IN THE AUSTRALIAN COMPETITION TRIBUNAL

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

THE TRIBUNAL:

JUSTICE A H GOLDBERG (President)

MR G F LATTA

DR J S MARSDEN

DATE OF REASONS FOR

DETERMINATION:

12 DECEMBER 2005

PLACE:

SYDNEY

REASONS FOR DETERMINATION

Introduction

1 This is an application by Virgin Blue Airlines Pty Limited (“Virgin Blue”) for review of a decision made by the Hon Ross Cameron MP, Parliamentary Secretary to the Commonwealth Treasurer. The Parliamentary Secretary’s decision was not to declare certain services provided by Sydney Airports Corporation Limited (“SACL”) at Sydney (Kingsford‑Smith) International Airport (“Sydney Airport”).

2 Part IIIA of the Trade Practices Act 1974 (Cth) (“TPA”) provides the statutory context for Virgin Blue’s application for review. Part IIIA was inserted into the TPA by the Competition Policy Reform Act 1995 (Cth). Part IIIA establishes a regime to facilitate third parties obtaining access or increased access to services provided by means of significant infrastructure facilities of national significance. The rationale underlying the regime is that access to certain facilities with natural monopoly characteristics is required to encourage competition in related markets. Accordingly, the regime enables third party access seekers to apply for declaration of such services.

3 Declaration does not provide an automatic right of access to the service for access seekers. Rather, it provides a basis for access seekers to negotiate terms of access with the service provider and, where parties are unable to agree on any aspect of access, there is provision for compulsory arbitration of the dispute by the Australian Competition and Consumer Commission (“ACCC”).

4 In order for a service to be declared, an application must first be made to the National Competition Council (“NCC”) for a recommendation that the service be declared. The NCC makes a recommendation to the relevant Minister (as designated under the TPA), whether the service ought to be declared, having regard to the criteria set out in s 44G of the TPA. The designated Minister (in this case the Parliamentary Secretary to the Commonwealth Treasurer) then decides whether to declare the service or not, having regard to the criteria set out in s 44H of the TPA. By virtue of s 44K, decisions of the designated Minister are subject to review by the Australian Competition Tribunal.

5 On 1 October 2002 Virgin Blue applied to the NCC for a recommendation pursuant to s 44G of the TPA in respect of the following:

“(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,

(Airside Service); and

(b) a service for the use of domestic passenger terminals and related facilities for the purposes of processing arriving and departing domestic airline passengers and their baggage at Sydney Airport (Domestic Terminal Service)”

(“the combined application”).

6 In December 2002 the application in respect of the “Domestic Terminal Service” was withdrawn, following an agreement reached between Virgin Blue and SACL in relation to the provision of that service.

7 On 30 June 2003 the NCC issued a draft recommendation that the service, described by Virgin Blue as the “Airside Service”, be declared. However, in its final recommendation, dated November 2003, the NCC recommended that the so‑called 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.

8 On 29 January 2004 the Parliamentary Secretary to the Commonwealth Treasurer published his decision under s 44H(1). He decided not to declare the Airside Service (“the designated Minister’s decision”).

9 On 18 February 2004 Virgin Blue applied to the Tribunal pursuant to s 44K(2) of the TPA for review of the designated Minister’s decision.

10 Qantas Airways Limited (“Qantas”) and SACL were each granted leave to intervene in Virgin Blue’s application for review. The Parliamentary Secretary was also granted leave to intervene for the limited purpose of making submissions and filing evidence in relation to the Commonwealth Government’s policy on price regulation of airport services in Australia.

11 At the hearing, the NCC appeared in order to assist the Tribunal with any questions regarding the interpretation and application of the criteria set out in s 44H(4) of the TPA and any additional matters in respect of which the Tribunal sought assistance.

12 We note at the outset that, pursuant to s 42 of the TPA, where a question of law is determined in these reasons, or a view is expressed or a conclusion is reached on a question of law, such question has been determined, such view is expressed and such conclusion has been reached, in accordance with the opinion of the presidential member presiding, Goldberg J.

13 As s 44K(4) of the TPA makes clear, a review of a designated Minister’s decision by the Tribunal is a “re‑consideration” of the matter, that is, a re‑hearing. Where the designated Minister has decided not to declare a service, as in the present case, s 44K(8) provides that the Tribunal may either affirm that decision or set it aside and declare the service. For the purposes of a review, s 44K(5) provides that the Tribunal has the same powers as the designated Minister. The Tribunal must reach its decision as to declaration by reference to the criteria set out in s 44H(4).

Background

14 Sydney Airport is the largest and busiest airport in Australia and is of critical significance for domestic airlines. Approximately 50% of all international passengers arriving in Australia, and 30% of all Australian domestic passengers, pass through Sydney Airport. It is one of the terminals on the Melbourne‑Sydney route, the busiest route in Australia, which in 2000 represented more than 20% of all passenger movements in Australia. The Melbourne‑Sydney route was said to be consistently one of the ten busiest air routes in the world.

15 SACL provides services at Sydney Airport through use of its facilities, including three runways, taxiways, and aprons for parking aircraft at around 40 gates designated for domestic operations.

16 Facilities at airports, including Sydney Airport, are generally characterised as either “airside” or “landside” facilities. Whilst the definition and scope of the “Airside Service” that is the subject of the present application was controversial and involved some debate as to what facilities fall within the airside characterisation, in general terms, airside facilities traditionally include runways, taxiways and aprons, airfield lighting, aircraft parking bays, visual navigation aids, hangars, freight terminals, and facilities for aircraft maintenance, refuelling and in‑flight catering. Landside facilities generally comprise terminals and the infrastructure within them, including flight information display systems, check‑in counters, public amenities and lounges for passengers and space for commercial operations such as retail shops. Landside facilities also generally include facilities outside terminals such as perimeter roads, car parks and walkway links to public transport.

17 Certain services provided by means of the use of areas for ramp handling and freight services at Sydney Airport were previously the subject of an application for declaration under Pt IIIA of the TPA at a time when Sydney Airport operated under a different regime to that presently before the Tribunal: see Re Review of Declaration of Freight Handling Services at Sydney International Airport (2000) ATPR ¶41‑754 (“Sydney International Airport”). These services were declared by the Tribunal for a period of five years.

Privatisation of Australian airports

18 A significant issue in this proceeding is the manner in which, and the terms and conditions upon which, SACL provides services at Sydney Airport. Accordingly, a brief background to the regulatory and pricing history of Australian airports in general, and of Sydney Airport in particular, follows.

19 Prior to 1997, most of the principal airports in Australia were owned and operated by the Federal Airports Corporation (“FAC”), which was established under the Federal Airports Corporation Act 1986 (Cth).

20 In 1997 and 1998 the Commonwealth Government effectively privatised most of Australia’s large airports, with the exception of Sydney Airport, by entering into leases with private operators for 50 year terms.

21 On 1 July 1998 the Commonwealth Government leased Sydney Airport to SACL for a period of 50 years with an additional 49 year option. At that time, SACL was a public company wholly owned by the Commonwealth Government.

22 On 28 June 2002 Sydney Airport was sold to the Southern Cross Airports Consortium. On the same day, the shares in SACL were acquired by Southern Cross Airports Corporation Pty Ltd, a member of the Southern Cross Airports Consortium.

Regulation of airports

23 One of the consequences of privatisation of airports was the introduction of a regulatory framework for managing airport pricing. In the Productivity Commission Inquiry Report, Price Regulation of Airport Services, published in January 2002, (“Productivity Commission Inquiry Report”), the Productivity Commission said that regulation of privatised airports was necessary in order to temper the strong market power of airports (in particular, the ability of airports to price well above cost), as any misuse of that market power could potentially increase airfares. It was hoped that regulation would be able to assist in producing more efficient outcomes than the outcomes produced in the market at that time.

24 Privatised airports were subject to special regulation under the Airports Act 1996 (Cth) (“Airports Act”), in addition to the general access regime under Pt IIIA of the TPA. Section 192 of the Airports Act set out a specific access regime for all privatised airports designated to be “core regulated airports” under that Act. Section 192 of the Airports Act provided that, within twelve months of the lessee of a “core regulated airport” becoming a privately‑owned corporation, each airport service would be a declared service for the purpose of the access regime under Pt IIIA (unless an access undertaking had been given in relation to that service within twelve months of privatisation).

25 Although Sydney Airport was designated as a “core regulated airport”, when the lease for Sydney Airport was transferred in July 1998 from the Commonwealth Government to SACL (then a government‑owned public company), it fell outside s 192 of the Airports Act as it was not leased by a privately‑owned corporation. As noted above, SACL was later privatised in June 2002.

26 Prior to privatisation of the Australian airports, FAC had established its landing and terminal charges on a network‑wide “single‑till” basis. The expression “single‑till” has been defined by the Productivity Commission as:

“An arrangement for setting airport charges whereby all airport revenues and costs are taken into account in setting aeronautical prices. Allowable aeronautical prices are set on a ‘residual basis’, after subtracting from total airport costs the revenue derived from non‑aeronautical activities.”

27 A “single‑till” arrangement is to be contrasted with a “dual‑till” arrangement, which has been described by the Productivity Commission as:

“An arrangement for setting airport charges whereby only the costs and revenues of providing aeronautical services [defined by the Productivity Commission as ‘services provided by infrastructure that facilitates aircraft movements (eg runways), and passenger processing facilities’] are included in the assessment of allowable aeronautical prices. In other words, aeronautical services are priced on a ‘stand‑alone’ basis, without regard to any net revenues from non‑aeronautical services [defined by the Productivity Commission as ‘services provided by or at airports that are not aeronautical services (eg freight facilities, car parking and retail shops and food outlets)’].” (emphasis added)

28 At the time of privatisation, the Commonwealth Government did not require the privatised airports to use the single‑till pricing arrangement. It imposed transitional price regulation on the airports. Airports at Melbourne, Brisbane, Perth, Adelaide, Alice Springs, Canberra, Coolangatta, Darwin, Hobart, Launceston and Townsville were subjected to a five‑year, CPI — X per cent annual cap on prices for aeronautical services. These price caps were subsequently removed from eight of the eleven airports on 5 October 2001. The price caps remained on Melbourne, Brisbane and Perth airports, although these airports were allowed to implement one‑off average price increases for price‑capped services.

29 Sydney Airport was never made subject to a price‑cap or any other requirement to reduce annually charges for aeronautical services. Instead, by declaration made on 30 June 2000, Sydney Airport was made subject to a price notification regime under the Prices Surveillance Act 1983 (Cth) (“Prices Surveillance Act”). Under the price notification regime, SACL was required to notify the ACCC of any proposed increase in the price, or substantial variation of the terms and condition of supply, of aeronautical services.

30 Pursuant to the price notification regime, SACL submitted a ‘Revised Draft Aeronautical Pricing Proposal’ to the ACCC in October 2000 seeking to increase certain aeronautical charges at Sydney Airport. In May 2001 the ACCC handed down its decision in relation to SACL’s application, objecting to SACL’s proposed increase which was, on average, an increase of approximately 130%, but approving a lower increase of approximately 97%. In that decision, the ACCC expressed support for a “building block methodology” to be used for assessing SACL’s maximum allowable revenue, a methodology to which we will return.

31 The Productivity Commission Inquiry Report noted that Sydney Airport was one of four airports with substantial market power. The Productivity Commission proposed two options for regulation of Sydney Airport; Option A, involving dual‑till price caps, and Option B, involving price monitoring.

32 Option B, which the Productivity Commission ultimately recommended and which was subsequently adopted in large part by the Commonwealth Government, provided, inter alia:

“Option B: price monitoring

This option would extend price monitoring to Phase 1 airports and Sydney airport for a probationary period, and maintain (modified) price monitoring of Adelaide, Canberra and Darwin airports. As in Option A, there would be no airport‑specific price regulation of any other airports.

For Sydney, Melbourne, Brisbane, Perth, Adelaide, Canberra and Darwin airports, there would be mandatory price monitoring by the ACCC. The monitoring regime would continue for five years:

· During this probationary period the regulator would not have the power to alter unilaterally the monitoring regime or impose stricter price regulation.

…

· Voluntary commercial agreements between airports and users (including non‑airline users) would be encouraged by providing guidelines regarding coverage, consultation and dispute‑settlement mechanisms. (The Commission sees no need to exempt from access regulation airports that enter into such agreements.)

· An independent public review would be conducted towards the end of the five‑year monitoring period to ascertain whether there should be any future price regulation of those airports. Other airports could be included in the review only where there is prima facie evidence of persistent misuse of market power.

…

All airports should be subject to the generic provisions of the Part IIIA National Access Regime.”

33 The Productivity Commission preferred price monitoring on the basis that it would encourage the airlines and airports to negotiate commercial agreements, whilst constraining inefficient outcomes. The Productivity Commission encouraged commercial agreements over regulation, but clearly designated the commercial environment in which such agreements would be successful.

34 Notably, the Productivity Commission considered that such commercial agreements should include dispute‑settlement mechanisms, such as provision for independent arbitration.

35 The Productivity Commission recommended that price notification be replaced with mandatory price monitoring for a probationary period of five years, following which an independent public review should be conducted to ascertain the necessity or extent of any further regulation.

