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Dec 21, 2016

Govt ready to seize opportunity to end Sydney's airport monopoly

For tens of million of abused Sydney Airport users, could sweet revenge be at hand?

A simplified guide to the economic relevance of Badgerys Creek
A simplified guide to the economic relevance of a Badgerys Creek airport

Commentary Back in 2002 when PM John Howard and his treasurer Peter Costello ditched free market principles to sell the publicly owned asset of Sydney Airport into the gentle and caring monopoly control of a Macquarie Bank consortium for $5.6 billion, a seemingly eternal orgy of screwing every last cent out of the airlines, their customers and some on site retailers set in at Australia’s major air travel gateway.

Could it be that it is about to be ended? The Sydney Airport Group which now owns the main, and desperately inadequate and outrageously uncompetitively priced Kingsford Smith Airport is making a lot of noise in the general media about how it might not use its first right of refusal to build and operate the second Sydney basin airport at the Commonwealth owned site at Badgerys Creek in Sydney’s west.

Given the arrogance and indifference of Sydney Airport to criticism of its treatment of airport users ever since who cares? It was made about as clear as it can be by the Turnbull Government yesterday that the new 24 hour international and domestic airport would up and running by 2026 with or without the participation, to the tune of around $5 billion, of Sydney Airport Group.

The government is reported to have withdrawn an offer of an Adani, or a $1 billion loan, to Sydney Airport to help the poor struggling dears build the Sydney West airport and thus ensure that there would never be competition between two airports serving the greater Sydney region, and its 7-8 million people by the middle of this century.

This is a golden opportunity for Sydney to escape from the cavalier mistakes of Howard and Costello back in 2002. There really is no such thing as an enduring public benefit from the sale of natural monopolies to private owners without imposing a set of iron clad conditions on future pricing, and when it came to Sydney Airport, both the Coalition and its Labor successors adhered to a so-called ‘light handed approach’, which basically told the public to suck-it-up.

However it is probably unlikely that Sydney Airport will walk away from building and operating Sydney West.  The shock of the cultural change of having to cede pricing power to a competitor which in time might rival or eclipse it in size might prove too unpalatable to swallow.

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20 thoughts on “Govt ready to seize opportunity to end Sydney’s airport monopoly

  1. Dan Dair

    When SAH decides, in the next few weeks, what it actually wants to do at Badgery’s Creek, we might have a better idea of how soon we can expect the new airport to be open.

    If SAH don’t want it, a new owner will want it operational as soon as is humanly possible, so that they can start to generate business & begin to get a return on their investment, be that the cost of construction or the cost of their lease.? (The Wagners showed that it is possible to build a comparable-sized airport, from breaking-ground to operational in around eighteen months. Up country (in Toowoomba) that build only cost them under $200 Million)

    If SAH take-up their option, I don’t expect it to be actually operational before 2028/9, a couple of years after the current plan. I’ve no doubt that SAH will put as few resources into the project as they can get away without, as well as suffering countless setbacks & ‘unforseen’ problems during the construction process.?

    If SAH are finally awarded this airport contract, the Competition and Consumer Commission should be all over it.?
    Two airports, one owner, zero competition.!

    1. Cantbeeffed

      The Wagners are also hitting the reality of their operation of a regional airport, with their airport manager now having ‘moved on’, with John Wagner now taking over that role. Not sure if they have either the financial or business appetite to do Sydney West.

  2. Giant Bird

    As a Melbourne resident I want to see SAH get it. They will deliberately delay and screw it up, almost but not all the way to the point that it gets taken off them. As a result Melbourne will get lots more international connections that would otherwise have gone to Sydney. Except for Qantas which will slowly die trying to be a Sydney concentric international airline despite the writing on the wall for years that is not where the best growth would be. However as an Australian I hope MAH declines. I hope the government makes the conditions so tough as to minimum facilities, how much the operator has to pay for and penalties for missing the deadline that MAH walks away. For a government corporation to build it and sell later on would be the best outcome for all Australians.

  3. Mark Skinner

    Sydney Airports will take up the option, then charge as much as they want to cover the cost and profit.

    All the government is doing is huffing and puffing to make it look good in the media.

    1. Dan Dair

      Nark,
      I agree with you.
      Big talk, to make them look tough for Mr & Mrs Voter.

      In 6 months time, no-one who isn’t directly involved will give a stuff.
      And in 10 years time when it still isn’t operational, none of the pollies involved now will be still around to catch-it at the polling booths anyway.?
      (unless they’re still around on the board of SAH, of course.!!!)

  4. comet

    It was no cavalier mistake by Howard and Costello.

    They did it deliberately!

    They intentionally stuffed up Sydney’s aviation industry for decades to come. They only thought about their own term in politics, and the reward they would get though political ‘donations’.

