Countervailing Power and Regulation
3.103 As noted in Chapter 1, the current regulation of airports relies principally upon the countervailing power of airlines, and the requirements on airport operators to disclose information about their operations and to consult major customers.
3.104 At the Conference and in submissions, the views of the airlines and the airports on the strength of the countervailing power of the airlines differed markedly. BARNZ agreed with the Commission's preliminary finding in the Draft Report that none of the three airports is likely to be significantly constrained by countervailing power of airlines under the current regime, and that the airlines stand to lose greater amounts than airports from withdrawing custom.64 In contrast, the airports considered that the Commission had not given sufficient weight to the regulatory regime, and to the countervailing power of the airlines.65
3.105 When the regulatory regime was being considered in the late 1980s, one argument was that the presence of three major independent airports lent airlines some degree of countervailing power in the event of a major dispute over airport charges for international flights. It was suggested that some flights might be switched between airports, with Wellington's Australia flights being suggested as being the most vulnerable, since they could be moved either to Christchurch or Auckland.66
3.106 As a matter of principle, the ability of airline buyers to exercise countervailing power against the airport suppliers of airfield services would seem to depend upon a number of factors, including the following:
- The level of buyer concentration.
- The ability to switch between alternative suppliers.
- The ability to retaliate by imposing costs upon suppliers.
- The ability to restrain suppliers through the consultation process.
3.107 Each is introduced below, and discussed in detail in the airport-specific chapters.
Buyer Concentration
3.108 A buyer must account for a substantial portion of a supplier's business before it has the potential to exert significant countervailing power against that supplier. The threat by a small buyer to switch its business elsewhere will have little impact on the supplier's behaviour. Thus, the size of the airlines and their collective efforts may assist them in exerting countervailing power against the market power of the airports. However, in some situations, it may be a breach of the Commerce Act for the airlines to act collusively.
3.109 The Commission notes that BARNZ does not make decisions for its members. BARNZ submitted that section 30 of the Commerce Act means members cannot act collectively in pricing matters. As a result, any countervailing power they have cannot be collectively acted upon or exercised. BARNZ presents a unified voice upon common issues, but does not direct or engage in unified action. This limits the airlines ability to act collectively.67
Ability to Switch
3.110 The ability to switch to alternative suppliers is a crucial underpinning required for the exercise of countervailing power. One factor favouring countervailing power is that airlines' capital (in contrast to that of airports) is relatively mobile, and hence has the potential to be deployed elsewhere. For example, overseas-based international airlines have the power to deploy their limited fleets to destinations in other countries, and some have withdrawn services to New Zealand, or resorted to code-sharing, when services proved to be unprofitable (or code-sharing more cost effective). having said this, airlines do invest in costs that become sunk at particular airports (e.g., maintenance facilities), thereby reducing their ability (and hence the credibility of any threat) to move elsewhere, and undermining any countervailing power they might possess.
3.111 The earlier discussion on demand-side considerations in geographic market definition suggested that most domestic travel is destination-specific, and that the decisions of airlines to use particular airports reflects customer demand. Airlines respond primarily to the point-to-point demands, and as a result appear to have limited ability to divert traffic to other destinations as a way of putting pressure on airports that they consider to be over-charging. Hence, the attempt by an airline to exercise countervailing power by threatening to switch to another airport is likely to lack credibility, and therefore to be unsuccessful.
Ability to Impose Costs
3.112 Airports, especially the smaller ones, may be vulnerable to changes in airline schedules at short notice. For example, in 1995 Dunedin Airport found that in the space of a week the two major airlines using the airport - Air New Zealand and Ansett New Zealand - which previously had supplied their schedules for the year, both announced that they were switching from jets to mainly turboprop aircraft. These aircraft fell in a lower charging weight group, so that even with increased frequency total revenues fell. Other airports have made the same claim. Airports reliant on a very few airlines are susceptible to risks that aircraft will be downgraded. The downgrading of aircraft results in reduced revenue for airports until landing charges can be reset.
3.113 Landing charges can only be set after consultation with substantial customers. In addition to having to consult over charges, airport companies must also consult on all major capital expenditure decisions. This is often tied up with the setting of prices, as the key debate is generally how and when the costs of the investment will be recovered.
3.114 The consultation process required before charges are set typically lasts one-and-a-half to two years, which delays the implementation of any price increase, and imposes costs that may make airports think twice before proposing changes in the first place. However, under the Airport Authorities Act, the airports are required to consult on charges every five years, regardless of whether they increase (or decrease) charges.
3.115 In addition to the costs associated with consultation, the major airlines have demonstrated a willingness to withhold airport payments and to consider court action. The airports are unable (for safety reasons) to deny landing facilities to an aircraft. Litigation imposes substantial costs on an airport, both in terms of the expenses of lawyers and experts and in diverted management time. Both AIAL and WIAL have been involved in litigation with the airlines in recent years.
3.116 Clearly, airlines do have some power to impose, or to threaten to impose, costs on airport companies with whom they are in dispute.
Ability to Gain from Consultation
3.117 Airlines face the incentive, as users interested in minimising their costs in a competitive industry, to monitor airport charging and efficiency. The statutory consultation process provides an avenue through which this monitoring may take place. However, there has been dissatisfaction with the consultation process and its outcomes. This could reflect in part the existence of a single supplier, rather than airlines being able to choose between competing suppliers (in terms of a given destination).
3.118 Experiences and outcomes from recent consultation between the airports and airlines are discussed in the airport-specific chapters.
Conclusion on Countervailing Power and Regulation
3.119 The Commission considers that the potential countervailing power of the airlines cannot be ignored as a feature in the relevant markets. The current regulatory regime may provide some constraint on airports, the extent of which is considered in the airport-specific chapters. However, the Commission considers that, from a generic perspective, this constraint is unlikely to be sufficient to prevent competition in airfield services from being limited at each of the airports.
Back to Top