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• Airfield Inquiry

• Final Report Part IV

• Benefits of Control for Acquirers
• Costs of Control for Acquirers
• Net Benefits to Acquirers

96. In establishing that controlling airfield activities is in the interests of the acquirers of the goods or services, it is necessary to consider the net benefit to acquirers by assessing the benefits and costs of control.

97. In this Inquiry, the Commission considered that the relevant interests to be examined are those of acquirers of airfield activities. The Commission approached this question by assessing whether the imposition of control would benefit the interests of the acquirers of airfield activities - both the aircraft operators (as direct acquirers), as well as the ultimate consumers, namely aircraft passengers and those using air freight services (as indirect acquirers).

98. The Commission balanced the likely benefits of control to acquirers against the likely costs of control that would be borne by acquirers. Full discussion on the Commission's consideration of the likely benefits of control is conducted in Chapter 7, and detailed for each airport in Chapters 8-10.

Benefits of Control for Acquirers

99. Acquirers could only be said to benefit from control of airfield activities if they as a group were to be made better off, relative to their position in the counterfactual, after allowing for any off-setting costs that they would bear as a result of control being introduced. Transfers of wealth between suppliers and acquirers are relevant to assessing benefits for acquirers, even though from an efficiency perspective such transfers are treated as mutually off-setting.

100. The sources of potential benefits of control for acquirers are:

• Excess returns (if present) would be reduced or eliminated by control, through lower prices being set, which would lead to a transfer of wealth to acquirers.
• Lower prices would reduce or eliminate allocative inefficiency, further enhancing the benefit to acquirers (in respect of the consumer surplus). There may also be indirect or spill-over benefits from lower prices.
• Productive inefficiency (if present) would be reduced or eliminated by control, with the resulting cost savings likely to be passed on in still lower prices, to the benefit of acquirers.
• Dynamic inefficiency (if present) would be reduced or eliminated by control, with the resulting lower required revenue from landing charges (to cover costs) likely to lead to still lower prices, to the benefit of acquirers.

101. The Commission considers that all inefficiencies and excess returns identified in the counterfactual, if removed, would accrue to acquirers, other than those inefficiencies associated with producer surplus. The total potential benefits to acquirers of control are relatively large in the case of AIAL, and are much smaller at WIAL and CIAL.

Estimates of the Potential Benefits to Acquirers of Control on Airfield Activities Supplied by AIAL, 2001-2007 Average ($000s)

Estimates of the Potential Benefits to Acquirers of Control on Airfield Activities Supplied by WIAL, 2001-2003 Average ($000s)

Estimates of the Potential Benefits to Acquirers of Control on Airfield Activities Supplied by CIAL, 2001-2003 Average ($000s)

102. However, control provides an imperfect substitute for competition for dealing with the inefficiencies and excessive returns in markets caused by a lack of competition. The imperfect nature of control is reflected in the costs of control.

Costs of Control for Acquirers

103. In assessing the potential benefit to those who acquire airfield activities, the costs of control that fall upon those acquirers must be netted off from the benefits assessed above. It is the net benefits of control to acquirers that are relevant under section 52(b) of the Commerce Act. Hence, the concern is only with those costs of control that may be borne directly or indirectly by acquirers, and with those that are additional to the present situation (the counterfactual), which includes the costs of consultation and litigation. The extent of the costs borne by acquirers also depends upon whether they bear the cost of the control regime (or whether these are borne by suppliers), and on the design and nature of the regime itself. The Commission is of the view that, while acquirers are likely to receive most of the benefits of control, they could indirectly pay most of the costs.

104. The direct costs of control under the Commerce Act are likely to be greater than those of the current regulatory regime. In addition, there are indirect costs of control associated with the inefficiencies that control creates. Control cannot be relied upon to eliminate the entirety of any inefficiencies and transfer effects found to be present in airfield activities at the three airports.

105. The total costs of control (direct and indirect) to acquirers are estimated in the following table. In formulating its estimates of the costs of control, the Commission has assumed price cap regulation under Part V and has not considered other forms of control under Part V or regulatory intervention.

Likely Costs of Controlling AIAL, 2001-2007 Average ($000s)

Likely Costs of Controlling WIAL, 2001-2003 Average ($000s)

Likely Costs of Controlling CIAL, 2001-2003 Average ($000s)

106. In calculating the costs of control, the Commission has assumedprice cap regulation, as this is one of the more common forms of regulatory control overseas. Use of this form of control, for the purpose of estimating the costs of control, should not be seen as predetermining the form of control that the Commission would employ if control were declared. The Commission notes that a wide range of regulatory controls are available under Part V, which are likely to be less intrusive or less costly than price cap regulation. It would also need to be determined, however, how effective different control mechanisms would be in achieving the benefits of control, i.e., the overall cost-effectiveness of control would need to be assessed for control mechanisms besides price cap regulation. The Commission has not considered the efficacy of other forms of control.

107. In terms of other control mechanisms, section 70(2) enables the Commission to use formulas or other methods from which prices or revenues, or any part of a price or revenue, may be determined. One suggestion, from BARNZ, is that the parties could commercially negotiate, based either on the principles resulting from this report, or pricing principles established by the Commission as a form of control. In addition, the Commission notes there may be other policy options available to the Minister. Irrespective, the Commission is cognisant that any form of control utilised would need to be commensurate with the level of market power available to the controlled airport, the size of the anticipated excess return, and resulting net benefits to acquirers.

Net Benefits to Acquirers

108. In considering whether control is "necessary or desirable...in the interests of" acquirers, the Commission attempted to measure, at each of the three airports, the benefits that acquirers would be likely to receive if airfield activities were to be subject to control, net of the likely costs of such control that would be borne by those same acquirers (where the costs of control are additional to those already being incurred under the present regulatory regime). Only if the net benefits were positive could it be determined that the interests of acquirers would be served by control. The total benefits and total costs are an average of the 2001 year and the forecast years.

Estimates of the Potential Net Benefits to Acquirers of Control on Airfield Activities Supplied by AIAL, 2001-2007 Average ($000s)

Estimates of the Potential Net Benefits to Acquirers of Control on Airfield Activities Supplied by WIAL, 2001-2003 Average ($000s)

Estimates of the Potential Net Benefits to Acquirers of Control on Airfield Activities Supplied by CIAL, 2001-2003 Average ($000s)

109. On the balance of probabilities the Commission is satisfied it is necessary or desirable for the airfield activities supplied by AIAL to aircraft operators to be controlled in the interests of persons acquiring the goods or services (whether directly or indirectly). Acquirers of airfield activities supplied by AIAL would be likely to benefit from the removal of excess returns and inefficiencies, and that benefit would not be outweighed by the likely direct costs and inefficiencies that administering control could create. The prospective net benefits to acquirers from control based on the Commission's assumed cost of control are about 4% of the total landing charges they pay to AIAL and 10% of AIAL's net profit from airfield activities.

110. In the case of the airfield activities supplied by WIAL and CIAL, on the balance of probabilities the Commission does not consider it necessary or desirable for airfield activities to be controlled in the interests of acquirers. The potential benefits to acquirers of controlling WIAL or CIAL are not sufficiently large to warrant control, given the costs associated with control. The Commission has not taken into account WIAL's proposed price increase of [...] and has only taken into account its recent 10% increase.