Turbulent Times: Australian Airline Industry Issues 2003

Executive Summary

These have been turbulent times for the Australian airline industry. It has been confronted with a marked decline in international tourism in the aftermath of the September 2001 terrorist attacks in the United States and, more recently, traffic loss attributable to the war in Iraq and severe acute respiratory syndrome (SARS) outbreaks in parts of Asia and Canada.

In addition to these upheavals, the industry has undergone major structural change since the late 1990s. On the major routes - the so-called 'domestic trunk routes', where there were four airlines in 2000, there are now only two. In 2000, the domestic trunk routes were dominated by Qantas Airways and Ansett Australiawith new entrants Virgin Blue and Impulse Airlines emerging in niche markets. Nowadays the industry has a lopsided two airline structure, with Qantas dominant since its takeover of Impulse Airlines in 2001 and the Ansett group's subsequent collapse in September 2001. Although Virgin Blue has rapidly built up its market share, it still has less than a third of the market.

The upheavals in the trunk airline sector have carried over to the regional airline sector. This is the part of the domestic airline industry which services centres in rural and remote Australia. At the time of the Ansett group's collapse, most regional operators had equity or close operational relationships with either Qantas or Ansett.

While the domestic airline industry is largely deregulated, Australia's international airline industry remains quite regulated at the Commonwealth level, as it is subject to the detailed capacity controls that are part of the long-established system of bilateral air service agreements (ASAs) that underpin the industry. ASA's provide the international legal framework enabling the operation of scheduled international air services between countries. These agreements control the amount of airline seat capacity which may be deployed on scheduled services over individual country to country routes; they are generally of treaty status and are enforceable in international law.

The Howard Government has had a long term commitment to a system of liberalised air services and this goal was supported by the 1999 Productivity Commission inquiry into liberalising the economic framework of the industry. To date, only the Trans-Tasman routes have benefited substantially from the Government's 'open skies' objective.

In another move to free up the international side of the industry, the Commonwealth adopted a policy of allowing more than one Australian owned international airline to operate scheduled services to and from Australia. However the September 2001 failure of the Ansett Airlines group brought an end to Ansett International's short-lived operations. Although Qantas is once again the only Australian flag carrier, Virgin Blue has signalled its interest in operating in some international markets in Australia's immediate region, such as the trans-Tasman market.

A significant worldwide trend that is starting to be felt in Australia is the rapid emergence of low-cost international carriers. Irish airline, Ryanair, is a high-profile European example, while SouthWest Airlines is a long-established American example. These are sometimes referred to as 'value-based airlines', reflecting their emphasis on aggressive containment of costs to sustain highly competitive fare levels. Two Australasian carriers have been established in recent times to cater for this growing market: Australian Airlines and Freedom Air. Unlike some of the new low-cost international airlines in Europe, these carriers are not independent but are fully-owned, stand-alone divisions of Qantas and Air New Zealand (Air NZ) respectively.

Levels of competition vary widely within each sector. In the domestic trunk airline sector, the fairly robust competition that previously existed between Qantas, Ansett and the new airlines has come and gone since the industry's 'deregulation' in 1989. This has given way to a more restrained form of competition between Qantas and Virgin Blue because Qantas is the only provider of nationwide, 'full-service' scheduled services. Qantas has the advantage of comprehensive regional and international networks and extensive feeder traffic links to other overseas airlines' networks through its membership of the One World Alliance.

In contrast, Virgin Blue is not a member of an alliance, its service frequencies are modest in comparison with those of Qantas, and its domestic network is nowhere near as extensive as that of Qantas. But in the low-cost, budget travel niche that Virgin Blue helped establish, competition with Qantas is vigorous. In response to Virgin Blue's success, Qantas is taking steps to expand its share of the budget travel market, while Virgin is now seeking to expand beyond its leisure traveller niche by developing its business travel market.

The Ansett collapse has decreased competition in many parts of the regional airline industry (of which the Ansett group owned a large portion). The Qantas-owned regional airline, QantasLink, dominates many routes and is the sole airline on some routes. Most of the former Ansett group regional airlines are not linked with an international alliance network. Nonetheless, Virgin Blue, Regional Expressformed by the amalgamation of former Ansett group airlines, Kendell and Hazeltonand other regional airlines such as Alliance Airlines in Queensland, compete to varying degrees with Qantas services. Because regional airlines operate mainly intra-state services, the states have sole responsibility for their economic regulation; most states have liberalised or deregulated operations.

