Conclusions
3.120 The purpose of this Chapter has been to consider the markets appropriate for this Inquiry, and to provide a general assessment of the competition facing (and constraints imposed on) the airports in the supply of airfield activities. In terms of the product dimension of the market, it was considered appropriate to define an airfield services market, which encompassed the range of functions included in the definition of airfield activities in the Airport Authorities Amendment Act. This had the effect of making congruent the definition of the market and the area of the airports' operations subject to the Inquiry.
3.121 In terms of the geographical dimension of the market, the generic analysis of passenger and airline demand suggested that, for most traffic, none of the three airports face significant competition from each other or from other regional airports. This suggests that there are geographically distinct regional airfield services markets. The lack of competition stems from passenger demand tending to be specific as to departure and arrival points, and from passengers being unlikely to switch to other airports. This is tested further in the airport-specific chapters.
3.122 This tendency is reinforced by the fact that, although passenger demand for air travel appears to be fairly price elastic, the associated derived demand for airfield services is highly inelastic because airfield charges make up a small proportion of the price of air travel. For these reasons, an airport that sought to exploit market power by raising its landing charges would not be prevented from doing so by passengers switching to another airport, since the increase in landing charges would have a very small impact on ticket prices, even if they were to be fully passed on by airlines.
3.123 The ability of another airport to be built is a potential constraint on the ability of the three airports to exert market power. However, the barriers to the entry of new airports are likely to be very high, and hence the potential competition from this source is weak at best. Among the entry barriers are the very large and mainly sunk investments involved, the stringent resource planning requirements, and the difficulty of gaining sufficient market share to spread the overhead costs thinly so as to be able to compete against a determined and well-established incumbent.
3.124 Another constraining factor is the possibility that certain regional airports might constitute "near entrants" into the relevant markets, especially if they were to be upgraded to handle larger aircraft, or if new airlines were to set up and use them. However, while it is recognised that competition at the margin from regional airports may provide some constraint, the degree is limited by the geographical nature of demand, and by the apparent unwillingness of the major airlines to divert international flights to regional airports. Hence, existing competition from regional airports cannot be relied upon to be effective in preventing the airports from exerting market power.
3.125 A further possible source of constraint is the countervailing power of airlines, which is fostered by the airport specific regulatory regime, under which the large airports are obliged to consult with their major customers over pricing and major investments, and to furnish information about their operations. The airports have argued that they are indeed constrained to some degree by such countervailing power, and have cited instances where that seems to have been the case.68 However, the Commission considers that, generically speaking, countervailing power provides a counterweight to the market power of the airports only to a limited extent. This is discussed in detail in each of the airport-specific chapters.
3.126 No conclusions are reached in this Chapter regarding whether airfield activities provided by the three major international airports are supplied or acquired in a market in which competition is limited or is likely to be lessened. This question is addressed separately for each airport in the airport-specific chapters.
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