AFCARALIA

SUMMARY

1. In accordance with the practice of the Australian Competition Tribunal for matters of significant public interest, the following summary has been prepared to accompany the Determination made today, and the Reasons for Determination which will be published on Monday, 12 December 2005 after any outstanding issues of confidentiality have been resolved. The summary is intended to assist in understanding the outcome of this proceeding and is necessarily not a complete statement of the reasoning, or the conclusions, of the Tribunal. The only authoritative statement of the Tribunal’s reasons is that contained in the published Reasons for Determination which will be published on 12 December 2005 and will be available on the internet at www.fedcourt.gov.au, together with this summary.

2. The matter before the Tribunal, constituted by Goldberg J (President), Mr G F Latta and Dr J S Marsden, was an application for review sought by Virgin Blue Airlines Pty Limited (“Virgin Blue”) of the decision of the Parliamentary Secretary to the Commonwealth Treasurer not to declare a service, described as the “Airside Service”, provided by Sydney Airports Corporation Limited (“SACL”) at Sydney (Kingsford‑Smith) International Airport (“Sydney Airport”).

3. On 1 October 2002, Virgin Blue applied to the National Competition Council (“NCC”) for a recommendation that the Airside Service be declared pursuant to s 44G of the Trade Practices Act 1974 (Cth) (“TPA”).

4. The Airside Service was defined as:

“(a) a service for the use of runways, taxiways, parking aprons and other associated facilities (Airside Facilities) necessary to allow aircraft carrying domestic passengers to:

(i) take off and land using the runways at Sydney Airport; and

(ii) move between the runways and the passenger terminals at Sydney Airport”.

5. The NCC recommended to the Parliamentary Secretary that the Airside Service should not be declared on the basis that it did not meet the requisite criteria in ss 44G(2)(a) and (f) of the TPA. Those criteria require that the NCC be satisfied:

· That access or increased access to the Airside Service would promote competition in at least one market other than the market for the Service;

· That access or increased access to the Airside Service would not be contrary to the public interest.

6. On 29 January 2004, the Parliamentary Secretary to the Commonwealth Treasurer published his decision not to declare the Airside Service on the basis that it did not meet the requisite criteria in ss 44H(4)(a) and (f) of the TPA (which are in identical terms to criteria (a) and (f) of s 44G(2)).

7. On 18 February 2004, Virgin Blue applied to the Tribunal for a review of the Parliamentary Secretary’s decision. The parties involved in the review were Virgin Blue, the NCC, Qantas Airways Limited (“Qantas”), SACL and the Parliamentary Secretary. The review by the Tribunal was a re‑consideration of the matter which was before the Parliamentary Secretary.

8. We have formed the view that the Airside Service in respect of which declaration was sought by Virgin Blue encompasses those activities which commence, in relation to the departure of an aircraft, with the loading of aircraft parked at a departure gate or point of embarkation with baggage, freight and all products required on the flight, and the entrance of passengers into the aircraft. It terminates when the aircraft is airborne. It also encompasses those activities which commence, in relation to an arriving aircraft, at a point when the aircraft lands, taxis to an arrival gate or point of disembarkation, and the passengers leave the aircraft, their baggage and freight are unloaded, and supplies, waste and other items used during the flight are removed from the aircraft. In short, the “Airside Service” covers all movement in relation to aircraft between runways and passenger arrival and departure gates and the servicing, maintenance, equipping and re‑equipping of aircraft at the start and end of a flight.

9. Pursuant to s 44H(4) of the TPA, the Tribunal cannot declare a service unless it is satisfied of all of the following criteria:

(a) that access or increased access to the service would promote competition in at least one market other than the market for the service;

(b) that it would be uneconomical for anyone to develop another facility to provide the service;

(c) that the facility is of national significance having regard to its size, its importance to constitutional trade or commerce, or the importance of the facility to the national economy;

(d) that access to the service can be provided without undue risk to human health or safety;

(e) that access to the service is not already the subject of an effective access regime;

(f) that access or increased access to the service would not be contrary to the public interest.

10. Criteria (b) to (e) were not in issue in the proceeding, and we are satisfied that each of those criteria has been satisfied. The criteria which were contested in the proceeding were criteria (a) and (f).

11. Criteria (a) required market definition. We found that the “market for the service” is the market for aeronautical services in Sydney. The “market other than the market for the service” (referred to as the “dependent market”), is the market for the carriage of domestic air passengers into and out of Sydney.

