Periodic review of airports and the threat of increased regulation is enough to keep airports from abusing their market power but they should not be complacent, according to former UK aviation economic regulator Harry Bush.

Despite the howls from airlines, the former group director of economic regulation at the UK Civil Aviation Authority (CAA) believes the Productivity Commission has come to the right conclusion about the nation’s major airports.

Bush, currently a board member of UK air traffic controller NATS and a major British teaching hospital, was at the CAA from 2003 to 2010 before becoming an independent advisor to regulators, companies and trade associations.

He was commissioned by the Australian Airports Association to run an experienced eye over the Productivity Commission’s draft report and thinks it has done a pretty good job of sifting through the complex issues.

“There’s an acceptance, including I think by the AAA, that certain of these airports do have market power,’’ he tells The Airport Professional during a visit to Sydney.

“The question for the Productivity Commission is: have they systematically abused that market power?

“And the commission has taken the view that they haven’t, that broadly they’ve behaved responsibly and there is therefore no real requirement materially to change the regulatory arrangements.”

Bush believes the Commission has applied “a refreshingly real-world perspective” to the sometimes fraught question of airline-airport relationships and says this applies particularly to the “superficially attractive” negotiate-arbitrate option. This is a major thrust of the campaign by airlines and calls for referral to an arbitrator if parties fail to reach an agreement in negotiations between airports and airlines.

Bush believes the Commssion’s scepticism is justified.

“The problem is that if you institutionalise arbitration, which is what this would mean, it has quite a lot of second-round effects and the Productivity Commission is right to have pointed to these,“ he says.

There’s risk, he says, of shadow regulation that distorts the commercial bargaining between airlines and airports because the parties set their positions according to what they think the arbitrator is likely to want.

He says his own experience in the UK, and to some extent Europe, justifies the Commission’s thinking.

“It’s a very different institutional arrangement but there’s no doubt that to the extent the regulator is around it does affect what parties do,“ he says.

“I think you could argue that if the airports had been abusing their market power then you could put up with those second-round effects.

“You might argue that the balance of cost and benefit would be different. You might then be prepared to put up with the costs of institutionalising the arbitration because the benefits would be greater in preventing airports abusing their market power.

“But if you don’t have that problem to start with, then the cost becomes significantly greater relative to the advantage.”

The economic consultant notes that the relatively lengthy history of light-handed regulation in Australia means the Commission can look at the behaviour of airports and determine whether they have abused their market power or not.

This differs from Europe and the UK, where airports have tended to be regulated in one form or another and any jump to light-handed regulation raises concerns about the potential for market power abuse. Regulators and policy makers tend to be very cautious against that background.

“In Australia you actually have the experience, the evidence, so you can make more evidenced judgements than those made in Europe,“ he says

But he adds this also requires the airports themselves to make sure that they don’t abuse their positions and they are able to continually justify their position.

“It may well be there are things that can airports can learn from some of the evidence that’s put forward about how they could improve their performance in the future,“ he adds.

“I don’t think, if I was an airport here, that I would be complacent.  I think I would be looking at the evidence and saying ‘Are there things we can do better?’.”

One such area, he argues, is service-level agreements.

He says he has been surprised there is so much use of the cost-based approach to pricing, adding he would have expected airlines and airports to be more focused on service and price.

This sees airlines defining the services they need and the standard to which they need them. Airports agree to provide the services for a price and to be held to account for their delivery.

“My own feeling is that may be more to be done at airports themselves to move towards that,’’ he says, adding there is no need for regulation to achieve this.

Bush acknowledges that some academics and airlines have questioned whether the threat of regulation is a sufficient deterrent, but he believes it is.

This is particularly so given the Commission made it clear it would crack down if it saw evidence of market power being abused.

“If you operate in a highly regulated entity you do lose degrees of freedom to run a business as you think you should do, you lose the freedom to get on with investment,“ he says.

“You have a lot of interchange with the regulator and a lot of detailed intervention potentially that is a big drawback to running a fast-moving business commercially.

“So I can see that this is a real potential deterrent to airports … and I don’t think people should be so sceptical about that.”

These and other issues are covered in a paper submitted by Bush to the PC and available online here.

By Steve Creedy

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About Steve Creedy

An award-winning journalist, Steve began covering aviation in the United States in the early nineties before returning to Australia later that decade and editing The Australian’s aviation section for 17 years. He is editor of Airline Ratings and has co-authored books on industry initiatives aimed at reducing greenhouse emissions.

Steve has joined the AAA to write interesting and informative editorial on the aviation industry.

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