Charge(s)! Knights-Errant Airlines Attack Airport Windmills
Regular readers of the Aviation Intelligence Reporter know that we often turn to literature to help make sense of modern aviation. Is it the fact that something like aviation was so fantastical then that only through that prism can we make sense of it now? That is one theory. Or maybe the metaphors just work better. Take, for example, the current Quixotic campaign from the airlines concerning airport and ANSP charges. It is near to impossible to not think of windmill tilting when one considers it. The windmills stand there, implacable, gently turning their sails in response to the elements, but to the airlines, they are dragons that must be attacked. What else can a knight-errant do?
For, as Cervantes notes, ‘Who was he that did not know that knights-errant are independent of all jurisdictions, that their law is their sword, their charter their prowess, and their edicts their will? ...Who, I say again, was the fool that knows not that there are no letters patent of nobility that confer such privileges or exemptions as a knight-errant acquires the day he is dubbed a knight, and devotes himself to the arduous calling of chivalry? What knight-errant ever paid poll-tax, duty, queen’s pin-money, king’s dues, toll or ferry?’ Well, who indeed? The airlines, like the good Don Quixote, have assumed the role of knights-errant (self-appointed) and are now in full battle mode charging the dragons on the crest of the hill.
Squabbling over paying your bills is not normally a happy hour discussion. It should be boring. And yet, for some reason, in the aviation sector, when an airport dares to raise its prices, it is newsworthy. The FT covered Heathrow’s charges. The UK Telegraph published a commentary from the CEOs of BA, Virgin and the legacy airlines’ association IATA, accusing Heathrow's attempts to break-even as ‘jeopardising Global Britain’.
It is not clear how having a bankrupt Heathrow would facilitate Global Britain. The question is deceptively simple. Should regulators allow airports to recover lost revenue? Should regulators allow airports to adjust their charges to reflect a fixed cost base and lower levels of traffic this year, and next, and probably the one after that too? The knights-errant des nous jour, our valiant good Sir Knight airlines, say that airports should not be allowed to recover lost revenues, because firms operating in a competitive environment would not be able to do so. ‘Why’ they ask ‘should we pay for services that we did not use?’ They make exactly the same case in response to ANSP charges too. ‘We cannot go back and demand of our passengers that the refunds we made – under strict regulatory pressure – now be paid back to us. Why then should we be required to pay out on the supply side as well?’
Airports and the ANSPs, which are mostly price-regulated entities, argue that they should be allowed to recover their losses, as part of the contract of regulation. That goes down well at an airline meeting. So, who is right? Recovery of losses is, at first blush, a hard one to accept. The corner café is not recovering its losses. But wait – actually, it is. The price of your steak frites has increased 15%, and in many countries, the café has also added a Covid recovery surcharge. Furthermore, the café can change its prices whenever it wants. Most airports set prices for 2020 more than 5 months before 2020 started. ANSPs set charges in accordance with a five year scheme. This is part of what being a 'price-regulated entity' entails. Airlines benefitted from that, largely under-paying the airports and ANSPs, which have lost money for more than 6 consecutive quarters.
ANSPs need highly skilled workers and expensive kit. An airport is expansive and expensive infrastructure. Not to mention immobile and totally illiquid. You can find a buyer or sub-lessee for your extra A320s; but you cannot sell that extra terminal or send it back to a parking lot at Teruel. The other side of the coin of being a 'price-regulated entity' is that your users, which often paid below market price charges in the past, have to accept paying a higher cost-based charge in the future. This is not a theoretical point. The enormous transaction values paid for slots, whether direct purchases as in the UK or the acquisition of bankruptcy assets such as Air Berlin's slot portfolio, shows that airport cost-based pricing is far below actual market value.
It is also interesting to contemplate the philosophical question of why many European governments did not step in with aid and compensation for airports. Was it assumed that the regulations provided the back-up necessary? In the US aid was made available, but the regulations and ownership are different in America. In fact, beyond philosophy, this is a question of regulation, right or wrong. Regulators have a determinative role. In many countries, the regulator approves airport charges before they can enter into force. Does this seem odd to you? An airport operator will understand far better its cost of operation and the cost of providing the infrastructure and facilities that airlines demand during annual consultations than the regulators are likely to do. They may deny it, but even in a regulated environment it is the airlines that keep the airports honest, not the regulators. If that is not an argument to get the regulators out of the process and to let the market in, it is hard to see what would be. The reality is that we need to look again at the regulatory models that we use and the ones that we overlook. To be effective, the regulators need to seek out best practice from around the world. For better or worse, that is in Australia.