12. The critical issue in assessing whether increased access would promote competition in the dependent market was whether there would be an enhancement of the competitive environment, and a greater opportunity for the implementation of competitive conduct in the dependent market. This assessment involved comparing the future with declaration against the future without declaration, that is, a comparison of the factual and counterfactual.

13. One of the principal issues canvassed in the proceeding was whether SACL had misused its monopoly power in such a manner as warranted the conclusion that there had been, and would continue to be in the absence of declaration of the Airside Service, an effect on competition in the dependent market. When we refer to a misuse of monopoly power, we are referring to an exercise of power in a manner which would not occur in a competitive environment.

14. We are satisfied that SACL has misused its monopoly power in the past, and that, unless the Airside Service is declared, competition in the dependent market will continue to be affected. In particular, we are satisfied that SACL has misused its monopoly power by the manner in which, and the reasons for which, it changed the basis for its charge for providing the Airside Service in July 2003 from an aircraft’s maximum take‑off weight (“MTOW”) basis to a charge on a per‑passenger basis (“known as the Domestic PSC”). This change adversely affected low cost carriers such as Virgin Blue as against full service airlines such as Qantas. Further, the evidence disclosed that SACL chose a passenger‑based charge “because Qantas preferred it”. At the time the basis for this charge was altered, SACL knew that it would impact more adversely on Virgin Blue than on Qantas.

15. SACL submitted that the Domestic PSC encouraged a more efficient use of the services and facilities provided at Sydney Airport than did the former MTOW‑based charge, and that efficient pricing principles warranted the use of a Domestic PSC. We have rejected this submission. We are satisfied that efficient pricing of the Airside Service required consideration of the underlying cost drivers of that Service by reference to the nature of the aircraft using the Service, rather than by reference to the number of passengers travelling in such aircraft.

16. A number of issues were raised in relation to the level of revenue SACL would be able to derive in the future. We are satisfied that, in the light of the history of the development of the Domestic PSC and the manner in which SACL is contemplating imposing further charges, these revenue issues are likely to be resolved by SACL exercising monopoly power to impose upon the airlines a level of revenue growth which would not be open to it in a competitive environment. While these issues are outstanding, and where the airlines have no recourse to independent arbitration and determination, there remains the opportunity for SACL to impose higher and additional charges upon the airlines which would be unlikely to be accepted in a more competitive environment.

17. We are satisfied that any commercial negotiations in the future between SACL and airlines using Sydney Airport as to the non‑price terms and conditions on which the airlines utilise the facilities and related services at Sydney Airport are likely, as in the past, to continue to be protracted, inefficient, and ultimately resolved by SACL using its monopoly power to produce outcomes that would be unlikely to arise in a more competitive environment. This situation is exacerbated by the lack of an appropriate dispute resolution procedure providing independent arbitration in any of the commercial agreements entered into or proposed between SACL and the airlines.

18. We are satisfied that the ability of SACL to exercise monopoly power in relation to the airlines’ use of the Airside Service is not subject to any effective constraints. We do not consider that the airlines have any significant countervailing power, or that the threat of re‑regulation by the Commonwealth Government is an effective constraint upon SACL, or that SACL’s ability to derive non‑aeronautical revenues operates as a sufficient constraint on SACL’s monopoly power.

19. We are satisfied that the environment for competition in the market for the carriage of domestic air passengers into and out of Sydney would be enhanced if the Airside Service was declared, in particular, because of the opportunity that declaration would create for airlines to have any access dispute with SACL resolved by the independent arbitration of the Australian Competition and Consumer Commission (“ACCC”), there being no other effective dispute resolution procedure available to domestic airlines using Sydney Airport.

20. We are therefore satisfied that increased access to the Airside Service would promote competition in the dependent market and consequently that criterion (a) is met.

21. We are also satisfied that increased access to the Airside Service would not be contrary to the public interest. We are satisfied that increased access to the Airside Service will promote competition in the dependent market, and that any costs of regulation arising from declaration are not of such weight that, notwithstanding this finding, increased access to the Airside Service would be contrary to the public interest. Nor are we persuaded that any other reason exists which would make increased access to the Airside Service contrary to the public interest.

22. We are therefore satisfied that criterion (f) is met.

23. We note that the access regime provided for in Pt IIIA involves two stages. Declaration of a service, governed by Div 2 of Pt IIIA, is the first stage. Upon declaration, the commercial relationship between the provider of the service and the access seeker continues, and they have the opportunity to pursue commercial dialogue and negotiations with a view to reaching agreement on terms and conditions of access to the service. Where the parties are unable to reach agreement in relation to an aspect of access to the service, the second stage of the access regime is enlivened. The second stage of the access regime, governed by Div 3 of Pt IIIA, enables an access seeker or a provider, in default of agreement, to have issues as to access determined by arbitration conducted by the ACCC.