36 It further recommended that airports be subject to the generic provisions of Pt IIIA of the TPA. The Productivity Commission clearly stated that the general access and anti‑competitive conduct provisions of the TPA would apply to all airports, noting that: “Under both options [dual‑till price caps and price monitoring], the general access and anti‑competitive conduct provisions of the Trade Practices Act would apply to all airports.” It considered that Pt IIIA of the TPA operated as a constraint on inefficiency.

37 The Commonwealth Government supported these recommendations of the Productivity Commission in a joint press release issued by the Commonwealth Minister for Transport and Regional Services and the Treasurer on 13 May 2002. In particular, the Commonwealth Government supported in principle the recommendation that commercial agreements should be encouraged and assisted, but was not prepared to play a role in preparing guidelines for the conduct of the negotiations or the content of particular agreements. The press release noted that:

“In the event that commercial agreement cannot be concluded in relation to access terms and conditions, the access provisions in Part IIIA of the TP Act provide recourse to arbitration for determining those conditions for ‘declared’ services. The Government is, however, prepared to assist airports and airport users [to] develop industry guidelines for commercial agreements should that be required.”

38 From 1 July 2002 the Commonwealth Government’s policy moved towards what the joint press release referred to as “lighter‑handed regulation”, which saw a change from price notification to price monitoring, as recommended by the Productivity Commission. Under the new regime, aeronautical prices are monitored by the ACCC over a period of five years, towards the end of which time an independent review is to be conducted to ascertain the need for any future airport price regulation. The Commonwealth Government considered that this threat of possible re‑regulation would “encourage negotiated pricing outcomes based on efficient costs and an adequate return on capital”.

39 The Commonwealth Government has reserved its right to bring forward the review or conduct its own review in the event that airports impose unjustifiable price increases. The Commonwealth Government set out a number of principles which would form the basis of the independent five‑year review, and any earlier or separate review conducted by it (“the Review Principles”). The Commonwealth Government stated in the joint press release that it “would only consider re‑introducing price controls on an airport if it formed the view that the airport had operated in a manner inconsistent with the [review] principles.” The Review Principles were then set out as follows:

“At airports without significant capacity constraints, efficient prices broadly should generate expected revenue that is not significantly above the long‑run costs of efficiently providing aeronautical services (on a ‘dual‑till’ basis). Prices should allow a return on (appropriately defined and valued) assets (including land) commensurate with the regulatory and commercial risks involved.

Price discrimination and multi‑part pricing that promotes efficient use of the airport is permitted. This may mean that some users pay a price above the long‑run average costs of providing aeronautical services, whereas more price‑sensitive users pay a price closer to marginal cost.

At airports with significant capacity constraints, efficient peak/off‑peak prices may generate revenues that exceed the production costs incurred by the airport. Such demand management pricing practices should be directed toward efficient use of airport infrastructure and, when not broadly revenue neutral, any additional funding that is generated should be applied to the creation of additional capacity or undertaking necessary infrastructure improvements.

Quality of service outcomes should be consistent with user’s [sic] reasonable expectations, and consultation mechanisms should be established with stakeholders to facilitate the two way provision of information on airport operations and requirements.

It is expected that airlines and airports will primarily operate under commercial arrangements and in a commercial manner, and that airport operators and users will negotiate arrangements for access to airport services.”

40 Following the Commonwealth Government’s acceptance of the recommendations contained in the Productivity Commission Inquiry Report, the declaration under s 21 of the Prices Surveillance Act which subjected SACL to a price notification regime was revoked.

41 As part of the change in policy, on 26 June 2002 the Parliamentary Secretary to the Treasurer directed the ACCC to undertake monitoring of prices, costs and profits related to the supply of aeronautical services and aeronautical‑related services at a number of airports, including Sydney Airport, from 1 July 2002, and to report annually to the Parliamentary Secretary on such monitoring.

42 As noted above, the Productivity Commission recommended that all airports should be subject to the generic provisions of Pt IIIA of the TPA rather than an airport‑specific access regime. This was supported by the Commonwealth Government, which considered that there was no need for the airport‑specific access regime in s 192 of the Airports Act to continue. Accordingly, s 192 of the Airports Act was repealed by the Civil Aviation Legislation Amendment Act 2003 (Cth).

Airlines: nature and history

43 The present proceeding involves a number of airlines which have adopted different business models. Of most significance is the distinction between the low‑cost carrier (“LCC”) business model and the full‑service airline (“FSA”) business model. The distinction between these business models becomes relevant when we come to consider the impact of SACL’s pricing policies upon the various airlines.

44 The FSA model has been the traditional business model of airlines. However, the LCC business model emerged in the 1980s and is now a well‑established and highly competitive business model. As Qantas and Virgin Blue were the two principal domestic airlines using Sydney Airport at the time of the hearing, we have analysed their structure and activities as exemplary of the FSA and LCC business models.

45 For many years the domestic Australian market was primarily dominated by two FSAs, Qantas and Ansett Australia Limited (“Ansett”), operating significant networks on domestic routes in Australia, with Ansett and its subsidiaries servicing regional and major routes. However, in September 2001 Ansett went into voluntary administration. At the time of the hearing, the Australian domestic passenger market was being serviced predominantly by Virgin Blue, Qantas, Jetstar Airways Pty Ltd (“Jetstar”) and Regional Express (“REX”).

Virgin Blue and the LCC business model

46 Virgin Blue began operating in Australia on 31 August 2000 and now operates scheduled flights between a large number of Australian destinations. By 30 April 2004 Virgin Blue had 42 aircraft operating 40 domestic routes, with over 3,000 employees. Virgin Blue’s main competitors in the Australian domestic passenger market are Qantas and Jetstar (although REX also operates aircraft on some of the same routes as Virgin Blue). As at February 2004, Virgin Blue’s share of the domestic passenger market was approximately 32%.

47 Virgin Blue’s business model is said to be based on offering affordable, convenient and service‑minded travel, and reflects the LCC business model that has enjoyed success in Europe and the United States of America. Virgin Blue said that LCCs keep their costs low by adopting efficient business practices and cutting out what they perceive to be unnecessary extras, such as free airline meals. The savings are passed on to the consumer as a lower fare, which in turn stimulates demand and increases the number of people flying on the routes on which it operates.

48 Virgin Blue seeks to make low fares widely available to stimulate demand and, where demand is subsequently strong, to increase the frequency of services, rather than to increase fare levels. This is seen as a key difference between the LCC and the FSA business models. Virgin Blue said that it has increased its capacity on many routes in response to high load factors (that is, the percentage of seats flown which are occupied), whereas traditionally an FSA may simply increase fares in response to high demand.

49 LCCs tend to target more price‑sensitive passengers, such as leisure travellers, people visiting friends and relatives, and certain types of business travellers who are generally from small to medium‑sized businesses. It was said that less service comes with lower cost. LCCs seek to attract those customers who are willing to forego certain features that might be enjoyed on a service run by an FSA in exchange for lower fares. Although LCCs do attract some of the traditional customers of an FSA, the LCC model is also intended to stimulate additional demand, that is, to attract customers who would otherwise not have flown if the low fare were not available.

50 Virgin Blue contended, and we accept, that a significant majority of its customers are particularly cost conscious and would prefer lower fares, with a less luxurious service, than to pay even a couple of dollars more for such services.

51 As a general rule, LCCs keep their costs low by:

· operating a single type of aircraft, thereby reducing training and fleet support costs;

· configuring the aircraft to maximise the number of seats;

· minimising in‑flight amenities;

· not providing complimentary meals or lounges;

· adopting procedures that enhance the efficient turn‑around of aircraft;

· operating on routes and flight schedules which maximise operating efficiency;

· operating out of simple, low‑cost terminals;

· implementing flexible labour arrangements;

· adopting more efficient financial systems and keeping management small.

52 Virgin Blue has adopted many of these typical LCC features, although it has customised its product to the Australian market.

53 Virgin Blue has in place a complex yield management system which aims to maximise revenue per flight by maximising sales of airfares at the best achievable price. The basic objective is to sell each seat on a flight at the highest fare level possible, based on anticipated demand and competitors’ pricing. Each airline seat is allocated a particular fare category or “bucket”, and the yield management computer systems are employed to determine the number of seats which should be offered in each bucket and the price point which should be set for each bucket, based on historic demand.

54 Virgin Blue assesses the profitability of its services on a route‑by‑route basis. Each route is assessed for its commercial viability and, where a route is unprofitable, Virgin Blue indicated that it would consider reducing the frequency of flights or withdrawing from the route altogether. This was said to be in contrast to FSAs, which tend to operate as a network, and therefore tolerate less profitable routes where they feed into more profitable areas of the network.

55 Around the world, the major effects of entry by LCCs into markets previously serviced by one or more FSAs have been said to be: the reduction of average fares on routes serviced by the LCC; increased demand as more price‑sensitive passengers consider air travel; growth in the LCCs’ market share; and a decline in FSAs’ market share which in turn may lead to FSAs instigating cost‑reduction programs, and, occasionally, withdrawing from a route.

Qantas and the FSA business model

56 Qantas, by contrast, has traditionally employed the FSA model. Qantas is the largest user of Sydney Airport, and its main operations base is located there. Qantas is the eleventh largest airline worldwide on the basis of RPKs (that is, annual revenue passenger kilometres). Along with its subsidiaries, it operates a domestic and international fleet of approximately 190 aircraft. At the time of the hearing, Qantas provided 732 international services every week to 80 destinations in 37 countries. Qantas and its subsidiaries operated more than 4,581 domestic flights each week to 58 urban and regional destinations across Australia.

57 Qantas and its subsidiaries also provide related services to the Qantas fleet such as catering, engineering, maintenance, inventory, training and support services for aircraft and engines, and ground handling and passenger handling services.

58 FSAs generally have large‑scale operations with wide networks and extensive fleets and facilities offering a variety of amenities to customers. They tend to offer a range of services, notwithstanding the extra cost, in order to attract certain consumer segments, particularly business customers. In contrast to LCCs, FSAs typically offer:

· a greater range of routes;

· a greater number of flights per route;

· a large fleet capacity;

· business and first class travel;

· in‑flight catering at no additional charge;

· complimentary business lounges;

· larger space between seats;

· complimentary newspapers and in‑flight entertainment;

· frequent flyer programs;

· vertical integration into travel agencies;

· alliance agreements with other airlines, and associated benefits such as baggage check‑through;

· arrangements with other travel and accommodation organisations.

59 Qantas is a network carrier. As such, it tends to view its profits on a network‑wide basis rather than on an individual sector basis. Even if some sectors are not profitable, Qantas may continue to operate them where it is profitable overall in its network. As a network carrier and an FSA, Qantas sees its strength as the provision of network breadth (that is, geographic reach) and depth (that is, frequency and capacity of service), providing interconnecting flights and amenities such as in‑flight catering, in‑flight entertainment, lounges, business class seats on most domestic flights, and a frequent flyer program. We were told that Qantas’ business model is designed to be as attractive as possible to a wide cross‑section of passengers.

60 FSAs tend to have higher average fares than LCCs, but they are able to compete with LCCs at certain price points. It was said that, traditionally, FSAs are likely to increase overall fare levels in response to strong demand.

61 Like Virgin Blue, Qantas now has in place a complex yield management system that aims to set fare buckets to attract different types of passengers.

Jetstar

62 Towards the end of 2003, Qantas established its own separately managed and independently operated domestic LCC, Jetstar. Jetstar is a point‑to‑point carrier. It commenced flights from Sydney Airport on 25 May 2004.

REX

63 REX is a regional airline which was launched on 1 August 2002. REX links regional centres with Sydney, Melbourne and Adelaide, and, at the time of the hearing, operated flights on the Sydney‑Canberra route. REX emerged out of the collapse of Ansett when two of Ansett’s subsidiaries, Kendell Airlines and Hazelton Airlines, were placed into administration and their assets bought to form REX. REX is Australia’s largest independent regional airline. It flies to 29 destinations and operates in excess of 1,000 flights per week on 32 different routes in south‑eastern Australia.

64 Sydney Airport is the core airport for REX’s operations, as more than half of REX’s passengers are processed through Sydney Airport, 15 of the routes operated by REX connect a regional centre (or Canberra) to Sydney, and approximately 60% of all travel on REX involves flights to or from Sydney Airport.

Legislative framework: Pt IIIA of the TPA

65 The background to the introduction of Pt IIIA into the TPA has previously been set out by the Full Federal Court in Rail Access Corporation v New South Wales Minerals Council Ltd (1998) 87 FCR 517 at 518‑519 as follows:

“On 11 April 1995, the Commonwealth of Australia, the States of New South Wales, Victoria, Queensland, Western Australia, South Australia and Tasmania, the Australian Capital Territory and the Northern Territory entered into the ‘Competition Principles Agreement’ (the Agreement). By the Agreement, the Commonwealth, State and Territory Governments agreed to adopt certain principles of competition policy and to apply competition laws across the public sector. The Agreement stated the ‘objective of competitive neutrality policy is the elimination of resource allocation distortions arising out of the public ownership of entities engaged in significant business activities’. This was to be achieved by the structural reform of public monopolies, so as to remove from the public monopoly any responsibility for industry regulation and to introduce competition to markets traditionally supplied by a public monopoly.

