Re Virgin Blue Airlines Pty Ltd

AUSTRALIAN COMPETITION TRIBUNAL
Virgin Blue Airlines Pty Limited [2005] ACompT 5
TRADE PRACTICES – application pursuant to s 44K(2) of the Trade Practices Act 1974 (Cth) – application for review of a decision made by the Parliamentary Secretary to the Commonwealth Treasurer not to declare a service described as the “Airside Service” – Airside Service provided at Sydney (Kingsford‑Smith) International Airport – whether criteria in s 44H(4) of the Trade Practices Act 1974 (Cth) satisfied – meaning of “increased access” – whether increased access to the Airside Service would promote competition in the market for the carriage of domestic air passengers into and out of Sydney for the purposes of s 44H(4)(a) of the Trade Practices Act 1974 (Cth) – whether increased access to the Airside Service would not be contrary to the public interest for the purposes of s 44H(4)(f) of the Trade Practices Act 1974 (Cth).
Airports Act 1996 (Cth): ss 71, 192
Civil Aviation Legislation Amendment Act 2003 (Cth)
Competition Policy Reform Act 1995 (Cth)
Federal Airports Corporation Act 1986 (Cth)
National Third Party Access Code for Natural Gas Pipeline Systems: s 1.9(a)
Prices Surveillance Act 1983 (Cth): ss 21, 22(2)(a), 27A
Trade Practices Act 1974 (Cth): Pt IIIA, Div 2, Div 3, ss 44B, 44F, 44G, 44H, 44I, 44K, 44S, 44U, 44V, 44X, 44Y, 44ZF
Productivity Commission Inquiry Report, Price Regulation of Airport Services, January 2002
Freight Victoria Limited (2002) ATPR ¶41‑884, considered
Rail Access Corporation v New South Wales Minerals Council Ltd (1998) 87 FCR 517, considered
Re Duke Eastern Gas Pipeline Pty Ltd (2001) 162 FLR 1, followed
Re Queensland Co‑operative Milling Association Ltd and Defiance Holdings Ltd (1976) 8 ALR 481, considered
Re Review of Declaration of Freight Handling Services at Sydney International Airport (2000) ATPR ¶41‑754, considered
File No 1 of 2004
RE:APPLICATION FOR REVIEW OF THE DECISION BY THE PARLIAMENTARY SECRETARY TO THE TREASURER DATED 29 JANUARY 2004 IN RELATION TO THE APPLICATION FOR DECLARATION OF THE AIRSIDE SERVICE PROVIDED AT SYDNEY AIRPORT

BY:     VIRGIN BLUE AIRLINES PTY LIMITED
JUSTICE A H GOLDBERG (President), MR G F LATTA & DR J S MARSDEN
12 DECEMBER 2005
SYDNEY

CONTENTS
INTRODUCTION ………………………………………………………..……………            [1]
BACKGROUND …………………………………..…………………………………..           [14]
PRIVATISATION OF AUSTRALIAN AIRPORTS ………………………………..            [18]
REGULATION OF AIRPORTS …………………………………………………..           [23]
AIRLINES: NATURE AND HISTORY …………………………………………..            [43]
Virgin Blue and the LCC business model ……………………………….           [46]
Qantas and the FSA business model ……………………………………..           [56]
Jetstar …………………………………………………………….………..            [62]
REX …………………………………………………….………………          [63]

LEGISLATIVE FRAMEWORK: PT IIIA OF THE TPA ………….……………..          [65]
THE ISSUES OF DETERMINATION BY THE TRIBUNAL …………..…………          [71]
CRITERIA (b) TO (e) …………………………………………………………………          [74]
CRITERION (a) …………………………………………………………………….....          [84]
WHAT IS THE “SERVICE” WHICH IS THE SUBJECT OF THE PROPOSED
DECLARATION? ….……………………………………………………………..            [86]
WHAT IS THE “MARKET FOR THE SERVICE” AND THE “MARKET OTHER
THAN THE MARKET FOR THE SERVICE”? …………………………………..          [124]
WHAT IS THE MEANING AND SCOPE OF THE EXPRESSIONS “ACCESS”
AND “INCREASED ACCESS”? …………………..……………………………           [130]
“PROMOTION OF COMPETITION” IN A DEPENDENT MARKET ……..        [145]

APPLICATION OF CRITERION (a) TO THE PRESENT PROCEEDING ……         [163]
SACL’S USE OF ITS MONOPOLY POWER …………………………………….           [166]
SACL’S REVENUE AND PRICING POLICIES ………………………………....         [167]
THE CHANGE IN DOMESTIC AIRSIDE SERVICE CHARGES FROM MTOW
TO PSC ………………………………………………………………………….           [200]
Efficient use of Sydney Airport ………………………………………..           [224]
The use of larger aircraft ………………………………………………..            [246]
Barriers to entry ………………….………………………………………           [258]
Sustainability of basis for charging in terms of revenue ………………           [264]
Equity, commercial risk sharing and transparency of charges ………..           [272]
Industry standards ……………………………………………………….          [281]
Pricing in accordance with the ACCC’s allowable revenue ceiling ….            [289]
DID SACL HAVE AN INCENTIVE TO RESTRICT COMPETITION IN THE
DEPENDENT MARKET? ………………………………………………………            [296]

LEVEL OF REVENUE ISSUES …………………………………………………           [313]
Revenue level …………………………………………………………….           [315]
SACL’s intention to impose new charges in the future …………………         [333]
NON‑PRICE TERMS AND CONDITIONS ……………………………………..           [367]
Negotiation of the conditions of use agreements ……………………….         [374]
SACL’s unilateral right to increase charges and the consequences of
failure to pay a charge ………………………………………..…………            [401]
Dispute resolution procedures and arbitration opportunities ………….          [415]
The force majeure clause ……………………………………………….            [421]
No minimum service standards …………………………………………           [435]
The exclusion of liability clause ………………………………………..            [443]
The split aircraft turn‑around issue …………………………………….            [447]
REX’s access to Gate 39 in Terminal 2 ………………………………..            [468]
Conclusion as to non‑price terms and conditions ……………………..           [477]

ARE THERE ANY EFFECTIVE CONSTRAINTS ON THE MANNER IN
WHICH SACL MAY EXERCISE ITS MONOPOLY POWER? ………………..           [478]
THE COUNTERVAILING POWER OF THE AIRLINES ………………………            [480]
THE THREAT OF RE‑REGULATION …………………………………..……..            [499]
NON‑AERONAUTICAL REVENUES …………………………….…………….            [509]
CONSTRAINTS IN COMBINATION …………………………….……………..           [513]

WILL INCREASED ACCESS TO THE AIRSIDE SERVICE PROMOTE
COMPETITION IN THE DEPENDENT MARKET? ………………………….....          [516]
THE IMPACT OF THE CHANGE IN DOMESTIC AIRSIDE SERVICE
CHARGES FROM MTOW TO PSC ……………………………………………            [523]
THE IMPACT OF AN INCREASE IN REVENUE ………………………………           [569]
THE IMPACT OF NON‑PRICE TERMS AND CONDITIONS …………………           [574]

CONCLUSION AS TO CRITERION (a) …………………………………………..          [581]
CRITERION (f) ………………………………………………………..…………….           [586]
RESIDUAL DISCRETION ………………………………………..………………..           [610]
PERIOD OF DECLARATION ……………………………………………..………           [615]
THE DETERMINATION ………………………………………..………………….           [618]

IN THE AUSTRALIAN COMPETITION TRIBUNAL

File No 1 of 2004

RE:APPLICATION FOR REVIEW OF THE DECISION BY THE PARLIAMENTARY SECRETARY TO THE TREASURER DATED 29 JANUARY 2004 IN RELATION TO THE APPLICATION FOR DECLARATION OF THE AIRSIDE SERVICE PROVIDED AT SYDNEY AIRPORT

BY: VIRGIN BLUE AIRLINES PTY LIMITED

THE TRIBUNAL:
JUSTICE A H GOLDBERG (President)
MR G F LATTA

DR J S MARSDEN

DATE OF REASONS FOR
DETERMINATION:
12 DECEMBER 2005

PLACE:

SYDNEY

REASONS FOR DETERMINATION
INTRODUCTION

This is an application by Virgin Blue Airlines Pty Limited (“Virgin Blue”) for review of a decision made by the Hon Ross Cameron MP, Parliamentary Secretary to the Commonwealth Treasurer. The Parliamentary Secretary’s decision was not to declare certain services provided by Sydney Airports Corporation Limited (“SACL”) at Sydney (Kingsford‑Smith) International Airport (“Sydney Airport”).
Part IIIA of the Trade Practices Act 1974 (Cth) (“TPA”) provides the statutory context for Virgin Blue’s application for review. Part IIIA was inserted into the TPA by the Competition Policy Reform Act 1995 (Cth). Part IIIA establishes a regime to facilitate third parties obtaining access or increased access to services provided by means of significant infrastructure facilities of national significance. The rationale underlying the regime is that access to certain facilities with natural monopoly characteristics is required to encourage competition in related markets. Accordingly, the regime enables third party access seekers to apply for declaration of such services.
Declaration does not provide an automatic right of access to the service for access seekers. Rather, it provides a basis for access seekers to negotiate terms of access with the service provider and, where parties are unable to agree on any aspect of access, there is provision for compulsory arbitration of the dispute by the Australian Competition and Consumer Commission (“ACCC”).
In order for a service to be declared, an application must first be made to the National Competition Council (“NCC”) for a recommendation that the service be declared. The NCC makes a recommendation to the relevant Minister (as designated under the TPA), whether the service ought to be declared, having regard to the criteria set out in s 44G of the TPA. The designated Minister (in this case the Parliamentary Secretary to the Commonwealth Treasurer) then decides whether to declare the service or not, having regard to the criteria set out in s 44H of the TPA. By virtue of s 44K, decisions of the designated Minister are subject to review by the Australian Competition Tribunal.
On 1 October 2002 Virgin Blue applied to the NCC for a recommendation pursuant to s 44G of the TPA in respect of the following:
“(a)a service for the use of runways, taxiways, parking aprons and other associated facilities (Airside Facilities) necessary to allow aircraft carrying domestic passengers to:
(i) take off and land using the runways at Sydney Airport; and
(ii)move between the runways and the passenger terminals at Sydney Airport,
(Airside Service); and
(b)a service for the use of domestic passenger terminals and related facilities for the purposes of processing arriving and departing domestic airline passengers and their baggage at Sydney Airport (Domestic Terminal Service)”
(“the combined application”).
In December 2002 the application in respect of the “Domestic Terminal Service” was withdrawn, following an agreement reached between Virgin Blue and SACL in relation to the provision of that service.
On 30 June 2003 the NCC issued a draft recommendation that the service, described by Virgin Blue as the “Airside Service”, be declared. However, in its final recommendation, dated November 2003, the NCC recommended that the so‑called Airside Service should not be declared on the basis that it did not meet the requisite criteria in ss 44G(2)(a) and (f) of the TPA.
On 29 January 2004 the Parliamentary Secretary to the Commonwealth Treasurer published his decision under s 44H(1). He decided not to declare the Airside Service (“the designated Minister’s decision”).
On 18 February 2004 Virgin Blue applied to the Tribunal pursuant to s 44K(2) of the TPA for review of the designated Minister’s decision.
Qantas Airways Limited (“Qantas”) and SACL were each granted leave to intervene in Virgin Blue’s application for review. The Parliamentary Secretary was also granted leave to intervene for the limited purpose of making submissions and filing evidence in relation to the Commonwealth Government’s policy on price regulation of airport services in Australia.
At the hearing, the NCC appeared in order to assist the Tribunal with any questions regarding the interpretation and application of the criteria set out in s 44H(4) of the TPA and any additional matters in respect of which the Tribunal sought assistance.
We note at the outset that, pursuant to s 42 of the TPA, where a question of law is determined in these reasons, or a view is expressed or a conclusion is reached on a question of law, such question has been determined, such view is expressed and such conclusion has been reached, in accordance with the opinion of the presidential member presiding, Goldberg J.
As s 44K(4) of the TPA makes clear, a review of a designated Minister’s decision by the Tribunal is a “re‑consideration” of the matter, that is, a re‑hearing. Where the designated Minister has decided not to declare a service, as in the present case, s 44K(8) provides that the Tribunal may either affirm that decision or set it aside and declare the service. For the purposes of a review, s 44K(5) provides that the Tribunal has the same powers as the designated Minister. The Tribunal must reach its decision as to declaration by reference to the criteria set out in s 44H(4).
BACKGROUND
Sydney Airport is the largest and busiest airport in Australia and is of critical significance for domestic airlines. Approximately 50% of all international passengers arriving in Australia, and 30% of all Australian domestic passengers, pass through Sydney Airport. It is one of the terminals on the Melbourne‑Sydney route, the busiest route in Australia, which in 2000 represented more than 20% of all passenger movements in Australia. The Melbourne‑Sydney route was said to be consistently one of the ten busiest air routes in the world.
SACL provides services at Sydney Airport through use of its facilities, including three runways, taxiways, and aprons for parking aircraft at around 40 gates designated for domestic operations.
Facilities at airports, including Sydney Airport, are generally characterised as either “airside” or “landside” facilities. Whilst the definition and scope of the “Airside Service” that is the subject of the present application was controversial and involved some debate as to what facilities fall within the airside characterisation, in general terms, airside facilities traditionally include runways, taxiways and aprons, airfield lighting, aircraft parking bays, visual navigation aids, hangars, freight terminals, and facilities for aircraft maintenance, refuelling and in‑flight catering. Landside facilities generally comprise terminals and the infrastructure within them, including flight information display systems, check‑in counters, public amenities and lounges for passengers and space for commercial operations such as retail shops. Landside facilities also generally include facilities outside terminals such as perimeter roads, car parks and walkway links to public transport.
Certain services provided by means of the use of areas for ramp handling and freight services at Sydney Airport were previously the subject of an application for declaration under Pt IIIA of the TPA at a time when Sydney Airport operated under a different regime to that presently before the Tribunal: see Re Review of Declaration of Freight Handling Services at Sydney International Airport (2000) ATPR ¶41‑754 (“Sydney International Airport”). These services were declared by the Tribunal for a period of five years.
PRIVATISATION OF AUSTRALIAN AIRPORTS
A significant issue in this proceeding is the manner in which, and the terms and conditions upon which, SACL provides services at Sydney Airport. Accordingly, a brief background to the regulatory and pricing history of Australian airports in general, and of Sydney Airport in particular, follows.
Prior to 1997, most of the principal airports in Australia were owned and operated by the Federal Airports Corporation (“FAC”), which was established under the Federal Airports Corporation Act 1986 (Cth).
In 1997 and 1998 the Commonwealth Government effectively privatised most of Australia’s large airports, with the exception of Sydney Airport, by entering into leases with private operators for 50 year terms.
On 1 July 1998 the Commonwealth Government leased Sydney Airport to SACL for a period of 50 years with an additional 49 year option. At that time, SACL was a public company wholly owned by the Commonwealth Government.
On 28 June 2002 Sydney Airport was sold to the Southern Cross Airports Consortium. On the same day, the shares in SACL were acquired by Southern Cross Airports Corporation Pty Ltd, a member of the Southern Cross Airports Consortium.
REGULATION OF AIRPORTS
One of the consequences of privatisation of airports was the introduction of a regulatory framework for managing airport pricing. In the Productivity Commission Inquiry Report, Price Regulation of Airport Services, published in January 2002, (“Productivity Commission Inquiry Report”), the Productivity Commission said that regulation of privatised airports was necessary in order to temper the strong market power of airports (in particular, the ability of airports to price well above cost), as any misuse of that market power could potentially increase airfares. It was hoped that regulation would be able to assist in producing more efficient outcomes than the outcomes produced in the market at that time.
Privatised airports were subject to special regulation under the Airports Act 1996 (Cth) (“Airports Act”), in addition to the general access regime under Pt IIIA of the TPA. Section 192 of the Airports Act set out a specific access regime for all privatised airports designated to be “core regulated airports” under that Act. Section 192 of the Airports Act provided that, within twelve months of the lessee of a “core regulated airport” becoming a privately‑owned corporation, each airport service would be a declared service for the purpose of the access regime under Pt IIIA (unless an access undertaking had been given in relation to that service within twelve months of privatisation).
Although Sydney Airport was designated as a “core regulated airport”, when the lease for Sydney Airport was transferred in July 1998 from the Commonwealth Government to SACL (then a government‑owned public company), it fell outside s 192 of the Airports Act as it was not leased by a privately‑owned corporation. As noted above, SACL was later privatised in June 2002.
Prior to privatisation of the Australian airports, FAC had established its landing and terminal charges on a network‑wide “single‑till” basis. The expression “single‑till” has been defined by the Productivity Commission as:
“An arrangement for setting airport charges whereby all airport revenues and costs are taken into account in setting aeronautical prices. Allowable aeronautical prices are set on a ‘residual basis’, after subtracting from total airport costs the revenue derived from non‑aeronautical activities.”
A “single‑till” arrangement is to be contrasted with a “dual‑till” arrangement, which has been described by the Productivity Commission as:
“An arrangement for setting airport charges whereby only the costs and revenues of providing aeronautical services [defined by the Productivity Commission as ‘services provided by infrastructure that facilitates aircraft movements (eg runways), and passenger processing facilities’] are included in the assessment of allowable aeronautical prices. In other words, aeronautical services are priced on a ‘stand‑alone’ basis, without regard to any net revenues from non‑aeronautical services [defined by the Productivity Commission as ‘services provided by or at airports that are not aeronautical services (eg freight facilities, car parking and retail shops and food outlets)’].” (emphasis added)
At the time of privatisation, the Commonwealth Government did not require the privatised airports to use the single‑till pricing arrangement. It imposed transitional price regulation on the airports. Airports at Melbourne, Brisbane, Perth, Adelaide, Alice Springs, Canberra, Coolangatta, Darwin, Hobart, Launceston and Townsville were subjected to a five‑year, CPI — X per cent annual cap on prices for aeronautical services. These price caps were subsequently removed from eight of the eleven airports on 5 October 2001. The price caps remained on Melbourne, Brisbane and Perth airports, although these airports were allowed to implement one‑off average price increases for price‑capped services.
Sydney Airport was never made subject to a price‑cap or any other requirement to reduce annually charges for aeronautical services. Instead, by declaration made on 30 June 2000, Sydney Airport was made subject to a price notification regime under the Prices Surveillance Act 1983 (Cth) (“Prices Surveillance Act”). Under the price notification regime, SACL was required to notify the ACCC of any proposed increase in the price, or substantial variation of the terms and condition of supply, of aeronautical services.