24. Declaration of the Airside Service does not therefore inexorably lead to arbitration; there is still scope for commercial resolution of access issues between the parties. Rather, declaration enables commercial negotiations to continue, but provides an opportunity for independent arbitration of the terms and conditions of access to the Airside Service should those commercial negotiations prove unsuccessful.

25. We therefore make the following determination, pursuant to s 44K(8)(b) of the TPA:

1. The decision of the Parliamentary Secretary to the Commonwealth Treasurer of 29 January 2004 not to declare the services required for the use of runways, taxiways, parking aprons and other associated facilities (Airside Facilities) necessary to allow aircraft carrying domestic passengers to:

(i) take off and land using the runways at Sydney Airport; and

(ii) move between the runways and the passenger terminals at Sydney Airport.

be set aside.

2. The service for the use of runways, taxiways, parking aprons and other associated facilities (Airside Facilities) necessary to allow aircraft carrying domestic passengers to:

(i) take off and land using the runways at Sydney Airport; and

(ii) move between the runways and the passenger terminals at Sydney Airport,

(defined as the “Airside Service”), be declared.

3. The declaration in paragraph 2 be effective on and from 9 December 2005 and shall expire on 8 December 2010.

AUSTRALIAN COMPETITION TRIBUNAL

Virgin Blue Airlines Pty Limited [2005] ACompT 5

TRADE PRACTICES – application pursuant to s 44K(2) of the Trade Practices Act 1974 (Cth) – application for review of a decision made by the Parliamentary Secretary to the Commonwealth Treasurer not to declare a service described as the “Airside Service” – Airside Service provided at Sydney (Kingsford‑Smith) International Airport – whether criteria in s 44H(4) of the Trade Practices Act 1974 (Cth) satisfied – meaning of “increased access” – whether increased access to the Airside Service would promote competition in the market for the carriage of domestic air passengers into and out of Sydney for the purposes of s 44H(4)(a) of the Trade Practices Act 1974 (Cth) – whether increased access to the Airside Service would not be contrary to the public interest for the purposes of s 44H(4)(f) of the Trade Practices Act 1974 (Cth).

Airports Act 1996 (Cth): ss 71, 192

Civil Aviation Legislation Amendment Act 2003 (Cth)

Competition Policy Reform Act 1995 (Cth)

Federal Airports Corporation Act 1986 (Cth)

National Third Party Access Code for Natural Gas Pipeline Systems: s 1.9(a)

Prices Surveillance Act 1983 (Cth): ss 21, 22(2)(a), 27A

Trade Practices Act 1974 (Cth): Pt IIIA, Div 2, Div 3, ss 44B, 44F, 44G, 44H, 44I, 44K, 44S, 44U, 44V, 44X, 44Y, 44ZF

Productivity Commission Inquiry Report, Price Regulation of Airport Services, January 2002

Freight Victoria Limited (2002) ATPR ¶41‑884, considered

Rail Access Corporation v New South Wales Minerals Council Ltd (1998) 87 FCR 517, considered

Re Duke Eastern Gas Pipeline Pty Ltd (2001) 162 FLR 1, followed

Re Queensland Co‑operative Milling Association Ltd and Defiance Holdings Ltd (1976) 8 ALR 481, considered

Re Review of Declaration of Freight Handling Services at Sydney International Airport (2000) ATPR ¶41‑754, considered

File No 1 of 2004

RE: APPLICATION FOR REVIEW OF THE DECISION BY THE PARLIAMENTARY SECRETARY TO THE TREASURER DATED 29 JANUARY 2004 IN RELATION TO THE APPLICATION FOR DECLARATION OF THE AIRSIDE SERVICE PROVIDED AT SYDNEY AIRPORT

BY: VIRGIN BLUE AIRLINES PTY LIMITED

JUSTICE A H GOLDBERG (President), MR G F LATTA & DR J S MARSDEN

12 DECEMBER 2005

SYDNEY

CONTENTS

INTRODUCTION ………………………………………………………..…………… [1]

BACKGROUND …………………………………..………………………………….. [14]

PRIVATISATION OF AUSTRALIAN AIRPORTS ……………………………….. [18]

