This briefing paper analyses, at a theoretical level, the potential economic benefits of secondary airport competition in the Sydney context.IntroductionOn the 3rd April 2014, the Australian Competition and Consumer Commission (ACCC) published their latest airport monitoring report which found that Sydney Airport had again performed the worst across a number of areas in 2012-13 when compared to Australia’s major airports. Specifically, Sydney Airport was rated the lowest in terms of overall service quality. Yet it continues to extract the highest revenue per passenger for its aeronautical services, while also maintaining the recent downward trend in its operating costs. The result of which has been further growth in operating margins, or ‘profits’.The ACCC and the Productivity Commission have both concluded that Sydney airport possesses considerable market power for both its domestic and international aeronautical services, which appears to have been exerted largely through sustained revenue and operating margin increases.After many years of planning and indecision, on Tuesday 15th April 2014 Badgerys Creek was approved by cabinet and confirmed by Prime Minister Tony Abbott as the location of Sydney’s second airport. While the economic and employment benefits from a second airport are significant and have been well documented, an aspect of the debate that has yet to be considered in detail is that of airport competition.The development of a second Sydney airport at Badgerys creek, with both domestic and international facilities, will not only ease aeronautical capacity constraints in the Sydney region, but provide a viable alternative for airlines that have had to rely solely on Kingsford Smith for aeronautical access into Sydney.A second airport at Badgerys Creek, in the long run and under separate ownership, has potential to curb the market power and monopolistic behaviour of Kingsford Smith Airport and create a more competitive airport market in the Sydney region. The end result of this may be more efficient aeronautical pricing and service quality outcomes at Kingsford Smith airport.Based on the available literature, this briefing paper analyses, at a theoretical level, the potential economic benefits of secondary airport competition in the Sydney context. As a preliminary to that discussion, Section 2 briefly assesses the concept of airport market power before reviewing evidence of it being exerted by Sydney Airport. Section 3 then discusses various economic aspects of secondary airport competition, including its effect on efficiency and potential limitations to competition. Section 4 of the paper then draws together theoretical and empirical literature to present a number of international examples of airport competition in Europe and the United States. The result of which is to provide some insight into the effect of competition on primary and secondary airports; and ultimately how these outcomes may relate to Sydney following the prospective development of a second airport at Badgerys Creek.
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