SUBMISSION BY. TO THE TRANSPORT AND INFRASTRUCTURE SELECT COMMITTEE ON THE COMMERCE AMENDMENT BILL 15 JUNE 2018
The Commerce Amendment Bill is necessary and urgently required 1.1. Air New Zealand supports the changes proposed in the Commerce Amendment Bill (the Bill), and in particular is encouraged by the proposed changes to specified airport services in Part 2 of the Bill 1. 1.2. The application of the Information Disclosure regime as set out in Part 4 of the Commerce Act has proven to be ineffective at restraining specified airports from targeting excessive profits. The proposed changes are necessary to allow airports that target such profits to be properly regulated to the benefit of all consumers of airport services. 1.3. Changes to the Commerce Act to allow enhanced regulatory control of poorly performing airports are necessary and urgent. AIAL and CIAL entered their third regulated price period in 2017. The Commerce Commission is at the present time reviewing these price setting events. Draft findings suggest that AIAL is targeting some $65m excessive revenue in the period - revenue $65m higher than would be expected if appropriate regulation were in place. 1.4. Amendments to the Commerce Act contained in this Bill also underscore the ability of the Commission to widen the scope of aeronautical services. 2 1.5. It is Air New Zealand s view that the dual till environment enjoyed by airport monopolies does not deliver good outcomes for consumers. Current regulatory settings incentivise monopoly airports to invest in the unregulated commercial till and only invest in aeronautical assets where they can achieve an excessive return. Airport companies targeting excess returns will set high prices for inadequate and wrung out terminal and tarmac assets. 1.6. Other monopoly services provided by specified airports return significant unregulated revenue from the same captive consumers who pay for runways and terminals. In FY17, AIAL returned $56m in car parking revenue. Earnings from car parking, retail, commercial and hotel leases all benefit from passenger growth yet airports are not required to factor this profitability in when setting aeronautical charges. 1.7. The amendments in the Bill make clear that the Minister or the Commission may limit an airports ability to exploit the dual till environment, by including services like car parking as regulated services. 1.8. As a substantial customer of airports, and on behalf of our customers, Air New Zealand would welcome the opportunity to appear before the Select Committee to discuss this submission. 1 This submission focuses on the proposed changes to specified airport services set out in Part 2 of the Bill and references to changes throughout this submission are limited to those in Part 2 of the Bill. While not discussed in this submission, Air New Zealand is also generally supportive of the amendments made in Part 1 and Part 3 of the Bill which it considers are reasonable and necessary to modernise the Commerce Act. 2 Section 56 (c) other services may be declared specified airport services by Order in Council
2. Information disclosure is no longer effective at restraining airports from recovering excess profits 2.1. The three specified airport companies - AIAL, WIAL and CIAL - currently experience light handed regulation under the Part 4 of the Commerce Act. The Information Disclosure regime requires annual reporting on aeronautical revenues and expenditure and certain quality metrics, such as cleanliness of toilet facilities. Prices are set in consultation with substantial customers. However, feedback from customers does not have to be taken into account, as there is no contract for service. Customers are in some cases forbidden from commenting publicly on matters raised in consultation until prices are set. 2.2. Air New Zealand is heavily impacted by prices, infrastructure and service quality at major airports. Air New Zealand must pay prices as set by airports, but running a successful business at certain ports is becoming more difficult as these ports become more congested and terminal buildings suffer from lack of investment. 2.3. Auckland Airport has been consulting since at least 2012 on a new integrated terminal. Air New Zealand welcomes this planned investment, considering it long overdue. However, at the time of writing, consultation on terminal plans continue. Air New Zealand submits that management at AIAL have become expert at maximising profit from the lightly regulated monopoly, and is concerned regarding their ability to deliver a terminal build in the compressed timeframe now required. 2.4. As shown in the graph below, airport aeronautical revenue per passenger has been rising steadily over time, increasing by nearly 30% in the FY09-FY17 period, with inflation accounting for less than half this increase. This is despite increasing numbers of passengers and under investment by airports. Given Air New Zealand s relatively high exposure to these increasing costs at its home airports versus our competitors, this has a significant negative impact on our cost competitiveness in a highly competitive industry.
2.5. Air New Zealand submits that the current regulatory regime does not restrain specified airports from targeting excess profits, and does not encourage improved service quality and efficiency. The proposed changes to the Commerce Act will introduce a credible threat of deeper regulation if airports continue to target excess profits. 3. Making changes to the Commerce Act creates correct incentives 3.1. Air New Zealand considers the proposed changes will simplify the process for the Commerce Commission to investigate poorly performing airports, and move them to more effective regulation if required. 3.2. By providing a general ability to inquire, and bringing further regulation in as an immediate potential consequence of an inquiry, the changes create appropriate incentives for airports to set prices that are commercially sustainable for airports and their customers. 3.3. Air New Zealand expects the threat of further regulation will have a moderating effect on airport pricing and investment behaviours. In fact, the changes proposed to the Act may in themselves reduce the need for any further actual regulation. 3.4. Air New Zealand does not consider that specified airport companies, or their shareholders, should be unduly concerned by the proposed changes contained in the Bill. Airport companies that do not target excessive profits, and deliver infrastructure as needed with services of good quality need not fear deeper regulation. 3.5. Air New Zealand considers that if further regulation is required, a well- designed negotiate / arbitrate regime would create a level playing field that is most conducive to delivering outcomes to the long-term benefit of consumers. 3.6. A negotiate / arbitrate regime is a light-handed form of regulation which is already provided for in the Commerce Act and is a logical progression for airport regulation if required. Negotiate / arbitrate regimes are used commonly in commercial arbitration both in New Zealand and overseas. 3.7. A negotiate / arbitrate regime requires parties to negotiate with each other, against a fall-back position of arbitration as set by the Commission. Parties are incentivised to drive for best outcomes for price and quality. Importantly, a negotiate / arbitrate approach creates strong incentives for airports and airlines to find win / win solutions. 4. Other legislative change is needed 5.1 It is important to note that change to the Commerce Act is not all that is required to constrain specified airports from targeting excessive profits. Under current settings, even if the Commerce Commission concludes that an airport is targeting excessive profits, specified airports consider that the price as they see fit clause found in the Airport Authorities Act 1966 (the AAA) protects them from lowering prices or returning excess profits. While that clause is specifically subject to Part 4 of the Commerce Act, jurisprudence on the point leaves significant uncertainty.
