Mr Andrew Clark Chief Financial Officer Airservices Australia GPO Box 367 Canberra ACT June 4, 2010 RE: REVIEW OF AIR SERVICES CHARGES

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1 Mr Andrew Clark Chief Financial Officer Airservices Australia GPO Box 367 Canberra ACT 2601 June 4, 2010 RE: REVIEW OF AIR SERVICES CHARGES Thank you for the opportunity to comment on the review of Airservices Australia charging policy, in addition to our official submission attached. Advance Cairns, Cairns Airport, Cairns Chamber of Commerce, Cairns Regional Council, and Tourism Tropical North Queensland have looked closely at both the current and future charging regimes and believe strongly that they impact unfairly on our regional Airport and business community. We understand that these charges are levied against visiting airlines as opposed to the airport directly. However, these high charges compound to make it difficult for the Airport to retain and increase the number of carriers flying into Cairns Airport, most particularly the low cost carriers. A further elevation of these charges by a proposed 55% will have a crippling affect. We know too well the detrimental and immediate effect that resulted out of the loss of airline capacity from the Japan market, and the effects of the global financial crisis on world travel. Our region recorded its highest level of unemployment ever during this period, which was directly attributed to the decline in the tourism industry. The region is still harbouring the nation s highest unemployment figures and many businesses are facing their bleakest ever financial year. Almost 22% of the region s workforce is directly employed in tourism with one in 10 businesses relying directly on the tourism industry last year our visitors spent $2.6 billion in our region. The success of our economy hinges on the supply of affordable airline seats. 87% of interstate and 65% of international visitors enter this region via our airport. The Cairns Airport is also the cornerstone of Australia s most northern regional economy, responsible for the servicing of a population far in excess of 250,000. Cairns Airport is the lifeline for many individuals in the Cape York, Gulf Savannah and Torres Strait areas. Air access is often the only transport option available for emergencies and during times when road transport is not available. At a time when welcomed growth in airline capacity is just beginning to trickle in, these proposed changes will have severe consequences on the region s ability to competitively position itself among other Australian cities, but also as an

2 international tropical holiday destination. The added cost of this proposed imposition with no added gain makes our region totally uncompetitive. Where major airports have the capacity to contrive benefits from size and scale of operations, remote locations cannot. In an environment of fairness we believe that the charges levied in Cairns should be equitable, or if anything lower to those charged across the country. While we appreciate that providing a high standard of service is vitally important and fundamental to passenger safety, it should not get to a level that it becomes a deciding factor for airlines to make a decision to fly into one destination as opposed to other airports. We believe strongly that the only equitable system should encompass full network charging. The charging for this service should reflect a national commitment to providing quality service across all destinations. It is totally unfair that a decision to follow a local specific charging model makes Cairns the most expensive airport in Australia to fly into. Therefore we implore your organisation, through this review process, to look at ways to provide some equity and fairness into the charging regime. If a decision is made to retain a system of local specific charging then we believe that there should be a level of compensation for the inequity that Cairns Airport users face. We believe that this matter is a significant factor in the recovery of our economy and ask for your favourable consideration. Yours truly, Mr Russell Beer Mr Stephen Gregg Mr Jeremy Blockey Chairman CEO President Advance Cairns Cairns Airport Cairns Chamber of Commerce Rob Giason CEO Tourism Tropical North Queensland Cr Val Schier Mayor Cairns Regional Council