Clause 6(1) of the Agreement provided that, subject to subcl (2), the Commonwealth would put forward legislation to establish a regime for third‑party access to services provided by means of significant infrastructure facilities where:

‘(a) it would not be economically feasible to duplicate the facility;

(b) access to the service is necessary in order to permit effective competition in a downstream or upstream market;

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

(d) the safe use of the facility by the person seeking access can be ensured at an economically feasible cost and, if there is a safety requirement, appropriate regulatory arrangements exist.’

As a result of the Agreement, the Commonwealth enacted the Competition Policy Reform Act…”

66 The access regime provided for in Pt IIIA involves two stages. The first stage is governed by Div 2 of Pt IIIA and requires declaration of a service. 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 the terms and conditions of access. 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 is governed by Div 3 of Pt IIIA and enables an access seeker or a provider, in default of agreement, to have issues as to access determined by arbitration conducted by the ACCC.

67 Declaration of a service under Pt IIIA may therefore be characterised as “default regulation”, in the sense that regulation, in the form of arbitration by the ACCC, is only engaged upon default of commercial agreement between the parties as to an aspect of access to the service.

68 Once the service is declared, it is declared in respect of the provider and all, or any, access seekers, and not merely between the parties to the application for declaration. Although one access seeker can initiate the procedure which may lead to the declaration of a service, if declaration is made it enures for the benefit of anyone who wishes to obtain access to the relevant service. Section 44I provides that the duration and effect of any declaration made is to be specified in the declaration, and continues in operation unless it is earlier revoked.

69 Division 3 of Pt IIIA of the TPA sets out the regime for arbitration of access disputes by the ACCC in relation to declared services. Arbitration is not an inevitable consequence of declaration of a service, but arbitration under Div 3 is only available upon the service being declared under Div 2. Declaration of a service opens it up to the possibility of regulation by arbitration. However, it does not follow inexorably that arbitration, and therefore regulation, will occur. The parties are still free to negotiate a commercial resolution of their outstanding access issues.

70 This proceeding concerns the first stage of the access regime, namely declaration of a service pursuant to Div 2 of Pt IIIA of the TPA.

The issues for determination by the Tribunal

71 The Tribunal’s role on review is to reconsider the matter that was before the designated Minister, and for this purpose the Tribunal stands in the shoes of the designated Minister.

72 Section 44H(4) of the TPA provides that the designated Minister cannot declare a service unless the Minister is satisfied of the criteria set out in s 44H(4)(a) to (f). In order to declare the relevant service, the Tribunal must similarly be satisfied of each of the criteria listed in s 44H(4).

73 The parties’ submissions to the Tribunal centred on the criteria set out in s 44H(4)(a) (hereafter referred to as “criterion (a)”), and s 44H(4)(f) (hereafter referred to as “criterion (f)”). Our focus is largely directed towards the issues arising out of criterion (a) and, to a lesser extent, criterion (f). However, it is also necessary to make findings in respect of the criteria set out in ss 44H(4)(b) to (e).

CriteriA (b) to (e)

74 In its final recommendation, the NCC was satisfied that the criteria set out in ss 44G(2)(b) to (e) were met. Virgin Blue submitted that the Tribunal could also be satisfied of these criteria, and SACL did not dispute that proposition.

75 Section 44H(4)(b) provides that the designated Minister (or the Tribunal on review) cannot declare a service unless the Minister (or Tribunal) is satisfied that “it would be uneconomical for anyone to develop another facility to provide the service.”

76 In the earlier decision of Sydney International Airport, the Tribunal rejected the contention that the relevant facility, for the purposes of s 44H(4)(b), was less than, what was in effect, the total airport. We see no reason to revisit this issue. The fact that a different service is provided by the facility does not alter the basic proposition that it would be uneconomical for anyone to develop another facility, being the total airport, to provide that service. There has been no evidence put before us in relation to events and circumstances which occurred after the hearing of Sydney International Airport which causes us to change this view. Accordingly, we are satisfied that it would be uneconomical for anyone to develop another facility to provide the service that is the subject of this application and we are therefore satisfied of the matter set out in s 44H(4)(b).

77 Section 44H(4)(c) provides that the designated Minister (or the Tribunal on review) cannot declare a service unless the Minister (or Tribunal) is satisfied that “the facility is of national significance, having regard to:

(i) the size of the facility; or

(ii) the importance of the facility to constitutional trade or commerce; or

(iii) the importance of the facility to the national economy.”

78 We are satisfied that the facility at Sydney Airport is of national significance having regard to its size, its importance to constitutional trade and commerce, and its importance to the national economy. As noted earlier, approximately 50% of all international passengers arriving in Australia pass through Sydney Airport, as do approximately 30% of all domestic passengers in Australia. It is thus a major international gateway for Australia’s tourism industry, and also makes a substantial and significant contribution to trade in Australia. Accordingly, we are satisfied of the matter set out in s 44H(4)(c).

79 Section 44H(4)(d) provides that the designated Minister (or the Tribunal on review) cannot declare a service unless the Minister (or Tribunal) is satisfied that “access to the service can be provided without undue risk to human health or safety.”

80 It was not in issue that access to the service that is the subject of this application can be provided without undue risk to human health or safety. In its final recommendation the NCC noted the submission of the representative body of the airlines, the Board of Airline Representatives Inc (“BARA”), that the conditions of use which apply at Sydney Airport require airlines to comply with all legislation, SACL’s Airport Operations Manual, SACL’s airport security program, and other relevant directions and legislative provisions. The NCC concluded that access to the Airside Service could be provided without undue risk to human health or safety. We are satisfied, having regard to the evidence that was placed before us as to the manner in which air operations are carried out at Sydney Airport, that access to the service that is the subject of the present application can be provided without undue risk to human health or safety. Accordingly, we are satisfied of the matter set out in s 44H(4)(d).

81 Section 44H(4)(e) provides that the designated Minister (or the Tribunal on review) cannot declare a service unless the Minister (or Tribunal) is satisfied that “access to the service is not already the subject of an effective access regime.”

82 As the Tribunal noted in Sydney International Airport at [217], 40,795:

“The expression ‘effective access regime’ … is a reference to a regime for access to a service or a proposed service established by a State or Territory that is a party to the Competition Principles Agreement which the Commonwealth Minister has decided is an effective access regime for the service or proposed services: ss 44M and 44N.”

It was not submitted that any such regime had been established and we know of no such regime. We are satisfied that access to the service is not already the subject of an effective access regime. Accordingly, we are satisfied of the matter set out in s 44H(4)(e).

83 As a result, the issues in the review are in substance confined to whether the Tribunal, standing in the shoes of the Minister, can be satisfied as to criterion (a) and criterion (f).

Criterion (a)

84 Criterion (a) requires that the Tribunal be satisfied:

“that access (or increased access) to the service would promote competition in at least one market (whether or not in Australia), other than the market for the service”.

85 It is therefore necessary to consider a number of preliminary issues of definition relating to the service the subject of the proposed declaration, the relevant markets, the meaning and scope of “access” and “increased access”, and the substance of the term “promotion of competition”, in the context of criterion (a).

What is the “service” which is the subject of the proposed declaration?

86 As noted earlier, when Virgin Blue applied to the NCC for a recommendation of declaration in the combined application, it did so in respect of the following:

“(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,

(Airside Service); and

87 Virgin Blue subsequently informed the NCC on 26 November 2002 that it had reached agreement with SACL on terminal access, and, in December 2002 Virgin Blue formally withdrew its application for declaration of the “Domestic Terminal Service”.

88 Accordingly, it is only the first limb of Virgin Blue’s definition of the service in respect of which declaration is sought which is relevant — the part of the service described as the “Airside Service”.

89 Virgin Blue argued that its intention was to define the “Airside Service” broadly so as to encompass all the services that were required to turn aircraft around between flights. Virgin Blue submitted that the definition of “Airside Service” should be viewed in the context of the combined application, which was clearly intended to cover all services at Sydney Airport.

90 Virgin Blue submitted that, in that context, the “Airside Service” should be construed comprehensively to encompass the domestic operations that airlines were entitled to undertake under the standard form of the conditions of use which SACL employs to govern the use of its services and facilities by airlines at Sydney Airport, the ‘Sydney Airport Conditions of Use’, version 2.6, dated 1 October 2003 (“SACL’s Standard COU”).

91 Schedule 5 of SACL’s Standard COU provides that the use of facilities and services referred to as the “Domestic operations at Terminal 2” attracts a number of charges, including a runway charge, an aircraft parking charge, a Terminal 2 passenger use charge and a Terminal 2 passenger screening charge. The facilities and services covered by SACL’s Standard COU are set out in sch 9, subject to the proviso that a separate agreement between SACL and the relevant airline may provide otherwise.

92 Schedule 9 of SACL’s Standard COU lists a range of facilities including airside grounds, runways, taxiways and aprons. It is in the following terms:

“Facilities and Services

Aircraft movement facilities and services

· Airside grounds, runways, taxiways and aprons

· Airfield lighting, airside roads, airside lighting

· Airside safety

· Nose‑in guidance

· Aircraft parking

· Visual navigation aids

Passenger processing facilities and services

· Forward airline support areas services

· Aerobridges, airside buses

· Departure lounges and holding lounges (but excluding commercially important persons lounges)

· Immigration and customs service areas

· Public address systems, closed circuit surveillance systems and security systems

· Baggage make‑up, baggage handling and baggage reclaim

· Public areas in terminals, public amenities, public lifts, escalators and moving walkways

· Flight information display systems

· Landside roads, landside lighting and covered walkways”.

93 Virgin Blue submitted that SACL’s Standard COU was in similar terms to the definition used in Direction No. 27, issued by the then Parliamentary Secretary to the Commonwealth Treasurer, Senator the Hon Ian Campbell, on 26 June 2002 pursuant to s 27A of the Prices Surveillance Act, which is the current price monitoring direction (“Price Monitoring Direction”). The Price Monitoring Direction directs the ACCC to undertake formal monitoring of the prices, costs and profits relating to the supply of aeronautical services and aeronautical‑related services by a number of airports, including SACL.

94 “Aeronautical services” are defined in the Price Monitoring Direction as “aircraft movement facilities and activities” and “passenger processing facilities and activities”. “Aircraft movement facilities and activities” are defined as:

“(i) airside grounds, runways, taxiways and aprons;

(ii) airfield lighting, airside roads and airside lighting;

(iii) airside safety;

(iv) nose‑in guidance;

(v) aircraft parking;

(vi) visual navigation aids;

(vii) aircraft refuelling services.”

“Passenger processing facilities and activities” are defined as:

“(i) forward airline support area services;

(ii) aerobridges and airside buses;

(iii) departure lounges and holding lounges (but excluding commercially important persons lounges);

(iv) immigration and customs service areas;

(v) security systems and services (including closed circuit surveillance systems);

(vi) baggage make‑up, handling and reclaim;

(vii) public areas in terminals, public amenities, public lifts, escalators and moving walkways;

(viii) flight information display and public address systems.”

95 At the hearing, Virgin Blue sought to clarify its definition of the “Airside Service” by setting out the facilities and operations which it said were intended to fall within the term. Virgin Blue submitted that, although it was not open to the Tribunal to amend the application (as the Tribunal is bound to consider the matter that was before the designated Minister), it was permissible and appropriate that the Tribunal clarify any ambiguity in the definition of the service.

96 Virgin Blue’s proposed clarification was set out as follows:

“The service the subject of the application is the use of airside facilities at Sydney Airport for the purpose of domestic air transport operations.

Airside facilities means:

(a) airside grounds, runways, taxiways and aprons;

(b) airfield lighting, airside roadways and airside lighting;

(d) airside access gates and perimeter fencing;

(e) airside water, air and power infrastructure;

(f) airside waste disposal facilities; and

(g) other facilities integral to the use of (a) to (f).

Domestic air transport operations means:

(a) take off and landing of passenger aircraft travelling to and from other airports in Australia;

(b) movement of such aircraft;

(d) loading and unloading passengers, baggage and goods on and from such aircraft;

(e) servicing of such aircraft including by way of maintenance, refuelling, catering, toilet and water services and cleaning;

(f) other operations necessary to enable (a) to (e).”

97 Virgin Blue submitted that its clarification was consistent with the definitions of “airside” and “landside” contained in s 71 of the Airports Act, in which “airside” is defined to mean “the part of the airport grounds, and the part of the airport buildings, to which the non‑travelling public does not have free access.” It also submitted that its clarification was consistent with the definition of “aircraft movement facilities and activities” contained in the Price Monitoring Direction (see [94] above) and the background discussion contained in the Productivity Commission Inquiry Report.

98 Qantas supported Virgin Blue’s clarification and its submissions on the ambit of the “Airside Service”. In particular, with regard to the matters listed in (a) to (c) of the definition of “Airside Facilities” in the Virgin Blue clarification, Qantas submitted that those matters were considered part of “aircraft movement facilities and activities” under the Price Monitoring Direction and were consistent with SACL’s Standard COU. In support of paragraphs (d) to (g) of “Airside Facilities” in the Virgin Blue clarification, Qantas submitted that those matters are associated with the taking off and landing of aircraft and were not inconsistent with the definition of the “Airside Service” adopted by the NCC in its final recommendation. In support of the matters listed in (c) to (e) under “Domestic air transport operations” in the Virgin Blue clarification, Qantas submitted that such operations were implicitly part of the operations that are necessary to turn aircraft around upon completion of a flight and in order to prepare the aircraft for the next flight.

