Price controls could leave airport users stranded on the tarmac
An Australian Productivity Commission inquiry into the regulation of our country’s airports has raised prospects of price controls and other regulations in a bid to exert control and oversight across the industry. Although well-intentioned, these moves are likely to have unforeseen and undesirable consequences which must be considered prior to the inquiry’s completion and delivery of the Commission’s report to Treasury by June 2019.
Although the allure of regulations might seem appealing to self-professed “champions of the people”, what remains clearer is that optimum results for consumers are best achieved in an environment that promotes free and lively competition – not heavy-handed measures which could prove disastrous for the very people they are intended to benefit.
Firstly, it’s worth noting that the aviation and airports industry is a constantly evolving one which is responsive and adaptive to market trends and consumer demand. It is doubtful that there is an imperative for radical regulations to be imposed when the industry itself is keeping up and adapting to market trends and desires. Brisbane and Melbourne airports will be receiving new runways in 2020, and 2024 and this will put downward pressure on prices with a boost to the supply of available flights. Moreover, according to industry figures from The Board of Airline Representatives (BARA), jobs in the industry have increased by 82% at a national level, including transportation, logistics, food and beverage services. Meanwhile, consumers have benefitted from ticket prices which have fallen by 40% over 12 years.
Many of these improvements at the airport level are made possible because the airports themselves hold the resources needed to invest in better services and infrastructure. Australia’s significant airports have invested $11.5 billion in improvements over the last ten years and this has translated to terminal upgrades, greater choice of services and downward pressure on airfares.
Price controls would put these benefits at risk. Compliance and monitoring costs alone will not only tax the resources of airports, but the public purse as well. Taxpayer funds will need to be used to set up an appropriate regulatory bureaucracy with its own resources. This will place further strain on hardworking Aussie families who already bear one of the developed world’s highest tax burdens.
If this regulator is given the full power to determine the ‘efficient’ price for airport services and even if this takes into account the notion of a “reasonable return on investment”, there are still grave concerns. If the price cap is too low, this would create massive supply-side shortages. An example of this would be if the regulator limited the price airports could charge for carparks. This could result in insufficient parking spots, creating stress and delays – potentially contributing to missed flights or customers being forced to lug heavy bags over longer distances as they are forced to get creative about finding a place to leave their car. Ultimately, such a policy choice to “protect consumers” would only create massive headaches.
From 1986 onwards, many English airports have been subject to regulation by the Civil Aviation Authority over how much they charge airlines for landings, takeoffs, security provision and passenger handling. One of England’s largest airports , Manchester airport, was known to set prices below capped levels in order to compete with rival airports including Liverpool John Lennon. Even if price caps sound great and buy votes in the short-term, they are sure to leave travelers short-charged in the long-term. The UK experience demonstrates that competition provides a better alternative to drive down prices.
A smaller profit margin for airports through price controls may not trigger immense sympathy for those who own them. However, it should trigger sympathy for consumers and taxpayers who are ultimately affected by a decline in supply or quality of the services and amenities they rely upon. Ultimately, these profits don’t all go to shareholders – they are reinvested into the airports themselves at considerable risk which is borne by the airport itself in order to deliver more and higher quality services to travellers through infrastructure investment. More price controls could mean fewer runways, fewer flights and higher ticket prices. These are perverse results which will only leave the industry stranded on the tarmac.