Terminal Navigation Pricing Review. Discussion Paper

Transcription

1 Terminal Navigation Pricing Review Discussion Paper March 2010

2 Contents 1 Foreword 3 2 Purpose of the Paper Overview Discussion paper process Questions for feedback 5 3 Airservices Pricing Framework Recent pricing history Existing charges Impact of prices 7 4 Pricing Options Overview of options 8 5 Other Options Graduated services Phasing in prices at new locations General aviation charging basis 10 6 Pricing of TN Services Criteria for assessing pricing options Cost drivers for TN services Efficient pricing of TN services across all locations Efficient pricing for TN services at closely located airports Equity in TN services pricing Simplicity and transparency in TN pricing 17 7 Attachments 18 Consultation Program 18 Regulatory Framework for Price Setting 19 International Guidance and Practice 20 Current Structure and Operation of TN Prices 21 Indicative Terminal Navigation Pricing Models 22 Page 2

3 1 Foreword The first priority of the Australian Government for aviation is the safety and security of the travelling public. An integral part of the Australian air traffic system is the provision of terminal navigation services at capital city, regional and general aviation aerodromes around Australia. The Australian Government announced in its December 2009 National Aviation Policy White Paper that Airservices would review its terminal navigation (TN) pricing in the first quarter of 2010 with a view to establishing a framework that facilitates the enhancement of air traffic services around Australia. This was, in part, prompted by the anticipated introduction of new TN services that are likely to be introduced at a variety of locations in the near term and the upgrading of services at other locations. In undertaking this review, the Minister for Infrastructure, Transport, Regional Development and Local Government requested Airservices to consider the impact of alternative pricing options on the introduction of new or enhanced air traffic control services, including at major regional airports, and to employ a wide ranging examination including, but not restricted to, pricing models where: new terminal navigation charges at a location are phased-in over a period of time; charges are levied on the basis of the same type of airport operation; and charges are levied at the same level as nearby competing airports. Accordingly, this paper has been developed to promote further discussion on the structure of charging methodologies for TN services and has regard to the feedback and comments received through the Airservices 2008 Options Paper which was released in August 2008, a copy of which is still available on our website at: Responses to this discussion paper close at 5pm on 14 May 2010, and should be directed to: pricing@airservicesaustralia.com Fax: Mail: Airservices Australia Terminal Navigation Pricing Review GPO Box 367 Canberra ACT 2601 If you have questions on the paper or the review process, please do not hesitate to contact myself on (andrew.clark@airservicesaustralia.com) or Paul Logan, Manager Financial Strategy and Business Performance, on (paul.logan@airservicesaustralia.com). Yours sincerely Andrew Clark Chief Financial Officer 31 March 2010 Page 3

4 2 Purpose of the Paper 2.1 Overview The purpose of this discussion paper is to outline possible pricing options for TN services and how they may facilitate the enhancement of air traffic services around Australia. Airservices recently conducted consultation on a range of pricing issues that apply equally across all of its operations (i.e. also including enroute navigation and aviation rescue and fire fighting services (ARFF)). These issues related to, for example, the length of the pricing period, risk sharing and the desirability of airlines negotiating directly with Airservices. This review though looks at the prices at regional airports where there are current TN services, or where a new TN service is likely to be introduced. It is at these airports, which tend to have lower volumes than major metropolitan airports, where the recovery of costs tends to give rise to higher location specific prices. The paper examines whether the current pricing methodology for these locations is problematic and if alternative pricing methodologies or approaches could be adopted that, consistent with the Government s Australian Airspace Policy Statement, will enhance air traffic management services at regional airports served by passenger transport services. The current pricing methodology for TN services is airport specific (i.e. location specific), though a range of cross subsidies exist. These cross subsidies are recovered through higher enroute prices supporting price caps at regional airports, and through a basin cross subsidisation from the major capital city airports to closely located (currently GAAP) airports. All locations are currently capped at $12.69 p/tonne. The review examines alternative approaches to the subsidisation of airport specific costs and sets out priced options for TN services along a price continuum that ranges from pure location specific to pure network prices. Within this range there are alternate hybrid models incorporating elements of both location specific and network pricing. The prices modelled are not to be taken as the actual level of charges beyond the current price freeze; rather, they provide an indicative price using existing, known parameters and applying the Australian Competition and Consumer Commission (ACCC) building block methodology. Airservices plans to develop a specific long term pricing proposal for all its services later this year that would apply from 1 July 2011 and this will include the outcome of this review and previous consultation, along with the latest forecasts for operating costs, capital expenditure and activity volumes. The discussion and the options presented should not be taken as an Airservices preferred approach but rather a range of options for comment. 2.2 Discussion paper process Consultation on this paper will be conducted during April 2010 with briefing sessions held at selected locations across the country as detailed at Attachment 1. If you are unable to attend a briefing session you may engage with an Airservices representative using the contact details contained in the Foreword above. Responses to this paper are due by 5pm on Friday 14 May Feedback on the options and issues raised are important to Airservices. All submissions will be published for purposes of transparency and will be available on our website If respondents wish to provide Page 4

