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National Press Club of Australia – Paul Scurrah Address

September 19, 2019 Business News No Comments

I also want to acknowledge the traditional owners of the land on which we meet, the Ngunnawal people, and I pay my respect to their elders past, present and emerging.

It says a lot about this issue that both Alan and I are sharing a stage – needless to say we did not fly to Canberra together!

But we are here today taking a stand for the travelling public. To be frank, the Productivity Commission has dropped the ball with its draft report and we cannot afford to wait another five years to get this right.

or the Virgin Australia Group, this debate comes at a very important juncture.

All airlines big and small (rich and poor), are swimming against the tide of costs being imposed by asset owners who are exempt from real competition, and the regulation and fair play that comes with it – privately owned, monopoly airports.

Let me be clear, we are a strong airline – built on an unwavering commitment to safety, great people, a powerful brand and a compelling value proposition.

I want to make our airline stronger, which is why I am here with Alan, to shine a light on a system that allows practices that are unchecked, unregulated and unseen by travellers far and wide. But we most certainly see them.

While Qantas and Virgin compete fiercely, Alan and I both have a commitment to resolving this issue – along with all our other airline partners, big and small, as part of A4ANZ, who I acknowledge today. I also acknowledge Rex Deputy Chair, John Sharp.

So, let me pose the question – what are we facing here?

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 pricing power they have.

This has created a lopsided outcome that is bad for the travelling public, bad for the country and bad for the economy.

On airports, 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.

Why? Because it’s fair, not one sided and will drive economic growth.

Not just for Virgin Australia, but for tourism operators, for importers and exporters and for all Australian businesses who trade with National and overseas partners.

From seaports to airports. I know how important these gateways are to the economy.

You know, some of you may remember my time as CEO of DP World Australia.

I had a similar experience on the waterfront – so arriving back in the airline industry at the Virgin Australia Group and getting deeper into the pricing structures of airports triggered a little déjà vu.

On Christmas Eve 2014 – the Port of Melbourne called me to advise that DP World would be seeing its rent increased by 767 per cent, without negotiation.

They claimed it had nothing to do with preparing that Monopoly Port Asset for Sale – some used the term at the time “Fattening the Pig” for sale.

Now, despite the fact that port investors are not often in the spotlight, this dispute turned public very quickly.

It was public because in the context of this Christmas Eve call – it was equivalent to you buying a coffee on Christmas day for $4 – then on Boxing day, you turn up to the coffee shop and that same coffee costs you over $30.

The Chair of the Port of Melbourne at the time said that DP world needed to suck it up and that it was, and I quote, “a new market” resulting from a new third entrant.

I was told that it was just competition and we should stop complaining.

I said at the time, comments like that from the Chair of a public monopoly, while interesting, were about as credible as Vladimir Putin lecturing the Western world on the virtues of democracy.

And while I was successful in beating the 767% price rise, port prices at that port will still go up by approximately 200% over a 10 year period. This shows the complete lack of oversight, demonstrating the system is broken.

Now to be perfectly transparent, when that did occur, and as the port owners increased their rents above market rates – as the CEO of the biggest port user, I was the guy who introduced infrastructure levies to pass these massive increases on – and who paid them? The truckers, other port users and ultimately the end consumer.

Yes, the increased cost just makes its way into the supply chain.

With the lack of effective oversight, that is exactly what is happening here while it is the airlines who take the flak as we pass on the private owner’s profit taking through to the consumer.

Since becoming the Virgin Australia Group CEO, I see all the signs leading to history repeating itself, with the airport monopolies, just like the Port of Melbourne, in a position to inflate charges at will.

How else would it be that you could account for one listed Airport’s 2018 Annual Report proudly noting revenues from aeronautical services have increased by 52% while in the same period aircraft movements fell by 0.3% – this is staggering!

Another airport told analysts that it would simply deal with subdued demand by increasing prices.

Wouldn’t we love that luxury!

We have the proof that at many of the airports the story is replicated.

That’s why I think the time has come, not for full declaration of these assets yet, but for a negotiate/ arbitrate process.

Unchecked, these monopolies are cruelling our Nation’s economic growth.

As Rod Sims has said this week, this type of process would give airlines the ability to negotiate with airports, and if we don’t get a fair deal, then we would have the right to arbitration.

It would, in effect, even up the bargaining power.

So, the question I think the airports have to answer is – what are you afraid of?

The pricing behaviour of the airports, driven by their shareholders, is only so because we have a system which has allowed this to be ‘normalised’.

I have to say, that at Virgin Australia we have a good relationship with most airport operators and we are working collegiately and well together.

The operators are only acting within the current parameters of the culture which has been allowed to prosper, but they are also saying “there is nothing to see here” – well there is.

In the 2018 ACCC Airport Monitoring Report, it showed airport profits continued to grow at 1.5 times actual passenger numbers – I think we do have a problem!

I argue – Australia’s aviation system simply cannot afford golden runways that support EBITDA margins north of 45 per cent.

Even most seaports, albeit with fairly weak State government intervention, allow for some level of commercial outcome via land rent review mechanisms with regard to tenants.

What about airports? They would argue that they have a monitoring report that provides a good oversight of their performance.

But, the profit returns and aeronautical increases are a better indicator of how effective this report actually is in constraining the pricing power of the monopoly Airports. There are no consequences – merely admonishment!

Rod Sims has been very forceful on this point. He has said that this process ‘is not only illconceived in economic theory, it has failed in practice.’

And you know, what are we fighting for here?

Well, we have an industry that is, without doubt, one of the most critical in the country.

Domestic and regional airline routes not only provide links between Australian capital cities, but also provide a vital service for rural, regional and remote communities.

The airline industry is a significant source of economic activity on its own, contributing $9.4 billion to the economy and supporting more than 50,000 jobs directly.

This economic contribution is almost twice the size of the contribution from the core operations of Australian airports.

It goes without saying that a strong, competitive airline industry is vital to Australia’s economy.

It seems hard to argue that Australian travellers, and the economy more broadly, should have to pay the price of a system which prevents airport customers from negotiating fair and reasonable deals.

Meanwhile, airports have become less productive despite the rising charges.

What reforms in other sectors have driven is culture change within the monopoly businesses, that shifts the focus to working with major customers.

The current failing regulatory arrangements introduce friction – costs basically – into the supply chain and there is plenty at stake if they are allowed to continue at the rapid pace of the past few years.

Now remember, airport productivity has declined and in his recent address to the BCA, the Treasurer noted that Australia’s productivity growth over the last decade has slowed.

Now that begs the question, what has the Productivity Commission been doing?

With the Government’s ambitious, productivity-boosting agenda, the airlines and other airport users shouldn’t be expected to do all the heavy lifting in the aviation sector. We need the right frameworks in place.

Thankfully, as the Treasurer also said in his recent BCA speech, the ability to influence productivity with the right policy settings and business practices is within the Government’s control.

I hope we can look to the government to act on the commitment to get policy settings for airports right.

At its core, the main objective of the Productivity Commission’s Inquiry into the economic regulation of airports was to determine whether the economic regulatory oversight of these airports remain in line with community and industry expectations.

Let me be clear – they do not.

We know that an independent, commercially based negotiate-arbitrate regime for airports would not only achieve the Government’s policy goals – driving parties to reach agreement through a credible threat of independent commercial arbitration – but deliver improvements in culture and negotiating behaviour by the privatised monopolists.

Now two decades on from the privatisation of our airports, and after repeated calls for change, the deadline for sensible reform is here.

A thriving aviation sector drives innovation, productivity and connects Australia, and it deserves – we all deserve – better.

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