Productivity Commission Inquiry: Economic Regulation of Airport Services Submission by Virgin Blue Airlines

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Productivity Commission Inquiry: Economic regulation of airport services Submission by Virgin Blue Airlines Non-confidential version 18 April 2011 Contents 1 Introduction and Executive Summary 1.1 1.2 1.3 1.4 1.5 2 Airports have substantial market power Airlines have limited ability to negotiate pricing outcomes with airports There is strong evidence of monopoly pricing and service standards The current regulatory regime is not effective Proposed model for economic regulation of airports Page 4 4 4 4 5 6 7 7 8 8 8 9 10 10 11 13 13 14 15 15 15 16 Background to the economic regulation of airport services 2.1 2.2 2.3 2.4 2.5 The privatisation of Airports Initial regulation 2002 Productivity Commission inquiry 2006 Productivity Commission review The current review 3 Virgin Blue’s business model and the importance of airport pricing 3.1 3.2 Virgin Blue’s business model: providing high quality service with a low cost base Airport aeronautical charges are a significant proportion of costs 4 Market power of airports 4.1 4.2 4.3 Overview Countervailing power as a constraint on the airports’ market power Changes in overall market power due to constraints from other airports 5 Negotiations with airports under the current regulatory regime 5.1 5.2 5.3 Overview Examples of Virgin Blue’s current experience in negotiating with airports Commercially negotiated outcomes will only be possible if airports have the incentive to negotiate and airlines have recourse to arbitration 16 17 6 Analysis of pricing and services at major Australian airports 6.1 6.2 6.3 6.4 6.5 6.6 6.7 7 Aeronautical Pricing Principles Overview of pricing since 2007 Airport aeronautical charges and agreements Evidence of increasing monopoly rents by the major airports Recent experiences of airport pricing Limitations of the Building Block Model Weighted Average Cost

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