Airport Operations: the working environment

Perth Airport’s Brad Geatches is sitting on an airport that is experiencing phenomenal growth, largely due to the surging fly in-fly out sector that is supporting the resources boom. He is managing a hefty investment commitment to keep pace with the growth and is bullish about the outlook; but he still has his concerns.

“We think that the various submissions made to the Productivity Commission confirmed that, benchmarked against international experience, the Australian airport regulatory environment is potentially the best one. These things are never perfect and they’re always capable of improvement, but the fundamental platform for ensuring that airports are meeting customers’ needs and are neither over-invested or under-invested or overpriced… exists. What Australia’s airports want more than anything else is some certainty about government policy, from security regulation to carbon tax to resourcing.

While the recent Productivity Commission review delivered an unexpectedly positive perspective on our privatized major airports, and airport infrastructure investment continues apace, at the smaller airport level there is still an undercurrent of apprehension about the business environment, driven by a range of factors.

That uncertainty is shared to some extent by the majors despite the PC report card.

“(But we need) to see federal government policy settings continuing to support commercial aviation. I think one of the critical issues is as the Commonwealth budget position comes under stress or they strive for their surpluses, that essential services impacting aviation are not compromised. We do have a concern to see that the border agencies are sufficiently resourced to meet the growth.”

Queensland Airports’ Dennis Chant is of a similar mind:

“The review of the Airports Act by the Productivity Commission effectively has endorsed what I think the airports at least perceived, that the Australian airport system is working very well. There’s been very significant investment in airport infrastructure over the last ten years, or basically since privatisation, and I think all the indications are that as an infrastructure sector airports in Australia are probably the best equipped to handle traffic, when we compare it to some of the other infrastructure classes such as our road and rail networks, our power distribution and generating networks. I think the Australian community has been served well by the privatisation of airports.

“There are always challenges, though they vary from place to place. I think the main thing is that we have certainty to invest and I think that government needs to be mindful (of that), not just in relation to airport infrastructure but I think investment in infrastructure generally. All the signs are that government itself is not going to be able to fund the infrastructure that Australia needs to continue its standard of living and sustain the economic growth; it needs significant investment by the private sector. What the private sector needs is certainty, so the policy settings and the regulatory settings need to be relatively stable and give certainty...”

And Newcastle Airport’s Paul Hughes agrees:

“The air of uncertainty detracts in terms of investment. The Sydney Basin Capacity Review, the RAAF Review, the fast train discussions and all those things are all topics that need to be well debated, but whilst they remain up in the air it also creates an environment of uncertainty. And uncertainty is not a great thing, particularly in this market at the moment, for investment. So we really need to get some solid direction in terms of those broader reviews and policy settings so that we can make sure that we can roll our investment plans out with some higher degree of certainty; and obviously respond to the airlines if they wish to meet the demand that we believe sits in our market.”

 

The two-speed market

 

There are those airports which are able to tap into the resources boom by hosting fly in/fly out operations, but other are suffering from a high Australian dollar which is encouraging outbound tourism while discouraging inbound. A few well-placed airports are able to weigh one off against the other.

But even the geographically advantaged may struggle to fund the infrastructure needed to lure and retain fly in/fly out operators.

Dennis Chant puts it in perspective:

“It’s a challenging time for the tourism industry. Our regional airports that service the mining areas are going ahead quite nicely, whereas the Gold Coast Airport that’s much more reliant on tourism is a little bit more challenged in terms of maintaining the growth that we’ve had over the last few years…

“The Australian dollar, combined with a flood of very attractive international airfares, has seen a very big outbound market and I think that’s reflected in the tourism industry figures where outbound for the first time in many years is substantially stronger than the inbound tourism flow. That obviously means that international destinations are competing quite strongly with our domestic destinations. At the same time I think the more attractive domestic destinations will come back into vogue over time.”