3 Airservices Australia Terminal Navigation Pricing Review Response to Discussion Paper 19 May 2010 Executive Summary In December 2009 the Australian Government released the National Aviation Policy White Paper which is intended to be an important element in the broader strategic plan to build a stronger and fairer aviation market. One key element was to highlight the importance of providing long-term planning, investment and regulatory certainty for the industry. As part of the White Paper, Airservices Australia (ASA) was required to review its terminal navigation (TN) pricing to establish a framework that facilitates the enhancement of air traffic services around Australia. In March 2010 ASA released the Terminal Navigation Pricing Review Discussion Paper and followed this up with public consultation at six major airports, including Cairns. This report puts forward seven options on a pricing continuum ranging from pure location specific pricing (the current method) to pure network prices. In the case of Cairns Airport and more particularly Far North Queensland and The Great Barrier Reef region, tourism and overall regional economic development will be severely impacted should the existing location specific pricing model continue to be adopted. Cairns Airport prices are out of frame with all other major ports in all options on the pricing continuum other than those premised on network charges. The issues which Cairns Airport has identified are discussed in detail in the balance of this paper and are summarised below: Location specific pricing will result in charges at Cairns increasing by 55% while all other major airports receive a price decrease; Location specific pricing will result in charges at Cairns being in excess of 70% more than the nearest major airport; Cairns and the wider Tropical North Queensland region have recently encountered difficult times and have the highest unemployment in the populated nation and increases in charges of the quantum identified will make recovery from this plight all the more difficult; Location specific pricing or any of the proposed variants to that theme are not appropriate in a regulated environment where the service provided is standardised throughout the nation with aviation safety protocols the driving factor; Comparisons to Gold Coast Airport which has similar levels of activity result in vastly different pricing outcomes under each option other than those premised on network pricing; and Federal Government subsidies currently exist at military airports and the proposed options premised on location specific pricing allow these subsidies to continue. In summary, aviation is a regulated environment where the service provided is standardised throughout the nation with aviation safety protocols the driving factor. Given this background, the concept of paying vastly different prices for identical services at different locations throughout the country cannot be classed as fair and reasonable, particularly where the consumption of those services is in no way discretionary. For this reason, we believe terminal navigation charges should be calculated either on a network basis, or in a way which does not create price differentials between airports throughout the nation. Management processes should also be put in place to ensure the efficient delivery of those services in each of the locations throughout the country. Page 1

4 Background on Cairns and Tropical North Queensland Cairns is the major gateway for the Tropical North Queensland Region which covers a vast area extending from Mission Beach in the south to the tip of Cape York in the north. Regional development in areas such as Tropical North Queensland (TNQ) is heavily influenced by tourism, which in turn, hinges heavily on aviation. The TNQ region almost solely relies on tourism and, because of its geographical location, air access links to deliver that tourism and future economic growth are vital. Tourism is the single largest contributor to the Far North Queensland economy. For the year ending December 2009 domestic and international visitors spent a total of $2.6 billion. Every $230,000 spent by visitors in TNQ creates one direct job in tourism. Tourism accounts for an estimated 15,000 jobs (22% of employment in the Cairns Regional Council area) with one in ten businesses relying directly on tourism. The full impact of tourism, including flow-on benefits on Gross Regional Product for TNQ (based on Qld Office of Economic and Statistical Research multipliers and definitions) is estimated at $2.35 billion and about 24% of GRP (Cummings Economics 2009). Recent Airport Growth Patterns The success of Cairns and the wider TNQ region relies on direct international airlines services. Direct services have been in decline in recent years and it is no coincidence that this has resulted in the high levels of unemployment currently being experienced. In contrast however, international arrivals have continued to grow significantly at all major capital city gateways as evidenced by the results outlined in Table 1 below. Table 1 International Passenger Movements By Airport CAGR Adelaide 286, , , , , ,399 12% Brisbane 3,266,481 3,606,690 3,763,314 3,921,752 4,035,790 4,115,093 5% Cairns 846, , , , , ,803-14% Gold Coast 136, , , , , ,853 36% Darwin 98, , , , , ,742 15% Melbourne 3,936,435 4,224,635 4,291,290 4,565,084 4,732,544 5,127,047 5% Perth 1,827,389 2,007,025 2,034,877 2,373,568 2,533,022 2,771,070 9% Sydney 8,951,825 9,515,983 9,865,970 10,378,240 10,552,900 10,630,806 3% Source: BITRE The recent White Paper has introduced specific policy designed to encourage international airlines to increase services to secondary international gateways such as Cairns. In the absence of direct international services, visitors have chosen not to visit Cairns and the wider TNQ region. This is not surprising given the dislocation in international services has largely been in the Japanese market which is characterised by mono-destination travellers who have chosen other destinations serviced by direct international services. It can be seen from Table 2 below that the domestic network has not picked up the dislocation in international services and Cairns is at the lower end of growth patterns compared to other major capital city gateways. Page 2

