Frontier Economics comment on inquiry into airport regulation
We are aware of some recent social media posts referencing our work on the Productivity Commission’s inquiry into Airport Regulation.
These posts reference the Commission’s critique in its draft report of our analysis which assessed the costs and benefits of reforming the regulatory regime applying to monitored airports. The Commission alleged that our work contained fundamental errors and was not credible. We disagree, and have provided a response to the Commission setting out why.
In short, our analysis was directed as estimating the potential impact of excessive airport charges on air travel and Australia’s connectivity with the rest of the world. We found that these effects were potentially quite significant, as airports had earned excess returns over a long period and returning some of that to airlines and airline passengers could substantially improve route connectivity.
This analysis should have encouraged further analysis and assessment. However, unfortunately it did not. Instead the Commission dismissed Frontier’s analysis based on disagreements with our finding of excess profits, and the impact of reducing this on airport charges.
Rather than identifying “fundamental errors”, the Commission has simply taken a different view without any consideration of the underlying framework we put forward. Our analysis of excess profits is based on an economically-sound methodology that draws data from ACCC monitoring reports and takes into account returns earned on both the aeronautical and non-aeronautical side of the business – the most common regulatory method used in other jurisdictions. The Commission in turn made a number of errors in characterising our approach to turning excess profits into a reduction in the aeronautical charges paid by airlines. Most notably, it confused a return passenger with a one way passenger which resulted in assumptions which in no way reflect those underpinning our work. We have sent the Commission further details to correct its misunderstandings.
More generally, Frontier Economics indicated its disappointment with the way the Commission contextualised our evidence and engaged with it. We were the only party to present a more detailed assessment of the impacts of changing the regulatory regime applying to monitored airports. Every other party including the airports and the Commission itself skirted this issue. Why? Probably because it is hard and requires certain assumptions to be made. Assumptions necessarily introduce uncertainty, but this does not of itself discredit our analysis. We were transparent about our assumptions and considered carefully how best to used this connectivity analysis in our wider assessment.
For those that are interested to understand these issues, we suggest you read our March 2019 submission to the Commission’s draft report.