In the analysis in Columns B
& C, it is assumed that the tax rate and earnings
retention rate are the same as achieved by SACL in 98/99, and
that expenses would remain constant.
The disparity in the Return on Equity makes
SACL a fairly unattractive investment. For it to match Qantas' performance, it
would have to raise an additional $441
million per annum in revenue.
At Jan 2000, SACL's sole shareholder (equity
holder) was the Federal Minister for Finance. By allowing his
company to run at less than the commercial standards Qantas can
achieve, he is accepting a loss of this $441
million - made up of the the dividend (see Column B in Table 1),
the tax charge he fails to collect, and the retained earnings not
gained by SACL.
Ultimately, these losses are a subsidy
funded by Australia's taxpayers. There are approximately 6.5
million taxpayers. Table 2 below shows the average subsidy per
taxpayer is $68. On average, each taxpayer is forgoing $68
per annum to enable the hoi-polloi to jet-set away on overseas
holidays, or to interstate business meetings.
Table
2 - Taxpayer Subsidy
|
$m
|
Dividends
Lost |
137
|
Tax
Charge Lost |
214
|
Retained
Earnings Lost |
89
|
Total Losses
|
441
|
Number
of Taxpayers (million) |
6.5
|
Subsidy
Per Taxpayer |
$ 68
|
This subsidy is a benefit to the airlines,
or their passengers. If they were paying their way, each
passenger could be up for an average of $43 more per return air ticket. Such an increase would
significantly impact demand on regional and short-haul domestic
air fares.
In Sept 2003, Qantas complained bitterly about being unable to afford less than $12 per passenger to
equip its aircraft with anti-missile defences. Airlines simply hate paying their way, and would
much prefer that taxpayers shovel unlimited sums of money into their industry.
SACL would most likely try to soften the
blow by striking a charge that shifted the weight more onto
international travellers (as suggested in the DT report for the
much more moderate increases SACL proposes).
Against this, the regional and domestic air
routes consume runway landing slots as much as the larger
international 747's. Deterring them could be just the right
strategy needed to support more profitable international traffic
without building a second airport (Neglecting noise impacts, as
every good airport economist does).
AirLines
Benefit |
$m
|
Aeronautical
Revenue Avoided |
441
|
Passsenger
Movements (million pa) |
22.5
|
In
Transit Passenger Proportion |
8%
|
Passenger
Enty/Exit at KSA (million) |
20.7
|
$
per Passenger Entry/Exit at KSA |
$21
|
$
per Return Air Ticket |
$43
|
Perhaps it is high time the
airlines had to build, own and operate their own airports -
without dipping into the public purse for around $440 million at
a time we are finding it desperately difficult to fund hospitals
and universities adequately.
It might also be reasonable to question
just how much more feasible the Sydney-Canberra-Melbourne fast
rail proposals would be if they were to enjoy such a massive
public subsidy.
It's clearly not a level playing field.
Will privatisation improve this ? Is it any
better with the now privatised international airports ? Let's
consider, for example, Melbourne's Tullamarine Airport.
Airport Sale Economics
"Melbourne Airport is owned and
operated by Australia Pacific Airports (Melbourne) Pty Ltd (APAM),
who took over its operation from the Federal Airports Corporation
(FAC) in July 1997. APAM is a wholly owned subsidiary of
Australia Pacific Airports Corporation (APAC). AMP, Deutsche
Asset Management, BAA plc and Hastings Funds Management are
shareholders of APAC. APAC paid $1.3 billion for a 50-year lease
of the airport, with an option for a further 49-year lease at the
end of this period - now owned by Airports Pacific Australia
Melbourne) Pty Ltd." (source,
ACCC).
The ACCC's presentation of APAM's financial
reports cautions that APAM's directors have decided that
"The company is not a
reporting entity because in the opinion of the Directors
there are unlikely to exist users of the accounts who are
unable to command the preparation of reports tailored so as
to satisfy specifically all of their information needs.
Accordingly, this "special purpose financial report"
has been prepared to satisfy the Directors' reporting
requirements under the Corporations Law."
If that doesn't get you wondering what they've
got to hide, the contents of their statements should. It turns
out that APAM have apparently made a loss of
around $29m in both the years of operations since they bought
in. The directors are quick to reassure that it is a going
concern:
"Notwithstanding the
company's deficiency in working capital the Directors believe
that the entity is a going concern based on future
positive operating cash flows and finance facilities
available."
