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The PC has firmly concluded:
The regulatory environment continues to remain challenging for asset owners both domestically and internationally. This was most explicitly witnessed in Australia through recent adverse regulatory determinations made within the energy sector, as previously discussed in the November 2018 article “What impact do the Australian Energy Regulator’s proposed changes have on your infrastructure assets?”. Similarly, several Australian ports have been involved in disputes involving the ACCC and the ATO has stepped up scrutiny and changed the treatment of stapled structures most commonly adopted for infrastructure assets.
Against this backdrop, there has been increasing concern over the potential for negative changes to the regulatory framework for airports. Since the PC published the terms of reference in mid-2018, airports, asset owners and managers have taken a proactive and co-ordinated approach to ensure a unified position for the inquiry. In response, there was a concerted effort by airlines and other key stakeholders to lobby government and campaign via the media against the draft findings of the PC, however these efforts lacked data to support their claims.
The period leading up to, and including, the PC review coincided with key commercial negotiations on Aeronautical Service Agreements (“ASAs”) between airlines and airports. Whilst this contributed to delaying some of the negotiations, the PC outcome reflects favourably on the airports and serves to bolster their negotiating position moving forward.
The PC’s directive of inquiry was to determine the effectiveness of the economic regulation for services provided by airports to airlines, passengers, people and businesses that access terminal precincts. Focus was placed on the four monitored airports (illustrated above) – Sydney, Melbourne, Brisbane and Perth – and second tier monitored airports including, Adelaide, Canberra, Darwin, Gold Coast and Hobart which are only subject to voluntary, self-reported monitoring. It should be noted that all other airports are only subject to voluntary, web-based reporting and are at lower risk of intervention. These include many of the Airports which JANA clients have exposure to, such as Cairns, Mackay, Sunshine Coast, Townsville, Mount Isa, Longreach, Launceston, Alice Springs and Port Hedland Airports.
The PC noted the following key points:
The Federal Government agreed with the PC’s view that the “ … existing airport regulatory framework remains fit for purpose and that there is no current justification for significant change to the current form of ‘light handed’ economic regulation”. However, the Government noted it also supported the PC wanting to ensure airports be accountable through closer monitoring of customer outcomes.
Australian airports have delivered strong returns over a number of years, reflecting the initially low entry prices, growth in both domestic and international passenger flows, development of retail and property revenues, as well as strong, growing demand for infrastructure assets. Although the report acknowledges that, on face value, isolated performance measures may be cause for concern, the PC (supported by the Federal Government) has firmly concluded the existing light-handed regulatory regime remains fit for purpose and that a negotiate-arbitrate model should not be adopted.
In opposition to the PC, the ACCC has taken a stronger stance against the airports in their submission to the Inquiry citing significantly raised aeronautical and car-parking charges over time. Although the PC has not sided with this view, the ACCC has a number of avenues separate from airport regulation to promote their concerns and opinion surrounding airport pricing. The Federal Government’s support of the PC largely allays the fear of an over-eager ACCC, noting they supported the PC’s recommendation of greater monitoring of customer outcomes, which may further assist in satisfying the ACCC given the additional transparency.
Airport operators and asset owners have viewed the outcome as relatively benign, largely dissipating concern over the potential for political activism and regulatory overreach in the airport sector. This is expected to provide more positive momentum to airport valuations, though the risk of increasing regulatory scrutiny should continue to be monitored.
Over the past two years in the lead-up to the PC review, the airports, asset owners and fund managers, took a co-ordinated approach to working closely with the Australian Airports Association (“AAA”) to proactively engage in public debate and advocacy ahead of this review, as there has been the general concern that due to the current political climate and recent statements and actions taken by the ACCC, the potential for negative changes to the regulation has increased. JANA believes the approach taken is appropriate and reflects the proactive steps that fund managers have taken to protect value for investors.
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