5 Table 2 Domestic & Regional Passenger Movements By Airport CAGR Adelaide 4,839,885 5,261,677 5,592,377 5,906,485 6,270,369 6,338,812 6% Brisbane 11,519,422 12,102,609 12,942,735 13,972,336 14,548,173 14,595,946 5% Cairns 2,582,591 2,842,947 2,967,077 3,066,414 3,153,427 3,133,385 4% Gold Coast 2,701,526 3,243,260 3,423,426 3,735,826 4,183,699 4,245,952 9% Darwin 1,061,842 1,110,550 1,186,319 1,311,984 1,409,316 1,313,041 4% Melbourne 15,812,950 16,505,127 17,276,678 18,185,325 19,835,387 19,755,183 5% Perth 4,437,291 4,754,672 5,429,870 6,105,246 6,705,180 6,840,820 9% Sydney 18,256,027 18,940,365 20,119,332 21,469,375 22,348,223 22,362,766 4% Source: BITRE State of the Region The effects of the Global Financial Crisis have crippled key economic contributors to the Far North. With such a high dependence on tourism, a reduction in international tourism visitation has had a heavy impact on the region s economy. Our construction industry has suffered significantly with the collapse of two of the region s top three construction firms. Hospitality, retail and car sales have also been hard hit. Add to this the rising Australian dollar and it is a recipe for the perfect crisis. The unemployment rate topped out in September 2009 at almost 14%, a record for the region and the highest in the nation. Since then it has reduced to 10.4%. However this figure is still unacceptably high and business confidence is also extremely low. As a far flung destination our community relies heavily on the success of our airport services and believe strongly that our airport must remain competitive and cost effective. Therefore it is unacceptable that we face the highest air services charges in the country, which will have a compounding affect on our airport and ultimately our business community. The loss of direct services from Japan has had a significant effect, not only on the Cairns and wider Tropical North Queensland economy but on the national economy also. This is best outlined by recent changes in Japanese visitor arrivals outlined below. Table 3 Australia Cairns Year Ended 31 Dec , ,507 Year Ended 31 Dec ,449 69,666 Movement (Pax) (91,830) (79,841) % Movement (21.6%) (53.4%) It can be seen from the above table that the reduction in Japanese visitors to Australia has been a direct result of the loss of direct services to Cairns and these visitors have largely bypassed Australia completely. Page 3

6 Current Terminal Navigation Charges Airservices Australia charges currently contribute $24.00 or 3.3% to a return airfare between Tokyo and Cairns*. Of this amount, Terminal Navigation charges represent approximately 60%. The Terminal Navigation charges at Cairns under the existing arrangements are double the major gateways of Brisbane, Sydney and Melbourne however it is comparable with secondary gateways other than Darwin which is a military airport and this is discussed further below. Table Current TN Charges (per Tonne MTOW) (Inc GST) $ / Tonne MTOW (Inc GST Sydney Melbourne Brisbane Perth Adelaide Cairns Canberra Coolangatta Darwin It can be seen from the above that the differential charging brought about by location specific pricing creates an advantage for the major gateway ports. This in turn creates barriers to entry (from the perspective of international operators) to secondary ports by charging higher rates to access those ports. From the perspective of domestic carriers, decisions are made on a regular basis about capacity allocation and there is presently no significant advantage held by the secondary ports in terms of Terminal Navigation charges. * Based on a Jetstar A330 operating at 65% load factors. No allowance has been made for distribution costs. Pure Location Specific Pricing The outcomes delivered by pure location specific pricing outlined in the Discussion Paper is in total contrast to Governments desire to support a broader strategic plan to build a stronger and fairer Aviation market, and provide a framework that supports aviation growth in secondary gateways and regional ports such as Cairns. In summary, the proposed charges (outlined in Table 4 below) deliver an outcome where: Airlines servicing Cairns will receive a 55% price increase; Prices fall at all other locations; Cairns is 70% more costly than the closest major airport; and Cairns will be the highest charge for major airports in the country. Page 4