5 commercially sensitive information this will not be disclosed but should be provided by way of annexure to the base submission. 2.3 Questions for feedback To make the process consistent, we request that submissions are framed to include a response against the following questions: Question #1: Which of the options is most likely to support the introduction of new or upgraded services to enhance safety and best meets the criteria of efficiency, equity and transparency? Question #2: What opportunities exist for more graduated levels of service options, prior to the introduction of a new tower service, which vary with traffic volumes at airports? Question #3: For new TN services, should Airservices phase prices in over a period of time ultimately moving toward full cost recovery and on what basis should this be done? Additionally, should the activity forecast for new locations be reviewed and the price adjusted for significant variations after the first 12 months? Question #4: Should pricing for low volume general aviation operators be based on a fixed price tiered arrangement? If so, what tiers should apply? Question #5: What are the equity and efficiency implications of: (a) charging operators at a particular location that particular location s cost; or (b) charging operators the same price for the same service regardless of location? Question #6: Is Airservices current TN pricing structure transparent, easily understood and easy to administer? 3 Airservices Pricing Framework 3.1 Recent pricing history Airservices approach to pricing has evolved over the last 15 years. The pricing methodology has moved from a broad network based charging system to more user pays based principles that were agreed with industry and the ACCC in 2004 when adopting the existing Long Term Pricing Agreement (LTPA), in line with the regulatory price setting framework (Attachment 2). The five year agreement with industry ended in December While the agreement does not actually expire; there is no further provision for price changes (up or down) past this date. Accordingly, Airservices released a comprehensive pricing structures options paper in August 2008 with the aim of putting a draft price notification to the ACCC in June The options paper was supported by a range of comprehensive public and private consultation in order to determine industry s appetite for any further pricing structural change. This was also supported by detailed pricing discussions through a Pricing Consultative Committee (PCC) established to agree the subsequent pricing framework and core pricing inputs such as the forward capital works program; forecast operating costs; Page 5

6 weighted average cost of capital; and forecast activity. This PCC comprised representatives from the major domestic and regional carriers, international airlines and associations, as well as general aviation operators. However, with the economic uncertainty in the industry in early 2009 that was brought on by the global financial crisis and the response by airlines around the world in cutting capacity, reducing staff and reporting significant losses or going into liquidation, Airservices sought to help ease the impact of the crisis by agreeing to extend the existing LTPA and hold prices constant until June This has meant that TN prices, along with all other Airservices charges, will have been effectively frozen for three years as they are at levels that were last set on 1 July The freezing of Airservices prices has allowed time for the industry to recover and allowed further industry consultation on a new price path, charging structure and risk sharing options. The Board of Airservices is yet to form a definitive view on any change to the level or structure of pricing when the current price freeze ends in June Feedback received to date, through a range of submissions and discussion though indicates that there is no real desire for wholesale structural change to Airservices pricing. However, particular areas of concern relating to terminal navigation charges have been noted for: The applicability of network prices between regional and metropolitan airports, or across similar services or for closely located airports. The use of weight based charges that are less than proportional to the actual weight of the aircraft. How general aviation operations should be included in the charging regime, including whether charges should be based on full stop landings, or whether circuit training sessions should be charged more. This paper includes some options which incorporate these preferences from different parts of the industry to provide an indication of the impact they have on TN charging levels. 3.2 Existing charges In relation to the TN service line, charges are set on a location specific basis, though a range of cross subsidies exist from enroute and basin tower locations. This includes a cross subsidy from enroute services to regional locations and from the major capital city airports to closely located (currently GAAP) airports under the current basin concept e.g. Sydney charges subsidise the costs of operations at Bankstown and Camden. This approach sees the charges as set adhering broadly to International Civil Aviation Organisation (ICAO) principles and recent pronouncements on Policies on Charges for Airports and Air Navigation Services (Doc 9082) for non-discrimination, cost-relatedness and transparency of charges, as well as consultation with users as set out in Attachment 3. TN services primarily cover services in tower and approach airspace to aircraft arriving at a location where a tower service is in operation, a full description is at Attachment 4. Current TN prices (that last changed on 1 July 2008) are set out in Attachment 5. At current prices, TN as a stand-alone service achieves a reasonable level of cost recovery. However, the recovery levels of segments within the service are mixed: Regional locations, which are currently price capped through the support of a small cross-subsidy from enroute, are as a group close to break-even. Page 6