Putting aside the current slump in domestic tourism, the potential for increased competition in the domestic airline industry through the emergence of new carriers is generally more favourable now than in the past. Although Qantas is likely to remain the dominant player in the domestic passenger and freight markets, some of the factors that led to the failure of previous new trunk route entrants are now less of a barrier.

In particular, airport terminal facilities are more readily available to new entrants now that some former Ansett terminals have been freed up as common-user facilities. The current relatively low cost of obtaining aircraft due to the depressed state of the aircraft market also favours potential new entrants. The liberal policy environmentincluding freedom of entry to domestic trunk routes by domestic airlines, and guidelines that allow foreign airlines to acquire up to 100 per cent of the equity in an Australian airline or to start a new domestic airline unless this is contrary to the national interestalso favours new entrants.

What of the future for the Australian airline industry? The apparent existence of economies of scalethe gains by way of reduced costs from the increasing size of operationsin the domestic airline industry suggests that there may be an on-going need for regulation to prevent monopolisation over the long term. In the absence of effective economic regulatory oversight of the industry, it has the potential to evolve into a Qantas monopoly. High capital and set-up costs have traditionally contributed to high entry costs and have increased the market power of the incumbent airlines, impeding competition. Should such circumstances continue to prevail over the longer term, it raises the issue of whether Australia's domestic market is really big enough to sustain competitive supply and whether a lightly regulated oligopoly is still appropriate.

Although the former two airline policy was not replaced with an industry-specific economic regulatory regime for airlines, the industry is subject to the general competition policy provisions of the Trade Practices Act 1974, which is administered by the Australian Competition and Consumer Commission.

The Trade Practices Act is intended to inhibit unfair competition throughout industry generally, but the recent Boral case in the High Court has led some observers to question its effectiveness in protecting smaller businesses from what might be termed predatory pricing by dominant companies. This is particularly relevant in today's domestic airline industry, with its 'David and Goliath' structure in the form of an emerging, relatively modestly sized and resourced Virgin Blue versus a dominant and well 'cashed-up' Qantas.

The future of the regional airline sector is far from clear; it seems likely that Qantas's regional operations will continue to be a major force. However, the role and sustainability of the non-aligned, newly restructured carriers such as Regional Express and Alliance Airlines have yet to be established. As the state governments are primarily responsible for the economic regulation of this sector, state policies could have a major influence on its long-term structure and outlook.

Competition in Australia's international airline industry will continue to be tempered by the bilateral air service agreements unless there are successful multilateral moves towards a more liberal regime over the longer term. Consequently, Qantas is effectively 'guaranteed' a major role in its international markets, although the intensity of competition with Qantas varies between markets and could increase if new Australian flag carriers gain access to Qantas routes. Australia's 'multiple-designation' policy means that more than one Australian-owned carrier can potentially operate scheduled air passenger services to and from this country.

The development of low-cost international carriers such as Australian Airlines will assist in nurturing financially viable traffic growth. Their potential to encourage increased traffic through highly attractive fares is particularly important in the current worldwide climate. Heightened security concerns and political uncertainty have caused global tourism to stagnate, with huge financial losses being reported by major, long-established 'full-cost' airlines, particularly in North America. The further expansion of low-cost international airlines will assist in counteracting this trend and in sustaining Australia's vital tourism industry.

Another facet of the changing airline industry over the past decade has been the Commonwealth's withdrawal from the operation of airports; all major airports are now operated by private 'owners' under very long-term leases from the Commonwealth. This has led to a new framework of economic regulatory arrangements for such airports. On 'privatising' the major airports, the Government imposed price caps on airport company charges for the aeronautical services which they supply to the airlines, but subsequently replaced the caps with a price monitoring regime. Airport companies attracted industry criticism for increasing aeronautical charges after the caps were lifted, but justified the increases on the grounds that they will be used to finance major airport investments, including upgrades to accommodate the new generation, very large capacity, international aircraft typethe A380 Airbuswhich Qantas and other international carriers will introduce to their Australian routes over the next decade.