7 Table 5 Current v Proposed TN Charges (Under Pure LSP) $ / Tonne MTOW (inc GST) Existing Charges Proposed Charges When looking further into the relative increase amongst Cairns major competitors in the market for aviation access there is an obvious dislocation when compared to these airports. Table 6 60% 50% 40% Current v Proposed TN Charges (Under Pure LSP) % Increase on Existing Charges 30% 20% 10% 0% -10% -20% -30% -40% If we break this down to a per passenger charge. the adoption of pure location specific pricing as outlined above will result in an increase in charges of: circa $6.50 * per arriving passenger on a wide-body aircraft; and circa $3.40 * per arriving passenger on a narrow-body aircraft. * This does not include distribution and commission costs which would further inflate charges to the consumer. Page 5

8 Incremental costs such as this make it increasingly difficult to encourage airlines to commence direct services to Cairns or allocate resources to Cairns in preference to other domestic destinations. The estimated increase in costs to be applied to airlines servicing Cairns will be approximately $8 million pa. Differentials such as this effectively create barriers to entry for regional airports such as Cairns by incentivising the use of major gateway ports. Assessment Against Airservices Criteria The Discussion Paper identifies three criteria for the assessment of pricing options. These criteria have been assessed for pure location specific pricing using the Cairns Airport example. Table 7 Criteria Prices should encourage economically efficient resource allocation and bear strong relationship to cost of provision of services. Cairns Airport View The Discussion Paper talks at length about efficiency for closely located sites however this is not applicable in the context of Cairns Airport which is the only major airport in the region and there is minimal opportunity to defray costs to achieve more efficient outcomes Cairns Airport has seen significant reductions in activity in recent years however there has been no corresponding reduction in costs by Air Services which indicates location specific pricing does not promote efficient resource allocation in a regulated environment where safety is paramount If location specific pricing is implemented with no effort made to match resources to activity, it will be left to airlines to make decisions about economically efficient resource allocation which will involve greater difficulties in attracting new services and/or cancellation of existing services which will have a significant detrimental effect on the economy of Cairns and the wider Tropical North Queensland region Prices should be equitable It is not fair or reasonable that prices at Cairns Airport are higher due to its isolated location while Gold Coast receives a benefit from its proximity to the Brisbane Airport and other secondary airports in capital cities contribute to lower costs at the main and secondary airport Aviation is a regulated environment which is highly integrated and the use of terminal navigation services cannot be viewed as a luxury good which is purchased at the discretion of the consumer the use of the service and the level of service provided is highly regulated throughout the nation based on aviation safety protocols which are standardised Paying vastly different prices for identical services at different places throughout the nation cannot be classed as fair or reasonable, particularly when the consumption of those services is not discretionary The only method of pricing to ensure fairness and reasonableness in the aviation environment where all activity is regulated is a network pricing model Prices should be simple and transparent and facilitate planning by end users Any pricing policy which involves a defined price path for a specified period would satisfy this criteria it would be satisfied equally by location specific or network pricing Page 6

9 Other Pricing Options Identified The Discussion Paper identifies seven pricing options ranging from pure location specific pricing (outlined above) to two variations of network pricing. Each of the non-network pricing options effectively contain large elements of location specific pricing and each of these result in: major price increases at Cairns; and significant price differentials compared to other major and secondary airports. The effect of each of the non-network pricing options other than pure location specific pricing is outlined below in graphical form. Option 2 Table 8 Option 2 - LSP With Price Cap for Secondary Capital City Airports Option 2 - LSP With Price Cap for Secondary Capital City Airports 18 60% 16 50% 14 40% $ / Tonne MTOW (inc GST) Increase on Existing Charges 30% 20% 10% 0% -10% -20% 2-30% 0-40% Option 3 Table 9 18 Option 3 - LSP With Price Cap for Secondary Capital City Airports & Training Adjustment 60% Option 3 - LSP With Price Cap for Secondary Capital City Airports & Training Adjustment 16 50% 14 40% $ / Tonne MTOW (inc GST) Increase on Existing Charges 30% 20% 10% 0% -10% 4-20% 2-30% 0-40% Option 4 Table 10 Option 4 - LSP for Variable Costs and Network Prices for Balance Option 4 - LSP for Variable Costs and Network Prices for Balance 12 30% 10 20% $ / Tonne MTOW (inc GST) Increase on Existing Charges 10% 0% -10% -20% 2-30% 0-40% Page 7