99 The NCC submitted that the Tribunal’s power to amend is limited by the service considered by the relevant designated Minister. Where the purposes for the use of the facility are changed, the dependent markets may also change, and the Tribunal may not be considering declaration of the same subject matter.

100 The NCC submitted that some elements listed under “Airside Facilities” and “Domestic air transport operations” in Virgin Blue’s clarification would fall outside the scope of the “Airside Service” as considered by the NCC and the designated Minister. In particular, Virgin Blue’s clarification extended the purposes for which access was sought from the movement of aircraft to encompass loading and unloading passengers, baggage and goods from passenger aircraft, and servicing aircraft including maintenance, refuelling, catering, toilet and water services, and cleaning. The NCC submitted that Virgin Blue’s clarification specified additional facilities to those contained in Virgin Blue’s application to it, including airside access gates and perimeter fencing, airside water, air and power infrastructure, and airside water disposal facilities.

101 Before the NCC, Virgin Blue had submitted that the facilities included in the term “Airside Service” did not need to be specifically listed, but that if they did, they would at least include the following:

· The runways at Sydney Airport;

· The taxiways at Sydney Airport;

· The parking aprons at Sydney Airport;

· Airfield lighting;

· Airside roadways;

· Airside lighting; and

· Visual navigation aids.

The NCC did not expressly consider the additional purposes and facilities in its final recommendation.

102 SACL submitted that the way in which the “Airside Service” was defined by Virgin Blue meant that it was limited to those services provided by SACL to facilitate aircraft movement. SACL submitted that a narrow approach to the definition of “Airside Service” was required on the basis that the Tribunal is bound by the scope of the application before the designated Minister and the NCC and by the terms of the application made to the Tribunal. As the Tribunal does not have power to amend the application, SACL contended that the only question for the Tribunal to determine was the meaning of “other associated facilities” found in the phrase “runways, taxiways, parking aprons and other associated facilities” used in Virgin Blue’s application. SACL submitted that the “other associated facilities” must be those facilities relevant to the activities listed in the definition, namely takeoff and landing using the runway, and movement between runways and passenger terminals. Therefore, the other associated facilities would be airfield lighting, airside lighting, visual navigation aids and nose‑in docking guidance systems only.

103 SACL submitted that “Airside Service” should not be interpreted to include the servicing of aircraft, loading or unloading aircraft, or anything that happens after arrival at the terminal or before departure from the terminal.

104 Qantas submitted that the inclusion of aprons in the definition of “Airside Service” demonstrated that the term is not strictly limited to movement of aircraft. As Qantas pointed out, aircraft do not take off and land on the aprons, rather, aprons support the servicing of aircraft between flights, including baggage handling, refuelling, catering access, and the loading and unloading of freight.

105 Qantas noted that the term “apron” is defined by SACL in a document recently proffered by SACL for consideration by Qantas to govern ground handling services at Sydney Airport, the ‘Sydney Airport Conditions of Use for Ground Handling’, version 2, August 2004 (“draft Ground Handling COU”). In the draft Ground Handling COU “apron” is defined to mean “any part of [Sydney] Airport which is used for the purpose of servicing an aircraft.”

106 Qantas also relied upon SACL’s Airport Operations Manual, which forms part of the conditions of use agreement currently governing Qantas and SACL’s relationship. SACL’s Operations Manual describes “aprons” as:

“A defined area on a land aerodrome intended to accommodate aircraft for the purposes of loading and unloading passengers, mail or cargo, fuelling, parking or maintenance.

That part of an aerodrome to be used:

(a) for the purpose of enabling passengers to board, or disembark from, aircraft;

(b) for loading cargo on to, or unloading cargo from, aircraft; and/or

107 Finally, Qantas relied upon the submission to the NCC put by BARA, that “Airside Service” included the servicing (that is, refuelling, catering and cleaning) of an aircraft within the airside precinct. Qantas noted that the NCC’s final recommendation failed to make any express exclusion of servicing of aircraft as part of the definition it adopted of “Airside Service”, even though the servicing of aircraft was clearly placed within that definition by BARA’s submission.

108 The determination of the scope of the service the subject of the present application is of critical significance because the resolution of this issue dictates the extent to which SACL will be able to impose charges and terms and conditions in respect of services not included within the subject matter of this proceeding. This is of particular relevance as SACL has intimated that it intends to introduce new fees or charges for certain services, such as ground handling and fuel throughput, and to impose separate terms and conditions on the provision of such services in the future. Virgin Blue maintains that these services properly come within the bundle of services encompassed in the Airside Service for which it already pays a charge. If the Airside Service is declared, it is only the charges for, or the terms and conditions in relation to access to, the Airside Service which can be the subject of arbitration by the ACCC.

109 It is important to bear in mind that declaration pursuant to Pt IIIA is in respect of access to a service provided by a facility, as distinct from access to a facility. “Service” is defined in s 44B as follows:

“service means a service provided by means of a facility and includes:

(a) the use of an infrastructure facility such as a road or railway line;

(b) handling or transporting things such as goods or people;

but does not include:

(d) the supply of goods; or

(e) the use of intellectual property; or

(f) the use of a production process;

except to the extent that it is an integral but subsidiary part of the service.”

110 This distinction between a service and a facility was explained in Rail Access Corporation v New South Wales Minerals Council Ltd (supra), where the Full Federal Court observed at 524:

“The definition of ‘service’ in s 44B of the Act makes clear that a service is something separate and distinct from a facility. It may, however, consist merely of the use of a facility. The definition of ‘service’ distinguishes between the use of an infrastructure facility, such as a road or railway line, and the handling or transporting of things, such as goods or people, by the use of a road or railway line. The fact that one service provider, such as Freight Rail Corporation, is using the railway line infrastructure facility made available to it by Rail Access Corporation for the purposes of carrying coal by rail does not mean Rail Access Corporation is carrying on, or is the provider of, a service of carrying coal by rail.”

111 As the NCC correctly observed, the Tribunal’s role is to determine whether the additional purposes and facilities that Virgin Blue identified as properly being included in the definition of “Airside Service” fall within the scope of the term, in light of the fact that the Tribunal is limited to a consideration of the service that was the subject of consideration by the designated Minister, which decision was in turn based upon the NCC’s final recommendation.

112 The service that is the subject of the present application is the “particular service” which is the subject of the written application to the NCC in accordance with s 44F(1) of the TPA. It is not for the NCC in its recommendation pursuant to s 44G, nor the designated Minister or Tribunal pursuant to the obligations imposed by s 44H, to redefine, expand, contract or otherwise interfere with the description of the “particular service” which is the subject of the written application to the NCC. However, it is for the NCC, the designated Minister, and the Tribunal on review, to interpret the definition or scope of the “particular service” which is the subject of the written application to the NCC.

113 The Tribunal’s general discretion to regulate and control proceedings before it pursuant to s 103 of the TPA was discussed in Freight Victoria Limited (2002) ATPR ¶41‑884. However, the general discretion found in s 103 would only permit amendments that do not amount to a material alteration, or a change in substance, of the subject matter before the Tribunal. The question for the Tribunal is whether Virgin Blue’s clarification changes the breadth or the scope of the description of the service so as to alter it materially from the service considered by the designated Minister.

114 In our view, the clarification proffered by Virgin Blue comes dangerously close to amending substantially the subject matter of the service sought to be declared. Some of the items in the clarification clearly fall within the scope of the subject matter of the service sought to be declared in Virgin Blue’s application to the NCC. Others are more problematic, such as the insertion of the phrase “for the purpose of domestic air transport operations” which is used to open a number of gateways. Accordingly, we do not adopt Virgin Blue’s clarification in the terms propounded. Instead, we have focused only on the definition provided in Virgin Blue’s application.

115 The expressions “Airside Service” and “Airside Facilities” are terms used by Virgin Blue in its application as a composite definition of the expressions and terms which precede them. These are expressions which are commonly used in the aviation industry and accordingly their use in the application must be construed having regard to that common usage. Usage may change the content of definitions over time. Our task is to examine the usage of the expressions at the time of Virgin Blue’s application.

116 In its final recommendation, the NCC referred to the following submissions made to it by BARA:

“BARA submitted that the term ‘airside service’ is an ambiguously defined term in the airline industry but that the term ‘airside’ has a generally accepted and understood meaning … The International Civil Aviation Organisation (ICAO) defines ‘airside’ as: ‘the movement area of an aerodrome, adjacent terrain and buildings or portions thereof, access to which is controlled.’ Given the ICAO definition, BARA considers it reasonable to conclude that Airside Service refers to the activities associated with the access, movement and servicing (refuelling, catering and cleaning) of an aircraft within the airside precinct.” (emphasis added)

117 The NCC also referred to the definition which the ACCC had given to “airside facilities” in its “Draft Guide to Section 192 of the Airports Act ‑ Declaration of Airport Services” (October, 1998), which included:

“aircraft movement areas such as runways, taxiways and aprons, aircraft parking areas, safety devices and guidance systems, airfield and airside lighting, airside grounds associated with the use of these facilities and vehicular access to these facilities.”

118 Also of relevance is the definition of “airside facilities” adopted in the Productivity Commission Inquiry Report which included “runways, taxiways and aprons, as well as airfield lighting, aircraft parking bays, visual navigation aids, hangars, freight terminals and facilities for aircraft maintenance and refuelling, and in‑flight catering”.

119 In its final recommendation, the NCC accepted Virgin Blue’s definition of “Airside Service”, which it said was broadly consistent with definitions given by the ACCC and the Productivity Commission and with submissions received from interested parties.

120 It is clear from Virgin Blue’s combined application (set out above at [86]), that there was an intention to cover the entire field of aeronautical services, comprising both airside services and landside services. The excision of the “Domestic Terminal Service” was not intended to exclude anything more than activities occurring inside the terminal.

121 We have formed the view that the use of the service the subject of Virgin Blue’s application 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. That use of the service 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 is 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. We define the term “Airside Service” accordingly.

122 We have formed this view for a number of reasons. The wording of Virgin Blue’s application suggests that the Airside Service covers those aspects of access to SACL’s facility that relate to the preparation and loading of aircraft for departure, the takeoff and landing of aircraft, and the process of the turning around of aircraft in between flights. This indicates that access to the aprons for the purposes of refuelling, catering, loading and unloading of passengers and baggage forms part of the Airside Service. So much was put to the NCC by BARA and was therefore considered by the NCC when making its final recommendation, in which it adopted Virgin Blue’s definition of “Airside Service”. Further, the definition of “Airside Service” given by Virgin Blue in its application specifically refers to “aprons” and the purpose for which aprons are used clearly goes well beyond movement of aircraft. We therefore consider that everything that happens on aprons forms part of the Airside Service for the purpose of defining the scope of Virgin Blue’s application.

123 This interpretation is supported by the broad meaning that “airside” is given in the aviation industry and, from a practical perspective, is preferable to a narrow definition which would limit the nature of the service which Virgin Blue intended to put before the NCC (and in turn the designated Minister), and which the NCC and the designated Minister in fact appeared to consider. In addition, a narrow interpretation would frustrate the intention of the applicant for review, would lead to commercial uncertainty, and would be likely to encourage further costly and time‑consuming proceedings. In these circumstances, such a broad definition of Airside Service, which accords with Virgin Blue’s intention, is supported by the common industry understanding, and which reflects the scope of the service considered by the NCC and the designated Minister, is to be preferred.

What is the “market for the service” and the “market other than the market for the service”?

124 Market definition was not a major issue in the proceeding. It was agreed by the parties that the “market for the service” in criterion (a) is the market for aeronautical services in Sydney. The parties differed somewhat as to the definition of the “market other than the market for the service” (more commonly described as the “dependent” market.)

125 Virgin Blue submitted that the dependent market is the market for domestic air passenger and freight services to and from Sydney, or alternatively, the market in which domestic air passenger services are supplied to and from Sydney. Qantas contended that the dependent market is the market for domestic air passenger services to and from Sydney. SACL contended that the dependent market is the market for domestic air passenger services only, but extending throughout Australia. SACL relied upon the expert opinion of Mr Gregory Houston, director of the United States of America firm National Economic Research Associates Inc, and Managing Director of its Australian operating entity. Mr Houston contended that the dependent market should be defined as the Australia‑wide market for domestic (both interstate and intrastate) air passenger services. He submitted that the network nature of the aviation industry, and the fact that airlines can flexibly redeploy aircraft from one route to another within the Australian domestic market, supported such a definition.

126 The differences in the definitions put forward by the parties are therefore to be found in the product dimension and geographic dimension of the market.

127 If all the relevant domestic airlines using Sydney Airport operated a national network with Sydney Airport as their hub, we would be inclined to the view that the relevant dependent market for the purposes of our analysis is the Australian national market for domestic air passenger travel. However, since the demise of Ansett and the commencement of operations by Virgin Blue, the LCC model has intruded into the equation. In particular, Virgin Blue and, more recently, Jetstar, do not use Sydney Airport as a hub for their domestic operations. These airlines, being LCCs, tend to focus upon individual sectors rather than operating on a network basis. This supports a market definition involving routes to and from Sydney. Similarly, new entrants may have fewer opportunities to redeploy aircraft than incumbent airlines, undermining the premise of the market definition put forward by Mr Houston.