REGULATION OF AIRPORTS ………………………………………………….. [23]

AIRLINES: NATURE AND HISTORY ………………………………………….. [43]

Virgin Blue and the LCC business model ………………………………. [46]

Qantas and the FSA business model …………………………………….. [56]

Jetstar …………………………………………………………….……….. [62]

REX …………………………………………………….……………… [63]

LEGISLATIVE FRAMEWORK: PT IIIA OF THE TPA ………….…………….. [65]

THE ISSUES OF DETERMINATION BY THE TRIBUNAL …………..………… [71]

CRITERIA (b) TO (e) ………………………………………………………………… [74]

CRITERION (a) ……………………………………………………………………..... [84]

WHAT IS THE “SERVICE” WHICH IS THE SUBJECT OF THE PROPOSED

DECLARATION? ….…………………………………………………………….. [86]

WHAT IS THE “MARKET FOR THE SERVICE” AND THE “MARKET OTHER

THAN THE MARKET FOR THE SERVICE”? ………………………………….. [124]

WHAT IS THE MEANING AND SCOPE OF THE EXPRESSIONS “ACCESS”

AND “INCREASED ACCESS”? …………………..…………………………… [130]

“PROMOTION OF COMPETITION” IN A DEPENDENT MARKET …….. [145]

APPLICATION OF CRITERION (a) TO THE PRESENT PROCEEDING …… [163]

SACL’S USE OF ITS MONOPOLY POWER ……………………………………. [166]

SACL’S REVENUE AND PRICING POLICIES ……………………………….... [167]

THE CHANGE IN DOMESTIC AIRSIDE SERVICE CHARGES FROM MTOW

TO PSC …………………………………………………………………………. [200]

Efficient use of Sydney Airport ……………………………………….. [224]

The use of larger aircraft ……………………………………………….. [246]

Barriers to entry ………………….……………………………………… [258]

Sustainability of basis for charging in terms of revenue ……………… [264]

Equity, commercial risk sharing and transparency of charges ……….. [272]

Industry standards ………………………………………………………. [281]

Pricing in accordance with the ACCC’s allowable revenue ceiling …. [289]

DID SACL HAVE AN INCENTIVE TO RESTRICT COMPETITION IN THE

DEPENDENT MARKET? ……………………………………………………… [296]

LEVEL OF REVENUE ISSUES ………………………………………………… [313]

Revenue level ……………………………………………………………. [315]

SACL’s intention to impose new charges in the future ………………… [333]

NON‑PRICE TERMS AND CONDITIONS …………………………………….. [367]

Negotiation of the conditions of use agreements ………………………. [374]

SACL’s unilateral right to increase charges and the consequences of

failure to pay a charge ………………………………………..………… [401]

Dispute resolution procedures and arbitration opportunities …………. [415]

The force majeure clause ………………………………………………. [421]

No minimum service standards ………………………………………… [435]

The exclusion of liability clause ……………………………………….. [443]

The split aircraft turn‑around issue ……………………………………. [447]

REX’s access to Gate 39 in Terminal 2 ……………………………….. [468]

Conclusion as to non‑price terms and conditions …………………….. [477]

ARE THERE ANY EFFECTIVE CONSTRAINTS ON THE MANNER IN

WHICH SACL MAY EXERCISE ITS MONOPOLY POWER? ……………….. [478]

THE COUNTERVAILING POWER OF THE AIRLINES ……………………… [480]

THE THREAT OF RE‑REGULATION …………………………………..…….. [499]

NON‑AERONAUTICAL REVENUES …………………………….……………. [509]

CONSTRAINTS IN COMBINATION …………………………….…………….. [513]

WILL INCREASED ACCESS TO THE AIRSIDE SERVICE PROMOTE

COMPETITION IN THE DEPENDENT MARKET? …………………………..... [516]

THE IMPACT OF THE CHANGE IN DOMESTIC AIRSIDE SERVICE

CHARGES FROM MTOW TO PSC …………………………………………… [523]

THE IMPACT OF AN INCREASE IN REVENUE ……………………………… [569]

THE IMPACT OF NON‑PRICE TERMS AND CONDITIONS ………………… [574]

CONCLUSION AS TO CRITERION (a) ………………………………………….. [581]

CRITERION (f) ………………………………………………………..……………. [586]

RESIDUAL DISCRETION ………………………………………..……………….. [610]

PERIOD OF DECLARATION ……………………………………………..……… [615]

THE DETERMINATION ………………………………………..…………………. [618]