IN FOCUS: Brisbane deadlock ignites airport charge debate

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Three events are coinciding at Brisbane, one of Australia's busiest airports. Construction has started on a new parallel runway; the airport operator has raised fees to help pay for it; and the airlines are baulking at the charges. Similar disputes have played out elsewhere across the globe, but here the issues are being pushed to their limit.

Brisbane airport lies next to a bay on a wooded estuary. It is well away from potentially troublesome residents, but it sits on spongy land. The site will only bear weight after many bargeloads of sand are dredged out of the bay, hauled in, dumped and allowed to settle. This extra preparation means a new runway will cost almost twice as much and takes almost twice as long to build as one on solid ground. It will not be ready for eight to nine years.

Operator Brisbane Airport (BAC) is raising 75% of the A$1.3 billion (US$1.33 billion) cost from loans, retained earnings and capital contributions by its shareholders - including a Schiphol Group subsidiary that owns 19%. It is asking airlines to pay the rest through higher landing fees. These extra fees started in October at A$0.35 per domestic passenger, and will step up over five years to a maximum A$3.15 per international passenger. BAC calls these increases modest and claims it is following the traditional funding model for Australian airport infrastructure.

Airlines disagree. A few foreign carriers are paying the increase, but domestic airlines have refused. Qantas is especially vocal.

Alan Joyce, Qantas's chief executive, insists that BAC should fund the new runway itself and charge airlines only when they start using it. He compares this to Apple asking its customers to pay now for an "iPhone 10" they will not receive for another decade. "Qantas has never been asked to pre-fund a large piece of infrastructure like this, so far out from when we will see the benefits of the investment," he says.

Australian and International Pilots Association president Barry Jackson, who finds rare common ground with Joyce in this dispute, adds: "Eight years is far too long a lead time. That's the sort of timeframe that government usually looks at."

War of words

Warren Bennett, executive director for the Board of Airline Representatives of Australia (BARA), criticises this approach. "BAC wants to start full cost recovery on the runway right from the start of the sand-dredging," he says. "Airlines operating to Brisbane now are expected to pay for an asset that will benefit airlines - possibly different ones - in eight to nine years' time."

So far, no one has blinked. Both sides have threatened to take the other to the Australian Competition and Consumer Commission, but the agency is discouraging them. Bennett doubts BAC will sue airlines to collect the unpaid charges. If that were its intent, he says, "they probably would have done that already."

Instead, BAC threatens that it will delay the sand-dredging until all airlines start paying the extra fees. In short: no payment, no runway.

Brisbane's stalemate highlights a key issue in airport infrastructure funding: how far ahead should airlines have to pay? Even Bennett concedes that some advance payment is acceptable. Australian airports and airlines typically agree to five-year pricing plans. These may include some pre-funding of capital projects that will become operational within the five years. Airlines accept this, he explains, because the pre-funding is limited and they obtain price certainty in return. But BAC's insistence on charging from the outset on a project with such a long lead time pushes airlines too far. "In other parts of the world," Bennett argues, "whole bloody airports get built in that time."

This is one of several tough issues in financing airport infrastructure. How much of the total cost and how quickly should airlines be asked to pay? Last year, for instance, New Delhi's Indira Gandhi International airport proposed a 340% rise in airline fees to help fund a new terminal and third runway. It backed down after a huge outcry. Another common complaint is over alleged extravagance. Recall Toronto Pearson's Terminal 1, which airlines sardonically call "the Taj Mahal".

A lack of clear standards fuels these disputes. In Australia, for instance, aeronautical charges are based on "pricing principles" established when the government privatised airports. Each airport has separate financial parameters. According to Bennett, "it's a complicated process". This leaves plenty of room for argument.

Other sources offer little guidance. Airports Council International (ACI), for instance, does not explain how member airports should charge for capital improvements. It praises its group, representing over 1,600 major airports, for managing to meet the growing demands of commercial aviation over two decades, while holding user charges at "a stable 4% of airline operating costs". ACI's manual acknowledges the need for consultations, but stresses that these "are different from negotiations and do not require an agreement between the parties". ACI insists that airport operators retain their "autonomy and freedom to set charges after considering the information obtained".

ICAO does recommend standards. It is not a global policeman, but its recommendations are respected - if not always followed. The latest version of these recommendations on airport charges addresses infrastructure funding. But it is frustratingly broad. In what seems a straight-forward warning that might apply to New Delhi and its sharp rises in fees, ICAO declares: "To avoid undue disruption to users, increases in charges should be introduced on a gradual basis." But then it compromises this clarity by adding: "However, it is recognised that in some circumstances a departure from this approach may be necessary."

On issues applicable to the Brisbane dispute, ICAO is equally vague. It states that "pre-funding of projects through charges should not be used to fully recover costs in advance".

Airlines might argue that this is what Brisbane airport is doing. Brisbane would reply that it is only asking them to pre-fund 25%.

Whatever its pre-funding policy, ICAO qualifies it by conceding that pre-funding "may be accepted in specific circumstances, after having allowed for possible contributions from non-aeronautical revenues, where this can assist in financing long-term, large-scale investment, provided that strict safeguards are in place."

ICAO then lists four such "safeguards". The one most pertinent to Brisbane is that airports may ask airlines to pre-fund projects "for a limited period of time" when this would smooth the transition from pre-project fees to the new fees that will apply once a project is finished.

But Brisbane's goal seems more about recovering part of its new runway's cost during construction, rather than smoothing the transition to higher fees eight to nine years from now. On the other hand, modest increases over a longer period are more consistent with ICAO's preference for bringing new charges in on a "gradual basis". In short, airports and airlines both can find something in ICAO's policies to support their arguments.

American arguments

North America remains an island in this sea of uncertainty. ICAO policies are not an issue in Canada and the USA. Instead, disputes are about the mix of passenger charges and government grants to fund airport projects.

For years, federal governments in both countries paid for airport infrastructure. But in the early 1990s Canada leased its airports to local authorities. Now these airports pay rent to the Canadian government - a point of contention - and are compelled to fund most projects themselves. Canada's federal government helps small or remote airports, such as for the new runway at Deer Lake and a new terminal at Iqaluit, earmarked in its 2013 budget. But the bulk of Canadian airport projects are funded by passengers through airport improvement fees.

In the USA, travellers also pay passenger facility charges (PFCs), but federal grants still fund 60% of airport improvements. Over the past decade, these grants have exceeded $3 billion annually. This prompts Gregg Saretsky, chief executive of WestJet, to observe that Canadian and US airports operate under different philosophies.

"The US views aviation as an arm of economic development," he tells Canadian media. "In Canada, the government has subscribed to a user pay model."

WestJet and Air Canada complain that the higher fees and taxes charged in Canada encourage 4.5 million travellers each year to drive south across the border and take cheaper flights from US airports such as Burlington, Vermont, and Bellingham, Washington. Canada's airports council told a Senate inquiry: "That's equal to an airport somewhere between the size of Halifax and Edmonton."

But there is also pressure for change in the USA. The fiscal deadlock in US Congress has spawned new proposals for funding airports. In a recent study the Reason Foundation, a conservative think tank, argues that US airports could support themselves and fund infrastructure improvements with user fees and long-term financing, rather than government grants. US airports, it claims, would do well to "distance themselves" from Washington's perpetual budget battles.

The FAA's approval this year of both Chicago's plan to privatise Midway Airport and Puerto Rico's completed privatisation of San Juan airport signals what may be the start of a realignment in US airport ownership. If so, this could raise in the USA the same questions as the rest of the world already faces over how to fund airport infrastructure.