ACI Europe asked two well-regarded regulators – a phrase verging on the oxymoronic – to review what was available. Dr Harry Bush and Warren Mundy penned a piece with the deeply off-putting, and/or dangerously patronising title: Lessons for Europe from Australia: the review of Australian airport economic regulation. Is there a heart that does not beat quicker when reading that? What are these lessons?
Regulators should avoid being distracted by such surface turbulence and focus instead on the underlying economics and incentives influencing the parties. For the airport sector, the Productivity Commission finds that the light-handed monitoring regime (and the potential for regulatory intervention if things go awry) is sufficient to safeguard the public and consumer interest, and has indeed delivered good outcomes.
Another interesting comment that Bush and Mundy draw out of the Productivity Commission report is that ‘threats, rhetoric and leveraging media attention are commonplace’. Revelatory indeed. Let us assess Messrs ’ Weiss, Gallego and Walsh's commentary in the Telegraph referred to above: Threats? Check. Rhetoric? Check.
Leveraging media attention? Check. But before you think that all is sweetness and light(handedness) in the Australian regulatory garden, you will be pleased to know that even in a country with too much sunshine, regulatory agencies have been known to jostle for position. In September this year, the Australian Competition & Consumer Commission (ACCC) – which has long feuded with the Productivity Commission – issued a report on airline competition in the 6. post-pandemic age. The ACCC’s former chair is now the chair of the A4ANZ – a copycat lobby group dedicated to undoing the light-handed regulatory structure that the Productivity Commission continues to support. The ACCC warned airports against recovering lost profits from the pandemic. A key focus here is the use of the word profits, and not revenues or lost depreciation. Australia's light-touch regulatory structure for airports allowed airports more of the upside reward in the past, and naturally expects airports to weather the downside risk in the pandemic. This is fundamentally different than the European or North American Systems.
But to move away from these childish squabbles, both sides must behave like grown-ups. Airports need to do their part. ACI will tell you, at length, that airport competition works. But the measure of this will be a little less blurry when we see airports striving toward new efficiency, lowering costs. This is where both Ryanair’s Michael O’Leary, and Lufthansa CEO Carsten Spohr can agree, having told viewers of StraightTalk (usual disclaimer) that airlines will grow at the airports delivering the best value. When traffic comes back, airports' cost per passenger needs to remain value-providing for airlines. Most of the operating cost savings are related to labour costs and consumables. There needs to be a credible demonstration that this will stay low when traffic starts to grow. There is certainly academic support for the airports lowering their charges at the moment and then sharing the upside as business returns, but there is an underlying assumption in that position that the airports also receive the sort of funding that the airlines have obtained. Certainly in Europe, that has not happened. Airports are therefore relying on their regulated status as much as possible.
European governments, unlike those governments in most other parts of the world, decided that the users of airports and ANSPs should pay for those airports. From the societal perspective, this is fair. The wealthier in the population, who can afford to fly regularly, should pay for the use of the infrastructure, rather than impose the cost on all of society through general taxation. Running an ANSP or an airport is expensive. A slab of concrete four kilometres long and 50 metres wide, and a building that sees millions of pairs of shoes crossing its thresholds every year needs to be maintained and renovated from time-to-time. Nonetheless, at many airports, airlines have managed to pull a quick one on their regulators. They have convinced governments that airport charges should be ‘cost-related’ but then they pocket the value of the airport slot. That topic, fascinating and unending, needs to be addressed as a matter of some urgency. It might have been one of the things we could have built back better during the depths of the pandemic. Ho hum.
Cervantes' Don Quixote is a story about a self-identifying knight-errant who struggles to adapt to a world that is shifting from monarchy to commercialisation. He finds himself in ridiculous situations. He beats a servant who expects to receive back-pay. He asks why he, a chivalrous knight, should pay his infrastructure costs. But the world has changed. Commercialisation and marketplaces define society. Airlines are not glorious flag carriers of states, but businesses dealing in a commercial environment, which need to pay their bills. Society – and the environment – will benefit if we can get over the fiction that airports should be free, or so cheap that they do not recover their cost of operation. And governments and regulators need to recognise that doing everything that they can to protect airlines may not actually be helping. It is good to remember that ultimately, it is the loyal Sancho Panza who achieves his dream. He becomes a civil servant. We can only hope that his experiences made him a good regulator.