Competition Analysis
Introduction
10.21 The Commission must determine whether the airfield services supplied by CIAL are supplied in a market in which competition is limited (or is likely to be lessened).
10.22 In Chapter 3, the Commission came to the conclusion that, for the purposes of this Inquiry, the relevant product market is the airfield services market, as defined by the airfield activities in the Airport Authorities Amendment Act 1997. 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, was also broadly canvassed. The Commission came to the preliminary view in Chapter 3 that, in terms of the geographical dimension of the market, its generic analysis of passenger and airline demand suggested that, for most traffic, none of the three airports faced significant competition either from each other, or from other regional airports.
10.23 In assessing CIAL's ability to exercise market power, the following considerations, which are further addressed below, are important:
- On the supply-side of the market, the actual competition from existing airports, or potential competition from new airports.
- On the demand-side, the possibility of airlines and their passengers and freight customers switching to other airports.
- The potential countervailing power of airlines.
- The present regulatory regime.
Demand Characteristics
10.24 The weighted elasticity of demand determined for Christchurch International Airport in Chapter 3 was [...].
Competition and Substitutes
10.25 In Chapter 3, the Commission noted that the nature of the investment in international airport facilities (with very large sunk costs), such as those at Christchurch International Airport, is likely to mean barriers to entry are high and, in consequence, competition from potential entrants is low. It was noted that Christchurch, like the other international airports, may face competition from other airports in the provision of airfield services. This competition may be of two kinds: the potential competition from prospective new entrants, and the existing competition from other airports already operating. The specific circumstances of Christchurch International Airport are now examined.
General Aviation
10.26 Airport substitutability from a supply-side perspective depends largely upon the size of aircraft. Smaller aircraft are more flexible as to where they can land, for example, a grass strip can be adequate for small, general aviation (GA) aircraft. GA aircraft are a large proportion of aircraft movements at Christchurch International Airport. There is a grass runway at Christchurch used by GA aircraft at times. For such aircraft, Rangiora Airport (approximately 20 minutes by road north of Christchurch International Airport) is a possible substitute. However, Christchurch has a large amount of GA traffic produced by a flight training school located at the airport. The Canterbury Aero Club also has its facilities at the Airport. In addition, Christchurch International Airport does not have the same operating constraints as Auckland and Wellington International Airports (in terms of peak hour congestion). GA aircraft landing charges at Christchurch have also not increased over the last ten years, instead they were decreased on 1 January 2001.
Domestic Aircraft
10.27 From a supply-side perspective, and focusing only on domestic traffic, which does not involve the use of the larger aircraft, there appears to be considerable scope for substitution between a number of airports in large centres and regional areas.
10.28 However, while there are many airports capable of servicing domestic aircraft, domestic travel tends to be destination specific. Other airports are, therefore, unlikely to be a substitute for Christchurch when passengers wish to go there. For example, most people wishing to travel to Christchurch - whether business people on a day return trip, leisure travellers making international connections, or commuter travellers who are interlining (who would suffer the inconvenience of having to transfer between airports if they were delivered to one airport but making a connection at another) - would find Dunedin, Timaru or Blenheim poor substitutes because of the time delays and extra costs imposed.
10.29 CIAL considers it faces some competition at the margin, citing planes over-flying its airport to Queenstown as an example.411 However, this presumably reflects the growing popularity of Queenstown as a destination in its own right, such that direct flights by larger aircraft can now be justified, rather than direct competition between the airfield services provided at the two airports.
10.30 Even if CIAL imposed a substantial increase in airport charges, competition between the domestic airlines would probably ensure that Christchurch remained the destination. If an increase in charges were to cause an airline to stop servicing Christchurch International Airport, another airline would likely start operating as demand for air travel to and from Christchurch would still exist, or, alternatively, remaining airlines would probably increase flight frequencies to fill the gap. Further, airport charges are not the most significant operating costs for an airline, so airlines would likely accept an increase in costs, rather than fly to an alternative airport and lose to a competitor the business generated from servicing Christchurch International Airport (given the additional loss of losing connecting international flights or not being a person or entity's preferred airline because all airports are not serviced). This suggests that, for domestic services, Christchurch International Airport has essentially a regional monopoly, in that, in the large majority of cases, there are no substitutes for their services for travellers wishing, and freight needing, to fly into or out of Christchurch.
International Aircraft
10.31 As noted in Chapter 8, Auckland International Airport is New Zealand's largest and busiest airport for passengers and freight. Christchurch is the only other airport in New Zealand also capable of handling the largest jets. As such, in the supply of airfield services to long-haul international flights, Christchurch provides competition for Auckland International Airport (in terms of point of entry or exit from New Zealand). While Christchurch International Airport operates as the gateway to the South Island, it is somewhat limited by the relatively small size of its population base. Also, hubbing by Air New Zealand out of Auckland is likely to reduce the potential for Christchurch to compete with Auckland for such services. In addition, downturns in the numbers of tourists visiting New Zealand and the financial position of airlines often impact on the extent of international services operating at Christchurch. Airlines have regularly reduced or stopped services (or reduced aircraft sizes) to Christchurch, choosing instead to connect Christchurch passengers to flights out of Auckland. However, flights to Christchurch have equally increased when justified by demand.