Pursuant to the price notification regime, SACL submitted a ‘Revised Draft Aeronautical Pricing Proposal’ to the ACCC in October 2000 seeking to increase certain aeronautical charges at Sydney Airport. In May 2001 the ACCC handed down its decision in relation to SACL’s application, objecting to SACL’s proposed increase which was, on average, an increase of approximately 130%, but approving a lower increase of approximately 97%. In that decision, the ACCC expressed support for a “building block methodology” to be used for assessing SACL’s maximum allowable revenue, a methodology to which we will return.
The Productivity Commission Inquiry Report noted that Sydney Airport was one of four airports with substantial market power. The Productivity Commission proposed two options for regulation of Sydney Airport; Option A, involving dual‑till price caps, and Option B, involving price monitoring.
Option B, which the Productivity Commission ultimately recommended and which was subsequently adopted in large part by the Commonwealth Government, provided, inter alia:
“Option B: price monitoring
This option would extend price monitoring to Phase 1 airports and Sydney airport for a probationary period, and maintain (modified) price monitoring of Adelaide, Canberra and Darwin airports. As in Option A, there would be no airport‑specific price regulation of any other airports.
For Sydney, Melbourne, Brisbane, Perth, Adelaide, Canberra and Darwin airports, there would be mandatory price monitoring by the ACCC. The monitoring regime would continue for five years:
·     During this probationary period the regulator would not have the power to alter unilaterally the monitoring regime or impose stricter price regulation.
…
·     Voluntary commercial agreements between airports and users (including non‑airline users) would be encouraged by providing guidelines regarding coverage, consultation and dispute‑settlement mechanisms. (The Commission sees no need to exempt from access regulation airports that enter into such agreements.)
·     An independent public review would be conducted towards the end of the five‑year monitoring period to ascertain whether there should be any future price regulation of those airports. Other airports could be included in the review only where there is prima facie evidence of persistent misuse of market power.
…
All airports should be subject to the generic provisions of the Part IIIA National Access Regime.”
The Productivity Commission preferred price monitoring on the basis that it would encourage the airlines and airports to negotiate commercial agreements, whilst constraining inefficient outcomes. The Productivity Commission encouraged commercial agreements over regulation, but clearly designated the commercial environment in which such agreements would be successful.
Notably, the Productivity Commission considered that such commercial agreements should include dispute‑settlement mechanisms, such as provision for independent arbitration.
The Productivity Commission recommended that price notification be replaced with mandatory price monitoring for a probationary period of five years, following which an independent public review should be conducted to ascertain the necessity or extent of any further regulation.
It further recommended that airports be subject to the generic provisions of Pt IIIA of the TPA. The Productivity Commission clearly stated that the general access and anti‑competitive conduct provisions of the TPA would apply to all airports, noting that: “Under both options [dual‑till price caps and price monitoring], the general access and anti‑competitive conduct provisions of the Trade Practices Act would apply to all airports.” It considered that Pt IIIA of the TPA operated as a constraint on inefficiency.
The Commonwealth Government supported these recommendations of the Productivity Commission in a joint press release issued by the Commonwealth Minister for Transport and Regional Services and the Treasurer on 13 May 2002. In particular, the Commonwealth Government supported in principle the recommendation that commercial agreements should be encouraged and assisted, but was not prepared to play a role in preparing guidelines for the conduct of the negotiations or the content of particular agreements. The press release noted that:
“In the event that commercial agreement cannot be concluded in relation to access terms and conditions, the access provisions in Part IIIA of the TP Act provide recourse to arbitration for determining those conditions for ‘declared’ services. The Government is, however, prepared to assist airports and airport users [to] develop industry guidelines for commercial agreements should that be required.”
From 1 July 2002 the Commonwealth Government’s policy moved towards what the joint press release referred to as “lighter‑handed regulation”, which saw a change from price notification to price monitoring, as recommended by the Productivity Commission. Under the new regime, aeronautical prices are monitored by the ACCC over a period of five years, towards the end of which time an independent review is to be conducted to ascertain the need for any future airport price regulation. The Commonwealth Government considered that this threat of possible re‑regulation would “encourage negotiated pricing outcomes based on efficient costs and an adequate return on capital”.
The Commonwealth Government has reserved its right to bring forward the review or conduct its own review in the event that airports impose unjustifiable price increases. The Commonwealth Government set out a number of principles which would form the basis of the independent five‑year review, and any earlier or separate review conducted by it (“the Review Principles”). The Commonwealth Government stated in the joint press release that it “would only consider re‑introducing price controls on an airport if it formed the view that the airport had operated in a manner inconsistent with the [review] principles.” The Review Principles were then set out as follows:
“At airports without significant capacity constraints, efficient prices broadly should generate expected revenue that is not significantly above the long‑run costs of efficiently providing aeronautical services (on a ‘dual‑till’ basis). Prices should allow a return on (appropriately defined and valued) assets (including land) commensurate with the regulatory and commercial risks involved.
Price discrimination and multi‑part pricing that promotes efficient use of the airport is permitted. This may mean that some users pay a price above the long‑run average costs of providing aeronautical services, whereas more price‑sensitive users pay a price closer to marginal cost.
At airports with significant capacity constraints, efficient peak/off‑peak prices may generate revenues that exceed the production costs incurred by the airport. Such demand management pricing practices should be directed toward efficient use of airport infrastructure and, when not broadly revenue neutral, any additional funding that is generated should be applied to the creation of additional capacity or undertaking necessary infrastructure improvements.
Quality of service outcomes should be consistent with user’s [sic] reasonable expectations, and consultation mechanisms should be established with stakeholders to facilitate the two way provision of information on airport operations and requirements.
It is expected that airlines and airports will primarily operate under commercial arrangements and in a commercial manner, and that airport operators and users will negotiate arrangements for access to airport services.”
Following the Commonwealth Government’s acceptance of the recommendations contained in the Productivity Commission Inquiry Report, the declaration under s 21 of the Prices Surveillance Act which subjected SACL to a price notification regime was revoked.
As part of the change in policy, on 26 June 2002 the Parliamentary Secretary to the Treasurer directed the ACCC to undertake monitoring of prices, costs and profits related to the supply of aeronautical services and aeronautical‑related services at a number of airports, including Sydney Airport, from 1 July 2002, and to report annually to the Parliamentary Secretary on such monitoring.
As noted above, the Productivity Commission recommended that all airports should be subject to the generic provisions of Pt IIIA of the TPA rather than an airport‑specific access regime. This was supported by the Commonwealth Government, which considered that there was no need for the airport‑specific access regime in s 192 of the Airports Act to continue. Accordingly, s 192 of the Airports Act was repealed by the Civil Aviation Legislation Amendment Act 2003 (Cth).
AIRLINES: NATURE AND HISTORY
The present proceeding involves a number of airlines which have adopted different business models. Of most significance is the distinction between the low‑cost carrier (“LCC”) business model and the full‑service airline (“FSA”) business model. The distinction between these business models becomes relevant when we come to consider the impact of SACL’s pricing policies upon the various airlines.
The FSA model has been the traditional business model of airlines. However, the LCC business model emerged in the 1980s and is now a well‑established and highly competitive business model. As Qantas and Virgin Blue were the two principal domestic airlines using Sydney Airport at the time of the hearing, we have analysed their structure and activities as exemplary of the FSA and LCC business models.
For many years the domestic Australian market was primarily dominated by two FSAs, Qantas and Ansett Australia Limited (“Ansett”), operating significant networks on domestic routes in Australia, with Ansett and its subsidiaries servicing regional and major routes. However, in September 2001 Ansett went into voluntary administration. At the time of the hearing, the Australian domestic passenger market was being serviced predominantly by Virgin Blue, Qantas, Jetstar Airways Pty Ltd (“Jetstar”) and Regional Express (“REX”).
Virgin Blue and the LCC business model
Virgin Blue began operating in Australia on 31 August 2000 and now operates scheduled flights between a large number of Australian destinations. By 30 April 2004 Virgin Blue had 42 aircraft operating 40 domestic routes, with over 3,000 employees. Virgin Blue’s main competitors in the Australian domestic passenger market are Qantas and Jetstar (although REX also operates aircraft on some of the same routes as Virgin Blue). As at February 2004, Virgin Blue’s share of the domestic passenger market was approximately 32%.
Virgin Blue’s business model is said to be based on offering affordable, convenient and service‑minded travel, and reflects the LCC business model that has enjoyed success in Europe and the United States of America. Virgin Blue said that LCCs keep their costs low by adopting efficient business practices and cutting out what they perceive to be unnecessary extras, such as free airline meals. The savings are passed on to the consumer as a lower fare, which in turn stimulates demand and increases the number of people flying on the routes on which it operates.
Virgin Blue seeks to make low fares widely available to stimulate demand and, where demand is subsequently strong, to increase the frequency of services, rather than to increase fare levels. This is seen as a key difference between the LCC and the FSA business models. Virgin Blue said that it has increased its capacity on many routes in response to high load factors (that is, the percentage of seats flown which are occupied), whereas traditionally an FSA may simply increase fares in response to high demand.
LCCs tend to target more price‑sensitive passengers, such as leisure travellers, people visiting friends and relatives, and certain types of business travellers who are generally from small to medium‑sized businesses. It was said that less service comes with lower cost. LCCs seek to attract those customers who are willing to forego certain features that might be enjoyed on a service run by an FSA in exchange for lower fares. Although LCCs do attract some of the traditional customers of an FSA, the LCC model is also intended to stimulate additional demand, that is, to attract customers who would otherwise not have flown if the low fare were not available.
Virgin Blue contended, and we accept, that a significant majority of its customers are particularly cost conscious and would prefer lower fares, with a less luxurious service, than to pay even a couple of dollars more for such services.
As a general rule, LCCs keep their costs low by:
·operating a single type of aircraft, thereby reducing training and fleet support costs;
·configuring the aircraft to maximise the number of seats;
·minimising in‑flight amenities;
·not providing complimentary meals or lounges;
·adopting procedures that enhance the efficient turn‑around of aircraft;
·operating on routes and flight schedules which maximise operating efficiency;
·operating out of simple, low‑cost terminals;
·implementing flexible labour arrangements;
·adopting more efficient financial systems and keeping management small.
Virgin Blue has adopted many of these typical LCC features, although it has customised its product to the Australian market.
Virgin Blue has in place a complex yield management system which aims to maximise revenue per flight by maximising sales of airfares at the best achievable price. The basic objective is to sell each seat on a flight at the highest fare level possible, based on anticipated demand and competitors’ pricing. Each airline seat is allocated a particular fare category or “bucket”, and the yield management computer systems are employed to determine the number of seats which should be offered in each bucket and the price point which should be set for each bucket, based on historic demand.
Virgin Blue assesses the profitability of its services on a route‑by‑route basis. Each route is assessed for its commercial viability and, where a route is unprofitable, Virgin Blue indicated that it would consider reducing the frequency of flights or withdrawing from the route altogether. This was said to be in contrast to FSAs, which tend to operate as a network, and therefore tolerate less profitable routes where they feed into more profitable areas of the network.
Around the world, the major effects of entry by LCCs into markets previously serviced by one or more FSAs have been said to be: the reduction of average fares on routes serviced by the LCC; increased demand as more price‑sensitive passengers consider air travel; growth in the LCCs’ market share; and a decline in FSAs’ market share which in turn may lead to FSAs instigating cost‑reduction programs, and, occasionally, withdrawing from a route.
Qantas and the FSA business model
Qantas, by contrast, has traditionally employed the FSA model. Qantas is the largest user of Sydney Airport, and its main operations base is located there. Qantas is the eleventh largest airline worldwide on the basis of RPKs (that is, annual revenue passenger kilometres). Along with its subsidiaries, it operates a domestic and international fleet of approximately 190 aircraft. At the time of the hearing, Qantas provided 732 international services every week to 80 destinations in 37 countries. Qantas and its subsidiaries operated more than 4,581 domestic flights each week to 58 urban and regional destinations across Australia.
Qantas and its subsidiaries also provide related services to the Qantas fleet such as catering, engineering, maintenance, inventory, training and support services for aircraft and engines, and ground handling and passenger handling services.
FSAs generally have large‑scale operations with wide networks and extensive fleets and facilities offering a variety of amenities to customers. They tend to offer a range of services, notwithstanding the extra cost, in order to attract certain consumer segments, particularly business customers. In contrast to LCCs, FSAs typically offer:
·a greater range of routes;
·a greater number of flights per route;
·a large fleet capacity;
·business and first class travel;
·in‑flight catering at no additional charge;
·complimentary business lounges;
·larger space between seats;
·complimentary newspapers and in‑flight entertainment;
·frequent flyer programs;
·vertical integration into travel agencies;
·alliance agreements with other airlines, and associated benefits such as baggage check‑through;
·arrangements with other travel and accommodation organisations.
Qantas is a network carrier. As such, it tends to view its profits on a network‑wide basis rather than on an individual sector basis. Even if some sectors are not profitable, Qantas may continue to operate them where it is profitable overall in its network. As a network carrier and an FSA, Qantas sees its strength as the provision of network breadth (that is, geographic reach) and depth (that is, frequency and capacity of service), providing interconnecting flights and amenities such as in‑flight catering, in‑flight entertainment, lounges, business class seats on most domestic flights, and a frequent flyer program. We were told that Qantas’ business model is designed to be as attractive as possible to a wide cross‑section of passengers.
FSAs tend to have higher average fares than LCCs, but they are able to compete with LCCs at certain price points. It was said that, traditionally, FSAs are likely to increase overall fare levels in response to strong demand.
Like Virgin Blue, Qantas now has in place a complex yield management system that aims to set fare buckets to attract different types of passengers.
Jetstar
Towards the end of 2003, Qantas established its own separately managed and independently operated domestic LCC, Jetstar. Jetstar is a point‑to‑point carrier. It commenced flights from Sydney Airport on 25 May 2004.
REX
REX is a regional airline which was launched on 1 August 2002. REX links regional centres with Sydney, Melbourne and Adelaide, and, at the time of the hearing, operated flights on the Sydney‑Canberra route. REX emerged out of the collapse of Ansett when two of Ansett’s subsidiaries, Kendell Airlines and Hazelton Airlines, were placed into administration and their assets bought to form REX. REX is Australia’s largest independent regional airline. It flies to 29 destinations and operates in excess of 1,000 flights per week on 32 different routes in south‑eastern Australia.
Sydney Airport is the core airport for REX’s operations, as more than half of REX’s passengers are processed through Sydney Airport, 15 of the routes operated by REX connect a regional centre (or Canberra) to Sydney, and approximately 60% of all travel on REX involves flights to or from Sydney Airport.
LEGISLATIVE FRAMEWORK: PT IIIA OF THE TPA
The background to the introduction of Pt IIIA into the TPA has previously been set out by the Full Federal Court in Rail Access Corporation v New South Wales Minerals Council Ltd (1998) 87 FCR 517 at 518‑519 as follows:
“On 11 April 1995, the Commonwealth of Australia, the States of New South Wales, Victoria, Queensland, Western Australia, South Australia and Tasmania, the Australian Capital Territory and the Northern Territory entered into the ‘Competition Principles Agreement’ (the Agreement). By the Agreement, the Commonwealth, State and Territory Governments agreed to adopt certain principles of competition policy and to apply competition laws across the public sector. The Agreement stated the ‘objective of competitive neutrality policy is the elimination of resource allocation distortions arising out of the public ownership of entities engaged in significant business activities’. This was to be achieved by the structural reform of public monopolies, so as to remove from the public monopoly any responsibility for industry regulation and to introduce competition to markets traditionally supplied by a public monopoly.
Clause 6(1) of the Agreement provided that, subject to subcl (2), the Commonwealth would put forward legislation to establish a regime for third‑party access to services provided by means of significant infrastructure facilities where:
‘(a) it would not be economically feasible to duplicate the facility;
(b)access to the service is necessary in order to permit effective competition in a downstream or upstream market;
(c)the facility is of national significance having regard to the size of the facility, its importance to constitutional trade or commerce or its importance to the national economy; and
(d)the safe use of the facility by the person seeking access can be ensured at an economically feasible cost and, if there is a safety requirement, appropriate regulatory arrangements exist.’
As a result of the Agreement, the Commonwealth enacted the Competition Policy Reform Act…”