Unfortunately, we can't see or assess these
longer range cash flows. But there is something we can see...
What we can see is that there may be some
interesting accounting behind APAM's apparent loss. On borrowings
of around $1292 m, APAM paid some $105 m in interest - equivalent
to an interest rate of 8.1%.
In comparison, SACL's borrowings of $899 m
required only $53 m in interest - equivalent to 4.9%. Qantas' 98/99
borrowings were achieved at an average interest rate of 5.3%.
As another point of reference, the
privatised Brisbane Airport operator Brisbane Airport Corporation
Limited (BACL) paid $90.1 million in interest or amortisation on
borrowings of 1,196m - a rate of 7.5%.
ACCC has made no comment on the
extraordinary difference in interest rates between SACL and
Qantas on one hand, and the private airport operators on the
other hand.
It could be that young companies like APAM
are not able to get the lower interest rates the likes of
government backed SACL and Qantas can get. But you could also
wonder who is getting the benefit of this higher interest rate,
and whether it's not just a way of either
- getting money away from the tax system,
or
- obfuscating the financial dealings so
that the public can't see what is going on.
Whatever the reason, APAM's negative
Return on Equity performance makes it look like a huge
underachiever compared to Qantas and SACL. But is it
really that bad ?
If APAM had
borrowed at similar rates to SACL, it would have saved $42m
- enough to get in the black, and paying taxes back to the
Commonwealth. Assuming it paid 35% tax, it might have earned a
profit after tax and abnormals of around $8.5 m. If this were
retained within the company, it's shareholder's equity would have
been $79 million, and the Return on Equity would reach a
reasonable 10.7%.
(In fact, APAM could offset it's profit
by it's $29 m loss from the previous year, and achieve an
even better ROE. But, equally, in its previous year, it could
have done better in the interest stakes. Including tax here
probably gives a better picture of APAM's underlying
profitability).
It's understandable that APAM might want to
appear to lose money. It will certainly help defend a low sale
price for Sydney airport. And it will also help SACL's case for
increasing airport charges.
APAM could be expected to support SACL's
increased charges. Even though the ACCC price-caps restrict what
it can expect to apply in Melbourne, it can only help to support
someone who wants charges to move in a more profitable direction.
If APAM could scale its charges for 98/99
by the amount now proposed by SACL ($114 m to 212 m), it would
have achieved a profit after tax of $10.2 m, to give Return on
Equity of 12.7%, as well as making very good money for the
companies it has borrowed from.
APAM's loss also makes it look like it's a
good idea to sell the airports. As long as you
- don't think about how much the value
of the assets might have been discounted in the sale
process, and
- can't see what Returns can be expected
a few years down the track as passenger numbers increase
and APAM's debt burden falls, and
- don't consider SACL's superior Return
on Equity.
SACL's results might also suffer from under-valuing
of the assets (certainly the replacement cost of KSA, namely the
projected cost for the Second Airport are at least double the
book value of KSA).
But at least the obfuscation of private
ownership, highly geared financing and high interest rates aren't
there to distract you from seeing that Sydney airport is in fact
a heavily subsidised financial underachiever.
Provided that the airport price is not
discounted to allow for the poor returns expected from the
current taxpayer subsidised operating regime, selling the
airports may well be a good idea. Especially if the returns from
user-pays commercial drivers were to remain in this country,
rather than dissappear overseas as excess interest and other
transfer payments.
On the other hand, selling the airport at
too low a price will lock-in the public subsidy permanently in a
way that will escape most people's attention. It's a clever trick
if you can get away with it.
What is an airport operator's Real Business
- where does it makes it's money ? It's revealing to look at each
airport's Operating Profit before Tax and Interest, divided by
the number of passengers moved (to account for size differences
between airports).
As table 4 shows, for Sydney only 7% of the
profit comes from aeronautical services. Much more profit is
coming from the public car park.
For SACL, the car parking contributed $24 m
to operating profit ( or $1.10 per passenger movement). The total
operating profit for aeronautical services was only $8.5 m.
