The cost of doing business at Perth Airport laid bare

Perth Airport Pty Ltd v Qantas Airways Ltd (No 3) [2022] WASC 51

A complex and long running dispute between the operators of Perth Airport (PAPL) and Qantas Airways regarding the pricing of airfield and terminal services (Airport Services) was recently determined by the Supreme Court of Western Australia, in Perth Airport Pty Ltd v Qantas Airways Ltd (No 3) [2022] WASC 51.

PAPL charged airlines in respect of Airport Services, each time an aircraft lands at or departs from the airport. These included services that were offered by PAPL, as well as access to infrastructure. In providing those services, PAPL was a monopoly supplier.

The question for determination

A contract between PAPL and Qantas for the provision of Airport Services had expired on 30 June 2018. In the subsequent period 1 July 2018 to 17 December 2018, PAPL had continued to provide the Airport Services, but there was no agreement on price. On a claim for restitution by PAPL, it was common ground that PAPL was entitled to fair and reasonable remuneration. In the absence of any other suppliers, the Court applied economic modelling to arrive at a reasonable price.

Background

In the period 1 July 2011 to 30 June 2018, PAPL had in place long-term contracts with various domestic and international airlines for its provision of Airport Services. Those agreements had expired on 30 June 2018.

In anticipation of those contracts expiring, in 2017, PAPL began the consultation and negotiation process with airlines on issues such as pricing for the upcoming seven-year period commencing 1 July 2018. By 30 June 2018, PAPL had entered into new long-term contracts with all major domestic and international airlines, except Qantas. Qantas and PAPL had not yet been able to reach agreement.

1 July 2018 to 17 December 2018

During the period 1 July 2018 to 17 December 2018, PAPL continued to provide Qantas with Airport Services, and Qantas continued to pay it, at a rate that Qantas believed to be “fair and reasonable”. This was well below the rate at which PAPL was seeking to agree.

PAPL issued the proceeding, seeking restitution for the Airport Services provided. It was common ground that PAPL was entitled to a fair and reasonable amount. The dispute was over how that amount should be calculated.

Application of building block modelling

PAPL had made use of the economic “building block model” of setting pricing for monopoly infrastructure, in negotiating the prices for its long term contracts. In a different context, that model is often used by economic regulators, such as the Australian Competition and Consumer Commission or the Australian Energy Regulator.

The underlying principle of a building block methodology is the calculation and summation of a return of and on capital, efficient operational expenses, and tax. At trial, both parties adduced expert evidence from economists.

La Miere J observed that expert evidence is of critical importance in at least two respects in cases such as these:

• firstly, in determining whether PAPL had or exercised market power in negotiating prices for the Airport Services with other airlines; and
• secondly, in determining the efficient costs of PAPL providing the Airport Services, as calculated using PAPL’s building block models.

His Honour noted that the outcome of the models depends on the inputs, which included:

• the opening asset base;
• capital expenditure during the pricing period;
• the period over which the assets are to be depreciated (useful life); and
• the variable assets beta (which measures the level of underlying risk of a company’s operations), gamma (the value of dividend imputation tax credits) and WACC (weighted average cost of capital).

Building block modelling v comparable transactions approach

La Miere J compared the different methodologies advocated by PAPL and Qantas to be used to determine the fair and reasonable prices for the Airport Services during the disputed period. PAPL advocated a “comparable transactions” approach which would assess the average prices paid by other airlines for Airport Services at Perth Airport and arrive at a reasonable price to be paid by Qantas by adjusting those prices to reflect any differences in the circumstances under which the services were provided to Qantas. On the other hand, Qantas submitted that the prices of the Airport Services should be the efficient cost of providing the services determined by using PAPL’s building block models with appropriate inputs.

His Honour found that an airline was likely to have greater bargaining power, in negotiations with an airport, if the airline was of a larger scale. Qantas, for the disputed period, had the highest market share of passengers through Perth Airport relative to other airlines, particularly in terms of domestic passenger numbers. Therefore, his Honour considered Qantas to have a greater bargaining power compared to other airlines that negotiated with PAPL and agreed prices for the disputed period.

In addition to his findings regarding Qantas’ power, his Honour found that PAPL possessed, and had likely exercised, substantial market power—being that PAPL had the ability to sustainably set prices above competitive levels, and as such the prices agreed with other airlines were unlikely to be consistent with the efficient long run average costs of providing Airport Services. At trial, evidence from Qantas’ expert was that the “mere presence of substantial market power means that the market is not effectively competitive.” Further, that the “comparable transactions” approach PAPL relied on is “likely to be distorted because they reflect PAPL’s exercise of its substantial market power”.

Outcome

In reaching his decision, his Honour took the view that the results of the building block methodology should be considered in light of all other relevant evidence—being the comparable transactions between PAPL and other airlines. His Honour determined that the price for the services provided by PAPL to Qantas should be no more than the prices that PAPL agreed with Virgin (for domestic services), and BARA (for international services). Those prices themselves had been negotiated on the basis of a building block methodology.

The below table sets out the positions of the parties and the eventual figure determined by the Court.

(**all amounts exclude GST)

As one can see from the table above, neither party was entirely successful—the remuneration that La Miere J considered to be fair and reasonable fell somewhere between the competing positions (apart from for the last category).

Qantas was ordered to pay PAPL to make up for the shortfall in payments made during the period 1 July 2018 to 17 December 2018—that is, the difference between the payments made by Qantas at the time, and the amount that was found to be a fair and reasonable remuneration.

At the date of writing this note, Qantas has filed an appeal, so it seems that the saga is to continue.