10.32 Christchurch International Airport does have the advantage of being the base from which air services to and from Antarctica are provided.
10.33 There is potential for more competition in shorter distance international routes such as Australia and the South Pacific. A number of airports can, and currently do, service the smaller Boeing 737 and 767 aircraft that are operated on these routes. In Christchurch International Airport's case, Dunedin is the most likely competitor in terms of outbound flights by New Zealand residents, with Air New Zealand operating its discount Freedom Air services to Australia. Queenstown is also a competitor in terms of inbound tourists, particularly skiers in the winter months. However, the Commission considers that neither Dunedin or Queenstown provide sufficient competition to be viewed as close substitutes for most travellers. In terms of inbound tourists, their choice of airport is likely to be driven by destination (e.g., the choice between skiing in Central Otago versus Mt Hutt). There is scope for certain airports to compete for traffic in Christchurch, but only at the margin.
Conclusion
10.34 The Commission considers there are supply side substitutes for some of the airfield services supplied by CIAL. In the case of long-haul international flights, Auckland is a substitute for Christchurch. There are instances where services have been discontinued at Christchurch, but continue to operate at Auckland. In the case of flights to and from Australia, Dunedin and Queenstown are potential substitutes, but such traffic can be more destination-specific, such that they are not close substitutes. There are no realistic substitutes for domestic services. On the whole, the potential or existing competition faced by CIAL in supplying airfield services is not significant.
10.35 The Commission notes that CIAL, in submissions, agreed with the Commission's findings that:412
- CIAL operates in a distinct geographic market.
- There are no substantial near entrants (regional airports) to compete effectively with Christchurch International Airport for domestic commuter and international traffic.
- Potential competition from entry of new airports is weak.
Constraints on Exercise of Market Power
10.36 As noted in Chapter 3, 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 with substantial customers.
Countervailing Power
10.37 At the Conference and in submissions, views of the airlines and CIAL on the strength of countervailing power of airlines differed markedly. BARNZ agreed with the Commission's preliminary finding in the Draft Report that CIAL is unlikely to be significantly constrained by the countervailing power of airlines under the current regime, and that the airlines stand to lose greater amounts than CIAL from withdrawing custom.413 In contrast, CIAL considered the Commission had not given sufficient weight to the regulatory regime and countervailing power of the airlines, although CIAL stated it had never denied that competition is limited in its market for airfield activities.414
10.38 CIAL considered that the Commission had "seriously underestimated the countervailing power of the airlines", through which it was significantly constrained. This countervailing power comes from three sources: the current regulatory regime (which CIAL viewed as being "medium-powered" when assessed against an international scale); the requirement to consult, which has the effect of delaying price changes while the consultation proceeds and then "locking in" price changes despite the potential for adverse market changes to occur; and the fact that its biggest customer provides in excess of 60% of its business (thereby giving that customer, in CIAL's view, significant negotiating leverage). CIAL cited the last consultation round as an example, which took 18 months to complete, and which led to prices being set for three years, during which period Korean Air ceased to use the airport and Qantas New Zealand collapsed.415
10.39 CIAL also cited in support of its argument the comment by McGechan J in Air New Zealand v WIAL that consultation provides a:416
...compulsory opportunity for vigorous and informed objection by powerful airline interests, and the political and consumer consequences which may follow.
10.40 That statement was made before information disclosure was made part of the regulatory regime. CIAL submitted that the requirement to consult imposes greater restrictions on airports than the Commission allowed for in the Draft Report, especially, in CIAL's view, for a relatively small airport like Christchurch facing the combined resources of the airlines operating collectively through BARNZ.417
10.41 CIAL argued that the market between airport and airlines is one of mutual interdependence in which, typically, there are no contracts. CIAL claimed it was performing an unwritten contract to satisfy both present and prospective future demand. Christchurch International Airport's biggest customer (Air New Zealand) provides in excess of 60% of its business. The ability of CIAL to price discriminate is circumscribed by ICAO rules. CIAL is vulnerable both to changes in airlines' schedules (including the size of aircraft operated) - which adds to the uncertainty of planning to meet demand over the lengthy time period needed for major airport developments - and to changes in the financial position of airline customers.418
10.42 CIAL) further submitted that CIAL's charges had remained unchanged over the period from 1989 to 2000 (apart from a slight increase in domestic charges in 1991). In real terms, CIAL's charges had fallen over the period.419
10.43 In general, 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 are an important determinant of any countervailing power against the market power of the airports.
10.44 The number of airlines operating at Christchurch International Airport is quite small, and two airlines (Air New Zealand and Qantas) provide the bulk of CIAL's revenues from landing charges. In addition, there is a growing tendency for international airline alliances. Airlines have also demonstrated capability to act collectively, as through BARNZ, and to engage in lobbying, in pursuit of common interests. This suggests that the buyer concentration needed as a prerequisite for the exercise of countervailing market power exists at Christchurch International Airport, at least in principle. The question is whether it is effective.