The access regime provided for in Pt IIIA involves two stages. The first stage is governed by Div 2 of Pt IIIA and requires declaration of a service. Upon declaration, the commercial relationship between the provider of the service and the access seeker continues and they have the opportunity to pursue commercial dialogue and negotiations with a view to reaching agreement on the terms and conditions of access. Where the parties are unable to reach agreement in relation to an aspect of access to the service, the second stage of the access regime is enlivened. The second stage is governed by Div 3 of Pt IIIA and enables an access seeker or a provider, in default of agreement, to have issues as to access determined by arbitration conducted by the ACCC.
Declaration of a service under Pt IIIA may therefore be characterised as “default regulation”, in the sense that regulation, in the form of arbitration by the ACCC, is only engaged upon default of commercial agreement between the parties as to an aspect of access to the service.
Once the service is declared, it is declared in respect of the provider and all, or any, access seekers, and not merely between the parties to the application for declaration. Although one access seeker can initiate the procedure which may lead to the declaration of a service, if declaration is made it enures for the benefit of anyone who wishes to obtain access to the relevant service. Section 44I provides that the duration and effect of any declaration made is to be specified in the declaration, and continues in operation unless it is earlier revoked.
Division 3 of Pt IIIA of the TPA sets out the regime for arbitration of access disputes by the ACCC in relation to declared services. Arbitration is not an inevitable consequence of declaration of a service, but arbitration under Div 3 is only available upon the service being declared under Div 2. Declaration of a service opens it up to the possibility of regulation by arbitration. However, it does not follow inexorably that arbitration, and therefore regulation, will occur. The parties are still free to negotiate a commercial resolution of their outstanding access issues.
This proceeding concerns the first stage of the access regime, namely declaration of a service pursuant to Div 2 of Pt IIIA of the TPA.
THE ISSUES FOR DETERMINATION BY THE TRIBUNAL
The Tribunal’s role on review is to reconsider the matter that was before the designated Minister, and for this purpose the Tribunal stands in the shoes of the designated Minister.
Section 44H(4) of the TPA provides that the designated Minister cannot declare a service unless the Minister is satisfied of the criteria set out in s 44H(4)(a) to (f). In order to declare the relevant service, the Tribunal must similarly be satisfied of each of the criteria listed in s 44H(4).
The parties’ submissions to the Tribunal centred on the criteria set out in s 44H(4)(a) (hereafter referred to as “criterion (a)”), and s 44H(4)(f) (hereafter referred to as “criterion (f)”). Our focus is largely directed towards the issues arising out of criterion (a) and, to a lesser extent, criterion (f). However, it is also necessary to make findings in respect of the criteria set out in ss 44H(4)(b) to (e).
CRITERIA (b) TO (e)
In its final recommendation, the NCC was satisfied that the criteria set out in ss 44G(2)(b) to (e) were met. Virgin Blue submitted that the Tribunal could also be satisfied of these criteria, and SACL did not dispute that proposition.
Section 44H(4)(b) provides that the designated Minister (or the Tribunal on review) cannot declare a service unless the Minister (or Tribunal) is satisfied that “it would be uneconomical for anyone to develop another facility to provide the service.”
In the earlier decision of Sydney International Airport, the Tribunal rejected the contention that the relevant facility, for the purposes of s 44H(4)(b), was less than, what was in effect, the total airport. We see no reason to revisit this issue. The fact that a different service is provided by the facility does not alter the basic proposition that it would be uneconomical for anyone to develop another facility, being the total airport, to provide that service. There has been no evidence put before us in relation to events and circumstances which occurred after the hearing of Sydney International Airport which causes us to change this view. Accordingly, we are satisfied that it would be uneconomical for anyone to develop another facility to provide the service that is the subject of this application and we are therefore satisfied of the matter set out in s 44H(4)(b).
Section 44H(4)(c) provides that the designated Minister (or the Tribunal on review) cannot declare a service unless the Minister (or Tribunal) is satisfied that “the facility is of national significance, having regard to:
(i)        the size of the facility; or
(ii)       the importance of the facility to constitutional trade or commerce; or
(iii)      the importance of the facility to the national economy.”
We are satisfied that the facility at Sydney Airport is of national significance having regard to its size, its importance to constitutional trade and commerce, and its importance to the national economy. As noted earlier, approximately 50% of all international passengers arriving in Australia pass through Sydney Airport, as do approximately 30% of all domestic passengers in Australia. It is thus a major international gateway for Australia’s tourism industry, and also makes a substantial and significant contribution to trade in Australia. Accordingly, we are satisfied of the matter set out in s 44H(4)(c).
Section 44H(4)(d) provides that the designated Minister (or the Tribunal on review) cannot declare a service unless the Minister (or Tribunal) is satisfied that “access to the service can be provided without undue risk to human health or safety.”
It was not in issue that access to the service that is the subject of this application can be provided without undue risk to human health or safety. In its final recommendation the NCC noted the submission of the representative body of the airlines, the Board of Airline Representatives Inc (“BARA”), that the conditions of use which apply at Sydney Airport require airlines to comply with all legislation, SACL’s Airport Operations Manual, SACL’s airport security program, and other relevant directions and legislative provisions. The NCC concluded that access to the Airside Service could be provided without undue risk to human health or safety. We are satisfied, having regard to the evidence that was placed before us as to the manner in which air operations are carried out at Sydney Airport, that access to the service that is the subject of the present application can be provided without undue risk to human health or safety. Accordingly, we are satisfied of the matter set out in s 44H(4)(d).
Section 44H(4)(e) provides that the designated Minister (or the Tribunal on review) cannot declare a service unless the Minister (or Tribunal) is satisfied that “access to the service is not already the subject of an effective access regime.”
As the Tribunal noted in Sydney International Airport at [217], 40,795:
“The expression ‘effective access regime’ … is a reference to a regime for access to a service or a proposed service established by a State or Territory that is a party to the Competition Principles Agreement which the Commonwealth Minister has decided is an effective access regime for the service or proposed services: ss 44M and 44N.”
It was not submitted that any such regime had been established and we know of no such regime. We are satisfied that access to the service is not already the subject of an effective access regime. Accordingly, we are satisfied of the matter set out in s 44H(4)(e).
As a result, the issues in the review are in substance confined to whether the Tribunal, standing in the shoes of the Minister, can be satisfied as to criterion (a) and criterion (f).
CRITERION (a)
Criterion (a) requires that the Tribunal be satisfied:
“that access (or increased access) to the service would promote competition in at least one market (whether or not in Australia), other than the market for the service”.
It is therefore necessary to consider a number of preliminary issues of definition relating to the service the subject of the proposed declaration, the relevant markets, the meaning and scope of “access” and “increased access”, and the substance of the term “promotion of competition”, in the context of criterion (a).
WHAT IS THE “SERVICE” WHICH IS THE SUBJECT OF THE PROPOSED DECLARATION?
As noted earlier, when Virgin Blue applied to the NCC for a recommendation of declaration in the combined application, it did so in respect of the following:
“(a)a service for the use of runways, taxiways, parking aprons and other associated facilities (Airside Facilities) necessary to allow aircraft carrying domestic passengers to:
(i) take off and land using the runways at Sydney Airport; and
(ii)move between the runways and the passenger terminals at Sydney Airport,
(Airside Service); and
(b)a service for the use of domestic passenger terminals and related facilities for the purposes of processing arriving and departing domestic airline passengers and their baggage at Sydney Airport (Domestic Terminal Service).”
Virgin Blue subsequently informed the NCC on 26 November 2002 that it had reached agreement with SACL on terminal access, and, in December 2002 Virgin Blue formally withdrew its application for declaration of the “Domestic Terminal Service”.
Accordingly, it is only the first limb of Virgin Blue’s definition of the service in respect of which declaration is sought which is relevant — the part of the service described as the “Airside Service”.
Virgin Blue argued that its intention was to define the “Airside Service” broadly so as to encompass all the services that were required to turn aircraft around between flights. Virgin Blue submitted that the definition of “Airside Service” should be viewed in the context of the combined application, which was clearly intended to cover all services at Sydney Airport.
Virgin Blue submitted that, in that context, the “Airside Service” should be construed comprehensively to encompass the domestic operations that airlines were entitled to undertake under the standard form of the conditions of use which SACL employs to govern the use of its services and facilities by airlines at Sydney Airport, the ‘Sydney Airport Conditions of Use’, version 2.6, dated 1 October 2003 (“SACL’s Standard COU”).
Schedule 5 of SACL’s Standard COU provides that the use of facilities and services referred to as the “Domestic operations at Terminal 2” attracts a number of charges, including a runway charge, an aircraft parking charge, a Terminal 2 passenger use charge and a Terminal 2 passenger screening charge. The facilities and services covered by SACL’s Standard COU are set out in sch 9, subject to the proviso that a separate agreement between SACL and the relevant airline may provide otherwise.
Schedule 9 of SACL’s Standard COU lists a range of facilities including airside grounds, runways, taxiways and aprons. It is in the following terms:
“Facilities and Services
Aircraft movement facilities and services
·      Airside grounds, runways, taxiways and aprons
·      Airfield lighting, airside roads, airside lighting
·      Airside safety
·      Nose‑in guidance
·      Aircraft parking
·      Visual navigation aids
Passenger processing facilities and services
·      Forward airline support areas services
·      Aerobridges, airside buses
·      Departure lounges and holding lounges (but excluding commercially important persons lounges)
·      Immigration and customs service areas
·      Public address systems, closed circuit surveillance systems and security systems
·      Baggage make‑up, baggage handling and baggage reclaim
·      Public areas in terminals, public amenities, public lifts, escalators and moving walkways
·      Flight information display systems
·      Landside roads, landside lighting and covered walkways”.
Virgin Blue submitted that SACL’s Standard COU was in similar terms to the definition used in Direction No. 27, issued by the then Parliamentary Secretary to the Commonwealth Treasurer, Senator the Hon Ian Campbell, on 26 June 2002 pursuant to s 27A of the Prices Surveillance Act, which is the current price monitoring direction (“Price Monitoring Direction”). The Price Monitoring Direction directs the ACCC to undertake formal monitoring of the prices, costs and profits relating to the supply of aeronautical services and aeronautical‑related services by a number of airports, including SACL.
“Aeronautical services” are defined in the Price Monitoring Direction as “aircraft movement facilities and activities” and “passenger processing facilities and activities”. “Aircraft movement facilities and activities” are defined as:
“(i)     airside grounds, runways, taxiways and aprons;
(ii)      airfield lighting, airside roads and airside lighting;
(iii)     airside safety;
(iv)      nose‑in guidance;
(v)       aircraft parking;
(vi)      visual navigation aids;
(vii)     aircraft refuelling services.”
“Passenger processing facilities and activities” are defined as:
“(i)     forward airline support area services;
(ii)      aerobridges and airside buses;
(iii)departure lounges and holding lounges (but excluding commercially important persons lounges);
(iv)      immigration and customs service areas;
(v)security systems and services (including closed circuit surveillance systems);
(vi)      baggage make‑up, handling and reclaim;
(vii)public areas in terminals, public amenities, public lifts, escalators and moving walkways;
(viii)     flight information display and public address systems.”
At the hearing, Virgin Blue sought to clarify its definition of the “Airside Service” by setting out the facilities and operations which it said were intended to fall within the term. Virgin Blue submitted that, although it was not open to the Tribunal to amend the application (as the Tribunal is bound to consider the matter that was before the designated Minister), it was permissible and appropriate that the Tribunal clarify any ambiguity in the definition of the service.
Virgin Blue’s proposed clarification was set out as follows:
“The service the subject of the application is the use of airside facilities at Sydney Airport for the purpose of domestic air transport operations.
Airside facilities means:
(a)      airside grounds, runways, taxiways and aprons;
(b)      airfield lighting, airside roadways and airside lighting;
(c)       visual navigation aids and nose‑in docking guidance systems;
(d)      airside access gates and perimeter fencing;
(e)       airside water, air and power infrastructure;
(f)       airside waste disposal facilities; and
(g)      other facilities integral to the use of (a) to (f).
Domestic air transport operations means:
(a)take off and landing of passenger aircraft travelling to and from other airports in Australia;
(b)      movement of such aircraft;
(c)       parking of such aircraft;
(d)loading and unloading passengers, baggage and goods on and from such aircraft;
(e)servicing of such aircraft including by way of maintenance, refuelling, catering, toilet and water services and cleaning;
(f)       other operations necessary to enable (a) to (e).”
Virgin Blue submitted that its clarification was consistent with the definitions of “airside” and “landside” contained in s 71 of the Airports Act, in which “airside” is defined to mean “the part of the airport grounds, and the part of the airport buildings, to which the non‑travelling public does not have free access.” It also submitted that its clarification was consistent with the definition of “aircraft movement facilities and activities” contained in the Price Monitoring Direction (see [94] above) and the background discussion contained in the Productivity Commission Inquiry Report.
Qantas supported Virgin Blue’s clarification and its submissions on the ambit of the “Airside Service”. In particular, with regard to the matters listed in (a) to (c) of the definition of “Airside Facilities” in the Virgin Blue clarification, Qantas submitted that those matters were considered part of “aircraft movement facilities and activities” under the Price Monitoring Direction and were consistent with SACL’s Standard COU. In support of paragraphs (d) to (g) of “Airside Facilities” in the Virgin Blue clarification, Qantas submitted that those matters are associated with the taking off and landing of aircraft and were not inconsistent with the definition of the “Airside Service” adopted by the NCC in its final recommendation. In support of the matters listed in (c) to (e) under “Domestic air transport operations” in the Virgin Blue clarification, Qantas submitted that such operations were implicitly part of the operations that are necessary to turn aircraft around upon completion of a flight and in order to prepare the aircraft for the next flight.
The NCC submitted that the Tribunal’s power to amend is limited by the service considered by the relevant designated Minister. Where the purposes for the use of the facility are changed, the dependent markets may also change, and the Tribunal may not be considering declaration of the same subject matter.
The NCC submitted that some elements listed under “Airside Facilities” and “Domestic air transport operations” in Virgin Blue’s clarification would fall outside the scope of the “Airside Service” as considered by the NCC and the designated Minister. In particular, Virgin Blue’s clarification extended the purposes for which access was sought from the movement of aircraft to encompass loading and unloading passengers, baggage and goods from passenger aircraft, and servicing aircraft including maintenance, refuelling, catering, toilet and water services, and cleaning. The NCC submitted that Virgin Blue’s clarification specified additional facilities to those contained in Virgin Blue’s application to it, including airside access gates and perimeter fencing, airside water, air and power infrastructure, and airside water disposal facilities.
Before the NCC, Virgin Blue had submitted that the facilities included in the term “Airside Service” did not need to be specifically listed, but that if they did, they would at least include the following:
·The runways at Sydney Airport;
·The taxiways at Sydney Airport;
·The parking aprons at Sydney Airport;
·Airfield lighting;
·Airside roadways;
·Airside lighting; and
·Visual navigation aids.
The NCC did not expressly consider the additional purposes and facilities in its final recommendation.
SACL submitted that the way in which the “Airside Service” was defined by Virgin Blue meant that it was limited to those services provided by SACL to facilitate aircraft movement. SACL submitted that a narrow approach to the definition of “Airside Service” was required on the basis that the Tribunal is bound by the scope of the application before the designated Minister and the NCC and by the terms of the application made to the Tribunal. As the Tribunal does not have power to amend the application, SACL contended that the only question for the Tribunal to determine was the meaning of “other associated facilities” found in the phrase “runways, taxiways, parking aprons and other associated facilities” used in Virgin Blue’s application. SACL submitted that the “other associated facilities” must be those facilities relevant to the activities listed in the definition, namely takeoff and landing using the runway, and movement between runways and passenger terminals. Therefore, the other associated facilities would be airfield lighting, airside lighting, visual navigation aids and nose‑in docking guidance systems only.