7 The price at military ports remains low as the prices are set to cover only the navigation aid services provided at those locations, and do not include the costs of Defence air traffic control services. Non-basin radar ports (Cairns, Canberra and Gold Coast (Coolangatta)) are those locations that have a separate dedicated terminal control unit providing radar approach services. Canberra and Gold Coast (Coolangatta) are achieving sound levels of cost recovery with the possibility of price reductions under the current pricing framework, while Cairns is below break even as forecast activity volumes under the previous five year agreement did not occur. Basin ports are those closely located airports that operate in a capital city basin. In those locations, the (current) General Aviation Aerodrome Procedures (GAAP) airports generate revenues that pay for less than a third of the fully allocated TN costs of operating the services at those locations. 3.3 Impact of prices Part of the conundrum for new services is the large step change in both service delivery and cost associated with moving from a non-controlled environment to a tower environment. Prices at a particular location affect affordability and, ultimately, the viability of services at the location. Elasticity of demand and affordability are hard to quantify and given the breadth and variety of locations, impacts on operators and consumers can therefore vary greatly. As an example, operators to a tourist destination like Proserpine are likely to be more sensitive to price change than those providing a business service such as transporting mine workers to Karratha. The rationale for the existing location-specific price approach is that setting a price at a particular location brings pressure to bear on the cost base at the location to find the optimal level of resources (human and capital) to supply the service i.e. the most economically efficient. This has occurred within the existing operational regulations and it is felt that service/procedure offerings and costs are now minimised to a point where any further gains would be marginal. Instead, an opportunity to ameliorate the cost impact of establishing new services or expanding existing services may be found in safety-based alternatives to the existing establishment models. As an example, there may be opportunities to apply procedural or low-cost technological solutions to achieve the required improvement in the safety net at a lower cost. This is discussed further at Section 5 - Other Options. The issue remains that whilst cost recovery can be further shifted between users, this is counter to the argument that users should only pay for the services that they use and should not have to make a contribution to services they do not use. Clearly, additional cross subsidies and pricing structural changes further along a price continuum toward network based pricing will impact those more frequent users of services at the higher volume capital city ports. Page 7

8 4 Pricing Options 4.1 Overview of options The current charge is airport-specific though a range of cross subsidies exists. In the larger capital cities where there are two or more airports in close proximity a form of basin pricing is employed and some costs are shared between the secondary airports and the main airport. Additionally, as described above, the highest price charged for TN by Airservices is currently $12.69 p/tonne landed at any location, and this applies at 14 of the 28 TN locations. Alternative pricing methodologies put forward for discussion are set out below. There are an unlimited number of potential pricing methodologies. Seven are provided here that cover a range of possible options. The order in which they are presented describes the closeness of each option to the price continuum that ranges from pure location specific pricing to pure network pricing. The prices derived under these options at each location are at Attachment Pure Location Specific Prices. Prices for each service under this option have been derived by dividing the location specific service costs by the location specific activity Maximum Take off Weight (MTOW) levels. 2. Current Pricing Framework. Prices for each service under this option have been derived by dividing the location specific service costs by the location specific activity (MTOW) levels. Secondary airports in capital city basins are subject to a price cap based on a 10% increase on current capped price levels, with the shortfall covered at the primary capital city airport. Regional airports are also subject to this price cap, with the shortfall covered by enroute services. The prices under this option differ from the current prices due to changes in costs and activity volumes. The current prices were based on projections established in 2004, whereas the prices estimated in this option are based on current costs and activity volumes. 3. Location Specific with Basin Prices and Training Circuit Charge. Prices are based on location specific costs for regional locations and capital city basins, with a single price within each basin. Training circuit sessions are charged at twice the rate of a full stop landing. 4. Location Specific Variable Costs with Fixed Cost Network Charge. Under this option prices at each location recover direct staff costs at that location but all other costs are recovered through an equal unit charge per MTOW across all locations. 5. Base Level Network Charge with Location Specific Class C Charge. The base level charge is derived by pooling the average Class D tower cost across all locations plus fixed overheads, with a location specific price for Class C services based charge for the incremental cost of the Class C service over the average Class D tower cost. 6. Service Based Network Pricing. Costs for Class D services are networked across Class D locations, while Class C service costs are networked across Class C locations. This option effectively sets like prices for like services even if the location specific costs of those services differ. 7. Pure Network Price Network prices have been established by dividing total Terminal Navigation Service costs by total Terminal Navigation Activity. Under this option all Page 8

