The ACCC and the Productivity Commission have both concluded that Sydney
Airport possesses considerable market power for its domestic and international
aeronautical services. However, the ACCC has not determined conclusively that
Sydney Airport has misused its market power; nor has this been suggested by the
After many years of planning and indecision, on Tuesday 15th
April 2014 Badgerys Creek was approved by cabinet and confirmed by Prime
Minister Tony Abbott as the location of Sydney’s second airport.
In 2002 as part of the privatisation agreement with the federal government,
the current owners of Sydney Airport acquired the first right of refusal to
build and operate any second major airport within 100 kilometres of the Sydney
Central Business District. This option is yet to be formally taken up by Sydney
Airport Corporation Limited.
While the economic and employment benefits from a second airport are
significant and have been well documented, an aspect of the debate that has yet
to be considered in detail is that of airport competition.
The development of a second Sydney airport at Badgerys Creek, with both
domestic and international facilities, will not only ease aeronautical capacity
constraints in the Sydney region, but provide a viable alternative for airlines
that have had to rely solely on Kingsford Smith for aeronautical access into
A second airport at Badgerys Creek, in the long run and under separate
ownership, has the potential to curb the market power of Kingsford Smith
Airport and create a more competitive airport market in the Sydney region. The
end result of this may be more efficient aeronautical pricing and service
quality outcomes at Kingsford Smith Airport.
Airport Privatisation and Market Power
The Productivity Commission (2007) found that Brisbane, Melbourne, Perth and
Sydney airports possess substantial market power, mostly because of the lack of
substitutability between airport services. Sydney Airport in particular, which
is capacity constrained and is a major hub for connecting traffic, has
virtually no competition from other airports in the region and there are no
comparable land-based transportation options. [2.2.1]
The Productivity Commission (2002) also concluded that in the absence of any
effective constraints or regulation, major airports (which are monopolists
without any direct competition) will generally have an incentive to exercise
their market power to maximise profits.
To achieve persistently higher profits, an unregulated monopoly airport,
over the long run, might be expected to set prices for aeronautical services
above the full cost of their provision (including normal profits); it might
also allow quality to fall over time through cost-saving measures and by
delaying investment. It should be noted that Australian airports are subject to
limited regulation in the form of price and service quality monitoring by the
ACCC; a process periodically subject to review by the Productivity Commission.
ACCC Airport Monitoring Reports
According to the ACCC (2010), Sydney Airport possesses a high degree of
market power in domestic markets; and as the main international gateway
airport, it is likely to have even greater market power than other Australian
airports for international traffic.
In comparing the expected price and service quality outcomes against the
monitoring results for each of the other airports, the ACCC (2010) considered
that Sydney Airport might be earning monopoly rents from its aeronautical
services. The ACCC (2011) also concluded that Sydney Airport’s
insufficient investment in aeronautical infrastructure, while undertaking
significant investment in non-aeronautical services, is consistent with the
airport exercising its market power.
In subsequent reports the ACCC has not demonstrated a misuse of market power
by Sydney Airport, citing data and information limitations as reasons
preventing a comprehensive assessment of market power. [3.4]
The Productivity Commission (2011) did make some broad assessments of the
misuse of market power at Australian airports with respect to a range of
pricing, investment and service quality indicators. Across each of these
individual indicators alone, the Productivity Commission did not find that the
Australian airports had misused their market power.
Despite a lack of conclusiveness around the misuse of market power at Sydney
Airport, its price, investment and service quality monitoring results remain
relatively weak when compared to the other monitored Australian airports and
have, for the most part, not improved since the Productivity Commission report
was published in 2011. [3.4, 3.5]
Economics of airport competition
Normally the expectation is that an increase in competition would be
economically beneficial through improved price and service quality outcomes.
This is not always the case in the airport market and is dependent on various
structural and locational characteristics of the respective airports.
However, if a secondary airport is established and takes traffic away from a
primary airport which is facing excess demand, its entry will lead to a more
efficient allocation of flights to airports in the region. For Sydney airport,
which was forecast (by the Joint Study on Aviation
Capacity for the Sydney region) to have excess demand in the coming
years, this is likely to be the case.
When a second airport enters into the market, it may be able to offer lower
charges than the primary airport because it is either more efficient or
flexible to the requirements of the low cost airlines. The monopoly status of
primary airports may have meant that they were not previously minimising their
costs and there is scope to reduce the overall level of aeronautical service
charges to airlines.
The threat of an airline switching airports also provides a direct and
powerful competitive constraint for airports. If an airport loses an airline
customer to a competitor, it can incur both a loss of aeronautical and
non-aeronautical revenue, as fewer passengers visit the shops and other retail
facilities or use car parks at the airport. Consequently, aeronautical revenue
losses will translate disproportionately into reduced profitability.
Forsyth (2013) suggests that the introduction of a second Sydney airport
with separate owners will create competition for Kingsford Smith Airport but it
is inconclusive whether the gains from having a duopoly will be that
substantial. It should be reiterated that Sydney Airport have the first right
of refusal to build and operate an airport at Badgerys Creek; the proposition
and extent of airport competition in the Sydney region is dependent on whether
Sydney Airport Corporation Limited formally take up that option. [4.2]
Forsyth (2006) also believes that strong competition between airports can be
a good substitute for economic regulation; this proposition is also supported
by other theoretical and empirical studies. [4.3]
Empirical Analysis and International Case Studies
While the breadth of research into the specific issue of airport competition
remains limited, a number of key areas of consensus can be highlighted from
recent empirical and theoretical studies.
The most important of which is the finding that airport competition has the
ability to improve various forms of pricing (including landing fees and
airfares) at primary and secondary airports. This was shown by Van Dender
(2007) and Brueckner et al. (2014) to be the case in the United States; and by
Bel and Fageda (2009) to be the case in Europe. Haskel et al. (2013) also
showed this by developing a theoretical model of airport competition.
A considerable number of empirical studies also showed that competition had
the ability to improve airport productivity and efficiency across multiple
jurisdictions. Yan and Winston (2014) showed this for airports in the San
Francisco Bay area of the United States; while D’Alfonso et al. (2013),
Merkert & Mangia (2014), Adler & Liebert (2014) illustrated this for
European airports. Chi-Lok & Zhang (2014) were also able to show, from a
sample of Chinese airports, that airports with more competition are more
efficient than their counterparts
While studies (Haskel et al. (2013) and Yan & Winston (2014)) did show
that competition had the ability to improve pricing and efficiency at airports,
the benefits obtained from such improvements were largely absorbed by the
airlines and not by the passengers. Brueckner et al. (2014) did however show
positive spill over effects from competition in terms of airfares.
A number of other studies (Hancioglu (2008); Bel & Fageda (2009); and
Adler & Liebert (2014)) were able to show that airport competition, under
certain circumstances, was an effective substitute for economic regulation.
Many of the studies, however, concluded that the nature and extent of these
price, efficiency and regulatory benefits varied according to various
locational and structural factors in an individual airport catchment. [5.1,
Note that the focus of this paper is on the issue of competition and the
literature relating to it. It is acknowledged that the second airport question
might also be considered from the perspective of the potential benefits of
common ownership.