SACL submitted that “Airside Service” should not be interpreted to include the servicing of aircraft, loading or unloading aircraft, or anything that happens after arrival at the terminal or before departure from the terminal.
Qantas submitted that the inclusion of aprons in the definition of “Airside Service” demonstrated that the term is not strictly limited to movement of aircraft. As Qantas pointed out, aircraft do not take off and land on the aprons, rather, aprons support the servicing of aircraft between flights, including baggage handling, refuelling, catering access, and the loading and unloading of freight.
Qantas noted that the term “apron” is defined by SACL in a document recently proffered by SACL for consideration by Qantas to govern ground handling services at Sydney Airport, the ‘Sydney Airport Conditions of Use for Ground Handling’, version 2, August 2004 (“draft Ground Handling COU”). In the draft Ground Handling COU “apron” is defined to mean “any part of [Sydney] Airport which is used for the purpose of servicing an aircraft.”
Qantas also relied upon SACL’s Airport Operations Manual, which forms part of the conditions of use agreement currently governing Qantas and SACL’s relationship. SACL’s Operations Manual describes “aprons” as:
“A defined area on a land aerodrome intended to accommodate aircraft for the purposes of loading and unloading passengers, mail or cargo, fuelling, parking or maintenance.
That part of an aerodrome to be used:
(a)for the purpose of enabling passengers to board, or disembark from, aircraft;
(b)for loading cargo on to, or unloading cargo from, aircraft; and/or
(c)for refuelling, parking or carrying out maintenance on aircraft.”
Finally, Qantas relied upon the submission to the NCC put by BARA, that “Airside Service” included the servicing (that is, refuelling, catering and cleaning) of an aircraft within the airside precinct. Qantas noted that the NCC’s final recommendation failed to make any express exclusion of servicing of aircraft as part of the definition it adopted of “Airside Service”, even though the servicing of aircraft was clearly placed within that definition by BARA’s submission.
The determination of the scope of the service the subject of the present application is of critical significance because the resolution of this issue dictates the extent to which SACL will be able to impose charges and terms and conditions in respect of services not included within the subject matter of this proceeding. This is of particular relevance as SACL has intimated that it intends to introduce new fees or charges for certain services, such as ground handling and fuel throughput, and to impose separate terms and conditions on the provision of such services in the future. Virgin Blue maintains that these services properly come within the bundle of services encompassed in the Airside Service for which it already pays a charge. If the Airside Service is declared, it is only the charges for, or the terms and conditions in relation to access to, the Airside Service which can be the subject of arbitration by the ACCC.
It is important to bear in mind that declaration pursuant to Pt IIIA is in respect of access to a service provided by a facility, as distinct from access to a facility. “Service” is defined in s 44B as follows:
“service means a service provided by means of a facility and includes:
(a)the use of an infrastructure facility such as a road or railway line;
(b)handling or transporting things such as goods or people;
(c)a communications service or similar service;
but does not include:
(d)       the supply of goods; or
(e)       the use of intellectual property; or
(f)        the use of a production process;
except to the extent that it is an integral but subsidiary part of the service.”
This distinction between a service and a facility was explained in Rail Access Corporation v New South Wales Minerals Council Ltd (supra), where the Full Federal Court observed at 524:
“The definition of ‘service’ in s 44B of the Act makes clear that a service is something separate and distinct from a facility. It may, however, consist merely of the use of a facility. The definition of ‘service’ distinguishes between the use of an infrastructure facility, such as a road or railway line, and the handling or transporting of things, such as goods or people, by the use of a road or railway line. The fact that one service provider, such as Freight Rail Corporation, is using the railway line infrastructure facility made available to it by Rail Access Corporation for the purposes of carrying coal by rail does not mean Rail Access Corporation is carrying on, or is the provider of, a service of carrying coal by rail.”
As the NCC correctly observed, the Tribunal’s role is to determine whether the additional purposes and facilities that Virgin Blue identified as properly being included in the definition of “Airside Service” fall within the scope of the term, in light of the fact that the Tribunal is limited to a consideration of the service that was the subject of consideration by the designated Minister, which decision was in turn based upon the NCC’s final recommendation.
The service that is the subject of the present application is the “particular service” which is the subject of the written application to the NCC in accordance with s 44F(1) of the TPA. It is not for the NCC in its recommendation pursuant to s 44G, nor the designated Minister or Tribunal pursuant to the obligations imposed by s 44H, to redefine, expand, contract or otherwise interfere with the description of the “particular service” which is the subject of the written application to the NCC. However, it is for the NCC, the designated Minister, and the Tribunal on review, to interpret the definition or scope of the “particular service” which is the subject of the written application to the NCC.
The Tribunal’s general discretion to regulate and control proceedings before it pursuant to s 103 of the TPA was discussed in Freight Victoria Limited (2002) ATPR ¶41‑884. However, the general discretion found in s 103 would only permit amendments that do not amount to a material alteration, or a change in substance, of the subject matter before the Tribunal. The question for the Tribunal is whether Virgin Blue’s clarification changes the breadth or the scope of the description of the service so as to alter it materially from the service considered by the designated Minister.
In our view, the clarification proffered by Virgin Blue comes dangerously close to amending substantially the subject matter of the service sought to be declared. Some of the items in the clarification clearly fall within the scope of the subject matter of the service sought to be declared in Virgin Blue’s application to the NCC. Others are more problematic, such as the insertion of the phrase “for the purpose of domestic air transport operations” which is used to open a number of gateways. Accordingly, we do not adopt Virgin Blue’s clarification in the terms propounded. Instead, we have focused only on the definition provided in Virgin Blue’s application.
The expressions “Airside Service” and “Airside Facilities” are terms used by Virgin Blue in its application as a composite definition of the expressions and terms which precede them. These are expressions which are commonly used in the aviation industry and accordingly their use in the application must be construed having regard to that common usage. Usage may change the content of definitions over time. Our task is to examine the usage of the expressions at the time of Virgin Blue’s application.
In its final recommendation, the NCC referred to the following submissions made to it by BARA:
“BARA submitted that the term ‘airside service’ is an ambiguously defined term in the airline industry but that the term ‘airside’ has a generally accepted and understood meaning … The International Civil Aviation Organisation (ICAO) defines ‘airside’ as: ‘the movement area of an aerodrome, adjacent terrain and buildings or portions thereof, access to which is controlled.’ Given the ICAO definition, BARA considers it reasonable to conclude that Airside Service refers to the activities associated with the access, movement and servicing (refuelling, catering and cleaning) of an aircraft within the airside precinct.” (emphasis added)
The NCC also referred to the definition which the ACCC had given to “airside facilities” in its “Draft Guide to Section 192 of the Airports Act ‑ Declaration of Airport Services” (October, 1998), which included:
“aircraft movement areas such as runways, taxiways and aprons, aircraft parking areas, safety devices and guidance systems, airfield and airside lighting, airside grounds associated with the use of these facilities and vehicular access to these facilities.”
Also of relevance is the definition of “airside facilities” adopted in the Productivity Commission Inquiry Report which included “runways, taxiways and aprons, as well as airfield lighting, aircraft parking bays, visual navigation aids, hangars, freight terminals and facilities for aircraft maintenance and refuelling, and in‑flight catering”.
In its final recommendation, the NCC accepted Virgin Blue’s definition of “Airside Service”, which it said was broadly consistent with definitions given by the ACCC and the Productivity Commission and with submissions received from interested parties.
It is clear from Virgin Blue’s combined application (set out above at [86]), that there was an intention to cover the entire field of aeronautical services, comprising both airside services and landside services. The excision of the “Domestic Terminal Service” was not intended to exclude anything more than activities occurring inside the terminal.
We have formed the view that the use of the service the subject of Virgin Blue’s application encompasses those activities which commence, in relation to the departure of an aircraft, with the loading of aircraft parked at a departure gate or point of embarkation with baggage, freight and all products required on the flight, and the entrance of passengers into the aircraft. It terminates when the aircraft is airborne. That use of the service also encompasses those activities which commence, in relation to an arriving aircraft, at a point when the aircraft lands, taxis to an arrival gate or point of disembarkation, and the passengers leave the aircraft, their baggage and freight is unloaded, and supplies, waste and other items used during the flight are removed from the aircraft. In short, the “Airside Service” covers all movement in relation to aircraft between runways and passenger arrival and departure gates and the servicing, maintenance, equipping and re‑equipping of aircraft at the start and end of a flight. We define the term “Airside Service” accordingly.
We have formed this view for a number of reasons. The wording of Virgin Blue’s application suggests that the Airside Service covers those aspects of access to SACL’s facility that relate to the preparation and loading of aircraft for departure, the takeoff and landing of aircraft, and the process of the turning around of aircraft in between flights. This indicates that access to the aprons for the purposes of refuelling, catering, loading and unloading of passengers and baggage forms part of the Airside Service. So much was put to the NCC by BARA and was therefore considered by the NCC when making its final recommendation, in which it adopted Virgin Blue’s definition of “Airside Service”. Further, the definition of “Airside Service” given by Virgin Blue in its application specifically refers to “aprons” and the purpose for which aprons are used clearly goes well beyond movement of aircraft. We therefore consider that everything that happens on aprons forms part of the Airside Service for the purpose of defining the scope of Virgin Blue’s application.
This interpretation is supported by the broad meaning that “airside” is given in the aviation industry and, from a practical perspective, is preferable to a narrow definition which would limit the nature of the service which Virgin Blue intended to put before the NCC (and in turn the designated Minister), and which the NCC and the designated Minister in fact appeared to consider. In addition, a narrow interpretation would frustrate the intention of the applicant for review, would lead to commercial uncertainty, and would be likely to encourage further costly and time‑consuming proceedings. In these circumstances, such a broad definition of Airside Service, which accords with Virgin Blue’s intention, is supported by the common industry understanding, and which reflects the scope of the service considered by the NCC and the designated Minister, is to be preferred.
WHAT IS THE “MARKET FOR THE SERVICE” AND THE “MARKET OTHER THAN THE MARKET FOR THE SERVICE”?
Market definition was not a major issue in the proceeding. It was agreed by the parties that the “market for the service” in criterion (a) is the market for aeronautical services in Sydney. The parties differed somewhat as to the definition of the “market other than the market for the service” (more commonly described as the “dependent” market.)
Virgin Blue submitted that the dependent market is the market for domestic air passenger and freight services to and from Sydney, or alternatively, the market in which domestic air passenger services are supplied to and from Sydney. Qantas contended that the dependent market is the market for domestic air passenger services to and from Sydney. SACL contended that the dependent market is the market for domestic air passenger services only, but extending throughout Australia. SACL relied upon the expert opinion of Mr Gregory Houston, director of the United States of America firm National Economic Research Associates Inc, and Managing Director of its Australian operating entity. Mr Houston contended that the dependent market should be defined as the Australia‑wide market for domestic (both interstate and intrastate) air passenger services. He submitted that the network nature of the aviation industry, and the fact that airlines can flexibly redeploy aircraft from one route to another within the Australian domestic market, supported such a definition.
The differences in the definitions put forward by the parties are therefore to be found in the product dimension and geographic dimension of the market.
If all the relevant domestic airlines using Sydney Airport operated a national network with Sydney Airport as their hub, we would be inclined to the view that the relevant dependent market for the purposes of our analysis is the Australian national market for domestic air passenger travel. However, since the demise of Ansett and the commencement of operations by Virgin Blue, the LCC model has intruded into the equation. In particular, Virgin Blue and, more recently, Jetstar, do not use Sydney Airport as a hub for their domestic operations. These airlines, being LCCs, tend to focus upon individual sectors rather than operating on a network basis. This supports a market definition involving routes to and from Sydney. Similarly, new entrants may have fewer opportunities to redeploy aircraft than incumbent airlines, undermining the premise of the market definition put forward by Mr Houston.
It therefore seems to us that, properly understood, the relevant dependent market should relate to the carriage of domestic air passengers into and out of Sydney.
Although most passenger aircraft also carry varying quantities of freight, we note that there are also in operation throughout Australia dedicated freight carriers about which we heard little evidence. We are therefore inclined to exclude the use of freight from the definition of the relevant dependent market. Whether the market be the market for the carriage of passengers and freight into and out of Sydney, or the carriage of passengers alone into and out of Sydney, the conclusion reached by us would not change.
WHAT IS THE MEANING AND SCOPE OF THE EXPRESSIONS “ACCESS” AND “INCREASED ACCESS”?
The expressions “access” and “increased access” are not defined in Pt IIIA of the TPA. Virgin Blue’s primary submission was that criterion (a) required determination of whether a right or ability (or an increased, or greater, or enhanced right or ability) to use the service, as opposed to no right or ability (or only a limited or restricted right or ability) to use the service, would promote competition in the dependent market. In the alternative, Virgin Blue submitted that access (or increased access) was to be equated with declaration, which required asking whether competition in the dependent market would be promoted by declaration, as opposed to the position where there was no declaration. This latter submission was the principal submission of the NCC and Qantas.
The NCC and Qantas sought to equate the terms “access” and “increased access” in criterion (a) with regulated access in the form of declaration under Pt IIIA of the TPA. Such an approach was said to reflect earlier Tribunal decisions interpreting the terms, in particular, the Tribunal decision in Sydney International Airport at [106], 40,775. The NCC submitted that increased access included accommodation of terms and conditions of access, including access on more favourable terms.
SACL rejected this approach, submitting that the actual consequences of declaration would need to be identified and assessed to see whether access or increased access in terms of more competitive use of the facility would in fact be achieved. In its view, the fact of declaration itself was not enough to constitute access or increased access. SACL agreed that an aspect of “access” would include the terms and conditions or the price upon which access was granted, but only where it could first be shown that such terms would have an effect upon the level of access, that is upon the right or opportunity to use the service.
SACL contended that, in any event, Virgin Blue’s application did not pertain to a question of access at all, as it was clear that Virgin Blue had access to Sydney Airport, and the substance of Virgin Blue’s contentions was not that it did not have access to Sydney Airport, nor that it had insufficient access. SACL submitted that criterion (a) was thus not engaged. In SACL’s view, Virgin Blue’s application was in reality merely a pre‑emptive attempt to stop SACL from imposing increases in its charges for the Airside Service, and an attempt to change the mode of pricing imposed by SACL to a model that benefited Virgin Blue over Qantas. SACL submitted that pricing disputes were not properly brought within the access regime under Pt IIIA unless either existing pricing was affecting access, or future pricing was likely to increase and so would affect access to the service. It submitted that neither of these circumstances arose in the present case.
There was an element of ambiguity in SACL’s submissions as to the meaning and content of “increased access”. SACL accepted that if “access” to a service meant the “right or opportunity to use the facility”, then “increased access” to such a service would mean “either or both a change in, or extension of, such rights or opportunities that may exist in relation to the level of use of the facility which would increase the level of use of that facility”. It followed, submitted SACL, that “increased access” required a “consideration of the means by which different sets of rights or opportunities can lead to different levels of use of the facility”. SACL further accepted that the notion of a “right” refers to “terms and conditions on which an access seeker can use a facility owned by another”, which terms and conditions can influence the extent to which a facility may be used in a direct and indirect way.
SACL then submitted that “the type and extent of access or increased access that the Tribunal must hypothesise is the access or increased access that is likely to exist if the relevant service were to be declared”. This involved some assessment about the likely nature and extent of access that would be provided under Div 3 of Pt IIIA. Although SACL accepted that the Tribunal was not required to “second guess” the precise terms of access that the ACCC might determine upon an arbitration commenced under s 44S of the TPA, it submitted that in some circumstances it would be appropriate for the Tribunal “to anticipate how the ACCC might determine an arbitration over access”. It contended that where the issue is whether “increased access” to a service would promote competition, it was “inevitable” that the Tribunal would have to “make a more detailed assessment of the nature and extent of the access” that would exist if the service was declared. Without such an assessment, SACL said it would be impossible for the Tribunal to assess rationally whether declaration would result in increased access.