9 costs are recovered via a single unit charge per MTOW that does not vary across locations Question #1: Which of the options is most likely to support the introduction of new or upgraded services to enhance safety and best meets the criteria of efficiency, equity and transparency? 5 Other Options While the paper has focussed on alternate pricing options, along the price continuum of location specific to network pricing, there are other approaches that Airservices could consider that do not include changing the pricing methodology and that may address the localised economic impacts of tower services being introduced at new locations. 5.1 Graduated services Part of the conundrum for new services is the large step change in both service delivery and cost associated with moving from a non-controlled environment to a controlled environment. Airservices notes there are current and potential graduated air traffic services which could be considered (such as Unicom, Certified Air/Ground Radio Service, virtual towers) in the future to improve safety at regional locations before requirements for controlled airspace and air traffic tower services and facilities are introduced. These sorts of opportunities could provide a solution at a range of locations that both mitigate the risk and provides a more cost effective solution than a full tower service. Question #2: What opportunities exist for more graduated levels of service options, prior to the introduction of a new tower service that vary with traffic volumes at airports? 5.2 Phasing in prices at new locations There may also be merit in phasing in prices at locations that have newly acquired TN services. That is, rather than introducing a sudden price increase at such locations these prices may be phased in over a number of years. One such rule might be to limit any price increase to $7 p/tonne per annum (or similar if a different unit of pricing is adopted). However, under any phase in of prices Airservices would not be recovering the costs that it has allocated to the location in question until the phase in period had ceased. One way to deal with this issue would be to estimate the under-recovery at that location during the phase in period and to recover this in higher prices at that location when prices are next reset. For example, if the under-recovery at a location had a present value, at the time prices were next reset, of $0.5m then capital costs at that location would be $0.5m higher and this would then be recovered in future prices over a predetermined period (say 10 years). Additionally, due to the variability of activity of new locations, Airservices might also consider reviewing activity after the first 12 months for new locations, as opposed to forecasting and setting it for a longer term as we do for established locations. This would allow time for the Page 9

10 volumes to settle, become more predictable and ultimately allow for a more accurate price being set. Question #3: For new TN services, should Airservices phase prices in over a period of time, ultimately moving toward full cost recovery and on what basis should this be done? Additionally, should the activity forecast for new locations be reviewed and the price adjusted for significant variations after the first 12 months? 5.3 General aviation charging basis In relation to general aviation operators, there are a number of instances where the cost of billing exceeds the revenue collected and/or there is a large administrative cost for the operator to reconcile the TN bill. As such, Airservices may be able to simplify general aviation charges and reduce administrative costs. This could include for example minimum charging thresholds; exclusion based on type of aircraft propulsion; exclusion of a component of service (i.e. do not charge for enroute services); and exclusion based on MTOW bands. Based on reviews of this conducted to date, the simplest and fairest approach would be to apply a tiered fixed charge based on the previous year s flight activity. That is, there could be a single annual charge that is the same for all operators who have low levels of flight activity, a higher charge for all operators who have moderate levels of flight activity and annual fixed charges for high volume operators based on the previous year s level of flight activity. Under this approach the current Light Aircraft Option (LAO) would also cease. Question #4: Should pricing for low volume general aviation operators be based on a fixed price tiered arrangement? If so, what tiers should apply? 6 Pricing of TN Services 6.1 Criteria for assessing pricing options Airservices has previously and in discussions with customers/stakeholders proposed the following criteria in assessing charging models: i. Prices should encourage economically efficient resource allocation and, as such, should have a strong relationship to the cost of providing services; ii. Prices should be equitable; and iii. Prices should be simple and transparent and facilitate planning by end users. An analysis of the implications of these criteria is set out in the sections below, covering the relevant aspects of efficiency as it relates across all TN services locations and for closely located airports. Equity or fairness in a TN pricing context has meant different things to different people and examples of these arguments is set out in Section 6.5, and the notion of simplicity and transparency is addressed in Section 6.6. To undertake these analyses, it is important to first understand Airservices TN services cost drivers. Page 10

11 6.2 Cost drivers for TN services TN services are required at a given location to meet appropriate levels of safety. The Civil Aviation Safety Authority (CASA) makes this decision following an assessment of the complexity of the traffic at a given airport. CASA provides directions to Airservices on the level of services required at a given location. Therefore, the drivers of costs that Airservices incurs are in effect the factors that CASA has had regard to in arriving at its decision. The need for TN services is not strictly driven by numbers of aircraft movements or passengers, but will reflect the risks associated with the mix of aircraft at a location, the topographic and climatic attributes of an airport and the potential peak demand for landings at the airport. CASA incorporates all of the above information into a risk assessment model for a particular airport and uses this to determine the required level of TN services to mitigate risks of accidents. Ultimately, it is CASA s assessment of these interrelated factors that determines the level of service which then drives Airservices costs. Similarly, it is the ongoing assessment of whether Airservices is meeting those obligations that determines whether Airservices needs to devote more or less resources to TN at a given location. Accordingly, the drivers for TN services, and the particular class of services, that are required are complex and will differ from location to location. More recently, this has been compounded by the broad mix of aircraft now utilising regional airports. However, other things being equal, the higher the traffic volume the more likely it is that a higher standard of service will be required. Once the class of service to be supplied has been determined, it is still the case that Airservices costs will vary with the amount of traffic, albeit in much smaller stepped increments. As traffic levels increase at the new location within that class of service, there will be a need to increase staffing levels and supporting equipment as more supervision is required to control the larger volume of traffic. Conversely, it is also important to recognise that there are significant fixed costs associated with providing TN services which are not traffic sensitive. For example, tower and equipment maintenance costs are incurred irrespective of the level of traffic landing at the airport. Many of these fixed costs will not be avoided even if TN services ceased to be supplied at a location. For example, the capital costs associated with building a tower at a given location are sunk in the sense that a tower has little or no use other than in providing TN services at that location. The same is true for much of the equipment installed in the towers. Once installed at the location this equipment has limited or no economic value other than its use in that location. The following graphic summarises the relationship between traffic and costs as described above. Page 11