5.2 Air New Zealand understands the Civil Aviation Act 1990 and AAA review will recommence this year, and looks forward to changes to both pieces of legislation to ensure effective and clear control of airports who target excess profits. 6. Ensuring the threat of regulation can be felt by a single airport 6.1. As currently drafted, the Bill can be interpreted to mean that all three specified airport companies can only be moved into deeper regulation together. 6.2. Clearly, the cost benefit analysis required by the Commission in considering whether to more deeply regulate one poorly performing airport will be affected if the Commission must consider the costs to move all three specified airports to deeper regulation when only one requires it. 6.3. This issue must be resolved to ensure the Bill is effective in ensuring a regulatory threat exists to encourage specified airports to act as good stewards of monopoly infrastructure.
7. Specific comments 7.1. Air New Zealand has set out specific comments in the table below. New Section in Bill 53B (3) Summary Air New Zealand comment Recommendation New sub-section provides that the Commission may include an analysis of how effective ID requirements are in the achieving the purpose of the Act 56 (1) (C) New overview clarifies that other services may be declared specified airport services by order in council 56F(1)(a) The Commission must hold an inquiry into the regulation of specified airport services if required to do so by the Minister; and may hold an inquiry on their own initiative Air New Zealand considers this analysis should be compulsory after each price-setting event to ensure information disclosure is effective for that specified airport. Air New Zealand welcomes the inclusion of this sub-section in the overview. Air New Zealand remains concerned that the airports ability to exercise monopoly power in nonaeronautical services is unregulated. This emphasis makes clear that the Commission/ Minister may more readily limit an airports ability to exploit its dual till practices, by considering services like car parking, retail or commercial leases in the airport landholding. Air New Zealand supports the ability of the Minister of Commerce or the Commerce Commission to undertake an inquiry as a general right. This is an important feature of the proposed changes that create appropriate incentives on airports to set prices that are in line with Commerce Commission Input Methodologies and achieve the purpose of the Act. However, Air New Zealand is concerned that the clause may be interpreted to mean an inquiry can only be held if it Air New Zealand recommends that the wording is updated to: the Commission must, as part of a summary and analysis, include an analysis of how effective the information disclosure N/A Air New Zealand recommends clarifying that an inquiry can be triggered into any single specified airport company, or into multiple specified airport companies. Additionally, Air New Zealand recommends amending the definition of specified airport services to clarify that it includes the services supplied by any one of the specified airport
includes all specified airport companies. This clause should be clarified that an inquiry can be triggered into any one or all of the specified airport companies. companies. This will ensure that the provisions in the remainder of the Bill can be applied to any one of the specified airport companies. 56G (1) 56G(2)(b) As part of the inquiry, the Commission must consider whether, what type and how additional regulation should be imposed on specified airport companies. As part of the inquiry, the Commission must assess the benefits of imposing different types of regulation against the costs of doing so. Air New Zealand supports this consideration as part of the inquiry. However, Air New Zealand is concerned that this clause could be interpreted to mean that additional regulation can only be applied to all three specified airport companies together (i.e. an individual airport cannot be moved into deeper regulation by itself). Air New Zealand agrees that costs versus benefits test is the most appropriate test to meet the purpose of Part 4. Use of the materially threshold (which exists in Section 52G) would risk biasing outcomes in favour of the monopoly airport rather than consumers. Air New Zealand recommends clarifying that additional regulation can be applied to any single specified airport company, or into multiple specified airport companies. N/A Moreover, 52G is concerned with imposing regulation in markets not previously subject to regulation rather than the scenario at hand where regulation exists but has been found to be ineffective. In addition, and in alignment with comments above, Air New Zealand believes it is important to clarify that an individual airport company can be moved into deeper regulation by itself. 56H(1) The Commission must make a Otherwise, there is a real risk that the costs of moving all three airports into deeper regulation will outweigh the benefits and the threat of deeper regulation as a constraint on airport behaviour will be undermined. Air New Zealand considers it is an important part of the design N/A
56K(2) 56I and 56J recommendation to the Minister on whether 1 of the following should be imposed on specified airport services The order in council imposing additional type of regulation must have an expiry date which must be no later than 20 years. There is no proposed timeframe for ministerial decision making on whether to impose regulation or for when the Commission must introduce such regulation of the proposed changes that the Commission must make a recommendation on further regulation at the end of an inquiry. Under current provisions, the Minister has no clear pathway to impose further regulation as the result of an inquiry. As such, the likelihood of regulation is weakened and specified airport companies do not take the findings of pricing reviews seriously. As set out in paragraphs 3.5 3.7 above, Air New Zealand is of the view that if further regulation is required, a well-designed negotiate/ arbitrate regime is the most logical first step. In Australia, expiring legislation of this type has created unintended consequences to the detriment of the regulatory regime. We suggest that an expiry date is unnecessary if the regime is well designed and well monitored. If timeframes are not applied to both of these processes, there is a risk of delay or inaction. Suggest removing 56K (2) It would be prudent to introduce timeframes for both processes of not more than six months.