Australia's airports: Issues and strategies

Certainly there is healthy rivalry amongst Australia’s major airports in the competition to attract new business and that sometimes leads to sniping, particularly in the direction of Sydney Airport as the nation’s gateway port. But there is clearly enough common ground for much to be gained by airing the loads and some cooperative lobbying of government.

This is especially so in an era of instability at the federal government level, because the uncertainty around investment and regulation will conflict with the unstoppable growth that is coming the industry’s way.

Airports would have been looking for more continuity and stability from an incoming government anyway, so the fragile state of the parliament is far from being good news. The chance of getting attention on to any of a number of major issues will be slim indeed, in the face of a government vulnerable to distraction at the whim of any one of a swag of individual MPs.

But the political environment could be even worse than that, if freshly empowered Green interests target aviation, including airports.

Australian Airports Association’s chairman John McArdle, speaking prior to a resolution of the post-election stalemate in Canberra, was hopeful that a new government could mean “an opportunity to get some visionary statements about where aviation is going in the future”.

But didn’t the White Paper provide that? McArdle says no, describing it as “a good start to national aviation policy” but lacking “any visionary comment in regard to where government expects aviation to be in five, 10 or 20 years time”.

Well it’s clear now that such expectations will not be met in the lifetime of the current government; and that airports will have to deal with the issues and challenges themselves, but perhaps in an even more constrained regulatory environment.

So it’s appropriate to review those issues and challenges and consider what progress might be made in what will undoubtedly be a turbulent 12 months.

 

Regulation

 

Aviation has always been a highly regulated industry, but until airport privatization the regulation was largely focused on aircraft operations. Since privatization however the screws have been tightened on airport operations, though it has until recently been a relatively benign regime. But in the months leading up to the

federal election in August, there were clear signals of intent with regard to tighter controls.

Melbourne Airport CEO Chris Woodruff certainly reads it that way: “One of the issues that we do face as an industry now is that despite what was indicated in the White Paper, the draft regulation may lead to more regulation with getting aeronautical investments underway. Not only do we have to complete a very detailed master plan which is not all that different from the past, but also for individual projects that add to airport capacity, like terminals, taxiways, roads and car parks. We will need to produce much more material that really doesn’t inform the community or the Minister beyond that contained in the Master Plan – it’s just duplication. We are looking to the government to streamline that legislation, consistent with the White Paper, so at least the aeronautical side of the business can have some comfort, some guarantees that we can invest in those things with confidence.”

The acceleration of a Productivity Commission review process is evidence that aeronautical pricing is included in enhanced regime; though many would argue that airport/airline negotiations in this arena have generally worked well.

Brisbane Airport’s Julieanne Alroe is one of those: “You’d have to say that airports have been one of the few infrastructure groups that have consistently been able to deliver capacity; and I think a lot of that has been a result of a light-handed regulatory approach, where we can come up with commercial outcomes with the airlines. And our shareholders have some certainty about investment. The White Paper itself didn’t change that, in fact it endorsed it. We are in a good position to argue that the regulatory environment we’ve had to date has been very successful and it would be a risk to have further capacity brought on line in this industry if that was to change.”

Sydney Airport’s Russell Balding agrees: “The issue I’m sure they’ll be talking about (at the forthcoming AAA Convention) is light-handed regulation. That model works, it’s proven when you look at the last Productivity Commission report. The light-handed regulatory regime is a proven success. And so from an airport’s point of view the model’s not broken, it doesn’t need fixing. So we want to make sure that that light-handed regulatory regime continues.”

Adelaide Airport’s Phil Baker believes that the trend in the regulatory environment is the biggest worry for Australian airports, because it’s difficult to know where it might head and where it might stop: “There’s a level of uncertainty around now that’s more heightened than it has been previously, so we need some level of certainty about the way the market’s going to move for a period of time, in terms of what you can do and what you can’t. It seems to be tightening up and my view is that the Greens will want to tighten it even more. We’d like to know how it’s going to be for the next x years, so you can rely on where you are. Not so much for the airport, but for the investors, because there are some pretty big investors involved in airports; and particularly for those mums and dads through their pension funds.”

There’s a perception that airport regulation is designed to protect a political future rather than to find a reasonable balance between infrastructure development, aeronautical charging and community interests. And that has been amplified in recent years by perceived conflicts of interest, with some government ministers responsible for airport regulation also responsible to electors living alongside airports. That needs to change.

Airport regulation also suffers from a paucity of industry professionals in the bureaucracy itself, from a lack of continuity of responsibility amongst those bureaucrats, and from the tendency for government to apply a one-size-fits-all approach to regulation, when there are in fact substantial differences that should be taken into account.