Peter Pallott at Sunshine Coast Airport is caught right in the middle of it:

“Airports are certainly being caught up in the two-speed economy. Those who are able to tap into the burgeoning fly in/fly out market seem to be doing very well, and in fact that’s putting significant pressure on some of those smaller airports in terms of infrastructure development to keep up with the demands of that market, whilst others that are perhaps more locally based than tourism based are finding it very difficult to attract the traffic that they require to service their home ports, and that’s very much become a challenge I think within the second tier airport fraternity. Where we’re positioned on the Sunshine Coast is that we have been very heavily reliant on tourism for our market, but we recognise that there is an opportunity to build our business market and to try and get a piece of the fly in / fly out marketplace and we’re working very much in that space right now.”

 

The Virgin dynamic

 

The metamorphosis of Virgin Australia, which continues apace, clearly has ramifications for many airports, large and smaller.

Rockhampton’s David Blackwell sees it as something that needs to be factored in to airport planning.

“Virgin Australia is quite aggressively moving to the upper end of the market and  I think that’s a really strong signal to airports that they need to look at this airline in a completely different perspective. The ATRs coming into the market as well, that’s going to change things quite dramatically for regional operators…

“We all compete quite vigorously for additional capacity and it’s a different scene if the airline is bringing in or announcing a lot of extra capacity. If Virgin is changing its market and at the same time not bringing a lot more capacity into the marketplace, you get an interesting dynamic. Contrast that with Jetstar which is buying a lot more planes, but I suspect a lot of them will go to Asia.”  

 

Security

 

There’s a lot of apprehension in the smaller airports about being caught up in the extension of enhanced security to larger turboprop aircraft mid next year. But many smaller airports are also being dragged into the higher security regime by their involvement in that fly in/fly out market; and that’s a phenomenon that hasn’t found its high water mark yet.

Add to that the advent of Virgin Australia’s ATR turboprops and there’s a widening net waiting to capture more regional airports when the extended regime hotson 1 July 2012.

“You really need 18 months to plan for this type of regulatory environment that we’re moving into on the security front,” says David Blackwell, someone who is close to the roll out of the OTS strategy.  “And a lot of these guys don’t have 12 or 18 months to play with.  There’s a significant risk for the airport in an investment perspective, but at the same time I don’t think the regulatory hurdles that these businesses must jump... and the amount of reporting and additional regulatory involvement that is required is really understood yet.” 

Mildura’s Bill Burke is caught right in the choke point, so he appreciates the apprehension that is besetting many other small airport operators:

“We’re at the bottom end of the feeding chain in terms of size and passenger numbers, but we’re at the top end in terms of security requirements. So you tend to have a bit of a mismatch between the capital required to establish a screening point and the revenue generated by the airport; and the money therefore has to come from somewhere.

“But what it’s going to do though is cause huge problems because you’re throwing totally inexpert and inexperienced people in the local government arena into a highly specialised area where they have no understanding. My phone’s been running hot over the last few weeks with people trying to put pick up on what we did, how we did it, why we did it and what the right mix is.”

 

Hub & Spoke

Part of the problem relating to security expenditure in rural Australia is the sheer number of airports competing for business, particularly along the Queensland coast.

So a relatively simple solution would seem to be the adoption of a hub & spoke model, with strategically placed airports being designated rural hubs and being fed by economically sized smaller aircraft or indeed road services. But the selection of the right airports would need to be a government imposition to circumvent rivalries.