    1. Dan Dair

      Comet,
      “Howard and Costello….did it deliberately!
      They intentionally stuffed up Sydney’s aviation industry….”

      I think that’s very harsh.!
      I don’t think for a moment the future of any part of Australia’s aviation industry crossed their minds when they were busy colluding in that scandal.?
      (I refer you to my earlier comment about pollies & the way they consider their long-term actions)

    2. michael r james

      They intentionally stuffed up Sydney’s aviation industry for decades to come. They only thought about their own term in politics, and the reward they would get though political ‘donations’.

      First, I think they just followed their hero Thatcher: if London could create a monopoly of its three airports (two of which are regularly #1 and #2 international airports in Europe) then they figured they could get away with it.
      Second, given how Max went from Howard’s head of PMC instantly to CEO of SAC, it is inconceivable that this wasn’t in the works for ages. This was up there with Obeid practice, except more clever I suppose (being technically not illegal). We really need solid law (not flimsy guidelines that allow Andrew Robb to say “just trust me”) about this kind of thing. Heck, even Trump is saying that no federal employee can go work for any company their department had supervision over, for five years.

  5. Jacob HSR

    The share price of Sydney Airport Holdings Ltd fell 6.8% today.

    You might want to keep an eye on the share price Ben.

  6. cud chewer

    I’m reminded of the number of times that Woolworths clings to two locations in the same town, purely to prevent a competitor moving in.

    I’d love someone to convince me that Sydney Airports won’t take up the option.

    1. Dan Dair

      The difference is that generally, people aren’t dissatisfied with Woolworths.
      Even if there’s two of them selling an identical product range, you’d still probably be happy to shop in either store.?

      How many people (or airlines) think that KSA is offering them value for money at any point in their progression through that facility.?
      How many people imagine that if SAH own BCA, that situation would improve things in any way.?

      1. michael r james

        Dan, purhleese. What have people got to do with anything?
        Cud Chewer is correct, as I have been saying for … at least 5 years. It’s a bit of a no-lose proposition for SAH. If nothing else they will manage to delay it by a another few years. But I doubt they will risk their own money; they’ll come up with some fiendish clever separate ownership structure (with MacBank taking huge “management fees” as usual; put Lucy on the board!) to raise the money required. If it all collapses after a few years, SAH will not be out of pocket and some of their senior execs and of course MacBank will have skimmed off a few hundred million in fees etc; the only losers will be the suckers who subscribed to this new investment vehicle.

        1. Dan Dair

          MRJ,
          I agree completely that it’s a ‘no lose situation’ for SAH.
          Much as I would like them to pass this up, I really can’t see them doing that.

          However, my point was only that people don’t mind two Woolworths stores in the same town because people generally like Woolworths stores.
          The same can’t be said of the business practices of KSA.

          If SAH are allowed to ‘own’ BCA, the deal should be referred to the Competition & Consumer Commission.
          SAH have a monopoly of the only international airport in Sydney at the moment.
          They should not be allowed to have a monopoly of the two Sydney international airports.

          1. michael r james

            Dan Dair wrote:

            If SAH are allowed to ‘own’ BCA, the deal should be referred to the Competition & Consumer Commission.
            SAH have a monopoly of the only international airport in Sydney at the moment.

            As the boss of the ACCC wrote in today’s paper, the time to have dealt with such issues was when the LNP privatized KSA. As he said, they threw in this monopoly right (to the entire Sydney area) so as to maximize the returns from the privatization (and I suspect because of nefarious, if not strictly illegal, manipulations by certain vested interests: “Competition that wold be of lasting benefit to the Australian economy was traded off for a one-off monetary gain.”

            Exactly the same sort of ridiculous devils bargain was done when Telstra was privatized and we continue to suffer for it, and continue to pay many times over whatever pennies it brought the government of the day.

            Anyway, you should stop talking about the ACCC doing anything. Rod Sims wrote today: “SAG has first right of refusal to own Sydney’s second airport; that can’t be taken away.”

          2. Dan Dair

            Michael,
            The Competition Commission CAN review the status-quo regarding SAH & the ownership of a second Sydney airport irrespective of what the COO says.

            To assert that what was essentially a private deal (not under the table, but equally not a deal where every line was highly scrutinized in the media) from fifteen years ago, should prevent the ACCC from acting on it smacks of cowardice or some kind of ‘pay-off’.?

            The commission can investigate anything at any time if it believes it’s appropriate.
            They may find that there’s no case for action,
            but equally, they may find that the wording in a contract is anti-competitive.
            Irrespective of what that contract says, or who the signatories are, if it’s anti-competitive, the ACCC can rule against it.
            (that was essentially what happened when the UK MMC ruled that the privately but completely legally-owned British airports authority MUST sell two of the three London airports they controlled.

