Airservices’ 2016 Pricing Proposal

Unfortunately Airservices Australia’s 2016 Pricing Proposal does not address the underlying need for it to assume more accountability over the services it delivers to airlines or adequately justify the proposed level of costs. BARA’s submission instead encourages more accountability and ongoing improvements in service delivery.

Airservices Australia (Airservices) has released its 2016 Pricing Proposal for industry comment before lodging it with the Australian Competition and Consumer Commission (ACCC) for formal assessment later this year. BARA supports Airservices for its initiative of seeking industry feedback before proceeding to the ACCC.

The 2016 Pricing Proposal effectively ‘rolls forward’ the previous arrangements implemented back in 2011. However, since the ACCC’s assessment in 2011, the Commission of Audit, Productivity Commission, Joint Parliamentary Committee on Public Works and Harper Review have all raised concerns about underlying issues with Airservices’ capital investment program, cost efficiency and pricing structures.

As it does not directly address these legitimate concerns, BARA cannot support the 2016 Pricing Proposal in its current form.

Accountability over service delivery

The core issue with Airservices’ 2016 Pricing Proposal is there are no binding incentives for it to deliver planned improvements in its services to airlines. This is especially problematic for the OneSKY project, for which a senate committee hearing has already raised procurement issues.

The $600 million OneSKY project will merge the civil and military air traffic management systems. BARA understands and supports the need to replace Australia’s existing air traffic management system. But at present airlines still do not have a clear understanding of the deliverables for the project or when improvements in capacity and capability will be ready and available for airlines to use.

Front-loaded costs and prices

The 2016 Pricing Proposal contemplates the bulk of capital expenditure to occur in the first two years, together with weighted average nominal price increases of 5.3% and 4.4% on 1 July 2016 and 1 July 2017, respectively.

BARA questions if Airservices can deliver on such an aggressive capital spend during the first two years of the agreement. BARA is also concerned with deficiencies in the transparency and efficiency of Airservices’ operating cost base for a range of reasons, including:

  • Actual annual operating costs (excluding depreciation) since 2012 exceeding forecast by 5.4%, 6.2% and 14.9%.
  • No information is provided on supplier costs.
  • There has been significant public controversy about executive pay.
  • Airservices employee numbers have grown more strongly than expected.
  • Airservices has not demonstrated that it has effectively implemented the internal efficiency measures relied upon in 2011. BARA has reviewed the 2016 Pricing Proposal and wants Airservices to amend it and include three initiatives:

BARA’s three initiatives

Airservices has not shown it has firmly implemented its performance management framework. The 2016 Pricing Proposal also contains little information about Airservices’ plan to improve its operating efficiency over the term of the new agreement.

  1. Establish a clear link between price increases and outcomes for airlines.
  2. Commission an independent third party to assess its operating and capital efficiency.
  3. Incorporate all new incremental capital expenditure into the prices charged at the location that provides the service.

BARA envisages a ‘checklist’ of tangible and measurable goods or services each financial year, especially for the OneSKY project. Annual price increases for en route and terminal navigation from 1 July 2016 onwards would depend on Airservices meeting the agreed deliverables for the previous financial year.

BARA notes Airservices has provided some tentative commitments and information towards clearly expressing some ways of measuring deliverables associated with its proposed $600 million OneSKY project as part of the CMATS Industry Working Group. As well as providing industry with tangible information about the OneSKY project deliverables, the measurements developed through the CMATS Industry Working Group could also underpin the commercial arrangements between Airservices and the airlines.

Many of Airservices’ performance measures also relate to efficiency outcomes for domestic aviation, such as flight times and delays between the major airports. They could be expanded to monitor services for international aviation, such as average flight times between specific overseas airports, and airborne and ground delay for international aircraft.

Third party review to examine operating and capital costs

BARA remains concerned about applying uniform pricing to delivering new services, especially aviation rescue and firefighting at regional airports, when most costs are subsidies that are ultimately borne by airlines operating at the major international airports.BARA proposes incorporating all new capital expenditure into the prices charged at the location they are provided. This would encourage better investment decisions at regional locations by creating an incentive for the users of services at regional locations to look at the merits of what Airservices proposes.

A long-term solution to pricing services at regional locations

BARA proposes Airservices commission an independent third party to review its operating and capital efficiency and devise a set of improvement initiatives. The reviewers and terms of reference should be mutually agreed between Airservices, the ACCC and major users. There will need to be formal reporting against the improvement initiatives to show which ones were successful.

Airlines want more accountability for the prices they pay for services

There’s still time for Airservices to amend its proposal, and incorporate the specific outcomes and information BARA seeks. But it would require a substantial commitment on the part of Airservices, especially developing tangible and measurable outcomes.

BARA’s initiatives fit with what international airlines can reasonably expect from other infrastructure and technology providers.