12 Figure 1: Graphical illustration of how costs vary with traffic Total TN costs CASA determines Class C service required CASA determines Class D service required Traffic at location Figure 1 demonstrates that below a certain level of traffic volume at a location, TN services are not required and Airservices incurs no costs at that location. However, at a certain point there is a step change in costs when a new Class D tower service must be provided (this may occur at different levels of traffic at different airports). At this point Airservices is required to incur significant fixed (and often sunk) costs to establish the service at that location. Further growth in traffic beyond that point has a positive but smaller impact on costs at the location reflecting the need for Airservices to provide more air traffic controllers at busier Class D locations than at less busy Class D locations. 1 A further discontinuity occurs at the point at which traffic levels raise the risk levels to a point where a Class C aerodrome/approach service is required at which point Airservices must invest in more equipment and a higher ratio of air traffic controllers to aircraft movements. Costs then increase relatively more smoothly with traffic and at a higher rate of increase. The higher rate of increase in costs to traffic at Class C airports reflects the fact that, for additional aircraft, there is a requirement for more surveillance, supervision and coordination by air traffic controllers and supporting equipment. 6.3 Efficient pricing of TN services across all locations Economic efficiency requires Airservices to both: i. signal to customers the cost that their activity imposes on Airservices. The cost that their activity imposes on Airservices will be equal to either: incremental costs - the new costs that Airservices will incur if customers increase their activity; or 1 While these cost impacts are drawn as a continuous upward sloping line, in reality this relationship will be stepped. For example, when staffing requirements move from one air traffic controller at a time in the tower to two air traffic controllers there will be a jump in the level of costs rather than a smooth increase in costs. Page 12

13 ii. avoidable costs - the existing costs that Airservices will avoid if customers reduce their activity. recover fixed costs (i.e. non incremental/non-avoidable costs) in the least distortionary manner. Pricing on the basis of incremental/avoidable costs sends the signal to users that they should only undertake (or continue to undertake) a certain activity if they value that activity at more than the costs that it imposes on Airservices. However, not all costs are incremental/avoidable. Fixed costs must be incurred irrespective of the level of activity and will continue to be incurred for all feasible levels of activity. For example, the capital costs associated with TN towers at a given location are sunk and will not be avoided even if activity at that location fell to zero. In order to recover these fixed, or unavoidable, costs it is likely that Airservices will have to set a price that exceeds the incremental/avoidable cost. At low volume locations, this may send 'too strong' a signal to customers that they should reduce their activity levels (i.e. the fixed cost component of a price may exceed the user s value of the service). In this case as with Aviation Rescue and Fire Fighting (ARFF), the ACCC referred to Ramsey-Boiteux efficient" pricing in relation to the recovery of common costs (which are a type of non-incremental/non-avoidable costs). The Ramsey-Boiteux method of cost allocation involves allocating common costs between users with the objective of maximising efficiency. In circumstances where demands for services produced by a multi-product monopolist are independent (i.e. where the cross-price elasticities of demand are zero), allocating common costs in inverse proportion to various users price elasticities of demand will maximise economic welfare. See J Vickers, Regulation, Competition and the Structure of Prices, Oxford Review of Economic Policy, Vol 1. 2 One of the implications of this rule is that, if demand for all services has the same price sensitivity then all costs that are not recovered from incremental/avoidable cost based pricing are most efficiently recovered through a constant absolute mark-up over incremental/avoidable cost. In the same paper, 3 the ACCC referred to a Productivity Commission report that argued large airports may have demand that is less price sensitive than smaller airports. However, Airservices is unaware of any robust evidence that this is the case, and as noted above, even if this is the case, what magnitude of differences there might be across airports is hard to quantify. In this context it is relevant to return to a consideration of Figure 1 above and its implication for efficient pricing. For the reasons described above, pricing will be most efficient if it is high when the incremental cost of extra traffic is high (and low when the incremental cost of traffic is low). We repeat Figure 1 above but illustrate the points at which incremental costs of traffic are highest. 2 3 Australian Competition and Consumer Commission, Preliminary View: Airservices Australia Draft Price Notification, November 2004, p. 77, footnote 33, Ibid, p 77. Page 13

