Airport Markets
General Considerations
3.20 An airport exists to facilitate the interchange between surface and air transport of passengers and freight.37 The facilities typically used include one or more runways (including taxiways and aprons); a terminal building or buildings where passengers are processed and retailing and servicing opportunities arise; freight handling facilities servicing imports and exports and domestic movements; and land-side roading and parking. However, the services provided internationally by airport owners vary widely. Some airport companies do little more than own infrastructure and provide facilities, with third parties obtaining access to those facilities to provide downstream services. Others are involved both in the provision of facilities and in the downstream and/or supporting services, such as ground handling, rescue fire, and air traffic control services. AIAL, WIAL and CIAL are mainly providers of infrastructure and facilities, but do supply some downstream and/or supporting services such as rescue fire services.
3.21 Markets can be viewed from both demand- and supply-sides. From the demand-side perspective, a number of airport services are often consumed together, regardless of who provides them. For example, to land a plane requires access to a number of facilities and services. The complementary nature of many of these services suggests that a broader market definition may be appropriate.
3.22 From a supply-side perspective, airports provide a variety of facilities and services to a range of different parties, including airlines, passengers (both New Zealand and foreign residents), freight forwarders and transporters, taxis and public transport, flight training operators, recreational pilots, aircraft maintenance and engineering businesses, and retailers and other concessionaires. Each of the facilities and services provided to each of these different users might conceivably fall within a different market.
3.23 The fact that many airport facilities and services are operated under single ownership suggests that integrated operation may be necessary for the efficient provision of services, in which case broader market definitions might be appropriate. It may be that a single supplier has lower transaction costs from organising its operations and co-ordinating activities internally, than would two or more independent suppliers attempting to do the same by interacting through the market.
3.24 On the other hand, it may be efficient for an activity to be provided by someone other than the airport company, suggesting that these activities could be supplied in unbundled form. However, even if it were efficient to do so, it does not necessarily follow that this will happen. Airport companies may be able to charge independent service providers higher than competitive rents (or other fees) to gain access to the airport, thereby discouraging them from doing so. Hence, the appearance of a lack of separate markets may conceal a potential for separate provision by non-integrated suppliers. There is legal precedent for markets to exist even in the absence of transactions occurring.38
3.25 In some previous cases involving the transport sector, the Commission has adopted broad market definitions where there were a number of very similar, geographically distinct, markets. For example, in Air New Zealand/Ansett the Commission stated, in connection with the definition of air services markets:39
Air services markets comprise a number of city pair routes. From a demand perspective, each could be considered as a separate market as, in most cases, services on one city pair are not seen by users as a substitute for services on another city pair. Fares on one route are unlikely to act as a constraint on those for another.
However, where a number of narrowly defined markets exhibit similar characteristics, they can be conveniently treated as a single class for the purposes of competition analysis. In this case, supply side substitutability and economies of scale and scope in operating route networks also suggest wider market definitions are appropriate.
3.26 In the decision just cited, a broad market approach was adopted, in which the various route markets were grouped together because of their similar demand characteristics and because of supply-side connections. This had the advantage of avoiding the potentially considerable duplication of the analysis relating to market definition and competition. A similar argument exists in favour of broad market definitions in the case of airports.
Review of Market Definitions Used in the Draft Report
3.27 With the above principles in mind, the following separate markets were put forward in the Draft Report:
- The aircraft movement market.
- The passenger aircraft access market.
- The freight aircraft access market.
- The airport access and utilities market.
- The commercial activities market.
3.28 The aircraft movement market came closest to matching the definition of airfield activities in the Airport Authorities Amendment Act. That market was defined as providing for the services and facilities for the movement of aircraft, and included: landing and take-off; aerodrome control; aircraft maintenance; and aircraft ancillary services. The last included aircraft refuelling and flight catering.
3.29 Although no parties at the Conference or in submissions had any fundamental concerns with the markets in the Draft Report, nor suggested that further markets ought to be considered, three parties did raise issues about them.
3.30 BARNZ agreed with the Commission's approach in the Draft Report. It noted that the aircraft movement market did not match exactly the definition of airfield activities in the Airport Authorities Amendment Act. BARNZ suggested that the statutory definitions needed to be reviewed.40
3.31 CIAL suggested that there was little practical relevance in distinguishing a freight aircraft access market from the aircraft movement market since freight is carried on most aircraft; the airfield services provided are the same for both passenger and freight aircraft; and the Commission did not suggest that the derived elasticities of demand and competitive conditions would be significantly different.41
3.32 AIAL broadly agreed with the Commission's approach and with its identification of segments within the broad market, but suggested that an in-depth analysis of these segments might have found that competition was limited in only some of them.42
3.33 The Commission has reconsidered the product market definitions set out in the Draft Report in the light of these comments. It now considers that the aircraft movement market was defined too broadly in the Draft Report, and that it should be re-defined to accord with the narrower definition of airfield activities in the Airport Authorities Amendment Act 1997. The justification for this revision is as follows:
- The purpose of this Inquiry is, in part, to test whether any of the three international airports operate in an environment of limited competition such that they have the potential to exert market power.
- It is unsatisfactory to define a market that differs significantly from that area of transactions that is the subject of the Inquiry. It should be noted that the Commission has no ability to review what activities are to be regarded as airfield activities in the Inquiry.
- Following competition law principles, markets should be defined with a view to highlighting the competition matter at issue.
- The price at issue for the Inquiry, and which could be subject to control, is the airport's landing charge, which is the charge that relates to airfield activities.
3.34 The details of the revised market definitions are set out below.
Airfield Services Market
3.35 Following the definition of airfield activities set out in the Airport Authorities Amendment Act, this market encompasses the provision of the following services and facilities for the landing, movement, parking and taking-off of aircraft:
- Airfields, runways, taxiways and parking aprons for aircraft ("sealed surfaces").
- Facilities and services for air traffic control.
- Facilities and services for parking apron control (if any).
- Airfield associated lighting.
- The maintenance and repair of airfield sealed services.
- Rescue, fire, safety and environmental hazard control services.
- Airfield supervisory and security services.
- Facilities and assets held for future airfield activities.
3.36 These facilities and services are generally demanded for the purpose of allowing aircraft movements, and share similar and complementary demand characteristics. They are also generally uneconomic to provide in unbundled form through different operators, although some (e.g., runway maintenance) may be contracted out by the airport. In addition, it is recognised that further complementary services (e.g., air traffic control) may be required for aircraft movements, and that these may be charged for separately.
Other Airport Activities
3.37 It is important to be aware of the other services (airfield and non-airfield) that the airports provide, especially given the potential scope for airports to cross-subsidise between airfield and other activities. However, the Commission considers that it is not necessary to go to the length of defining the relevant markets, since they are likely to be numerous, and in any case they lie outside of the scope of this Inquiry. Appendices 12, 14 and 16 provide details of the other services that AIAL, WIAL and CIAL provide.
Conclusion on Airport Markets
3.38 The Commission's conclusion is that, for the purposes of this Inquiry, the relevant product market is the airfield services market. Airfield services are services that fall within the definition of airfield activities, as defined in the Airport Authorities Amendment Act.
3.39 The three international airports under review each operate in that product market, as well as in a wide range of other potential markets that fall largely outside of this Inquiry. The issue of whether airports are in competition with each other in the airfield services market, or whether each operates in a geographically distinct market, is introduced below, and addressed further in the airport-specific chapters.
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