            The ACCC have the power to change any business-situation, law or contract which is anti-competitive and not in the interest of the nation.
            Whether they use that power wisely, is a totally different matter.?

  7. ghostwhowalksnz

    Any other operator will want either a big contribution to build costs or an ongoing subsidy for the first 10 years. Macquarie would have worked out the ‘opportunities’ in its bid as deeply as the build costs and the government can hardly want the operator to go bust when 75% complete( which would be possible unless they extremely deep pockets)
    These sort of cash cow investments have very high rates of return which are expected from day one, not for them the very high risk like mining.

    1. Dan Dair

      Ghost,
      I don’t disagree that some kind of interim-funding is probably appropriate.
      I do think that there are options which could avoid the banks dipping their sticky-fingers deep into the pot,
      such as the government builds it & the new leaseholders lease it on an annual fee basis, once it’s operational. (That fee to be on a percentage of annual turnover or one twenty-fifth of the build-costs plus annual interest fee, assuming a 50 year lease?)
      Even if SAH take it & try to smother its growth, the nation will still get repaid in full.

      Or the government could offer tax-breaks for the operating company AFTER the airport is operational. Aside from an annual franchise fee, the owners could perhaps pay no business tax until the value of the construction costs have been matched.? (that way, no cash changes hands on the construction & the new owners would claw-back those tax-breaks only by ensuring the new airport is a success.?)

      There’s the old chestnut about what the Wagners built in Toowoomba. How quickly they completed it & how little (comparatively) it cost
      &
      there are bound to be other interested parties at home & around the world that would be very interested in doing a deal to ‘own’ Sydneys’ second airport.

      I don’t think the government really have to ‘sweeten’ the deal.
      I’d imagine there to be a big queue of interested parties if SAH don’t take it.?

  8. michael r james

    Dan Dair wrote:

    The commission can investigate anything at any time if it believes it’s appropriate.

    Maybe but it is irrelevant. It is perfectly clear from Rod Sim’s article in yesterday’s national paper that he, the head of the ACCC, has zero intention of doing anything. When do they ever act in our interests? Look at Telstra and Transurban. Even Terry McCann agrees in today’s Australian:

    The sale of Sydney Airport in 2002 was arguably the most inept thing the Howard-Costello government did in its 11 years in office. It is indisputably the most inept privatisation we have seen from any government, federal or state.

    and:

    In its latest half-year Sydney Airport generated a staggering gross profit of 81c in every revenue dollar. No other business comes close. Even Telstra at the very peak of its fixed-line telco monopoly only made around 50c in the revenue dollar. Toll-road operator, our down under ‘‘giant vampire squid’’ Transurban, is perhaps the closest, generating 73c of gross profit out of every revenue dollar.

    The main omission by McCrann is that what he calls a Howard “error” was far worse. As clear as day this was an inside job. If we probed I am sure we would find some relationship between the News Ltd author and the guilty party, who doesn’t even get mentioned in his story.

    Incidentally I suspect SAH will still huff and puff, and in the end the government will be forced to somehow bribe them–probably half a bill or maybe more–to get them to walk away without disrupting and delaying the new airport for years longer. Indeed I suspect this is what a lot of the press coverage and ministerial blather is all about: it will be reported as a good deal: a mere billion, and “saving” the government $5bn in fully subsidizing continued ownership by SAH. Of course the only reason the government is doing this at all is that their budget is in such a mess that it would look more than unusually atrocious and incompetent to be handing out such gobs of our money to a privatized entity … In good times they would have done it without thinking twice.

    Another useful point by McCrann: “the (Kerry) Packer Rule. It was long clear that if Packer was selling something, it was not wise to be the buyer. We should now know that if Macquarie is buying, you shouldn’t be selling. “

  9. Dan Dair

    Hi Ben,
    Have you got any updates on this yet.????

    Was there ever really a four-week deadline.?

    1. Ben Sandilands

      Hi Dan,
      This is the quote from the post you were referring to:
      QUOTE: The existing airport’s owners have at most nine months in which to agree to the terms of the ‘notice of intent’ prior to entering into a binding contract. Minister Fletcher made it clear the government wanted an answer sooner than that. If they declined the offer the Commonwealth, which owns the Badgerys Creek site, would build the the new airport itself, or with an alternative private consortium. UNQUOTE

      From memory, I may have erroneously referred to a four week deadline in the first version of that earlier post but corrected it when it didn’t appear in a subsequent transcript of an interivew.

      There is no update on this as yet. Given current news concerning the Sussan Ley story I strongly suspect the government’s collective mind is elsewhere. But when it makes a move, it will be reported.