10.45 The ability to switch to alternative suppliers is crucial to the exercise of countervailing power. The behaviour of a supplier with market power is likely to be moderated where a significant buyer can credibly threaten to switch its custom elsewhere.
10.46 One factor favouring countervailing power is that the capital of airlines (in contrast to that of CIAL) is relatively mobile, and hence has the potential to be relatively easily 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 this proved more cost-effective than providing a direct service. having said this, airlines do invest in costs which arguably 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. It is difficult to see how Air New Zealand, for example, could withdraw from providing air services in this country. Air New Zealand has a strong position in New Zealand and relies on the country to some extent for its marketing and brand image. The airline also has significant maintenance facilities at Christchurch International Airport.
10.47 The major airlines have demonstrated a willingness to withhold airport payments and to consider court action. This indicates that the airlines do have some power to impose, or to threaten to impose, costs on CIAL.
Consultation
10.48 Airlines, as users interested in minimising their costs, want to monitor airport charging and efficiency. The statutory consultation process provides an avenue through which this monitoring may take place. However, the airlines have been dissatisfied with the consultation process and its outcomes to date.
10.49 Over a period of 18 months up till 1 January 2001, CIAL consulted with its substantial customers over charges. CIAL went through a number of proposals during consultation before arriving at new higher charges. However, CIAL did not propose a flat across-the-board increase. In general, the landing charges for international aircraft decreased, while the landing charges for domestic aircraft increased. Overall, charges for large aircraft increased over the course of consultation, while charges for small aircraft decreased or remained unchanged. New charges were announced in December 2000 and took effect on 1 January 2001.
10.50 CIAL's recent consultation suggests that the airlines may have some power to moderate prospective increases in charges, at least in some circumstances.
Conclusion
10.51 There are clearly widely disparate views on the effectiveness of countervailing power of the airlines, as augmented by the regulatory requirement for CIAL to consult with its substantial customers, and to publish information under disclosure requirements.
10.52 The Commission considers that the countervailing power of the airlines cannot be ignored as a feature of the relevant markets. The current regulatory regime appears to provide some constraint on CIAL. However, the Commission is of the view that there are not sufficient constraints on the exercise of market power by CIAL. While CIAL is required to consult with substantial customers before setting charges, CIAL ultimately has the power to set whatever charges it thinks fit. There is no requirement to negotiate or reach commercial agreement. Airlines do have some power, but their ability to effectively exercise that power is limited.
Assessment of Whether Competition is Limited
10.53 CIAL has relatively high market power in the market for airfield services due to the lack both of supply side substitutes and adequate countervailing power of airlines. It is not economical, and often not possible, to duplicate many of the assets associated with facilitating aircraft movement in a particular region, and demand tends largely to be region-specific. The lack of alternative airports to meet customer-driven origin and destination demand, means airlines cannot credibly threaten to remove sufficient custom to produce an undesirable consequence, and thereby discipline any airport's pricing decisions. Any reduction in use by one airline will tend to be replaced by increased use by another airline, as that second airline moves to meet the customer-driven origin and destination demand in the competitive market.
10.54 The structure of the market, and the impact of a regulatory approach designed to encourage countervailing power, provides a counter-weight to the potential market power of the major airports. However, the presence of such a regulatory framework indicates a concern about possible market power.
10.55 The Minister's Notice requires the Commission to report to the Minister on 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". The airfield services supplied by CIAL to aircraft operators form the bulk of the airfield services market at Christchurch International Airport and are, in the Commission's view, subject to limited competition. The goods or services (falling within the definition of airfield activities) provided by CIAL to aircraft operators that are subject to limited competition are set out in Table 59.
Table 59: Airfield Services Supplied by CIAL Subject to Limited Competition
| Airfield Activities | Goods and Services Supplied by CIAL |
|---|
| Airfields, runways, taxiways, and parking aprons for aircraft | Airfields, runways, taxiways, and aprons. |
| Facilities and services for air traffic control | None. |
| Facilities and services for parking apron control | None. |
| Airfield associated lighting | Apron flood lighting. |
| Services to maintain and repair airfields, runways, taxiways, and parking aprons for aircraft | Day-to-day maintenance (grass moving, pavement sweeping, and patching). |
| Rescue, fire, safety, and environmental hazard control services | Rescue, fire, safety, and environmental hazard control services. |
| Airfield supervisory and security services | Provides and maintains security fencing and perimeter patrols. |
| Facilities/assets held for future airfield activities | None. |
10.56 The Commission has reached the conclusion that the airfield services supplied by CIAL are supplied in a market in which competition is limited (or is likely to be lessened). The first requirement of section 52 is, therefore, satisfied. The remainder of this Chapter considers whether it is necessary or desirable for the prices, revenue, or quality standards of any of the goods or services identified above to be controlled in the interests of acquirers; and whether airfield activities should be controlled.
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