Table
4 - Operating Profit Before Tax and Interest, per Passenger
Movement
|
Aero/pm |
NonAero/pm |
% Aero |
Car Parking |
Sydney |
$ 0.39 |
$ 5.56 |
7% |
$1.10
|
Melbourne |
$ 0.90 |
$ 4.41 |
17.0%
|
$1.13
|
Brisbane |
$ 0.28 |
$ 6.34 |
4.2%
|
$0.79
|
For Melbourne, car parking earned
$1.13 per passenger movement, and in Brisbane $0.79.
And there are clearly much greater
profits available from the non-aeronautical activities (we've not
considered here how much money is being made by the contractor's
operating the airport parking concessions).
This is further evidence that
airport users are simply not paying for the real cost of
providing the aeronautical services.
If you look to what is bringing in
the money, the airport operator is really in an up-market retail
and car-parking business.
Given how little profit arises
from the aeronautical services at an airport, the economy may
well be better off converting airports to other commercial uses.
Airline Charges to Rise
The Daily Telegraph report by Ian Lovett, December 9, 1999
read:
Airline fares are set to rise
as Sydney Airports Corporation beefs up its balance sheet
ahead of an expected float next year.
A Sydney to London ticket is
likely to rise by $10.25 and Sydney to Melbourne by $1.95.
The rises, if approved by the
Australian Competition & Consumer Commission, will take
effect from November 2000.
The ticket rises follows the
Federal Government owned Sydney Airports Corporation - SACL's
- decision to double its airport fees.
SACL said this would boost its
revenue by
$98 million to $212.5
million.
The money would be used to
bring the airport operator's return on investment closer to
current returns.
At present, SACL's return on
investment is 2.6 per cent.
By contrast, Qantas returned 13.9
per cent on investment in 1998-99.
Brokers said it was normal for
government enterprises to cut costs and boost income to make
their balance sheets more attractive ahead of floating on the
stock exchange.
Three weeks ago, the Federal
Minister for Finance and Administration, John Fahey, said he
favoured a float of SACL, but it is not yet Government policy.
Mr Fahey also said he favoured
offering SACL shares at discount prices to residents affected
by airport noise.
SACL's manager of economics,
Steve Fitzgerald, and chief financial officer, Don Huse, met
with the airlines to discuss the rise.
Mr Huse stressed the rise
would not be introduced until after the Olympics to allow the
airlines to better plan for its introduction.
SACL chief executive Tony
Stuart said the proposed increased charges to airlines
followed a significant upgrade of facilities for passengers
and airlines at the airport.
It predicts a 6 per cent rise
in international and a 7.5 per cent increase in domestic
passengers over the next year.
Despite SACL's attempts to
soften resistance, industry analyst said the fee rise was
expected to get a hot reception, particularly from Qantas.
Qantas' share price has fallen
26 per cent since November 22 after Richard Branson's Virgin
Airlines said it planned to begin operations in Australia,
threatening Qantas' hold on the lucrative domestic travel
market.
A 24 page document detailing SACL's
proposal for increased charges (9th Dec 1999) can be found at the
ACCC airport report website ( http://www.accc.gov.au/airport/airrep.html, follow the link to syd_proposal_summary.zip ) . SACL's Price Rise is based on an WACC of 8% on
just the regulated aeronautical services they provide. It is
effectively the Return on Equity deployed on the regulated
aeronautical services (at least in SACL's opinion).
It does not address any underperformance in
the non-regulated business, either on the aeronautical or non-aeronautical
sides.
SACL's Price Rise will produce barely a
quarter of the revenue increase that would be needed to bring
SACL to a similar overall performance level to Qantas. This might
be because SACL is underachieving in both the non-regulated and
regulated parts of its business. So it might be that SACL should
increase its non-regulated charges to ease some of the pain to
travellers - but from the taxpayer's point of view it doesn't
matter which part of the business the money comes from as long as
it's not the taxpayer.
We will have to wait for future profit/loss
statements and balance sheets to see whether improvement occurs
in these areas. But the timidity with which the regulated charges
increase is being proposed doesn't suggest the airlines will be
losing their subsidy too soon.
SACL claims the airport "contributes
nearly $8 billion to the economy" and 66,000 jobs (8% of
Sydney's workforce). But what evidence can they offer to support
these claims ? Is it independently verifiable ?