To adapt the words of Professor Baumol, declaration of the Airside Service will require SACL to behave as it would if its activities were carried out in a competitive marketplace.
SACL submitted that the airlines had ignored SACL’s long‑term pricing proposal in assessing the impact of increases in the Airside Service charges and that their witnesses had simply made general statements about the impact of increased charges. The evidence of the expert economists was controversial in this respect.
In the modelling performed by Professor Oum and Mr Smart, much was made of significant increases which would occur in the Airside Service charges. Some of these increases were not realistic. Mr Smart demonstrated that certain increases, and also reductions, in the Airside Service charge would have an effect on the profitability of a number of routes for Qantas. However, Mr Smart did not consider that significantly higher Airside Service charges would cause Qantas to exit any routes, although he considered that relatively modest changes to the level of the Airside Service charges could result in some routes to and from Sydney becoming unprofitable. He reached a similar conclusion in relation to Virgin Blue’s route profitability, albeit based on limited information.
Route profitability is, however, particularly significant for an LCC such as Virgin Blue which considers route profitability on a stand‑alone basis, rather than on a network basis. Virgin Blue generally requires all routes to be profitable on a stand‑alone basis in the long term, although unprofitable routes may be continued in the short term if they meet certain specific criteria. Mr Tim Jordan, Virgin Blue’s Head of Commercial, said that Virgin Blue will generally not accept an unprofitable route unless there are strategic reasons for maintaining the route in the short term, such as the strategic importance of Virgin Blue servicing a particular route or city, expected improvement in profitability in the medium term, or scheduling issues.
Mr Smart’s analysis was the subject of significant criticism by Mr Houston, called by SACL, who concluded that the data produced by Qantas was inadequate for the purpose of determining whether a change in the level of the Airside Service charge was likely to result in an airline suspending, maintaining or expanding capacity on a route.
Mr Houston’s criticism of Mr Smart’s analysis and also his criticism of Professor Oum’s modelling was cogent, but it fails to take account of the differential impact the change from an MTOW‑based charge to a passenger‑based charge has on the costs of Virgin Blue as an LCC. As noted earlier, the change in tariff structure converted a fixed cost to a variable cost which adversely affected Virgin Blue and reduced the incentive for airlines to chase the marginal customer.
In Professor Oum’s assessment, an increase in the Airside Service charge (using a 100% increase from $3.00 to $6.00 per passenger) would have a significantly larger negative percentage impact on reducing Virgin Blue’s traffic volumes as compared to Qantas in all of the duopoly routes to and from Sydney Airport. Accordingly, Virgin Blue would lose proportionally more passengers if both airlines faced an identical increase in the Airside Service charge.
There can be some criticism of the figures Professor Oum ultimately reached. However, it is sufficient for present purposes to observe that (with all airlines using yield management systems which price all buckets to the point of elasticity) a greater percentage reduction in passenger volumes as a result of an identical dollar increase in a passenger‑based charge for the Airside Service would be expected for airlines with a lower price structure, as compared with an airline whose market and strategy is based on a higher pricing structure.
LCCs such as Virgin Blue service a particular type of passenger, which is price sensitive, and operate under a particular cost structure which is different to that of FSAs such as Qantas. These factors support the contention that an increase in the Airside Service charge and the particular tariff structure employed by SACL will impact more heavily on LCCs such as Virgin Blue.
We have formed the view that airlines have a somewhat limited scope to pass through profitably any increases in the Airside Service charges to the majority of their passengers, which result will impact on demand and route profitability. We have also formed the view that LCCs in particular will be disadvantaged vis‑à‑vis FSAs by such an increase and by the use of a Domestic PSC in particular. This has consequences for the level of rivalry in the dependent market in general, and on demand and route profitability in particular.
SACL relied on the introduction of fuel surcharges and a credit card surcharge by Qantas and Virgin Blue to demonstrate that the imposition of identical charges by the airlines would not have any adverse affect on competition in the dependent market. SACL contended that if both airlines similarly passed on to passengers any increase in the Airside Service charge, then neither airline would be worse off and there would be no subsequent reduction in competition.
On 11 May 2004 Qantas introduced a fuel surcharge of $6.00 on all domestic tickets issued after 18 May 2004. Two days later, on 13 May 2004, Virgin Blue increased the price of each of its fare buckets by $6.00 as a fuel surcharge, to take effect from tickets issued on or after 18 May 2004. According to Mr Jordan, whose evidence we accept, notwithstanding the introduction of the $6.00 fuel surcharge in May 2004, Virgin Blue’s average fares did not increase by $6.00. Rather, the average fares derived by Virgin Blue between April 2004 and June 2004 decreased on all routes other than the Sydney‑Canberra route on which a small increase in the average fare occurred.
Mr Jordan attributed this decrease in average fares to a decreased demand for tickets which brought about a change in the number of tickets purchased in each fare bucket. What occurred was that, in order to sustain demand and maintain acceptable load factors, Virgin Blue was obliged to offer more tickets in cheaper fare buckets. No doubt it can be said that the reduction in demand for tickets was attributable to a number of factors and not solely the fuel surcharge. Relevant factors impacting on demand arise from seasonal factors, changes in capacity on particular routes and increases in competition on routes, particularly from Jetstar. Nevertheless, the fact is that immediately after the first fuel surcharge was implemented, demand for Virgin Blue tickets was reduced and average fares were reduced. We are satisfied that the first fuel surcharge had an impact on that reduced demand.
A second fuel surcharge of $4.00 (bringing the total fuel surcharge to $10.00) was introduced by Qantas and Virgin Blue, effective from 26 August 2004. At the time of the hearing there was no evidence available as to the effect of the increase on demand for tickets.
The credit card surcharge gives rise to different considerations. In one sense, it is voluntary and avoidable. A passenger can pay in cash or by cheque, although such payments limit the manner in which tickets can be purchased. Tickets can only be purchased over the internet by credit card payment. Further, a credit card surcharge does not appear as part of the headline ticket price. It does not have to be included in an advertised ticket price.
In February 2003 Qantas introduced a 1% surcharge on credit card transactions effective from the beginning of April 2003. Virgin Blue refrained from following suit. It undertook an advertising campaign in April 2003 to draw a distinction between Qantas’ and Virgin Blue’s approach to a credit card surcharge. Subsequent market research showed that passengers had not chosen to fly with Virgin Blue because Qantas imposed a credit card surcharge and Virgin Blue did not do so.
Virgin Blue brought in a credit card surcharge in June 2004 of $2 per sector per passenger because there was no competitive advantage in not doing so. It was not part of the headline ticket price and so had less impact on passengers’ views about total ticket cost, and because it gave Qantas and Jetstar a competitive advantage as they recovered their merchant service costs whilst Virgin Blue did not do so.
In summary, the credit card surcharge is not an analogue for an increase in ticket prices to recover an Airside Service charge, and has little relevance to the issue whether the Airside Service charge and any increase in it has an adverse impact on competition in the dependent market.
THE IMPACT OF AN INCREASE IN REVENUE
Any further increase in the charge for the Airside Service will further exacerbate the adverse effect of that charge on competition in the dependent market. As it has a differential impact on LCCs such as Virgin Blue as compared with FSAs such as Qantas, any further increase will reduce the differential of variable operating costs between airlines such as Virgin Blue and Qantas. Any additional charges levied for services currently provided as part of the Airside Service so as to increase SACL’s level of revenue will have an impact on the costs of the airlines and their ability to compete in the dependent market.
As we have noted earlier, Virgin Blue estimated and SACL accepted (see [202] and [190] above, respectively), that the change from an MTOW‑based charge to the Domestic PSC would result in an increase of approximately 52% to the Airside Service charge paid by Virgin Blue whereas Qantas’ charges would only increase by approximately 4%. This disproportionate effect will intensify as the Domestic PSC increases, as proposed by SACL in its draft Aeronautical Services Agreement, propounded on 28 September 2004. The consequent reduction in the difference in operating costs between Virgin Blue and Qantas, brought about by the disproportionate increase in the costs of LCCs such as Virgin Blue, will have a flow‑on effect in relation to the prices offered for air travel and a consequent narrowing of the difference in prices offered.
As Dr Williams pointed out, this will have the effect of limiting the range of price options available for passengers in the dependent market. This will have an effect on competition because it will reduce the extent to which the LCC model airline will be competitive with the FSA model airline. The significance the LCC model has for competition in the air passenger market generally is that its low cost structure has enabled it to provide vigorous competition to the FSA model airline.
Although the increases in the Domestic PSC proposed by SACL in its draft Aeronautical Services Agreement are on one view relatively small compared to Virgin Blue’s overall variable costs and the average domestic fares, Virgin Blue’s yield management practices operate so that fare buckets are priced to the point of elasticity and leave little room for passing on costs to passengers without there being a corresponding effect on demand. Mr Jordan of Virgin Blue noted that overall Virgin Blue made a pre‑tax profit on each passenger processed through Sydney Airport for the eleven month period ended February 2004 of approximately $[x] averaged across all Sydney routes. Thus, even a small increase in a per‑passenger charge will have a significant effect on Virgin Blue’s profitability. This effect will be exacerbated by the fact that Virgin Blue assesses its route profitability on a stand‑alone basis (and some of these routes are only marginally profitable). The significance of route profitability is demonstrated by the fact that in September 2004 Virgin Blue suspended its Sydney‑Canberra service (Virgin Blue had not operated profitably on the route for a considerable time). Virgin Blue also ceased flying the Sydney‑Alice Springs route after October 2004 because it was unprofitable. In its place, it commenced flying the Adelaide‑Alice Springs route. The key factor in Virgin Blue’s decision to switch from the Sydney‑Alice Springs route to the Adelaide‑Alice Springs route was that the direct operating costs were significantly lower on the Adelaide‑Alice Springs route. Thus an increase in charges by SACL may also lead to a reduction in the frequency or capacity of routes currently offered by Virgin Blue.
We accept the proposition put by SACL that consumers will be influenced in their choice by the relative airfares offered by the airlines. This does not mean that a uniform increase in the charges for the Airside Service will not have any impact on competition because the differential between the prices of each airline’s airfares would remain constant. As we have previously discussed, the different cost structures and different passenger preferences of Virgin Blue and Qantas mean that a uniform increase in costs to the airlines impacts differently upon each airline. A uniform increase in costs will therefore not necessarily translate to a uniform increase in the airfares offered by each airline. Furthermore, LCCs seek to target, among others, a large proportion of passengers who only choose to fly because a low fare is offered. The LCC model is premised upon generating such additional demand, rather than merely attracting existing passengers away from other airlines. Even a small increase in airfares may deter such passengers from choosing to fly.
THE IMPACT OF NON‑PRICE TERMS AND CONDITIONS
We have already found that, without declaration of the Airside Service, the counterfactual scenario will involve:
·protracted negotiations for new or varied contractual arrangements in relation to the conditions of use of Sydney Airport;
·minimum service standards by SACL may not be established;
·new charges are likely to be imposed by SACL on airlines either directly or indirectly;
·SACL may unilaterally increase substantially the revenue it obtains from the imposition of the Airside Service charge;
·the proposed force majeure clause is likely to generate a significant increased risk for the airlines and therefore involve them in an increased cost;
·services will be carved out of existing services and the airlines will be subject to extra charges and imposts.
Each of these factors has an impact on airlines because they either affect the efficiency of airlines in the manner in which they operate in a competitive environment or add to their cost structure in a manner which affects their ability to pass on further costs to passengers and their profitability.
We are satisfied that the operating efficiency of an airline and its ability to be competitive in a relevant market can be affected by the conditions of use to which it is subject when it uses an airport. Much depends upon the nature of the conditions of use laid down by the airport operator. Protracted negotiations lead to uncertainty and an inability to engage efficiently in forward planning. Where one of the negotiating parties is a monopolist with the ability and the inclination (as SACL has demonstrated in the past) to exercise its monopoly power, the negotiations tend to end up with the other negotiating party being compelled to accept terms which can impact on its ability to be competitive. An example of such a situation is found in Jetstar’s experience at the time it was about to commence operations at Sydney Airport.
Although SACL has propounded a long‑term pricing proposal, it is apparent, as we have found earlier, that it is proposing to introduce further charges which will be imposed in respect of the use of components of the Airside Service.
These charges will increase the costs of the airlines using Sydney Airport which will have an effect on their ability to be, and remain, competitive in the dependent market. More particularly is this so where the airlines in the dependent market have different cost structures based on the LCC and FSA models.
A similar effect will occur if the force majeure clause is implemented. It will involve the airlines assuming a significant risk and either having to make some provision for the contingency involved or obtain adequate insurance cover as protection against a substantial open‑ended contingent liability. In either case, there will be a cost effect which will impact on their ability to be, and remain, competitive in the dependent market.
If the Airside Service is declared, and these factors continue to exist (as we consider they will if the Airside Service is not declared), the airlines will have the opportunity to negotiate these matters in a manner more reflective of what would occur in a competitive environment because, in the absence of a negotiated resolution of any such matter, the disputed issue can be referred to the ACCC for an arbitrated determination. For example, if the negotiations in relation to the conditions of use of Sydney Airport remain protracted and without resolution, the airlines can have the terms of their conditions of use determined by independent arbitration.
CONCLUSION AS TO CRITERION (A)
The issue whether increased access to the Airside Service will promote competition in the dependent market is complex because the answer is derivative. In this context, increased access equates to access on different terms and conditions; in particular, on a term that if any airline which uses Sydney Airport is unable to agree with SACL on any aspect of access to the Airside Service then an access dispute will arise which, in the absence of a negotiated resolution, will be arbitrated and determined by the ACCC.
Increased access does not mean that an airline will inevitably be able to alter, vary or modify the terms upon which it is given access to the Airside Service. Rather, it means that the commercial environment will change and the airline will have the opportunity to seek to achieve such alteration, variation or modification by independent arbitrated determination in default of a negotiated resolution.
An example exposes the distinction: if the Airside Service is declared, Virgin Blue will not be able to require SACL to change the Domestic PSC to an MTOW‑based charge or any other charge. However, Virgin Blue will have the opportunity, if it wishes, to seek to negotiate that charge with SACL on mutually acceptable terms. If it cannot do so, it will have the opportunity, indeed the right, to notify the ACCC that an access dispute exists and to have the ACCC, by arbitration, determine whether the nature, structure and level of the Airside Service charge should be changed and, if so, in what manner. A similar situation can also arise, for example, if Qantas asks SACL to lay down certain minimum standards of service delivery in relation to the provision of the Airside Service. If SACL is unwilling to do so, Qantas would have the option of referring the matter to the ACCC for an arbitrated determination.
It can be seen from our analysis of the factual and the counterfactual that a comparison of the circumstances and state of competition between the factual and the counterfactual discloses that declaration of the Airside Service would bring about increased access (that is, access on different terms and conditions) to the Airside Service at Sydney Airport which would promote competition in the dependent market. The environment for competition in the dependent market will be enhanced if declaration of the Airside Service is made compared to the state of competition in the dependent market if the Airside Service is not declared.
We are therefore satisfied, in terms of criterion (a), that increased access to the Airside Service would promote competition in at least one market other than the market for the Airside Service, that is, the dependent market.
CRITERION (f)
The second disputed criterion in s 44H(4) concerned criterion (f), which requires that the Tribunal be satisfied:
“(f)that access (or increased access) to the service would not be contrary to the public interest.”