“There are too many (airports) and I think this is where the competition between the municipalities for funding creeps in,” says Bill Burke. “When I got here (Mildura) I beat the drum very strongly with the state government on developing an aviation strategy, an infrastructure strategy, so that you recognised the significance of certain airports in certain locations… which takes you straight into the hub and spoke concept…

“I think that needs to happen more widely, and where I see incredible conflict in competition is up in Queensland where you get the Gladstones and the Emeralds and all of those towns that all want to have a big airport and lots of services, but all within a couple of hundred clicks of each other, all competing wildly to get the airlines. And of course the airlines are having a field day, they’re beating down the level of costs and some of those places no doubt are putting out all sorts of dream deals to attract the airlines…

“There’s just an unfortunate waste and misuse of the capital available. I think we could develop the country in a lot more rational way if we were more realistic about the way it’s being served. I think it can only come from federal and state sources, probably driving down from the federal down to the state and then down to the local government areas, so that funding... Capital funding of an airport is fundamentally beyond most local government municipalities…”

 

Carbon tax

 

Perspectives on the imminent carbon tax are necessarily somewhat confused given that detail remains scant, but it is clear that the aviation industry will be impacted at the domestic and regional levels.

“If that’s going to impact more on the domestic market than the international market, that’s going to make people a bit more cost conscious in terms of ticket prices and domestic travel versus international,” says Paul Hughes.

“The effect on airports is directly related to the effect on the airlines,” says Peter Pallott.  “For regional aviation where those costs, once again because of the smaller passenger base, are going to be more heavily felt, it will have to flow on to the regional aviation community significantly.”

Broome Airport’s Nick Belyea is also concerned:

“BIA is concerned at the impost of this and the affect it will have on fuel prices which translates to higher costs for airlines and passengers. Reduced services means reduced employment and a domino effect that can impact on places the size of Broome and the wider Kimberley region. Broome and the Kimberley region are in a remote part of Australia and aviation is the vital transport connection. The impost of a carbon tax will increase industry costs and make Broome less attractive to competing tourist destinations such as Bali. It will also hurt small commuter airlines and the GA industry that provide a vital connecting service to remote communities throughout the Kimberley.” 

 

A Healthy Airline Industry

At least some airport managements recognise that they are dependent on the health of the airline sector. And that that applies right across the business, not just in the regional services arena.

Queensland Airports’ Dennis Chant is certainly one of those:

“We’re mindful of the challenges that our airline partners have and that they have to operate in a global environment and face an increasingly competitive market. I think that we need to have some sympathy, that they do need to be internationally competitive and I think their initiative to set up airlines such as Jetstar have been good for the Australian industry. It is a global industry and our airlines need to be global players; they can’t be shackled by artificial constraints. The way they’re going to grow jobs in Australia is by being internationally competitive, not being hamstrung by legacy practices.”

 

Protecting airports

 

While there has been some belated recognition of the need to protect key airports from urban encroachment, the sanity has not always filtered down to the smaller airports.

 “Not enough communities are preserving the aviation asset, the airport, and not enough people are protecting the airport for the future,” says Bill Burke. “In many places you see the encroachment of residential development and that is having a detrimental effect on the ability of the airport to operate, through night hours particularly. That that capability needs to be preserved because it’s going to become more and more important in the future.

“The other thing that too many municipalities aren’t doing is preserving the capacity of airport to expand its runways in both width and length and that, again, comes back to planning aspects which are going to become quite crucial in years to come.”

 

RAAF review

 

For a few strategically placed airports the relatively recently released RAAF review of its airport requirements has left an unpleasant taste.

“We’re pretty disappointed with the tone of the report,” says Newcastle’s Paul Hughes. “We don’t have any issues here in terms of operations; our forecast into the future and what we’ve seen from RAAF’s forecasts as well, we’re not going to have issues in the future either. And a lot of the issues around cost recovery have been dealt with and the like, so there’s a number of issues raised in the paper which we’ve already dealt with, and for a region like the Hunter, as strong as it is from an economic point of view, to not be able to grow its airport and support that growth in an economic sense would be very much a step backwards from the national point of view.

“What hasn’t been addressed is the economic benefit of access to regions, whether it be through Williamtown or other airports. From a broader aviation perspective, when you take all the issues raised in the Aviation White Paper, not just the narrow myopic view of the military aspect of all of that, runways are a scarce resource and a significant economic driver and we need to understand that, and there’s got to be some balance created.”

 

 

 

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