Australian airport investors under fire over ‘grossly inflated’ profits

The chief executives of Qantas and Virgin Australia have hit out at infrastructure investors in a joint appearance in Canberra, calling for greater government intervention in the sector.

A group of Australian airport investors has hit back at accusations of making “grossly inflated” profits at the expense of airlines and their passengers from the bosses of two of the country’s largest carriers.

Alan Joyce, chief executive of Qantas, and Paul Scurrah, chief executive of Virgin Australia, made a rare joint public speech at the National Press Club in Canberra on Wednesday titled “The Great Australian Monopoly: Where nobody wins but the airports”.

The pair argued that airports are a monopoly, charging excessive fees to airlines and generating outsized profits.

They also called on federal treasurer Josh Frydenberg to intervene in the sector and argued for the introduction of a new arbitration process to settle disputes between airlines and airports.

In his remarks, Scurrah said: “The airports we are dealing with are privatised monopolies that own and operate many of Australia’s airports, with many generating profit margins that are grossly inflated, in my view because of the power they have.

“We say it is time for an intervention, yet not the kind of intervention that infrastructure funds and investors in airports would have you believe. We are calling for a lot more equity and transparency in the relationship and for a negotiate/arbitrate model to be implemented.”

Australia’s Productivity Commission is conducting an inquiry into the airports sector and is due to publish its final report on 22 October, having handed it to the federal government in June.

In its initial report, published in February, the Productivity Commission recommended maintaining the current regime of light-touch regulation of the airports sector, saying that “existing airport regulation benefits the community and remains fit for purpose” and that each of Australia’s four major airports (Sydney, Melbourne, Brisbane and Perth) had “generated returns sufficient to promote investment while not earning excessive profits”.

Currently, the Australian Competition and Consumer Commission regularly monitors the country’s four largest airports and reviews of this system are conducted every five years. No significant changes have been made to it since monitoring by the ACCC began in 1997.

A group of investors pre-empted the criticism from Joyce and Scurrah last week, sending a letter to Frydenberg on 13 September expressing concern about criticism of private ownership of airports.

The letter from the Australian Airports Investor Group, which consists of several superannuation funds and fund managers who hold ownership stakes in Australian airports, said in the letter, a copy of which has been obtained by Infrastructure Investor: “The campaign for new, heavier-handed regulation at Australia’s airports is based on the misplaced view that the model of superannuation fund and privately owned airports has failed, resulting in increased charges on airlines and consumers.

“This is despite successive Productivity Commission reviews concluding that airport charges have little effect on airfares. Although airport charges have little effect on airfares the opposite can be said of airport investment, which has been fundamental to stimulating aviation competition, particularly for international travel.”

‘Existing regulatory model is working well’

The AAIG said airport owners have invested A$15 billion ($10.3 billion; €9.3 billion) in expanding and improving airports since 2002, with more than A$20 billion of investment planned over the next 20 years.

The letter continued: “Our track record of investment in airports has significantly outweighed distributions derived from them. Given the significant investment required for the future, it will be important that this trend is set to continue. The planned investment for the next decade is unprecedented and is predicated on the continuation and stability of the existing regulatory regime.

“The existing regulatory model is working well and we urge the Australian government to reject the current campaign by the airlines to impose a highly restrictive and confidence-sapping regulatory regime on Australia’s airports.”

The membership of the Australian Airports Investor Group is AMP Capital, AustralianSuper, First Sentier Investors, IFM Investors, Macquarie Infrastructure and Real Assets, Morrison & Co, Palisade Investment Partners, Perron Group, QIC, StepStone, Sunsuper and UniSuper.

Infrastructure Investor requested comment from several individual members of the AAIG but all declined to comment beyond the content of the letter.

The bosses of each of Australia’s four major airports issued critical statements today in response. Melbourne Airport chief executive Lyell Strambi said: “Under the existing regulatory settings we have reached agreement with all 47 airlines operating out of Melbourne and concluded a new 10-year deal with Qantas for Terminal 1.

“Our new agreement includes a Capital Consultation Group, annual price resets should capital investment fall short of plan, a quality forum and rebates where we fail to meet service levels.

“Where is the case for additional regulation when the existing dispute mechanisms are hardly ever used? It would give the whip hand to incumbent airlines, allowing them to delay investment and reduce competition. That’s no good for the traveller, no good for jobs and no good for tourism.”

Melbourne Airport has been operated on a 50-year lease since 1997 by Australian Pacific Airports Corporation, a consortium comprising AMP Capital (27.32 percent stake), IFM Investors (25.17 percent), Future Fund (20.34 percent), SAS Trustee Corporation (18.47 percent) and Utilities Trust of Australia, managed by Morrison & Co (8.7 percent).

As well as the four major airports, other airports that have been leased to the private sector include Canberra, Adelaide, Hobart, Launceston, Gold Coast, Darwin and Alice Springs, with Sydney Airport listed on the ASX.