Limited Competition
18. If airfield activities were supplied in a market in which competition is limited or likely to be lessened, then section 52(a) would be satisfied. In considering this question, the Commission asked whether competition is currently limited. Finding that competition is limited for the airfield activities at each airport, the Commission did not need to consider whether competition is likely to be lessened. The Commission's analysis of competition in the supply of airfield activities is introduced generally in Chapter 3, and conducted separately for each airport in Chapters 8-10.
Relevant Markets
19. To provide a framework within which to analyse whether competition might be limited, the Commission defined the market(s) related to the supply of airfield activities. In defining the relevant market(s), the Commission took account of the relationships between airfield activities, which are the specific focus of the Inquiry, and the other activities conducted at the airports in question.
20. 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 1997.
Constraints on Market Power
21. The Commission investigated whether any of the three airport companies are able to exercise market power in the airfield services market, such that competition is limited (in terms of section 52 of the Commerce Act). In doing this, it considered whether or not sufficient constraints (including both structural and behavioural aspects) exist. The possible constraints on an airport's exercise of market power may include the following:
- The potential competition between airports or from other modes of transport.
- The potential for new entry.
- The potential countervailing power of airlines.
- The existing regulatory environment (which includes a requirement to consult on charges and a threat of further regulation).
- Competition from off-airport sources of supply.
22. The competition faced by the airfield activities at airports from those at other airports may be of two kinds: the existing competition from other airports already operating, and the potential competition from prospective new entrants. The Commission's conclusion is that the nature of the investment in a major airport facility, such as those at Auckland, Wellington and Christchurch, is such that barriers to entry are high, and hence that competition from potential entrants is very low. The extent of existing competition for airfield activities depends largely on the degree to which existing airports are substitutes for one another. The Commission's view is that there is some scope for supply-side substitution for general aviation aircraft given the presence of small airfields in the vicinity, but not for larger (commercial) aircraft. There are not substantial near entrants to compete effectively with the three large airports for domestic and international traffic. Alternative modes of transport are also unlikely to provide a constraint on the behaviour of airport companies.
23. The airfield services supplied by one airport are not seen on the demand-side as substitutable for another airport - demand is driven by the destination to which passengers want to go. The pricing of airfield activities appears to have little impact on demand. The Commission's estimate of the weighted average elasticity of demand for airfield activities at Auckland and Christchurch is [...] and for Wellington [...].
24. The current regulation of airports relies largely upon the countervailing power of airlines, the requirements on airport operators to consult with them before setting charges, and the threat of further regulation. However, analysis suggests that meeting demand for flights is the overriding factor determining which airport an airline flies to, rather than the costs of doing so, and that airlines' countervailing power is generally limited. Airport charges, while a significant cost for airlines, are unlikely to make the difference between an airline flying or not flying to a particular city, although there is some elasticity at the margin. However, there is some evidence that acquirers' behaviour constrains the airport companies at the margins, but it does not, by itself, prevent exercise or even abuses of market power.
25. The Commission's conclusion is that there are insufficient constraints on AIAL's, WIAL's and CIAL's ability to exercise market power in the supply of airfield activities compared to what would be found in a market where competition was workable or effective. Each operates largely within its own geographically distinct regional airfield services market, which are the greater population areas around the three airports (namely the greater Auckland, Wellington and Christchurch areas). Acquirers of airfield activities at each airport do not see other airports as offering viable substitute services.
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