In Re Duke Eastern Gas PipelinePty Ltd (supra) the Tribunal considered the construction of a provision in similar terms to s 44H(4), s 1.9 of the National Third Party Access Code for Natural Gas Pipeline Systems. The Tribunal considered at 33, that s 1.9(d) (which is substantially similar to criterion (f)), “does not constitute an additional positive requirement which can be used to call into question the result obtained by the application of [the earlier criteria in s 1.9]”. Rather, s 1.9(d) accepted the results derived from the application of the earlier criteria but “inquires whether there are any other matters which lead to the conclusion that coverage would be contrary to the public interest”.
We consider that this construction applies equally to criterion (f). It is an independent and self‑contained criterion of which we must be satisfied. It requires consideration whether there are circumstances other than those raised for consideration by ss 44H(4)(a) to (e) which demonstrate that increased access (the issue in this proceeding) would be contrary to the public interest.
Virgin Blue submitted that the question the Tribunal must ask itself in respect of criterion (f) is whether conferring on airlines a right or ability to use the Airside Service is contrary to the public interest.
According to the NCC, as criterion (f) is phrased in the negative, in a case where ss 44H(a) to (e) are satisfied, in order to make a decision not to declare a service, the costs of regulated access must outweigh the benefits of regulating natural monopoly services. It was said that the task for the Tribunal is to assess whether the costs of regulation outweigh the benefits of declaration and, in doing so, the costs should be recognised as including both direct costs of regulation, for example, the costs of arbitration, and indirect costs of regulation, for example, the cost of distorting efficient investment or production decisions.
SACL submitted that the direct and indirect costs of regulation would outweigh any benefits that might be obtained in the dependent market under declaration of the Airside Service. SACL relied upon the evidence of Professor Baumol who sought to show that declaration would lead to costly regulation which would be open to strategic misuse. Professor Baumol’s evidence regarding the excessive cost and perniciousness of regulation was, as he acknowledged, largely based on his experience of regulation in the United States of America and to that extent his evidence in this respect was of limited assistance.
The direct, immediate and up‑front nature of much regulation in the United States of America contrasts with the default nature of the arbitration available under a declared service pursuant to Div 3 of Pt IIIA of the TPA. The use of arbitration under Div 3 of Pt IIIA is only activated where the parties are unable to reach agreement on one or more aspects of access to a service. Arbitration is not immediate and indeed may never occur. We note in this regard Qantas’ reference to Australia’s past experience under s 192 of the Airports Act where no arbitrations arose in the four years during which airport services at Brisbane, Melbourne and Perth were deemed to be declared under Pt IIIA of the TPA. Further, following the declaration of ramp handling services at Sydney Airport as a result of the Tribunal’s decision in Sydney International Airport, there has not been resort to arbitration under Div 3 of Pt IIIA of the TPA.
If arbitration were to occur, the arbitration process has the potential to be swift and relatively inexpensive. The powers of the ACCC are sufficient to ensure that any arbitration that does occur is conducted efficiently and expeditiously: see, for example, ss 44Y and 44ZF. The ACCC is not bound by the rules of procedure and may give directions as necessary for expedient hearings of matters, including for matters to be heard via telephone or video link: s 44ZF. The ACCC is also empowered to terminate an arbitration where it is vexatious, where the subject matter is trivial, misconceived or lacking in substance, or where the party notifying the dispute has not engaged in good faith negotiations: s 44Y.
We note that SACL’s other economic expert, Mr Houston, also sought to highlight the costs and disadvantages of regulation. A key assumption of Mr Houston’s analysis was that declaration would involve arbitration by the ACCC and he estimated the timing and cost to the parties involved of such an arbitration. As indicated, declaration need not result in arbitration. The parties are free to reach commercial agreements and will have a clear commercial and financial incentive to do so. The commercial negotiations would presumably be no more or less expensive with declaration. Declaration therefore does not incur costs at the stage before a Div 3 arbitration is requested.
We consider Mr Houston’s analysis to be of little probative value. It is speculative and based on a number of assumptions that will not necessarily be valid at any given point of time. Much would depend upon the nature of the dispute and the extent to which there had been negotiations to resolve the dispute. Any estimate of such costs, particularly where arbitration is not inevitable, is speculative in the extreme. It should also be remembered that the legislation anticipates a speedy and cost efficient arbitration: s 44ZF.
We also observe that previous independent work by Mr Houston emphasised elements of the desirability of regulation, particularly in situations of private investment in infrastructure. In a paper entitled ‘Private Participation in Infrastructure in China. A Regulatory Perspective’ delivered on 15 November 2001, Mr Houston said:
“[A] critical requirement for successful private participation in infrastructure industries everywhere is the establishment of an ‘independent’ regulatory framework with
·     clarity of jurisdiction
·     independence from vested interests
·     dispute resolution processes and principles.”
It was put to Mr Houston that the lighter‑handed policy devised by the Commonwealth Government, involving as it did only the threat of re‑regulation, did not meet this critical requirement. Mr Houston did not agree with the proposition put to him, but was unable to identify a dispute resolution process and principle in the Commonwealth Government’s policy. We do not consider that the Commonwealth Government’s lighter‑handed policy does include an independent regulatory framework other than in Pt IIIA of the TPA.
We are not satisfied that there is any substantive or effective dispute resolution process directly tied to the threat of re‑regulation. The Review Principles do not give any indication that disputes in general would lead to re‑regulation. The Review Principles state that “[i]t is expected that airlines and airports will primarily operate under commercial agreements and in a commercial manner, and that airport operators and users will negotiate arrangements for access to airport services”, without commenting on any mechanism for the resolution of disputes. The need for dispute resolution processes that had been identified by the Productivity Commission was not effectively responded to by the Commonwealth Government.
The Review Principles focused on the conditions that, if violated, could trigger a review regarding the need for a resumption of price controls. Accordingly, violation of the Review Principles would not necessarily trigger the introduction of more general dispute resolution processes. It is not clear that re‑regulation would bring dispute resolution processes to bear on non‑price terms and conditions of access, for example. It is therefore difficult to see how moves to re‑regulation, if limited to price controls as foreshadowed by the Review Principles, would amount to the imposition of dispute resolution processes beyond those associated with price levels.
Virgin Blue submitted that a bargaining power asymmetry exists between SACL and the airlines and that the economic expert evidence had demonstrated that declaration would assist in redressing that asymmetry, leading to a net public benefit.
Virgin Blue argued that where a disparity of bargaining power exists between negotiating parties, the prospect of arbitration if negotiation fails increases the likelihood of the parties reaching a commercial agreement that truly reflects a fair negotiated position. Such an outcome is in the public interest. Virgin Blue also argued that where the bargaining power is equal there is no reason to conclude that declaration, introducing the possibility of arbitration, would reduce the opportunities for commercial negotiation.
We agree with these submissions and consider that declaration will redress the bargaining power asymmetry presently existing due to SACL’s position as a monopoly provider of the Airside Service in Sydney in circumstances where the scope of dispute resolution procedures in relation to access to the Airside Service are severely limited. As Mr Houston himself put it in his presentation (referred to above at [596]), “[t]he overall objective of economic regulation is to mimic the outcome of a ‘competitive market’”.
The NCC accepted that declaration did not mean that the opportunity for commercial negotiations was foregone but contended that declaration would limit or alter the nature and outcomes of commercial negotiations between access seekers and service providers such that the potential benefits of commercial negotiation without any recourse to a binding dispute resolution process would be foregone. We do not agree. Nor do we agree that early recourse to arbitration may result in an imposed outcome that is not as efficient as one that may have been developed by the parties themselves.
We consider that the availability of a binding dispute resolution process provides an incentive for parties to negotiate in a realistic, practical and positive manner in an attempt to resolve differences which affect, and have a real impact on, their daily commercial activities. Indeed, we consider that the availability of a binding dispute resolution process will bring about a more efficient outcome than a situation where no such process is available. More particularly is this so where the arbitrator has to take into account the matters specified in s 44X(1) of the TPA.
We do not regard the outcome of the negotiations between SACL and the airlines in relation to the issues which arose between them, and which we have discussed, as an efficient disposition of their differences. The history of the conduct of SACL to which we have referred demonstrates the desirability, indeed the necessity, of having in place a binding dispute resolution process.
We are satisfied that where there is significant bargaining asymmetry, as we have found exists between SACL and the airlines using Sydney Airport, a binding dispute resolution process will address such bargaining asymmetry and provide a better framework for commercial negotiation.
The interaction of the provisions of Pt IIIA of the TPA and the Commonwealth Government’s policy of lighter‑handed regulation were contentious. SACL submitted that the Government’s acceptance of the lighter‑handed approach should preclude declaration under Pt IIIA of the TPA. SACL contended that, just because Pt IIIA continues to operate, it does not mean that the Airside Service should automatically be declared. SACL also emphasised the importance and predominance of the Government’s stated policy of “lighter‑handed” regulation. In particular, SACL submitted two matters that it considered to be of great weight in the determination of criterion (f), both of which arose from that policy, as outlined in the Commonwealth Government’s joint press release issued in May 2002 following the release of the Productivity Commission Inquiry Report (referred to at [37] above). These matters were:
·that the prices notification regime be replaced with a prices monitoring regime for a probationary five‑year period;
·that the Government supported the lighter‑handed regulation in the form of prices monitoring arrangements and that an independent review be conducted after five years “to determine whether there have been unjustifiable price increases that warrant the imposition of price controls.”
However, it should be remembered that the Commonwealth Government’s joint press release also stated that all airports should be subject to the generic provisions of the National Access Regime in Pt IIIA of the TPA.
We acknowledge, and have given considerable weight to, the Commonwealth Government’s policy of lighter‑handed regulation. We do not challenge that policy, but nevertheless place it in context with all the other factors and criteria to be taken into account in determining whether the Airside Service should be declared. In particular it must be again remembered that the Commonwealth Government’s policy includes the applicability of Pt IIIA of the TPA to Sydney Airport.
We have already found that we are satisfied that our finding as to promotion of competition in the dependent market is sufficient to outweigh any perceived effect or consequence of declaration on Government policy. Indeed, we consider that, in the light of such finding, declaration is consistent with the underlying objectives of Government policy. We are therefore satisfied for the purposes of criterion (f) that increased access to the Airside Service will not be contrary to the public interest.
RESIDUAL DISCRETION
SACL submitted that even if we were satisfied that criteria (a) and (f) were satisfied, we should nevertheless decline to declare the Airside Service because of the Government’s policy of lighter‑handed regulation, the absence of market failure, the current negotiations between the parties to reach a long‑term agreement, and the unlikelihood that any benefit will be derived from declaring the Airside Service. It was submitted that, to the extent, if any, these considerations were not relevant to the question of public interest, they were relevant on any issue of residual discretion.
We accept that we have a residual discretion to decline to make a declaration, but it is extremely limited. In Sydney International Airport the Tribunal said at [223], 40,796:
“The Tribunal is prepared to accept that the statutory scheme is such that it does have a residual discretion. However, when one has regard to the nature and content of the specific matters in respect of which the Tribunal must be satisfied pursuant to s 44H(4) of the Act, that discretion is extremely limited. The matters therein specified cover such a range of considerations that the Tribunal considers there is little room left for an exercise of discretion if it be satisfied of all the matters set out in s 44H(4).”
We agree with these observations. The comprehensive issues set out in s 44H(4) leave little room for the consideration of other issues. Particularly is this so when s 44H(4)(f) requires consideration of the broad subject of “the public interest.”
Each of the matters raised by SACL in respect of the exercise of a residual discretion has been considered in our analysis of criteria (a) and (f). We see no reason which warrants us reconsidering those matters in the context of the exercise of our residual discretion.
We are satisfied, in the exercise of our residual discretion, having regard to our satisfaction of the matters raised in s 44H(4), that the Airside Service should be declared.
PERIOD OF DECLARATION
It remains to consider the period during which the Airside Service should be declared. The issues which have given rise to the application for declaration show that the period of declaration should be sufficiently long to enable SACL and any airline using Sydney Airport to make and implement strategic business decisions. However, the period of declaration should not be so long as to deny SACL the opportunity to demonstrate that its conduct is such that continuous or renewed declaration is no longer necessary. We note that it is desirable that any decisions as to pricing proposals and the implementation of terms and conditions of access to the services offered at Sydney Airport are able to be made in such a way during the period of declaration that there is sufficient time for any access disputes to be negotiated and, if incapable of commercial resolution, to be determined by arbitration by the ACCC. It is also desirable that any period of declaration allow for the implementation of any such decisions and arbitrated issues so that during the period of declaration the consequences of such decisions and arbitrated outcomes can be observed and understood.
In its draft recommendation when it considered that the Airside Service should be declared, the NCC formed the view that declaration for a period of five years was most appropriate. This is the period of declaration which Virgin Blue in fact sought before us. SACL contended that a period of two years was more appropriate in order to enable SACL’s proposed long term commercial agreements to be bedded down, or otherwise a period of three years was sufficient for the result of any review undertaken by the Commonwealth Government to be known.
We consider that five years is an appropriate period for declaration. In the circumstances outlined above, we initially considered that a period of seven years might be an appropriate period for declaration. However, whilst SACL and the airlines negotiated terms and conditions of access over a number of years, between 1998 and 2004, we consider that declaration will truncate any future commercial negotiations of this nature as any party will be able to insist upon arbitration if genuine and good faith negotiations do not achieve a commercial resolution. Accordingly, a period of five years is a sufficient period for declaration.
THE DETERMINATION
The Tribunal therefore makes the following determination pursuant to s 44K(8)(b) of the TPA:
1.It sets aside the decision of the Parliamentary Secretary to the Commonwealth Treasurer of 29 January 2004 not to declare the services required for the use of runways, taxiways, parking aprons and other associated facilities (Airside Facilities) necessary to allow aircraft carrying domestic passengers to:
(i)        take off and land using the runways at Sydney Airport; and
(ii)       move between the runways and the passenger terminals at Sydney Airport.
2.It declares the service for the use of runways, taxiways, parking aprons and other associated facilities (Airside Facilities) necessary to allow aircraft carrying domestic passengers to:
(i)        take off and land using the runways at Sydney Airport; and
(ii)       move between the runways and the passenger terminals at Sydney Airport,
(Airside Service).
3.It determines that the declaration in paragraph 2 of the determination shall be effective on and from 9 December 2005 and shall expire on 8 December 2010.