14 Figure 1: Graphical illustration of how costs vary with traffic Total TN costs Incremental cost of traffic very high Incremental cost of traffic relatively low Traffic crosses threshold for Class D service Traffic crosses threshold for Class C service Traffic at location It can be seen that incremental costs are highest immediately before traffic crosses the threshold for a new service (or a new level of service) to be provided at a location causing Airservices to incur substantial fixed and sunk costs. After that point and once Airservices has incurred the relevant fixed costs, incremental costs associated with traffic fall substantially (but are still positive). This suggests that the most efficient pricing would involve the highest prices prior to the introduction of a new service. While somewhat counter-intuitive, the economic logic is that efficient pricing is intended to send cost signals to consumers so that users who do not value the service sufficiently can alter their behaviour and the costs can be avoided. The appropriate time at which to send this signal is before fixed and sunk costs are incurred. For example, by the time Airservices has followed regulatory requirements and has built a Class D tower at a location it is actually inefficient to signal those costs in prices to end users because a reduction in traffic will not allow Airservices to avoid those costs once incurred. This is highly relevant given that CASA has recently determined that Airservices should introduce Class D services at a number of locations. One location is Broome where the full location specific price (based on 2008/09 landings) is estimated to be in the vicinity of $18 p/tonne. This price would cover all the incremental/avoidable and fixed costs. Were Airservices to implement this price then TN prices at Broome would go from $0 to around $18 p/tonne in a single step. However, Airservices can only charge for TN after it has committed to equipping a tower at Broome, train new staff or relocate existing staff to Broome etc. These costs are included in the $18 p/tonne charge but are not avoidable if fewer aircraft land at Broome. In fact, given that Broome will have a basic level of staffing the only manner in which fewer flights would reduce Airservices costs would be if CASA revoked the need for TN services to be supplied. This could give rise to the potentially highly inefficient cycle of events where: i. The cost of landing at a location are low because TN services are not supplied; Page 14

15 ii. iii. iv. Low costs attract higher traffic such that CASA determines TN services are required; This leads to high location specific prices at that location; This leads to lower traffic such that CASA determined TN services are not required; v. The cycle starts again at i above. This is an extreme example, and it is not possible to determine the point at which prices are so high that demand is impacted in this way. To manage this risk, Airservices has adopted price capping at high cost locations, with the caps moving by 10% per annum until full cost recovery is achieved. An illustration of this is the potential problems with full location specific pricing for TN services at Camden airport. Camden is the smallest airport (by volume) with TN services and has, unsurprisingly, the highest location specific costs owing to the need to recover fixed costs over a small volume of traffic. Prices at Camden based purely on location specific costs would be in the vicinity of $270 p/tonne landed. However, the highest price charged for TN by Airservices today is $12.69 p/tonne landed at any location. This price cap is in place in recognition of the fact that an immediate shift to location specific pricing would cause a sudden and severe price increase at a number of locations and prices materially higher than this would be counterproductive. That is, materially higher prices would distort traffic and there may be no reduction in the overall costs being incurred by Airservices. This is an example of where location specific pricing, which does not differentiate between fixed and variable cost recovery, may actually send too strong a price signal to users of small airports with the effect that landings at those airports are discouraged even though the variable costs of accommodating those landings are relatively small. The threshold efficiency implication then is whether the price sensitivity of TN services to demand (up and down) at a location is sufficient to support an argument that they are avoidable and therefore should be charged on a location basis. Following from this is then a question as to how the fixed or non-avoidable costs should be recovered. 6.4 Efficient pricing for TN services at closely located airports In each major capital city there is generally a single major airport at which the larger passenger aircraft land and one or more smaller airports where smaller aircraft land, generally GAAP style airports deemed to be in the basin. These smaller aircraft may be serving passengers in rural areas (i.e. towns from which there is insufficient demand to travel to/from the capital to justify the use of large capacity planes), commercial cargo or training and/or recreational flights. For example, in Sydney, Sydney Airport serves the larger aircraft and Bankstown and Camden serve smaller aircraft. In Melbourne, Melbourne Airport serves the larger aircraft and Essendon and Moorabbin serve the smaller aircraft. The existence of the smaller closely located basin airports serves to reduce costs at the larger airport. This is true in general and also specifically for Airservices. As a general observation, it is unlikely that the aircraft traffic at smaller basin airports could be accommodated at the major airport without creating congestion and/or the need for significant investment in the major airport. In terms of Airservices TN costs, shifting traffic from the smaller basin airports to the major airports would likely result in a net increase in Airservices TN costs. This is because TN costs per aircraft are a function of the complexity of traffic at the airport and the CASA service level requirements at the airport (which also become more stringent the more Page 15