Overriding all of the detail is the simple fact that aviation is such an important part of the Australian economy that it merits its own federal portfolio; or at least, for an interim period, to be part of a distinct transport portfolio, not buried in an even larger grouping of responsibilities as it has been.

 

Infrastructure investment

 

The growth picture for the airline industry, especially in Asia, is generally agreed on, even if there are unwelcome interruptions along the way. That growth is largely being driven by the continuing transformation of the air travel industry from an elite service to a mass transport mode; and by access to air travel for a burgeoning middle class throughout Asia, but particularly in China first and then India.

Airlines are gearing themselves to participate in that growth, with aircraft orders placed to provide the capacity. Will our airports be ready to handle that growth, or will it be heading to other parts of the globe either because we can’t accommodate it or we don’t get the bilaterals right? It’s a big ask to expect airports to invest speculatively for traffic that might not eventuate because of other parties’ failings.

Chris Woodruff is clear on the issues and optimistic about the traffic: “Are we ready for them in facility terms? That’s a big one. If we look ahead to next year, I think Melbourne’s looking at record international growth beyond our expectation and I’m having to accelerate a lot of the capacity investments, I’m having to bring them all forward by a couple of years. That is going to be a challenge for us because at the same time as operating a great airport you’ve got to do a lot of building very quickly. Our pinch points, for example, are check-in desks, gate lounges, baggage reclaim facilities on the inbound. We are going to have to do that very quickly to accommodate the growth that’s coming our way. And I can’t see that moderating because if you look at the Asian airlines, they’ve got record numbers of aircraft being delivered in the next few years and I believe that we are going to be a focus for a lot of that.”

Part of the government’s solution to infrastructure shortages has been to provide incentives for off-shore carriers to use ’regional international ports’ such as Cairns, Darwin, Adelaide and the Gold Coast. But John McArdle is concerned that these airports may be inadequately resourced as it is without introducing more traffic.

“If the regional international ports are to be utilized as gateways, there are inherent problems that go with that. Namely, are there sufficient resources made available to our border agencies to process inbound and outbound increases at all existing ports? And in the event that government says that we do have a pseudo open skies policy at regional international ports, the resources are not available to meet that demand. The infrastructure is there, but the staffing resource from our border agencies is always inadequate and playing catch up to actual growth demands.”

 

Who gets the growth traffic?

 

Sydney is the country’s major gateway airport and even though it is artificially constrained in capacity terms by regulation (movement caps and curfew), it is still forecasting strong growth. SACL’s Russell Balding believes that governments and the tourism industry need to cooperate on growing Australia’s overall share of the international tourism market.

"People will put it to you that you are an airport and you operate a monopoly piece of infrastructure,” Balding says. “I tend to disagree with that because the first thing you’ve got to do is compete with other airports around the world to attract new airlines and the passengers they fly.

“From my perspective, our first point of competition is to attract passengers to Australia. For example, Asia is where the growth is going to come from over the next 10 years or more, especially from China. Figures that we are looking at say that by 2015 or 2018 there’ll be over 100 million Chinese tourists travelling abroad each year.

“As a country Australia needs to ensure that we’re in on the ground floor in attracting those additional tourists into Australia. It is just crucially important. The first point of competition is therefore to get them to come to Australia. The airlines, when they do their routes analysis and networks, have options. They could go to Europe or the US, or they could stay in Asia. So we are facing strong international competition to attract them to Australia. It is a global market – no-one has to fly to Australia.

“Once the carrier looks at its business case and makes the decision to come to Australia, then we’ve got to compete strongly again with other capital city airports, particularly Brisbane, Melbourne and Perth.”

There is, however, some doubt about the government’s ability to assess and establish bilateral agreements in a timely manner to maximize Australia’s share of the coming Asian traffic wave.

“The governments have just recently re-negotiated the Chinese bilaterals which kick in from the first of November, but they’ve already been fully taken up,” says Melbourne’s Chris Woodruff. “There’s more demand than that from the Chinese carriers, but they can’t come here, so where will they deploy their aircraft if it’s not to Australia? This doesn’t seem to sit with the Government’s policy of making sure there is capacity in Australia’s agreements well ahead of demand. I would like to be in a position as an industry to always have bilateral headroom so that we can attract those carriers to our shores. This is what the Government policy says.”

 

Finance

 

All of that infrastructure that will be required to add capacity at the nation’s airports will involve massive investment – and that means access to capital. How are those more risk-averse financial institutions viewing airport finance?