128 It therefore seems to us that, properly understood, the relevant dependent market should relate to the carriage of domestic air passengers into and out of Sydney.

129 Although most passenger aircraft also carry varying quantities of freight, we note that there are also in operation throughout Australia dedicated freight carriers about which we heard little evidence. We are therefore inclined to exclude the use of freight from the definition of the relevant dependent market. Whether the market be the market for the carriage of passengers and freight into and out of Sydney, or the carriage of passengers alone into and out of Sydney, the conclusion reached by us would not change.

What is the meaning and scope of the expressions “access” and “increased access”?

130 The expressions “access” and “increased access” are not defined in Pt IIIA of the TPA. Virgin Blue’s primary submission was that criterion (a) required determination of whether a right or ability (or an increased, or greater, or enhanced right or ability) to use the service, as opposed to no right or ability (or only a limited or restricted right or ability) to use the service, would promote competition in the dependent market. In the alternative, Virgin Blue submitted that access (or increased access) was to be equated with declaration, which required asking whether competition in the dependent market would be promoted by declaration, as opposed to the position where there was no declaration. This latter submission was the principal submission of the NCC and Qantas.

131 The NCC and Qantas sought to equate the terms “access” and “increased access” in criterion (a) with regulated access in the form of declaration under Pt IIIA of the TPA. Such an approach was said to reflect earlier Tribunal decisions interpreting the terms, in particular, the Tribunal decision in Sydney International Airport at [106], 40,775. The NCC submitted that increased access included accommodation of terms and conditions of access, including access on more favourable terms.

132 SACL rejected this approach, submitting that the actual consequences of declaration would need to be identified and assessed to see whether access or increased access in terms of more competitive use of the facility would in fact be achieved. In its view, the fact of declaration itself was not enough to constitute access or increased access. SACL agreed that an aspect of “access” would include the terms and conditions or the price upon which access was granted, but only where it could first be shown that such terms would have an effect upon the level of access, that is upon the right or opportunity to use the service.

133 SACL contended that, in any event, Virgin Blue’s application did not pertain to a question of access at all, as it was clear that Virgin Blue had access to Sydney Airport, and the substance of Virgin Blue’s contentions was not that it did not have access to Sydney Airport, nor that it had insufficient access. SACL submitted that criterion (a) was thus not engaged. In SACL’s view, Virgin Blue’s application was in reality merely a pre‑emptive attempt to stop SACL from imposing increases in its charges for the Airside Service, and an attempt to change the mode of pricing imposed by SACL to a model that benefited Virgin Blue over Qantas. SACL submitted that pricing disputes were not properly brought within the access regime under Pt IIIA unless either existing pricing was affecting access, or future pricing was likely to increase and so would affect access to the service. It submitted that neither of these circumstances arose in the present case.

134 There was an element of ambiguity in SACL’s submissions as to the meaning and content of “increased access”. SACL accepted that if “access” to a service meant the “right or opportunity to use the facility”, then “increased access” to such a service would mean “either or both a change in, or extension of, such rights or opportunities that may exist in relation to the level of use of the facility which would increase the level of use of that facility”. It followed, submitted SACL, that “increased access” required a “consideration of the means by which different sets of rights or opportunities can lead to different levels of use of the facility”. SACL further accepted that the notion of a “right” refers to “terms and conditions on which an access seeker can use a facility owned by another”, which terms and conditions can influence the extent to which a facility may be used in a direct and indirect way.

135 SACL then submitted that “the type and extent of access or increased access that the Tribunal must hypothesise is the access or increased access that is likely to exist if the relevant service were to be declared”. This involved some assessment about the likely nature and extent of access that would be provided under Div 3 of Pt IIIA. Although SACL accepted that the Tribunal was not required to “second guess” the precise terms of access that the ACCC might determine upon an arbitration commenced under s 44S of the TPA, it submitted that in some circumstances it would be appropriate for the Tribunal “to anticipate how the ACCC might determine an arbitration over access”. It contended that where the issue is whether “increased access” to a service would promote competition, it was “inevitable” that the Tribunal would have to “make a more detailed assessment of the nature and extent of the access” that would exist if the service was declared. Without such an assessment, SACL said it would be impossible for the Tribunal to assess rationally whether declaration would result in increased access.

136 We part company with SACL at the point at which it contends that it may be appropriate for the Tribunal to anticipate how the ACCC might determine an arbitration over access. It forms no part of our inquiry to assess whether increased access would result in any particular outcome in an ACCC‑arbitrated dispute over terms and conditions of use of Sydney Airport. We should not opine as to, speculate, or second‑guess the methodology that the ACCC might adopt in relation to the setting of the price or other terms and conditions of infrastructure services.

137 As noted above, the TPA does not define access or increased access. Looking to the common meaning of the term “access”, the Concise Oxford Dictionary (8^thed., 1990) defines access as, inter alia, “the right or opportunity to reach or use or visit”. The New Oxford Dictionary of English (2001) defines access, inter alia, as “the means or opportunity to approach or enter a place”. The Macquarie Dictionary (3^rd ed., 1998) defines access as meaning, inter alia, “way, means or opportunity of approach”. It was generally agreed between the parties that the ordinary meaning of the terms meant that where “access” is used in criterion (a), it is a noun meaning a right or ability or opportunity to make use of the service, and that “increased access” is therefore an enhanced right, ability or opportunity to make use of the service.

138 In the present circumstances, Virgin Blue already has use of the facility of Sydney Airport. However, access is a concept that is broader than physical access, and includes the terms and conditions on which such physical access is available.

139 In our view, the notions of access and increased access include the terms and conditions upon which such access or increased access is made available at the facility. This is consistent with the view taken by the Tribunal in Re Duke Eastern Gas Pipeline Pty Ltd (2001) 162 FLR 1 where the Tribunal considered the meaning of “access (or increased access) to Services” for the purposes of s 1.9(a) of the National Third Party Access Code for Natural Gas Pipeline Systems. There, the Tribunal rejected the applicants’ argument that the statutory criterion regarding access or increased access was not enlivened unless access to the service was either unavailable or limited in some way. The Tribunal stated at 16:

“criterion (a) does not have as its focus a factual question as to whether access to the pipeline services is available or restricted. Put in that way, the question would not take sufficient account of the terms on which access is offered. Rather, the question posed by criterion (a) is whether the creation of the right of access for which the Code provides would promote competition in another market.”

140 Such an interpretation is also supported by the legislation. Div 3 of Pt IIIA of the TPA explicitly recognises that access disputes in that Division cover aspects of access to a declared service: s 44S. Further, s 44V(2)(c) allows the ACCC in its determination of an arbitration of an access dispute to specify the terms and conditions of a third party’s access to a service. Although Divs 2 and 3 of the TPA operate independently, their operation should be complementary as they relate to the same subject matter and it is therefore desirable that the construction of terms that are common to both Divisions be consistent.

141 The definition in s 44B of the TPA of a “third party”, in relation to a service, as being “a person who wants access to the service or wants a change to some aspect of the person’s existing access to the service” (emphasis added) also supports this interpretation.

142 This interpretation is further supported by the fact that it gives a meaning to criterion (a) that reflects its origin, namely cl 6(1)(b) of the Competition Principles Agreement, dated 11 April 1995, which provides:

“Subject to subclause (2), the Commonwealth will put forward legislation to establish a regime for third party access to services provided by means of significant infrastructure facilities where:

…

(b) access to the service is necessary in order to permit effective competition in a downstream or upstream market.”

143 In this proceeding, Virgin Blue is essentially seeking different terms and conditions for the use of the Airside Service; those terms and conditions being the opportunity for arbitration in default of commercial agreement between access seekers and the provider of the service in relation to matters and issues which affect Virgin Blue’s ability to engage in competitive conduct in the dependent market. Accordingly, this is a case of increased access, where Virgin Blue is seeking an enhanced right, ability or opportunity to make use of the Airside Service at Sydney Airport in the sense that it is seeking different terms and conditions upon which the use of that Service is made available to it which involve the opportunity for arbitration in default of agreement.

144 Increased access will occur if declaration is made because the terms and conditions of access will change and the right of access will be enhanced. In the present circumstances this will occur because, whereas prior to declaration a decision to impose a charge by SACL or impose a term and condition as a prerequisite to gaining or continuing use of the Airside Service could not be challenged or appealed in any way, subsequent to declaration such charge or term or condition could be challenged, made the subject of negotiation and, if it could not be negotiated to a mutually acceptable resolution, could be referred to arbitration by the ACCC.

“Promotion of competition” in a dependent market

145 Competition, in the context of the TPA, is generally defined as a process, rather than a state of affairs, and is now understood to refer to the nature and extent of rivalry in a given market. In Re Queensland Co‑operative Milling Association Ltd and Defiance Holdings Ltd (1976) 8 ALR 481, the Trade Practices Tribunal held at 515:

“Competition expresses itself as rivalrous market behaviour… In our view effective competition requires both that prices should be flexible, reflecting the forces of demand and supply, and that there should be independent rivalry in all dimensions of the price‑product‑service packages offered to consumers and customers.”

146 In Sydney International Airport the Tribunal considered the meaning of “promoting competition” at [106]‑[107], 40,775, as follows:

“The Tribunal does not consider that the notion of ‘promoting’ competition in s 44H(4)(a) requires it to be satisfied that there would be an advance in competition in the sense that competition would be increased. Rather, the Tribunal considers that the notion of ‘promoting’ competition in s 44H(4)(a) involves the idea of creating the conditions or environment for improving competition from what it would be otherwise. That is to say, the opportunities and environment for competition given declaration, will be better than they would be without declaration.

We have reached this conclusion having had regard, in particular, to the two stage process of the Pt IIIA access regime. The purpose of an access declaration is to unlock a bottleneck so that competition can be promoted in a market other than the market for the service. The emphasis is on ‘access’, which leads us to the view that s 44H(4)(a) is concerned with the fostering of competition, that is to say it is concerned with the removal of barriers to entry which inhibit the opportunity for competition in the relevant downstream market. It is in this sense that the Tribunal considers that the promotion of competition involves a consideration that if the conditions or environment for improving competition are enhanced, then there is a likelihood of increased competition that is not trivial.

147 In Re Duke Eastern Gas Pipeline Pty Ltd (supra) at 17, the Tribunal endorsed the approach taken in Sydney International Airport as set out above, stating:

“The Tribunal [in Sydney International Airport] concluded that the Trade Practices Act analogue of criterion (a) is concerned with the removal of barriers to entry which inhibit the opportunity for competition in the relevant downstream market. It is in this sense that the notion of promotion of competition involves a consideration that if the conditions or environment for improving competition are enhanced, then there is a likelihood of increased competition that is not trivial. We agree.”

148 In order to determine whether access or increased access “would promote competition” in a dependent market, it is necessary to undertake an analysis of the future with declaration (which is referred to as the “factual”) as against the future without declaration (which is referred to as the “counterfactual”). As the Tribunal in Sydney International Airport observed at [108], 40,775, a comparison of the factual and the counterfactual requires a forward‑looking analysis which involves a comparison of the competitive conditions and environment likely to arise in the future with and without declaration.

149 The characterisation of the factual and counterfactual scenarios put forward by Virgin Blue in its primary submission was that the Tribunal is required to compare the future state of competition in the dependent market with a right or ability to use the service, and the future state of competition in the dependent market without any right or ability to use the service. We do not agree. In our view, the counterfactual should be understood by reference to the current conditions of access projected into the future. Virgin Blue currently has use of Sydney Airport, and to undertake a counterfactual analysis which discounts this fact would be wholly unrealistic.

150 SACL’s submissions tended to infer that an assessment of the factual required the Tribunal to surmise the possible outcomes of any arbitration under Div 3 of Pt IIIA. We reject the proposition that predictions of the outcomes of arbitration by the ACCC are any part of the Tribunal’s task in assessing whether criterion (a) is made out. This much was made clear by the Tribunal in Sydney International Airport at [187], 40,790‑40,791. We note that, in any event, it would be exceedingly difficult for the Tribunal to engage in such a practice, requiring as it does a hypothesis not only as to what determination the ACCC would reach, but also as to the identity of the parties to any potential arbitration. As s 44U makes clear, the parties to the arbitration of an access dispute are the provider, the third party access seeker and “any other person … having a sufficient interest”.

151 SACL also submitted that, in looking to the future with or without declaration, the relevant question is whether SACL will engage in anti‑competitive conduct. This formulation puts the test too highly. Rather, one should ask whether past or present conduct of the service provider informs us as to the likely future conduct of the service provider and the effect on competition in the dependent market of such conduct. If such conduct has, or is likely to have, an adverse effect on competition, then one looks at declaration and asks whether that will enhance competition in the dependent market by creating opportunities and an environment in which the impact of such conduct and its effect on competition may be lessened or diminished.

152 When one considers the counterfactual, the current scenario may be used as a benchmark, taking into account past and current events and circumstances and extrapolating them into the future. A consideration of the factual involves an assessment of whether increased access on different terms and conditions would enhance the environment for competition in the dependent market and create or open up more opportunities for competitive conduct in the dependent market.

