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• Necessary or Desirable

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• Airfield Inquiry

• Final Report Part IV

• Inefficiencies
  • Allocative Inefficiency
  • Productive Inefficiency
  • Dynamic Inefficiency
• Excess Returns
  • Historical Excess Returns
  • Excess Returns 2001 Year and Beyond

76. After examining the asset valuations, WACCs and cost allocations of the airports, the Commission then assessed the consequences of any state of "limited" competition in the airfield services market in the counterfactual to determine whether control is necessary or desirable in the interests of acquirers. The issue is whether control would lead to an improvement in acquirers' economic welfare. Consequences of a lack of competition can manifest themselves in various ways, including excessive returns, inefficiencies (allocative, productive and dynamic), and inferior product quality. These may be reduced by control. A full discussion on these consequences is presented in Chapter 7, and these are detailed for each airport in Chapters 8-10.

Inefficiencies

77. The Commission evaluated the overall economic efficiency of the airfield services supplied by AIAL, WIAL and CIAL. This was done on the basis of 2001 year prices, as well as on expected future prices. It also fed into the net benefits analysis that was conducted in order to determine whether control is recommended. The analysis of inefficiencies in the supply of airfield activities is presented in Chapter 7, and detailed for each airport in the airport-specific chapters.

78. The Commission considered allocative, productive and dynamic efficiencies.

Allocative Inefficiency

79. Allocative efficiency concerns the overall level of prices, and whether they are too high, resulting in output below the optimal level (and also returns being excessive).

80. Based on its views on asset base and WACC, the Commission estimated the competitive price and level of output, which it then compared with the actual price and output. Allocative inefficiencies were estimated both for 2001 year prices and into the future. The allocative inefficiencies were measured by deadweight losses of consumer and producer surplus resulting from prices being above the competitive level. Negative values in the table indicate situations where price was below the assessed competitive level.

Estimated Allocative Inefficiencies ($000s)

Productive Inefficiency

81. Productive efficiency requires that the cost of any given output be minimised, so that resources are not wasted.

82. The Commission considered that there is likely to be some room for improvement in the productive efficiency of the airfield activities provided at all three airports. The Commission adopted a range of 1-3% of airfield operating expenses (excluding depreciation) as a measure of productive inefficiency for AIAL, 0-1% for WIAL, and 1-2% for CIAL.

Dynamic Inefficiency

83. Dynamic efficiency occurs where firms adopt new products and processes in a timely fashion, and invest to ensure that capacity matches demand.

84. The Commission estimated the approximate extent of any dynamic inefficiencies in the airfield activities at each of the three airports. It only found evidence of dynamic inefficiencies in the case of AIAL.

Excess Returns

85. Airports should be able, on average over time, to earn a normal return on the optimised assets used in providing the services of airfield activities. An actual return in excess of the appropriate target WACC over time would suggest that the entity was earning an excessive or monopoly return, unless those returns reflect superior performance (e.g., superior productive efficiency improvements). Findings regarding productive efficiency were presented separately above.

86. The Commission estimated the distributional impact of any excess returns on airfield activities that AIAL, WIAL and CIAL may have earned historically, may be earning currently, or may potentially earn in the future. The analysis of excess returns is presented generically in Chapter 7, and detailed for each airport in Chapters 8-10.

Historical Excess Returns

87. The Commission conducted an analysis of the historical returns on the airfield activities of the three airport companies over the period since vesting. This involved adjusting the asset base, and comparing actual returns on that base with Commission-determined target (WACC) returns. The Commission's views on the relevant asset bases of the airports, and on their respective WACCs, were used in the analysis.

88. The Commission's estimate of the average historical returns earned by AIAL, WIAL and CIAL in respect of their airfield activities (relative to target) is shown in the following tables:

Returns on Airfield Activities Supplied by AIAL Since Vesting ($000s)

Returns on Airfield Activities Supplied by WIAL Since Vesting ($000s)

Returns on Airfield Activities Supplied by CIAL Since Vesting ($000s)

89. After analysing possible reasons for the positive returns identified for each airport, the Commission concluded that both AIAL and WIAL earned excess returns historically. No excess returns historically were identified for CIAL.

90. In AIAL's case, there is a trend of increasing returns, moving from negative returns just after vesting (1998) to large positive returns per annum currently. This finding led the Commission to conclude that AIAL has used its market power in airfield activities by raising prices above the efficient level. This reinforced the Commission's finding that there are insufficient constraints on the exercise of market power by AIAL.

91. A trend of increasing returns is also apparent in the case of WIAL, but the level of excess returns is not as significant.

Excess Returns 2001 Year and Beyond

92. Averaged annual historical data are useful for evaluating the pricing behaviour of airports in the past, but the returns fluctuate considerably from year-to-year over the period, and may be a poor indicator of present and future behaviour. The Commission examined the results of each airport's most recent financial year (2001) in more detail. It endeavoured to quantify the potential excess returns and inefficiencies implied by prices for airfield activities at each airport's 2001 financial year.

93. The analysis of the 2001 year only provides a snapshot of the pricing of airfield activities by the three airports at one point in time. During this Inquiry, all three airports increased their prices for airfield activities (AIAL and CIAL in 2000, and WIAL at 1 July 2002). Incorporating the airports' forecasts of growth in aircraft movements, operating costs and the asset base, the Commission extended its 2001 year analysis for the airports to forecast future returns. Forecasts are produced to 2003 for WIAL and CIAL, and to 2007 for AIAL (matching the period of AIAL's agreements with airlines).

94. The following returns are projected:

Estimated Future Excess Returns ($000s)

95. Excess returns of varying magnitudes are forecast for all three airports at the upper end of the estimated range. Only AIAL and WIAL display excess returns at the point estimate. The analysis does not take into account WIAL's proposed price increase of [...], but does take into account its recent 10% increase.