10 Option 5 Table 11 Option 5 - Combination of LSP and Network Option 5 - Combination of LSP and Network 14 40% 12 30% $ / Tonne MTOW (inc GST) Increase on Existing Charges 20% 10% 0% -10% -20% 2-30% 0-40% If these options were matched against the criteria identified by Airservices, a similar theme to that expressed above for pure location specific pricing would emerge from the perspective of Cairns Airport. Comparison to Gold Coast Airport Location specific pricing creates a significant barrier to entry for new international carriers and runs contrary to regional development and tourism. As we can see in the graph below, the pure location specific charges in Cairns are in excess of double Gold Coast however passenger volume is not that different (Gold Coast total pax are 4.6 million v Cairns at 3.7 million). It can be seen below that under all options other than those based on network pricing, there is a significant price differential between Cairns and Gold Coast. Table 12 Pricing Options - Cairns v Gold Coast $ / Tonne MTOW (inc GST) Current Charges Option 1 Option 2 Option 3 Option 4 Option 5 Option 6 Option 7 Cairns Gold Coast It is not fair or reasonable that under a regulated environment where users have no discretion over the type or quantum of services provided that the charges can be so different at two locations where activity is comparable. While the existence of a curfew at Gold Coast will serve to reduce costs, this cannot explain the significant difference under each option. Airservices have indicated that the Cairns operation would be classed as an efficient one the location specific pricing analysis does not support this assertion. Page 8

11 Airservices have also indicated that costs at Gold Coast are low compared to Cairns due to proximity to the Brisbane Tower and efficiencies that this creates. If this cannot be achieved in Cairns, this is a cost which is being borne by Cairns due to its regional location which is not fair given the regulated nature of the aviation environment and runs counter to the Government desire for a fairer aviation playing field. If airport charges are not to pose an impediment to regional airports competing with capital city hubs for international flights, then a model that does not produce significant price differentials between regional airports and major gateways is necessary. Over 93% of international passenger traffic now passes through the four major gateways. Network pricing is the preferred model as decisions on aviation safety and standards are taken on a national basis by a regulator and involve high fixed costs which cannot always be borne by activity levels in regional areas. Military Airports Aircraft landing at military airports such as Darwin and Townsville are presently charged a fraction of the charges at other locations throughout Australia. Airservices have indicated the reasons for this is the military are responsible for the provision of large parts of terminal navigation services at these locations and choose not to recover the costs of providing these services. This is effectively a subsidisation by the Federal Government to activities in these locations which is supported under any of the options proposed in the Discussion Paper other than full network pricing. Again, the imposition of significantly higher charges at Cairns whilst providing significant subsidies at other locations is not fair. Network pricing as proposed in the Discussion Paper removes this inequity. The Economic Perspective and Elasticity of Demand From an economic efficiency perspective, the rationale for network pricing stems from the presence of externalities at a network level. That is, from the fact that the volume and efficiency of activity at certain points in the network impacts on the volume and efficiency of activity at other points. Externalities across aviation networks are common. For example, delays at major airports rapidly permeate the entire network, disrupting schedules across the board. Similarly, security risks onboard an aircraft have the potential to affect locations far broader than their point of origin the effectiveness of security provisions at one airport has direct implications for others. It is on this basis that network pricing approaches have historically been justified as the mechanism for funding provision of certain aviation-related services. With both the risks and the beneficiaries of these services spread disparately across the aviation network, it is appropriate that the costs are similarly distributed. Terminal navigation services present a somewhat mixed case. While the prima facie benefits of efficient terminal navigation services would appear to accrue at a proximate level (i.e. at the airport and its surrounds), they nonetheless have spill-overs across the network. That is, the efficiency with which a given airport processes its traffic has implications for the efficiency with which the network processes traffic in aggregate. Inefficient terminal navigation at a major hub airport such as Sydney, Melbourne or Brisbane would impose externalities on users and services-providers across the entire network. While these impacts will be more pronounced where traffic volumes are higher and network linkages greater, they will most certainly be present at smaller airports also. In the face of such externalities, economic efficiency justifies the costs of terminal navigation being distributed in part across the entire network. This is not to say that full equalisation (i.e. pure network pricing) would be perfectly efficient, but rather, that some portion of the costs of terminal navigation over and above the cost of network overheads should be shared across the network. Page 9