16 complex the operations at the airport). It is also the case that Airservices would not avoid its fixed costs at the smaller basin airport if traffic at that airport was reduced. In fact, even in the purely hypothetical event that all of the traffic at smaller basin airports shifted to the major airport, Airservices would still not avoid its sunk costs at the smaller basin airport (e.g. the cost of the Tower and associated location specific equipment). This means that it will be counterproductive for Airservices prices to promote the shifting of traffic from smaller to larger airports in the basin. Moreover, even if traffic could not shift in this fashion in the short run (e.g. because the major airport was already capacity constrained or there were administrative rules preventing certain types of aircraft from landing at the major airport) there may still be equity concerns about charging materially higher prices at the smaller airports in a basin. This is because the reasons for administrative rules sending smaller aircraft to the smaller (higher unit cost) airports in the basin relate to a desire to lower cost overall. It may therefore be considered unfair or inequitable if the smaller aircraft operators should suffer a materially higher price as a result. To date Airservices pricing in basin locations has been capped at the maximum price it charges anywhere (currently $12.69 p/tonne). Were these charges to be based on a purely location specific basis they would generally be much higher (in some cases above $30 p/tonne). Rather than a simple price cap one option might be to pool all costs in the basin and to recover this on the same basis from all traffic in the basin, with the exception of aircraft flying circuits that would be charged a price that is double the price of other traffic. This reflects an estimate of the additional costs circuit flights impose on the provision of TN services due to the fact that aircraft flying circuits spend longer time in controlled airspace than do other flights. This has been included as one of the modelled options above. 6.5 Equity in TN services pricing Equity or fairness in a TN pricing context has meant different things to different people. An often discussed concept of fairness in previous pricing consultation has centred on the concept of user pays. This has been applied by some to TN pricing by arguing that only the users of TN services at a particular airport should pay for the costs of providing TN services at that airport. On the other hand, others argue that the use of TN services does not arise out of an explicit voluntary demand by users at a particular location. Rather, as Airservices incursion of TN costs is determined by regulations with a broader community benefit aspect as its basis, they argue that a location based user pays concept of equity has less weight and that fairness in this case involves pricing in a broadly similar fashion for broadly similar services. To illustrate, consider Tamworth and Rockhampton as case studies. Tamworth has much smaller volumes of traffic than Rockhampton (around one quarter the volume). As a result, if fixed costs at Tamworth were to be recovered only from landings at Tamworth then prices at Tamworth would be much higher than at Rockhampton (around four times as high). Under an interpretation of user pays fairness this would be considered fair. However, the alternative construction of fairness is that if two aircraft receive essentially the same TN service from Airservices and if they impose essentially the same incremental costs on Airservices (i.e. it is a regulatory requirement that drives the service cost) then they should both pay the same price. Under this construction of fairness the price for an aircraft landing at Tamworth would be the same for the same aircraft landing at Rockhampton. Page 16

17 Question #5: What are the equity and efficiency implications of: (a) charging operators at a particular location that particular location s cost; or (b) charging operators the same price for the same service regardless of location? 6.6 Simplicity and transparency in TN pricing It is important that any pricing methodology be transparent, easily understood by stakeholders and easy to administer. If this is not the case and if there is room for material discretion when setting prices then it will be more difficult for stakeholders to understand and contribute to the process. Moreover, there is greater likelihood of disputes between Airservices, the ACCC and stakeholders. At face value, current TN prices are relatively simple and transparent as the charge is based on the MTOW of an aircraft for each full stop landing and the charges are cost-reflective for the location. Question #6: Is Airservices current TN pricing structure transparent, easily understood and easy to administer? Page 17