153 Put another way, the task of the Tribunal is to compare:

· the opportunities and environment for competition in the dependent market if the Airside Service is declared; with

· the opportunities and environment for competition in the dependent market if the Airside Service is not declared.

154 This comparison is assisted by any evidence of monopolistic behaviour, or of a capacity and willingness on the part of the monopolist to engage in conduct which significantly disrupts or affects competition in the dependent market.

155 The promotion of competition in the dependent market does not require a demonstration that there will be more efficient outcomes in the dependent market. Greater efficiency may follow declaration, but the critical issue is whether there will be an enhancement of the competitive environment and greater competitive opportunities in the dependent market.

156 Whether competition will be promoted depends upon the extent to which a service provider has the ability, in the absence of declaration, to use market power to affect adversely competition in the dependent market. If a service provider has market power and the ability to use it in a way that adversely affects competition in a dependent market, and if the service provider has a history of so acting, declaration involving increased access to the service (in the sense of access on different terms and conditions with the ability to negotiate and, if necessary, have independent arbitration of those terms and conditions), would be likely to improve the environment for competition in the dependent market.

157 Thus, the relevant comparison is the future with declaration (involving an assessment of what impact the opportunity for arbitration will have, such that future commercial negotiations would be conducted in the context whereby arbitration would be available to the parties as a circuit‑breaker in the absence of reaching an agreement), and the future without declaration (this being understood by reference to the current conditions of access and the current and past behaviour of the service provider projected into the future).

158 It was common ground between the parties that the promotion of competition involves promoting the conditions or opportunity or environment for rivalry to occur, to a non‑trivial or tangible extent. So much is clear from the authorities in Sydney International Airport and Re Duke Eastern Gas Pipeline Pty Ltd (supra). However, the parties differed in the degree of probability or certainty which those terms connote.

159 According to Virgin Blue, “non‑trivial” connotes the same degree of change as the word “substantial”, which appears elsewhere in the TPA. Virgin Blue submitted that the effect need not be large or weighty, but should be meaningful to the competitive process.

160 Virgin Blue also submitted that the requirement that access or increased access “would” promote competition meant “realistically could” and was not to be interpreted as “will” promote competition. Virgin Blue contended that the degree of certainty required by the phrase “would promote competition” is that there is a significant finite probability, rather than that such a consequence be “more probable than not”.

161 SACL, on the other hand, submitted that when considering the future opportunities and environment for competition, the Tribunal should not engage in hypothesising what “might realistically” or “could or might be expected” to occur. It submitted that the use of the word “would”, rather than “may” or “would be likely”, was significant.

162 In our view, we need to be satisfied that if the Airside Service is declared there would be a significant, finite probability that an enhanced environment for competition and greater opportunities for competitive behaviour – in a non‑trivial sense – would arise in the dependent market.

Application of criterion (a) to the present proceeding

163 In order to analyse the future with and without declaration of the Airside Service, we must consider the extent to which SACL has the ability, in the absence of declaration, to use its market power to affect adversely competition in the market for the carriage of domestic air passengers into and out of Sydney. If SACL has market power and the ability to use it in a way that adversely affects competition in this market, and if SACL has a history of so exercising its market power, we then have to consider whether declaration of the service would be likely to improve the opportunities and environment for competition in the relevant dependent market.

164 The existence of SACL’s monopoly power was not controversial and, indeed, was accepted by all the economic experts called by the parties. This leads to a consideration of whether SACL has misused its monopoly power. In these reasons, 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. Secondly, it must be considered whether there are any effective constraints on the manner in which SACL can exercise its monopoly power. This inquiry raises for consideration the countervailing power of the airlines, the threat of re‑regulation by the Commonwealth Government, and the importance of non‑aeronautical revenue to SACL. Finally, we must consider what impact SACL’s use of its monopoly power has on the competitive conditions existing in the dependent market.

165 At all times in this analysis we are seeking to determine what the environment for competition in the dependent market would be if the Airside Service was not declared, compared with the likely situation if the Airside Service was declared. When considering the situation without declaration, it is necessary to take into account what has happened in the past and what is happening in the present with a view to determining what is likely to happen in the future without declaration. In this sense we are informed by SACL’s conduct in the past and the present. If SACL has misused its monopoly power and has engaged in monopoly pricing in the past or is continuing to do so in the present, that is a harbinger of what is likely to happen in the future.

SACL’s USE OF ITS monopoly power

166 Virgin Blue and Qantas submitted, in general terms, that three areas demonstrated a misuse of monopoly power by SACL, these being:

(1) SACL’s revenue, pricing policies and charges for the Airside Service;

(2) SACL’s non‑price terms and conditions of access to Sydney Airport;

(3) A number of specific incidents involving SACL and various airlines which use the facilities provided at Sydney Airport.

SACL’S revenue and pricing policies

167 A number of charges presently relate to the Airside Service. These charges include:

· the Domestic Passenger Services Charge (“Domestic PSC”) payable by domestic airlines in respect of each arriving and departing passenger;

· a portion of the Terminal 2 Passenger Facilitation Charge (“PFC”);

· the regional aircraft runway charge payable by regional airlines;

· the freight and general aviation runway charge payable by operators of freight and general aviation aircraft;

· an apron charge for general aviation aircraft;

· security charges.

168 Of relevance to the present proceeding is the Domestic PSC, and, to a lesser extent, the PFC.

169 In December 1999 SACL began detailed discussions with its aviation customers regarding the development of a proposal to increase substantially its aeronautical charges. At the time, aeronautical charges were based on the maximum take‑off weight of the aircraft (“MTOW”).

170 In February 2000 a group of 27 airlines, including Qantas, commenced proceedings against SACL in the Federal Court of Australia alleging, inter alia, that SACL was not entitled to increase its aeronautical charges in order to recover amounts that SACL had spent on airport upgrades in preparation for the Olympic Games in Sydney, and that SACL was liable to pay compensation for various disruptions to airline services caused by the upgrades. According to Mr Steven Fitzgerald, General Manager, Airport Operations at SACL, Qantas appeared to be the primary driver of these proceedings. In February 2001 SACL filed a cross‑claim in the Federal Court proceedings, seeking orders, inter alia, that Qantas was bound by certain conditions of use at Sydney Airport.

171 As we have noted earlier (see [30] above), in October 2000 SACL submitted a ‘Revised Draft Aeronautical Pricing Proposal’ to the ACCC seeking to increase certain aeronautical charges at Sydney Airport by an average of around 130%. In May 2001 the ACCC published its decision in relation to SACL’s proposal. The ACCC rejected SACL’s proposed increase of approximately 130%, but approved an average increase in aeronautical charges of approximately 97%.

172 In its decision, the ACCC set out a basis for SACL’s allowable aeronautical revenue up until May 2006. The charges were “smoothed” to establish constant nominal prices over the period which were expected to generate revenue of $183.5 million in 2000/2001 which was to increase to $215 million in 2004/2005. The ACCC also expressed support for a “building block methodology” to be used in assessing SACL’s maximum allowable revenue.

173 From April to July 2001, there were in tensive negotiations between SACL and the various airlines in relation to settlement of the Federal Court proceedings, during which time SACL and Qantas discussed replacing various airport charges with a single passenger‑based charge. On 1 August 2001 SACL and Qantas executed a Deed of Settlement and Mutual Release in settlement of the Federal Court proceedings (“the Deed of Settlement”). As part of the settlement, SACL agreed to prepare a Passenger Services Charge Notification to the ACCC to replace the various airport charges with a single passenger‑based charge. In the Deed of Settlement, SACL and Qantas agreed, inter alia, to the following:

“1. Passenger Services Charge

(a) SACL agrees to submit its Passenger Services Charge Notification to the ACCC on the Lodgement Date.

(b) If the ACCC notifies SACL in writing that it needs more time to make its decision in relation to the Passenger Services Charge Notification, the parties may agree to extend the ACCC Decision Date to another date.

(c) SACL will not revoke or amend its Passenger Services Charge Notification without the prior written consent of Qantas.

(d) SACL agrees to give due and proper consideration to any proposed amendments to the Passenger Services Charge Notification proposed by the ACCC and, with the agreement of Qantas, may (but is not obliged to) amend the Passenger Services Charge Notification.

(e) SACL acknowledges that the ACCC should be encouraged and assisted to reach a decision that it does not object to the Passenger Services Charge Notification. SACL and Qantas will each use its best endeavours to cooperate with each other and the ACCC in responding to any questions or requests from the ACCC and/or any consultants appointed by the ACCC concerning the Passenger Services Charge Notification.

(f) In order for SACL to discharge its ‘best endeavours’ obligation in clause 1(e), SACL agrees to:

i. ensure all statements (whether oral or in writing and whether public or privately to the ACCC and/or its consultants) about the Passenger Services Charge Notification and passenger service charges generally contain expressions of support for and/or descriptions of the benefits of the Passenger Services Charge Notification and passenger service charges generally;

ii. ensure correspondence to and discussions with the ACCC and the Government and/or any consultants appointed by the ACCC which relate to the merits of the Passenger Services Charge Notification and passenger service charges generally contain expressions of support for and/or descriptions of the benefits of the Passenger Services Charge Notification [and] passenger service charges generally;

iii. provide to the ACCC all documentation, records and information necessary for the ACCC to reach a decision in relation to the Passenger Services Charge Notification in a timely manner;

iv. ensure that the Government is provided with information necessary for it to understand the rationale for the passenger service charge;

v. arrange to meet jointly with Qantas and the ACCC and/or any consultants appointed by the ACCC when required;

vi. provide Qantas with a copy of any correspondence received by SACL from the ACCC and/or consultants appointed by the ACCC in relation to the Passenger Services Charge Notification within one business day of the receipt of such correspondence unless prohibited by and then only to the extent of any express confidentiality obligation to the ACCC or a third party;

vii. consult with Qantas prior to responding (whether verbally or in writing) to any correspondence provided under clause 1(f)(vi) other than responses seeking clarification of any request; and

viii. consult with Qantas in relation to any submissions made by SACL to any public forum or inquiry arising from the Passenger Services Charge Notification.

(g) The provisions of clauses 1(e) and (f) will have no force or effect after the ACCC decision process in relation to the Passenger Services Charge Notification is completed.

(h) Subject to this clause, SACL will maintain a passenger services charge (‘PSC’) as the primary basis for charging for aeronautical charges such as landing…”

174 On 3 August 2001 SACL sought the ACCC’s approval under s 22(2)(a) of the Prices Surveillance Act to replace the existing MTOW‑based charges that applied to the use of runways, taxiways and airside facilities by international and domestic airlines with a charge based on the number of arriving and departing passengers. SACL proposed an International Passenger Service Charge (“International PSC”) of $19.31 (including GST) per passenger movement through the international terminal and a Domestic PSC of $4.00 (including GST) per domestic passenger movement.

175 Qantas and Ansett supported SACL’s proposed change to the tariff structure, but it was opposed by Virgin Blue on the basis that a passenger‑based charge did not reflect cost drivers, would promote inefficiency and was anti‑competitive. Virgin Blue’s business model relies upon achieving high load factors and, upon its calculations as at 13 August 2001, if it achieved a 70% load factor and 20 rotations per day, SACL’s proposed change to the tariff structure would result in an additional cost per year of between $[x] and $[x].

176 On 28 August 2001 the ACCC determined that, although it did not object to the imposition of a passenger service charge for international passengers, it objected to a passenger service charge for domestic passengers. The ACCC concluded that:

“…Virgin Blue’s submission raises important concerns about the impact the domestic passenger charge may have on competition in the domestic aviation market. It appears that the proposed restructure may disadvantage new entrants who carry more passengers per aircraft. However, these complex issues requires greater analysis than what has been possible in the PS Act’s 21 day statutory period.

The Commission considers that it has not had sufficient time under the PS Act’s 21 day statutory period to fully consider and analyse the effects of the proposed domestic charge restructure. As such, the Commission objects to the proposed passenger service charge for domestic passengers.”

177 It should be borne in mind that the International PSC was a composite airside and passenger facilitation (or terminal) charge, which created a logical connection between the number of passengers and the basis of the charge. The proposed Domestic PSC, on the other hand, was limited to the Airside Service, that is, the use by domestic aircraft of runways, taxiways, aprons and associated facilities. We also note that neither Virgin Blue nor any other LCC was operating international flights out of Sydney Airport at the time SACL sought approval of the change in tariff structure from the ACCC.

178 Following the ACCC’s decision, SACL proceeded to implement an International PSC commencing November 2001. However, SACL deferred any further steps to implement a Domestic PSC and continued to employ an MTOW‑based charge.

179 As noted earlier (see [38] above), following the movement in the Commonwealth Government’s policy towards “lighter‑handed regulation”, as of July 2002 SACL was no longer required to notify the ACCC of any proposed increases in the price of aeronautical services. Instead, from 1 July 2002, SACL was simply required to report to the ACCC in relation to its prices and financial performance, and the ACCC in turn reported to the Parliamentary Secretary to the Treasurer.

180 In August 2002, SACL reconsidered its position in relation to the manner in which it levied aeronautical charges. SACL’s reconsideration of the Domestic PSC was documented in a number of papers.

