because it is in a state of perpetual development to cope with the growth in passenger numbers filling up the seats and profits of Qantas and other airlines.

Qantas has also spent plenty of money on new aircraft and associated facilities such as its valuable airport lounges to accommodate its premium passengers. But this didn’t extend to the T3 terminal which it sold to Sydney Airport in 2015 for $535 million. Qantas clearly thought it couldn’t do a better job of providing airport services and agreed to a deal post the 2019 handover of terminal management to Sydney Airport to run the 17 gates, the car parking, the retail food and beverage outlets and other facilities in the 54,000 square metre terminal.

The argument of the Airlines is distorted to focus on the aeronautical charges imposed on each passenger they carry and convey through the airports. It conveniently overlooks the substantial improvements and investments made by the airport companies. Anyone travelling through Sydney Airport in the last 10 years will have seen the vast amount of physical changes to the entire precinct from the road access to the check-in desks, the retail offerings and of course the car parking along with many unseen improvements such as the road traffic management control centre.

The 2018 SkyTrax Awards for the best international airports rates Sydney Airport at number 20 ahead of Brisbane (22), Melbourne (27), Auckland (24), New York JFK (69) and LAX (72). It ranks behind Singapore Changi airport which has been number one for 6 years running, South Korea’s Incheon (2), Tokyo Haneda (3), Hong Kong (4) and London Heathrow (8) to name a few.

Qantas hubris

It is informative to scrutinise the position of Qantas as the chief protagonist in the debate about airport charges.

The 2018 Annual Report from Qantas gives us plenty of insight into how things are going on the other side of the airbridge.

Outgoing chairman Leigh Clifford reported that during FY18, Qantas returned another $1 billion to its shareholders through dividends and buybacks. Adding the further $500 million payments announced in the August end of year results, the company will have returned more than $3 billion to its shareholders since 2016.

The good news doesn’t end there.

Qantas set aside $67 million to pay another bonus to about 27,000 non-executive employees for their contribution to the FY18 result. This was the fourth bonus in four years and takes the total amount paid to these employees to more than $300 million.

As CEO, Mr Joyce has ridden through the tough times and has not enjoyed a base pay rise since his $2.1 million salary was frozen in 2011. But his variable remuneration has justifiably been cruising in the jet-stream for the last few years as the financial performance of the company has significantly improved.

In the last two years alone, Mr Joyce has banked over $35.4 million in total remuneration. That’s almost 60% more than Sydney Airport’s highly regarded former CEO Kerrie Mather banked in the previous 6 years.

Mr Joyce’s message to shareholders in the 2018 annual report also contains some good insight. He said the one challenge facing all airlines in FY19 would be the “significantly higher fuel prices” but he makes no mention of the airport charges to which the company now takes grave exception.

The Qantas Group’s return on invested capital of 22% was well above the 10% threshold it sets for itself and has been above this mark for four consecutive years. Who is making the excessive profits?

Qantas’s material business risks, according to the Annual Report, include the competitive intensity of the airline industry, fuel and foreign exchange volatility, cyber security and data governance, climate change and key business partners and alliances. It makes no mention whatsoever of the aeronautical charges imposed by the multitude of airports the airline uses, ostensibly implying that this is not a material risk factor for the group.

Enjoy the flight

If the Productivity Commission reaffirms its previous view from 2011 that the current state of affairs at the airport is fine, then it will obviously be business as usual for Sydney Airport.

Should a more comprehensive approach to the price-setting arrangement be considered, this will become a very protracted and complex situation for all parties, but potentially with the same outcome. The extremely detailed process seen in New Zealand for Auckland Airport is a good example.

The bottom line is that the airlines should continue doing the good job of flying everyone around and leave the hard part of getting people in and out of airports to the experts.

Leave a Reply

Your email address will not be published. Required fields are marked *