“Money’s available, it’s just at what price and for how long,” says Julieanne Alroe. “Our aim at the moment is to get our money with longer term projects attached to them, at good prices of course. So it’s a matter of looking at alternate ways of doing it. Certainly the availability of money has tightened and we are going out there to a more difficult market than we were seeing pre-GFC.”

“We’ve just had a bond issue and it was very well received, so I think the markets are supportive,” says Chris Woodruff. “We are right in the middle of refinancing some existing bank facilities and once again we’ve got support from our core lenders. So we can certainly borrow in the markets to finance these investments, we can fund all the capacity enhancements we need to make. That said, our capital structure is compromised by uncertainty associated with the renewal of Tripartite Deeds. We kmow the Government understands this – that’s clear from the White Paper – and now the election is out of the way I’m sure we’ll sort this out soon.”

But finance apparently gets tougher if it’s not destined for aviation infrastructure, as Darwin Airport’s Ian Kew explains: “Banks remain reluctant to finance non-aviation commercial property development, particularly if it includes retail or office blocks etc. Their appetite and the availability of debt finance has diminished as a result of the Global Financial Crisis. But a year ago it was almost impossible to get bank finance for commercial property developments, now it’s definitely improved but it’s under very stringent conditions. So their appetite – and indeed in some cases shareholder appetite – has weakened for commercial property at the moment. And that’s where the real blue sky is for airports in the longer term.”

 

 Integrated planning

 

The level of cooperation amongst stakeholders in airport development varies dramatically from state to state, indeed from city to city. Brisbane Airport has gained a lot from the synergies derived from a planning environment closely integrating the state and city authorities with its own team.

“Some of the road projects you see at Brisbane Airport, the State Airport Link and the roundabout upgrade, were developed with both of us contributing and coming up with a really good access outcome for Brisbane,” says Julieanne Alroe. And we see us working more and more with the City, designing public transport, bike access etc. Good relationships will help us as we move into the more challenging aspects of safeguarding airports, managing building heights and preserving the buffer around the airport, things like that. There’s a real recognition of the importance of the airport, but also of the airport reaching out to the City and the State more effectively.”

Alroe also points to the enhanced levels of cooperation amongst airports, airlines and Airservices to achieve more efficient delay management strategies and greener operations generally.

But not all airports are working in such a synergistic environment.

Russell Balding points to the failure of stakeholders to establish efficient ground access infrastructure for Sydney Airport as a prime example:

“Sydney has got its advantages because of its close proximity to the city, being just eight kilometres from the CBD. But we have challenges with the road netwrok and public transport around the airport," he says.

“We have some 90,000 passengers a day coming through our airport. In Sydney if you have a major event at ANZ Stadium the government puts on extra trains, bus services, special clearways. There’s a whole range of ground transport action plans and initiatives to make sure they can cope with the 80,000 people going into and out of the stadium. Well, we have 10,000 more than that each and every day, but when you look at the road access in and around the airport in Sydney, and the issues around public transport services, they are our pressure points.”

And there’s an economic price to pay for such neglect.

“From a national perspective, some state governments really get tourism and they really get the economic impact of tourism – and others don’t quite get it yet,” Balding says.

“To put it into perspective, every time a 747 lands in Sydney, say 85-90 per cent load factor of tourists, that brings $1.8 million to the Sydney economy. So I look it the other way and every time a 747 doesn’t land then Sydney is losing $1.8 million. I think governments are starting to realize the economic importance of tourism. You only have to look at North Queensland when the global financial crisis hit, and the impact that had on the industry and the broader economy up there.”

 

 Other focus areas

 

The lack of government attention to aviation continues to be of concern. There is some consensus in the airport sector (indeed in the industry generally) that aviation is of sufficient size and importance to the nation’s economy that it merits its own minister; but with no change to the portfolio arrangements in the latest cabinet reshuffle aviation remains buried in an infrastructure and transport department that is simply too big.

Too big, for example, to properly assess the industry’s position in relation to that inevitable emissions trading scheme. And the uncertainty around all of that is in itself a significant inhibitor to investment.

Then there’s the issue of protecting airports from urban encroachment, something that some states have done a much better job of than others. The conflicting pressures from developers and airport growth managers will only intensify; and they can only be resolved by government intervention and planning, underscored with integrity.

And last, but by no means least, are the issues around airport security, which remain largely unresolved despite the program of action initiated by the Wheeler Report in 2006. Issues such as airport policing effectiveness, screening training, technology introduction and funding are unresolved, or at the very least slow in the process. And that state of affairs is simply the product of a relatively incident-free environment – so far.