I certify that the preceding six hundred and eighteen (618) numbered paragraphs are a true copy of the Reasons for Determination herein of the Tribunal

Associate:
Dated: 12 December 2005

Counsel for Virgin Blue: S J Gageler S.C. and J A Halley

Solicitors for Virgin Blue: Gilbert & Tobin

Counsel for Qantas: J E Griffiths S.C. and M J Darke

Solicitors for Qantas: Minter Ellison

Counsel for Sydney Airport Corporation Limited: F M Douglas QC and N Manousaridis

Solicitor for Sydney Airport Corporation Limited: Mallesons Stephen Jaques

Counsel for the National Competition Council: P R Whitford S.C.

Solicitor for the National Competition Council: Phillips Fox

Counsel for the Parliamentary Secretary to the Treasurer: A I Tonking

Solicitor for the Parliamentary Secretary to the Treasurer: Australian Government Solicitor

Dates of Hearing: 11, 12, 13, 14, 15, 18, 19, 20, 25, 26 and 27 October 2004

Date of Final Submissions: 16 December 2004

Date of Reasons for Determination: 12 December 2005

Counsel for Virgin Blue:	S J Gageler S.C. and J A Halley
Solicitors for Virgin Blue:	Gilbert & Tobin
Counsel for Qantas:	J E Griffiths S.C. and M J Darke
Solicitors for Qantas:	Minter Ellison
Counsel for Sydney Airport Corporation Limited:	F M Douglas QC and N Manousaridis
Solicitor for Sydney Airport Corporation Limited:	Mallesons Stephen Jaques
Counsel for the National Competition Council:	P R Whitford S.C.
Solicitor for the National Competition Council:	Phillips Fox
Counsel for the Parliamentary Secretary to the Treasurer:	A I Tonking
Solicitor for the Parliamentary Secretary to the Treasurer:	Australian Government Solicitor
Dates of Hearing:	11, 12, 13, 14, 15, 18, 19, 20, 25, 26 and 27 October 2004
Date of Final Submissions:	16 December 2004
Date of Reasons for Determination:	12 December 2005

[2005] ACompT 5

12 Dec 2005