12 However, the case for pure network pricing is strengthened when equity or regional development considerations are taken into account. The provision of terminal navigation services is characterised by significant fixed costs and is hence subject economies of scale. Accordingly, unit costs fall as output increases, allowing airports with higher traffic volumes to enjoy lower per-unit cost-recovery charges when a location specific regime is employed. With these airports being Australia s capital city hubs, a location specific approach places regional airports at a competitive disadvantage, compounding the already significant challenges that second-tier airports face in attracting international services. Under the proposed full location-specific pricing model, the four airports with the lowest per-tonne charges would be Sydney, Melbourne, Brisbane and Perth. While the Federal Government continues to reiterate its commitment to dispersing international services to regional airports including most recently in the Aviation White Paper where an extension to the regional package was announced location-specific pricing is clearly inconsistent with these objectives. In the specific case of Cairns, the adverse impacts of location specific pricing are compounded by falling traffic volumes, contributing to an iterative downward spiral, where lower levels of traffic necessitate higher perunit charges (for a range of aeronautical services) which in turn further diminishes competitiveness. In addition, the impact of aeronautical-related charges such as those levied for terminal navigation will be more acute where the elasticity of demand for airport services is greater. The demand for airport services is derived-demand, determined principally by demand for travel to/through a given location. Hence, the elasticity of demand for airport services at a given location is primarily a function of the elasticity of demand for travel to that location. Among the three broad groups of travellers business; visiting friends and relatives; and leisure the elasticity of demand is generally held to be greatest among the latter. Estimates from the literature suggest that the elasticity of demand among leisure travellers lies within a range of around -1.2 and Hence, a one percent increase in airfares to a predominantly leisure destination (including that induced by the passthrough of aeronautical charges) will lead to a reduction in demand of between 1.2% and 1.5%. Conversely, the elasticity of demand among business travellers is estimated to lie within a range of to Hence, a comparable increase in airfares to a predominantly business destination will lead to a considerably smaller in the order of 0.2% to 0.3% - fall in demand. Cairns and the wider Tropical North Queensland region has a resident population of circa 150,000 yet 3.7 million passengers travel through the airport each year. Hence, with the composition of travellers to regional locations heavily skewed towards leisure travellers (for example, 75% of visitors to Cairns are travelling for the purposes of holiday or leisure), the impacts of a given increase in airfares will have a relatively greater impact on visitation to the region. Hence, location specific pricing undermines regional development not merely by necessitating a higher per-unit charge and thereby diminishing competitiveness, but by the fact that the impact of a given dollar of that charge on demand will be greater. Summary - Why Network Charges? Aviation is a regulated environment where the service provided is standardised throughout the nation with aviation safety protocols the driving factor. Given this background, the concept of paying vastly different prices for identical services at different places throughout the country cannot be classed as fair or reasonable, particularly where the consumption of those services is in no way discretionary. For this reason, we believe terminal navigation charges should be calculated either on a network basis, or in a way which does not create price differentials between airports throughout the nation. Management processes should also be put in place to ensure the efficient delivery of those services in each of the locations throughout the country. Further, the outcomes delivered by pure location specific pricing and variations premised on location specific pricing outlined in the Discussion Paper are in total contrast to Governments desire to support a broader strategic plan to build a stronger and fairer aviation market, and provide a framework that supports aviation growth in secondary gateways and regional ports such as Cairns. Page 10