The total revenue earned by Qantas on its
world-wide operations was $8.4 billion, $6.4 billion of which was
net passenger revenue for 19.2 million passengers carried - an
average revenue of $336 per passenger carried (98/99 annual
report). Net freight revenue was only $550 m, so it's only a
small part of the picture
Given Qantas's share of the market, it's
unlikely that all the airlines operating from just one
international airport would take $8 billion in revenue from KSA -
particularly considering it's not their home base. If a passenger
carried means a one-way trip, then the total passengers moved by
Qantas (from every airport it operates at) is just slightly less
than KSA's total passenger movement of 22 million.
At best, SACL's claim might be talking
about the revenue taken by all the airlines operating out of KSA.
This is the airports's gross output, not its contribution to the
economy's productivity (the difference is the gross inputs
consumed, or expenditure made by airlines in producing this
revenue; typically, production is about 10% of gross output in
the aviation business).
It is specifically not the profit, from
which tax might flow that could offset the subsidy. Qantas' $8.4
billion of revenue produced only $241 million in tax - probably
not all of which was paid in Australia. It's hardly likely that
the other airlines with even greater foreign ownership would pay
even this rate of tax to Australia. Hence, it's likely that SACL's
contribution produces much less than half the tax needed to
offset the public's subsidy.
But the real problem here is that this is
guesswork. Even for the experts that SACL might hire to conjure
up such figures it is guesswork. The job count figure is even
more guesswork - with other estimators claiming that to claim
even 30,000 jobs for the airport would be overstating the case
greatly. Our economy would be decimated if the other 92% of
Sydney's workforce contributed as little as the airport. All of
Sydney would contribute only $10 billion to the economy's whose
annual GDP was $450 b as at Sep 99 quarter. !
The total Transport and Storage industries
contributed only $25 billion to GDP, and it's contribution to
employment was 4.7% (see www.abs.gov.au, Output
and Employment by Industry). These statistics make the SACL's
claims for its contribution look very doubtful.
Especially if you take account of some
other complications:
It's not just the airport contributing
to this revenue. There is a whole lot of public
infrastructure supporting the airport - tollways, public
roads, even basic services like electricity, water and
sewerage.
Imagine how long an airport or any
other business could operate without electricity, yet no
airline would expect that the costs of electricity production
be subsidised because it contributes so much more revenue to
the economy
There are competing forms of transport,
such as high-speed rail, or ordinary road, rail and
shipping services, that would substitute for the airport
services. There are also competing forms of
communications, like video-telephony and the internet
that can substitute for interstate business meetings.
Given the vaguaries and outright trickery
of many accounting practices, it's just not feasible nor reliable
to go through every airlines' books to determine what the real
contribution of KSA is. It is not transparent, and can never be
so.
A major point of competition reform is that
providing subsidies to particular businesses' is not an efficient
way to run an economy. It's just too easy for a canny operator to
missappropriate the subsidy or for his workers to grow fat and
lazy on its benefits. It's too hard to be sure of what kind of
return you are getting for the public money.
The market philosophy insists that these
issues can only be addressed by taking a user-pays competitive
market based approach to provision of services.
This market philosophy is being applied
ruthlessly in Australia in most public services - witness the
recent annihilation of the Commonwealth Employment Service !.
So why do we subsidise airports ? Why have
they escaped the zeal of the economic reformists ?
Have the economic rationalists been
corrupted by too many frequent flyer points ?
What are
aeronautical services ? There is in fact a strict legal
definition behind the accounts prepared by airports. This is
given in the Airports Regulations.
To understand the
term, you need to be aware of the distinction between "aeronautical
services" and "aeronautical related services". The
distinction here is that the Airport Regulations define
aeronautical services fairly narrowly - almost to what could be
seen as the monopoly aeronautical services - see Table 5 below.
These aeronautical services are subject to a price-cap
administered by the ACCC.
Aeronautical
related services appear to be those aeronautical services that
need to be monitored just in case the airport operator has "too-much"
market power. ACCC is required to monitor these related services
(see Table 7 below for description).
There are services
(like the new train to KSA) that escape both price-capping and
monitoring, as may any new investments by the privatised airport
operators.
As well, charges
introduced for demand management purposes will be exempt from the
price cap. There's a great escape clause !
There are also
things that Airservices Australia does (like air-traffic control,
navigation aids, aircraft noise monitoring) that aren't included
in the airport operator's responsibilities. And environmental
services are also not even monitored (so guess where a canny
airport operator could try to save a few bucks ?).