18 7 Attachments Consultation Program ATTACHMENT 1 Airservices will be conducting public consultation forums on the content of this Discussion Paper at the following locations: CITY DATE TIME ADDRESS Sydney 28 th April 15:30 Cairns 29 th April 14:00 Brisbane 30 th April 13:30 Adelaide 4 th May 9:00 Perth 4 th May 15:00 Melbourne 5 th May 13:30 Stamford, Sydney Airport Cnr Robey and O'Riordan Street MASCOT (Meeting is in the Kingsford Room, contact on the day is Paul Logan ) Control Tower Complex, Ground Floor Mick Borzi Drive, Cairns Airport. (Buzz at gate. Meeting is in the Video Conference Room, contact on the day is Leanne McVinish ) Air Traffic Services Building Airport Drive (Take the Domestic Terminal exit onto Airport Drive, building is at base of control tower, buzz at gate. Meeting is in the Burdekin Room, contact on the day is Paul Logan ) Operations Building Tapleys Hill Road Adelaide Airport West Beach (South of Harbour Town Shopping Centre, buzz at gate. Meeting is in the Video Conference room, contact on the day is Rick Haddad ) Air Traffic Services Centre Kleinig Avenue Perth Airport (There is a call box at gate. Meeting is in the ATC large training room and contact on the day is Mike Hoare ) Air Traffic Services Centre Tower Rd, Melbourne Airport. (Buzz at gate. Meeting is in the Melbourne Lounge Conference room and contact on the day is Fran Dichieri ) Alternate contact for all meetings is Paul Logan on Please RSVP to Robyn Gargan on (02) or robyn.gargan@airservicesaustralia.com if you would like to attend. Page 18

19 Regulatory Framework for Price Setting ATTACHMENT 2 Airservices prices are subject to review by the ACCC under Part VIIA of the Trade Practices Act Under these arrangements the ACCC has regard to maintaining investment and employment; discouraging entities from using market power to set prices; and to discourage cost increases arising purely from wages growth. Consideration of these criteria is subject to any direction issued by the government. The ACCC have advised that in interpreting these provisions and obtaining an appropriate balance, they will assess the relative economic efficiency of any proposed prices. In endorsing the current pricing agreement in 2005, the ACCC provided the following views: The ACCC does not agree with views expressed by some parties that Airservices should revert to a network pricing approach. The ACCC considers that this would be unlikely to advance either efficient or equitable outcomes. Network pricing is more likely to exacerbate productive inefficiency because the costs of providing services are not targeted directly to those using the service. In addition, there is an equity argument against customers being required to pay more than the cost of providing the service to them. In response to submissions from the larger passenger airlines, the ACCC analysed whether Airservices pricing structure entails a cross-subsidy in the pricing of TN, ARFF and en route services; and between locations in the pricing of TN and ARFF services. While Airservices is not currently subject to competition for its regulated services, the ACCC considers that the question of cross-subsidy is relevant in examining the reasonableness or fairness of prices. The ACCC found that there appears to be a degree of cross subsidisation of TN and ARFF services at regional and GA locations by en route and TN services at radar locations. The ACCC will continue to monitor this situation, particularly if there is a likelihood of competition being introduced to Airservices services. 4 In other words, it is generally considered to be consistent with efficient pricing for costs to be recovered in prices for services at the location where those costs have been incurred. However, the ACCC has also recognised that where costs are fixed (i.e. do not vary with traffic at a location), reflecting these costs in higher prices has the potential to unduly discourage demand for services at that location. That is, including fixed costs in prices could send an economic signal to users that their traffic has a greater impact on Airservices costs than it really does. In this context, the ACCC has recognised Airservices need to achieve cost recovery while minimising the attendant distortion to allocative efficiency. 5 One implication of this is that if recovering fixed costs at small airports were to lead to high prices that are materially above the true traffic sensitive costs at that location then it may be efficient to spread the recovery of those fixed costs across a number of other locations. 4 ACCC, Final decision on Airservices Australia price notification, December 2004, p Ibid, p.110. Page 19

20 International Guidance and Practice ATTACHMENT 3 Airservices current approach to price setting adheres to International Civil Aviation Organisation (ICAO) principles and recent pronouncements on Policies on Charges for Airports and Air Navigation Services (Doc 9082) for non-discrimination, cost-relatedness and transparency of charges, as well as consultation with users. There are a number of key recommendations made by ICAO on how air navigation services should be priced, including: Foreign-based international carriers should be treated the same as domestically based international carriers in pricing and access to aeronautical services; In the development of specific prices, the cost of services to be shared is the full cost of providing the services, including appropriate amounts for cost of capital, depreciation of assets, and the costs of maintenance, operation, management and administration; Air navigation services may produce enough revenue to exceed all direct and indirect operating costs and so provide for a reasonable return on assets including a contribution to necessary capital improvements; An equitable allocation of the costs of air navigation services among aeronautical users should occur, and that costs are allocated so that no user is burdened with costs that are not attributable to it. This equates to user pays ; Aeronautical charges should not be imposed in a way that discourages the use of facilities and services necessary for safety, or discourages the introduction of new aids and techniques; Any charging system should take into account the cost of providing air navigation services, the effectiveness of the services, and the financial situation of the users and the providers; There should be a gradual progression to full cost-recovery; and Charges can be based on the aircraft weight, but the weight scale should take into account, less than proportionally, the relative productive capacities of the different aircraft types concerned. Whilst there is some variability around the world, in practice international charging for TN services is largely weight based, and generally appear to target the recovery of aerodrome and approach costs associated with the location at that location. Page 20