181 First, Mr Dominic Schuster, who was at the time the Manager of Economics at SACL, prepared an internal memorandum dated 27 August 2002 for Mr Gregory Timar, then SACL’s General Manager of Corporate Planning and Strategy. Mr Schuster’s responsibilities included making recommendations to SACL’s Board Strategy Committee in respect of the appropriate level of charges for aeronautical services. Mr Timar’s position required him to address the maximisation of SACL’s revenue. In particular, Mr Timar was responsible for recommending to SACL’s Board that it change its pricing for domestic aeronautical charges from an MTOW‑based charge to a passenger‑based charge. This involved consideration of the ways in which aeronautical charges could be raised. The issue of the introduction of a Domestic PSC “for runway use” was raised in this memorandum as follows:

“Introducing the charge at the level proposed last year would generate revenues of some $4.5m annually against the existing MTOW regime, because of the higher load factors being achieved since Ansett’s collapse. Qantas continues to support a move to the domestic PSC, explicitly recognising that there would be upside for SACL. Virgin Blue is now subject to passenger‑based runway charges at Melbourne and Perth Airport, but there is no suggestion that it has relaxed its philosophical stance against this form of charge. Moreover, SACL’s current relationship with the carrier may make introduction more difficult. Qantas has advised that it would not support the passenger‑based charge unless it also applied to Virgin Blue.”

182 Secondly, in SACL’s ‘Traffic & Aeronautical Revenue Task Force Report’, dated 16 October 2002, it was noted:

“The domestic PSC for runway use which was rejected by the ACCC in August 2001 can now be re‑instated provided all stakeholders are in agreement. The move to passenger‑based landing charges domestically could yield up to $5m a year over the weight‑based regime, because of the assumptions adopted for passengers excluded from the charge, and high aircraft load factors.

…

Qantas actively supports moving to a domestic PSC. While theoretically, different carriers could be charged on a different basis, Qantas would only support the PSC on the basis that it is charged to all domestic carriers.

Virgin Blue opposes the introduction of the passenger‑based charge as its single class 737 aircraft carry more passengers per landed tonne than Qantas. Virgin Blue also has a much lower rate of transfer and transit passengers, which are to be exempt from the domestic PSC, than Qantas.”

183 Thirdly, M r Schuster co‑sponsored the SACL ‘Board Strategy Committee (Information) Paper 7/6’ that was prepared for a meeting of that Committee on 16 December 2002 (“Strategy Committee Paper of December 2002”). This Paper was co‑sponsored with Mr Timar and Mr Greg Russell, Director of Aviation at SACL. Appendix 3 of the Paper stated:

“Qantas continues to be extremely keen that a domestic PSC be introduced. It has recognised informally that the potential exists for SACL to derive more revenue from a PSC than the weight‑based equivalent, but has no difficulties with this. The main reasons for Qantas’ enthusiasm for the PSC are that it can be passed directly to passengers, becoming a variable cost while Qantas would be unlikely to adjust airfares, and because it could strengthen their commercial position relative to Virgin Blue.

…

A further consideration is SACL’s relationship with Virgin Blue which remains somewhat difficult, and whether we can successfully implement a domestic PSC at the previously struck rate with that airline. While Qantas has indicated a willingness to adopt charge struck in August 2001, one would assume that Virgin Blue management will see the potential for passenger loads to drop and argue that a charge struck prior to Ansett’s collapse is no longer appropriate. They may also query the transfer and transit rate as very much higher than its experience. This may lead to as [sic] charge being calculated that comes much closer to SACL’s publicly stated goal of a revenue‑neutral restructuring of charges. A successful declaration of airside facilities under the Trade Practices Act access regime, as sought by Virgin Blue, would also hamper any attempt to restructure domestic charges.”

A table annexed to the Strategy Committee Paper of December 2002 showed the clear economic advantage to SACL in charging a Domestic PSC.

184 There followed a number of discussions with Virgin Blue regarding the introduction of a Domestic PSC. On 10 February 2003 the newly appointed Executive Chairman and Chief Executive Officer of SACL, Mr Max Moore‑Wilton, attended Virgin Blue’s offices in Brisbane for a “meet and greet” and informed Virgin Blue that SACL was considering a move to a passenger‑based charge.

185 In a facsimile dated 13 February 2003 Mr Brett Godfrey, Chief Executive Officer of Virgin Blue, wrote to Mr Moore‑Wilton stating that Virgin Blue would not like to see an increase in landing fees given that the aeronautical charge was doubled less than two years prior.

186 In a presentation given at the Price Deregulation and Airline Commercial Agreement Workshop held by the Strategy Committee on 26 February 2003 (“Strategy Committee Presentation of February 2003”), SACL considered the optimal approach to pricing. The Presentation acknowledged a “material disadvantage” to Virgin Blue upon the imposition of a Domestic PSC. This disadvantage was based on Virgin Blue’s higher load factors and use of Boeing 737 aircraft. It was noted that Virgin Blue carried around 2 passengers per tonne, whereas Qantas carried approximately 1.1 passengers per tonne. The Presentation showed that “[r]ebalancing to reflect pax [passengers]: MTOW, QF would pay around $4.00, Virgin $2.00 per pax.” The Strategy Committee Presentation of February 2003 also noted “Qantas strongly supports the PSC, as it can be fully passed on to customers and aids its competitive advantage.”

187 On 4 March 2003 Virgin Blue wrote to SACL stating its opposition to the change in the airside charges and seeking that SACL consult with the airlines and enter into a long‑term agreement in relation to airport use. Mr Godfrey wrote to Mr Moore‑Wilton:

“If SACL is changing methodologies to push through a pricing regime that will discriminate against Virgin Blue, relative to its major competitor Qantas, and against the findings of the ACCC, we would consider this bordering on bad faith. … I must reiterate an uncapped per pax charge levied compared with the existing MTOW would most likely directly benefit Qantas at our expense.”

188 On 10 March 2003 SACL informed the airlines of its intention to implement a Domestic PSC at Sydney Airport from 1 July 2003. In a letter to Virgin Blue on that date, Mr Moore‑Wilton stated SACL’s opinion that the ACCC’s reasons given in August 2001 did not signal a complete opposition to the Domestic PSC, but rather that the ACCC had not had enough time to consider fully and analyse the effects of the proposed passenger charge. Mr Moore‑Wilton’s letter also stated, inter alia:

“You have expressed concern about your competitive position relative to Qantas under the domestic PSC. Sydney Airport is open to public scrutiny and must be able to demonstrate a transparent approach to charging that ensures airlines pay the same for equivalent levels of service. As such, we do not see any case for a differential charging regime. This is consistent with the approach to runway charges that I understand Virgin Blue has accepted at other airports.

Passenger based charges provide a better measure of airport utilisation than traditional weight based charges, and also provide for a sharing of risk between airports and airlines, as landing charges are based on passenger loads rather than simply the scheduled weight of the aircraft which will vary over time.”

189 Virgin Blue continued to oppose the introduction of a Domestic PSC on the basis that it would dramatically increase Virgin Blue’s costs of operating from Sydney Airport and would place it at a significant competitive disadvantage with respect to Qantas. In a letter dated 14 March 2003 from Mr Diederik Pen, Head of Ground Services for Virgin Blue, to Mr Russell, Mr Pen stated:

“We are very disappointed by your proposal to introduce a passenger service charge for domestic runway use. The effect of this charge, if introduced, will be to dramatically increase Virgin Blue’s costs of operating from Sydney Airport as well as to place Virgin Blue at a significant competitive disadvantage with respect to Qantas.

This proposal retards the constructive relationship we had hoped we were building following our difficulties last year.

The introduction of passenger‑based charges for the use of the runway at Sydney Airport will have significant anti‑competitive effects on competition in domestic aviation and will penalise Virgin Blue as the more efficient operator. Virgin Blue disagrees with your statement that passenger‑based charges are a better measure of airport utilisation. Weight‑based charges are a better measure of the impact of use on the relevant physical assets – the run‑way and associated facilities. It is impossible to believe that a 737 with only 1 passenger has only 1/150^th of the impact of a 737 with 150 passengers on board. Passenger‑based charges are not efficient and do not reflect the cost of the service provided.

The ACCC accepted the potential for passenger‑based charges to have substantial impacts on competition in the domestic aviation market. The ACCC noted that SACL’s then‑proposed restructure may disadvantage new entrants who carry more passengers per aircraft. On the basis of these concerns, the ACCC objected to the charge in 2001. SACL had the opportunity to come back to the ACCC and address this issue, however SACL instead chose not to proceed with the passenger‑based charge for domestic users. I think that it is telling that SACL didn’t think that it could respond to the concerns raised by the ACCC in 2001.

In the context of the current regulatory regime for airports, Virgin Blue has reluctantly accepted passenger‑based charges at other airports, but these charges were part of wider deals with these airports that on balance allowed Virgin Blue to maintain its competitive position. As part of that process Virgin Blue also obtained long term commitments from them as to price and service levels. Neither of these seems to be the case with SACL.

Virgin Blue has always had a position where it will enter into long term commitments on pricing and service levels for landing charges. We have always been willing to enter such discussions with SACL on the proviso that SACL does not erode Virgin Blue’s competitive position.

…”

190 A meeting of representatives from SACL and Virgin Blue took place on 21 March 2003 to discuss the move to a Domestic PSC. At the meeting Mr Russell of SACL accepted that SACL’s proposal meant an increase in landing charges to Virgin Blue of 50‑53% and an increase to Qantas of only 4% or even less. However, he observed that it was SACL’s policy to introduce a Domestic PSC because “we feel it is more efficient to charge that way”. The reason why it was efficient was not stated. We return to this issue later in these reasons.

191 A sequence of correspondence followed the meeting and on 8 April 2003 Mr Moore‑Wilton wrote to Mr Godfrey in the following terms:

“…the following outlines the situation from SACL’s perspective.

Virgin Blue has been aware since mid‑2001 of SACL management’s intention to move to passenger‑based charges for domestic services. While SACL chose not to proceed with this initiative during what was a time of upheaval in the domestic aviation sector, the time has now come to bring domestic charges in line with the framework that applies to the majority of other major Australian airports and to the rest of Sydney Airport’s customers.

In our view, this hiatus provided Virgin Blue with a relative advantage during its start‑up phase. As a matter of principle, however, SACL considers that passengers using the same Sydney Airport facilities should pay the same in airport charges regardless of which airline they fly with or the type of aeroplane on which they fly. Consistent with our aim of treating passengers consistently across carriers and recognising that all passengers use the airport’s runway facilities, we have decided to levy the charge on all arriving and departing passengers, including transferring and transit passengers.

The proposed passenger charge, of $2.86 per arriving and departing passenger for runway use, excluding security and GST, compares favourably with the PSC levied at other major Australian airports. Moreover, I understand that a number of airports that have not adopted passenger‑based charges would have done so, but for the opposition of Virgin Blue.

…

You observe in your letter that Virgin Blue would like long‑term certainty on aeronautical costs. SACL is currently in the process of developing its Master Plan, in consultation with airlines, and it would be illogical for SACL to make long‑term pricing commitments in advance of this. However I stand by my earlier proposal to negotiate long‑term commercial agreements with airlines once the Master Plan has been accepted by Government, expected early next year.

In the short term, however, I am prepared to commit to Virgin Blue that, once implemented, the runway component of the domestic PSC will not change for two years. This will provide Virgin Blue with a high degree of certainty as to its costs of operating from Sydney Airport. This commitment is conditional on Virgin Blue withdrawing its application to the National Competition Council for a declaration of airport facilities for an equivalent period of two years.”

192 Virgin Blue responded in a letter dated 7 May 2003. Virgin Blue told SACL that, amongst other things, the proposed Domestic PSC would increase Virgin Blue’s costs by 53% whilst increasing Qantas’ costs by only 4%, and constituting an overall price increase of 20% to SACL. Of particular note is Mr Godfrey’s observation:

“Without trying to be flippant, let me state something that all of us can agree on, passengers don’t land on runways … aircraft do. The asset is depreciated by the rubber hitting the runway, whether the aircraft is full or empty. We expect to and are happy to pay for that privilege regardless of whether we succeed or fail in getting passengers on board – that is a business risk we assume and we are not about to pass on the cost of that risk to your shareholders.

The general principal [sic] of virtually all transport is the opposite – that is it should reward efficiency and optimum utilisation that we strive for…

…

While we are well aware of the excellent and valued relationship you have with Qantas, tilting the playing field in its favour is upsetting a long established egalitarian principle of airport facility use. We sweat the asset and SACL gets the benefit in your retail/terminal activities without incurring any additional costs.

We also consider that your proposed charges represent unjustifiable price increases in contravention of the pricing principles articulated by the Commonwealth Government in its response to the Productivity Commission report. Far from encouraging the efficient use of airport facilities, your proposed charges would achieve the exact opposite.

…

Your $2.86 per arriving and departing passenger increases our cost by 53%, Qantas’s by an estimated 4% and therefore at our detriment, grants SYD airport an overall further price increase of 20%. This follows less than 2 years after raising them by 97%. SACL has ignored the fact that we squeeze more passengers into the aircraft by way of a trade off in lowering our yields – SACL seems to prefer to incentivise us to fail (just think of the money we could save if our planes flew empty!). This is why, as you correctly stated, we oppose these charges.