The financial
statements supplied by Airport Operators are called for by the
Airports Act of 1996, and more specifically defined in the
Airports Regulations promulgated under those acts).
Table
5 - Aeronautical Services for Financial Statements
From the Airports
Regulations (as at August, 1998), "aeronautical
services" means services and facilities in relation to:
(a) |
aircraft landings,
take-offs and parking, including the provision of: |
|
(i) |
runways, taxiways, parking aprons
and associated lighting; and |
|
(ii) |
airside roads and grounds, and
associated lighting; and |
|
(iii) |
maintenance and repair services in
relation to runways, taxiways, and parking aprons; and |
|
(iv) |
rescue, fire-fighting and safety
services; and |
|
(v) |
environmental-hazard-control
services; and |
|
(vi) |
services and facilities to ensure
compliance with environmental laws; and |
|
(vii) |
airfield navigation services,
including nose-in guidance and visual navigation aids;
and |
(b) |
the embarkation or
disembarkation and temporary accommodation of passengers,
including the provision to passengers of: |
|
(i) |
toilets, seating, thoroughfares,
transfer systems and aerobridges; and |
|
(ii) |
departure lounges and holding
lounges; and |
|
(iii) |
flight-information and public-address
systems; and |
|
(iv) |
facilities to permit the operation
of terminal security services; and |
(c) |
the administrative
processing of passengers, including the provision to
passengers of: |
|
(i) |
facilities to enable the operation
of customs, immigration and quarantine services; and |
|
(ii) |
passenger check-in facilities; and |
|
(iii) |
landside terminal access roads,
lighting and covered walkways; and |
|
(iv) |
baggage handling services; and |
|
(v) |
facilities to enable the operation
of baggage security services; |
"non-aeronautical
services" means services
provided at an airport that are not aeronautical services.
"Airside" means the part of
the airport grounds, and the part of the airport buildings,
to which the non-travelling public does not have free access.
"Landside" means the part of
the airport grounds, and the part of the airport buildings,
to which the non-travelling public has free access.
There is some disparity between the list of
Aeronautical Services from the Airports Regulations, and the ACCC
lists of price-capped or monitored aeronautical services. For
example, the regulations do not include aircraft refuelling or
aircraft maintenance sites and buildings as aeronautical services
- things which you might ordinarily expect to consider to be
aeronautical services (after all, the plane can't fly without
them !).
Perhaps the regulations are trying only to
identify the "monopoly" aeronautical services provided
by the airport operators.
Table
6 - Price Capped Aeronautical Services
Aircraft
movement areas |
(a) |
grounds,
runways, taxiways, aprons |
(b) |
airfield
lighting, airside roads/lighting |
(c) |
airside
safety |
(d) |
nose-in
guidance |
(e) |
aircraft
parking areas |
(f) |
visual
navigation aids |
Passenger
processing areas |
(a) |
forward
airline support area services |
(b) |
aerobridges,
airside buses |
(c) |
departure
lounges and holding lounges (excluding commercially-important-persons
lounges) |
(d) |
immigration
and custom service areas |
(e) |
public
address systems, closed circuit surveillance systems,
security systems |
(f) |
baggage
make-up/handling/reclaim |
(g) |
public
areas in terminals, public amenities, lifts/escalators/moving
walkways |
(h) |
flight
information display systems |
(i) |
landside
road and lighting, covered walkways |
Source: Department of
Transport and Regional Development, Pricing Policy Paper,
December 1996
Table
7- Monitored Airport Services
The services and facilities that are
subject to formal monitoring are:
1 |
aircraft
refuelling; |
2 |
aircraft
maintenance sites and buildings; |
3 |
freight
equipment storage sites; |
4 |
freight
facility sites and buildings; |
5 |
ground
support equipment sites; |
6 |
check-in
counters and related facilities; and |
7 |
car parks
(including public and staff parking but not valet parking). |
Disclaimer
This web-page has
been prepared on a non-commercial basis for the intended use of
Sydney's airport-affected residents, and is specifically not
suited for use for commercial purposes. It is based on the best
available information at December, 1999, but it is recommended
that you check the source documents and agenceis cited before
making any further use of the material.
First published 2nd January 2000.
Last revised
Last Change: vdeck mod
Visitor
since Sat 21-Feb-2004.