Not only has SACL chosen to change the methodology to the detriment of Virgin Blue, you are also using stealth to cover an additional $5‑6 million per annum price increase on the travelling public so soon after privatisation.

…”

193 In response to SACL’s comments in Mr Moore‑Wilton’s letter in relation to the application for declaration of Sydney Airport, Virgin Blue went on to say:

“In light of SACL’s track record on price increases, including the more recent change in methodology, further compounded by an unwillingness to commit long term due to your incomplete master plan, we are left with no choice but to assume that the airport is likely to seek further price rises in relation to this aeronautical charge. Therefore Virgin Blue believes that it is in its best interests to reject your proposal, and pursue our National Competition Council application to have the Airside Service declared, even though Virgin Blue understands that declaration under Part IIIA of the Trade Practices Act can be a lengthy process. We however certainly believe we have little to lose in light of your consultation process and consequent ‘proposal.’”

194 On 26 May 2003 Mr Moore‑Wilton wrote to Mr Godfrey, attaching a notification of variation of aeronautical charges that informed all customers that from 1 July 2003 SACL would start charging aeronautical fees on a per‑passenger basis. In the letter Mr Moore‑Wilton said:

“I have heard the concerns of Virgin Blue, however, Sydney Airport remains of the view that passengers at the airport should pay the same price for use of the same facilities. It is particularly disappointing that Virgin Blue spokesmen have reverted to inflammatory media comments in seeking to force your view.”

195 In a letter dated 28 May 2003 one of Virgin Blue’s major shareholders, Sir Richard Branson, sought to intervene in the situation, expressing concerns that the proposed change in pricing would “penalise Virgin Blue, subsidise Qantas and secure a significant price rise and consequent revenue raising for SACL.”

196 On 30 May 2003 SACL’s Board approved the variation in aeronautical charges to a per‑passenger basis, effective from 1 July 2003.

197 Mr Moore‑Wilton responded to Sir Richard Branson in a letter dated 6 June 2003, expressing the view that Virgin Blue’s objections were to a rise in price and not based on any “point of principle”. He said that SACL would consider any further proposal from Virgin Blue. Although Mr Moore‑Wilton said that Virgin Blue’s objections were not based on any point of principle he did not respond, and had not previously responded, to Mr Godfrey’s observation in his letter dated 7 May 2003 (see [192] above) that:

“passengers don’t land on runways … aircraft do. The asset is depreciated by the rubber hitting the runway, whether the aircraft is full or empty…

The general principal [sic] of virtually of all transport is the opposite – that is it should reward efficiency and optimum utilisation that we strive for ...”

198 Mr Moore‑Wilton’s principle, as stated in his earlier letter of 8 April 2003 (see [191] above), had been that:

“passengers using the same Sydney Airport facilities should pay the same in airport charges regardless of which airline they fly with or the type of aeroplane on which they fly. Consistent with our aim of treating passengers consistently across carriers and recognising that all passengers use the airport’s runway facilities, we have decided to levy the charge on all arriving and departing passengers, including transferring and transit passengers.”

199 From 1 July 2003 SACL commenced imposing a Domestic PSC on aircraft using Sydney Airport rather than the previously applied MTOW‑based charge.

The change in domestic airside service charges from MTOW to PSC

200 It should be noted at the outset that SACL submitted that an analysis of its change from an MTOW‑based charge to the Domestic PSC would only be relevant if the Tribunal formed the view that, in the event of declaration of the Airside Service, the charge for that service would be structured on an MTOW basis, and, if it were so structured, there would be an increase in access to the Airside Service which would promote competition. We reject this submission. It misunderstands the significance and relevance of the change and ignores the manner in which the change may be characterised. The relevance of the change to a Domestic PSC is the consideration whether it is an example of an exercise of monopoly power by SACL which could not be sustained in a competitive market and which has an adverse effect on competition. This consideration feeds into the analysis of whether the environment for competition would be promoted in a future with declaration as against a future without declaration.

201 Virgin Blue submitted that SACL’s change from an MTOW‑based charge for domestic flights to the Domestic PSC was discriminatory. As we outlined above, Virgin Blue employs an LCC business model which is typically premised upon the airline attracting and maintaining higher load factors, relative to the FSA model, and keeping costs low. Virgin Blue’s basic concern was that, as LCCs tended to have smaller aircraft and more passengers per aircraft than FSAs such as Qantas, when SACL began to charge for aeronautical services on a per‑passenger basis for each aircraft movement rather than on the weight of the aircraft, Virgin Blue, as an LCC, had to pay higher charges for aeronautical services than Qantas. This was said to be discriminatory because the change in the tariff structure was made in circumstances where SACL knew that it would have a greater impact on Virgin Blue than it would on Qantas, and was aware that Qantas supported the change because, among other things, of this disadvantageous effect on Virgin Blue. Furthermore, the change could not be said to constitute a more efficient manner of pricing or to represent the only or most effective method for SACL achieving any legitimate ends that it could properly pursue in a competitive environment.

202 Virgin Blue estimated that the change from an MTOW‑based charge to the Domestic PSC resulted in an increase in the charge paid by Virgin Blue of approximately 52% (based on the assumption of an 80% load factor, 125 passengers per aircraft and an average MTOW of 69 tonnes). This was to be compared to the increase for Qantas estimated to be approximately 4%. This result was acknowledged by Mr Russell of SACL at the meeting held between representatives of SACL and Virgin Blue on 21 March 2003 (see [190] above). We accept that the change in tariff structure from an MTOW‑based charge to a Domestic PSC had such a differential impact on the airlines.

203 Virgin Blue’s contention that, as an LCC, it was more affected by the Domestic PSC than Qantas, it being an FSA, was supported by Professor Tae Hoon Oum, UPS Foundation Professor of Transport and Logistics at the University of British Columbia. Professor Oum opined:

“All of the empirical findings via the duopoly competition models indicate clearly that a 100% increase in SACL’s Airside Service charges (from A$3 to A$6 per passenger) has a significantly larger negative percentage impact on Virgin Blue’s traffic volumes than those of Qantas in all of the duopoly routes to/from Sydney Airport. This result is supported by a clear intuition: because a low cost carrier, such as Virgin Blue, carries a large share of fare sensitive passengers and has a lower cost per passenger, an identical cost increase per passenger will surely have a larger impact on it than a full service airline, such as Qantas.”

204 In our view, it is clear that the differences between the LCC and FSA business models of Virgin Blue and Qantas mean that a tariff structure based on charging per passenger versus charging per unit of MTOW will systematically affect these airlines differently.

205 Compared to FSAs such as Qantas, Virgin Blue, and indeed other potential LCC entrants, tend to operate with higher load factors and lighter aircraft. LCCs are more likely to operate aircraft in a single class configuration, which also tends to increase the passenger‑to‑MTOW ratio. The combination of larger aircraft, a greater variety of service levels and a higher absolute level of service typical of FSAs means that Qantas tends to have a lower load factor than Virgin Blue. This, combined with the fact that the weight of an aircraft goes up more than proportionally with the passenger load, leads to a result that Qantas, as an FSA, would tend to have a much lower passenger‑to‑MTOW ratio than an LCC like Virgin Blue.

206 SACL’s change from an MTOW‑based charge to a Domestic PSC thus puts LCCs such as Virgin Blue at a disadvantage vis‑à‑vis FSAs such as Qantas due to the higher load factors and lighter, single class configuration aircraft used by LCCs.

207 However, as SACL pointed out, any tariff structure it employed could be said to discriminate against the business model of any given airline. Had it retained the MTOW‑based charge for its Airside Service, it submitted that Qantas could have complained that the tariff structure discriminated against it because the FSA model which it adopts tends to use heavier aircraft and have lower load factors than the LCC model used by Virgin Blue. SACL submitted that it was not possible for any airline to protect, indefinitely, an advantageous manner of charging. It submitted that it was equally impossible for airports to determine levies in an attempt to charge in such a way that would affect all airlines similarly. Accordingly, SACL submitted that a misuse of its monopoly power could not be demonstrated by the fact that the Domestic PSC resulted in higher charges to LCCs.

208 Furthermore, SACL submitted that Virgin Blue’s ability to compete was not damaged by the change in tariff structure, as Virgin Blue remained a strong competitor for Qantas and Jetstar. SACL contended that the impact the change in tariff structure has had on airlines’ costs is to be distinguished from an impact on competition, which is the relevant focus of the present inquiry. That may be so, but the extent of competition in the dependent market can still be inhibited by the imposition of a discriminatory charge.

209 Accordingly, the context in which SACL made the decision to change its tariff structure and whether such a tariff structure is supported by a legitimate rationale such that it would survive in a competitive market must therefore be examined.

210 The history of SACL’s change from an MTOW‑based charge for aeronautical services to a Domestic PSC shows that the issue of a passenger‑based charge was discussed by SACL and Qantas in mid to late 2001 in the context of settlement of court proceedings which Qantas and a number of other airlines had brought against SACL. Qantas had shown a particular interest in ensuring that SACL did everything within its power to see the Domestic PSC approved by the ACCC so that SACL could introduce it. So much is clear from cl 1 of the Deed of Settlement between SACL and Qantas on 1 August 2001 (referred to above at [173]).

211 The Deed of Settlement contained what might be thought to be unusual provisions in relation to the implementation of a “best endeavours” obligation on SACL to shepherd through the ACCC a change to the Domestic PSC. We draw particular attention to cl 1(f) of the Deed of Settlement, which contains a detailed description of how SACL was to discharge its “best endeavours” obligation. In particular, we draw attention to subcl (iv) whereby SACL agreed to:

“ensure that the Government is provided with information necessary for it to understand the rationale for the passenger service charge”.

How that “rationale” was communicated to the Government was not made clear in the proceeding before us.

212 The history of SACL’s change to a Domestic PSC also makes it quite clear that when the SACL Board was considering the imposition of a Domestic PSC in early 2003, SACL was well aware that Virgin Blue opposed the change and that its principal complaint related to the inefficient and anti‑competitive nature of the Domestic PSC as a pricing policy. SACL was well aware of Virgin Blue’s contention that the Domestic PSC would penalise Virgin Blue as a more efficient operator than Qantas and would have significant anti‑competitive effects on domestic aviation. This had been made clear in Mr Pen’s letter of 14 March 2003 (referred to above at [189]). What is more, as SACL knew from the Strategy Committee Paper of December 2002 (see [183] above), the main reason for Qantas being “extremely keen” that the Domestic PSC be introduced was that Qantas could pass it on directly to passengers and it could strengthen Qantas’ commercial position relative to Virgin Blue.

213 We are satisfied, particularly having regard to the content of the Strategy Committee Paper of December 2002, that Qantas had either told SACL, or it was clearly apparent from the discussions that SACL had had with Qantas, that Qantas saw the Domestic PSC as putting Virgin Blue at a competitive disadvantage to Qantas in relation to its use of Sydney Airport. It is a reasonable inference from the contents of that Paper, which we draw, that Qantas had told SACL representatives of this fact.

214 Mr Timar, now the General Manager, Aviation Business Development at SACL, acknowledged as much in his answer to this question from counsel for Virgin Blue:

“What I want to suggest to you is that you well understood that Qantas was happy to pay on a per passenger basis even if it involved Qantas paying more because Qantas knew that the per passenger charge would hurt Virgin Blue much more than it would hurt Qantas?’

Mr Timar answered:

“That’s one way to phrase it but I think that’s broadly right, yes.”

215 We draw particular attention to Mr Schuster’s replies under cross‑examination to counsel for Virgin Blue which confirmed that Qantas’ preference for a passenger‑based charge was one of the reasons why SACL introduced the change in tariff structure. Counsel for Virgin Blue questioned Mr Schuster, now SACL’s Manager of Aviation Pricing and Economics, about the revenue SACL would raise in the current financial year if it priced its charges for aeronautical services so as to achieve allowable revenue according to the ACCC’s methodology. Mr Schuster said SACL was working on an expected revenue of $46.9 million and that if it had retained an MTOW basis for the charge, SACL would only have received $36.9 million. The following exchange then occurred:

“[COUNSEL FOR VIRGIN BLUE]: So the delta between an MTOW charge and a per passenger charge has reached has it not for this financial year $10 million?

MR SCHUSTER: Yes.

[COUNSEL FOR VIRGIN BLUE]: And that was a fairly strong reason, wasn’t it for SACL to move from MTOW to per passenger, wasn’t it?

MR SCHUSTER: Yes, it was.

[COUNSEL FOR VIRGIN BLUE]: And I want to suggest to you that that was the reason why SACL moved from MTOW to per passenger, not because of any decision or concern about efficiency otherwise. It simply came down to revenue, didn’t it, for SACL?

MR SCHUSTER: Our primary goal was to move closer to allowable revenue. We could have chosen to increase our tonnage base charge to get there but because of other considerations that we’ve discussed, we chose a passenger base charge.

[COUNSEL FOR VIRGIN BLUE]: And that other consideration we discussed I take it was Qantas’ view that it would prefer a domestic per passenger charge rather than MTOW?

MR SCHUSTER: We did do it because Qantas preferred it.”

216 It will be recalled that, in the Strategy Committee Paper of December 2002, Mr Schuster wrote that Qantas was “extremely keen” and enthusiastic for the Domestic PSC to be introduced.