Continued traffic growth over the medium term will mean that airports will face pressure to utilise existing infrastructure more efficiently and it appears the Commonwealth will continue to involve itself in addressing these challenges. There are important competition policy issues at stake and these are closely associated with problems of airport congestion. Slot systemspermission for aircraft movementsare effective in rationing scarce airport and airspace capacity but can restrain competition. Sydney (Kingsford-Smith) Airport (KSA) is the only Australian airport to have a slot system to ration airport capacity among competing airline users. Sydney KSA's life could be extended if its operations were changed because its technical capacity far exceeds its actual (regulation-constrained) capacity.

The Government has to date shown a preference for administrative solutionssuch as a guaranteed number of regional airline slots at peak times, a cap on the number of hourly movements, and the noise curfewto 'economic' solutions such as peak-load pricing and the sale of slots by auction. The main regional airlines are major beneficiaries of administrative regulation. Arguably, they are subsidised by passengers of non-regional services. Sydney KSA remains the pivotal airport facility for the Australian airline industry despite the growth in new air service links that by-pass Sydney; increasing the operating capacity of the existing Sydney KSA will delay the need for a second major airport in Sydney.

Introduction

The Australasian airline and aviation infrastructure industries have experienced major changes to their policy and operating environments in the past decade. The upheavals have included the collapse of the Ansett group, the absorption of Impulse Airlines into Qantas, the entry and rapid growth of Virgin Blue and the establishment of Australian Airlines, Freedom Air and Jetconnect. The 1990s trend towards the liberalisation of Australasian air services has continued with the establishment of an Open Skies agreement between Australia and New Zealand in late 2000. The 2001 terrorist attacks in the United States and the 2003 Iraq and SARS crises led to significant downturns in the international and domestic aviation markets, resulting in further change.

In the aviation infrastructure industry, the past decade has witnessed the transfer of all of Australia's major airports from the Commonwealth to private companies under long-term leases, changes to the regulation of cost recovery at airports and the restructuring of charges for aviation services.

Upheavals in the domestic airline industry are nothing new and they have invariably developed a strong political flavour, as most recently witnessed during the 2001 Federal Election campaign when the Federal Opposition and the Victorian Labor Government became closely aligned with the AnsettTesna interests. Reflecting on the industry in the early post-Second World War decades, former Liberal Party leader, Sir Billy Snedden observed in 1981 that:

The domestic trunk airline industry encompasses the mainline domestic scheduled air passenger service network. It is composed predominantly, but not exclusively, of inter-capital routes.

Since the 1960s, the trunk route airlines have operated mainly jet aircraft capable of carrying 100 to 250 passengers and between two tonnes and ten tonnes of freight. While Boeing 727s and McDonnell Douglas DC 9s were the dominant first generation aircraft types in Australia, these aircraft types are now retired; the current day fleet relies heavily on various models of the Boeing 737 and Boeing 767 jet aircraft types.

The industry was nominally 'deregulated' at the federal level with the end of the two airline policy in 1990. However, some state governments maintain economic regulation of intra-state routes, while at the national level, the Australian Competition and Consumer Commission (ACCC) monitors the state of competition in the industry in accordance with its generic trade practices responsibilities. Appendix 1 contains a listing and brief description of the larger regional and trunk route operators in Australia's domestic airline industry as at May 2003.

Players

In the past two years, the trunk airline industry has changed from a four-airline structureQantas Airways, Ansett Australia, Virgin Blue and Impulse Airlinesto a lopsided two airline system.

Qantas

The Qantas Airways Group has extensive commercial and ownership links with a number of regional carriers. Qantas also has code-sharing⁽⁴⁾ and alliance arrangements with international carriers through the One World Alliance. This is the second largest of the five 'airline alliances', or the groupings of allied airlines that underpin the globalisation of the airline industry. (The Ansett group was a member of the largest alliance, the Star Alliance.) Qantas also has strong international equity links with British Airways, which owns over 21.4 per cent of the airline. Qantas has a 46.2 per cent interest in Fiji's Air Pacific.

Qantas Domestic is now the only provider of nationwide, 'full-service' scheduled air services. Qantas has expanded its fleet rapidly since the Ansett group collapsed, when Qantas's domestic market share was 55 per cent; it now has around 70 per cent of the travel market on the domestic trunk route network. Qantas's extensive domestic and international route network can be seen by clicking here to view an interactive electronic route map.

In response to the growing popularity of discount air travel in recent years, and to meet the competitive challenge from Virgin Blue at the 'low fare' end of the market, Qantas has built on the low-cost operating arrangements it inherited in its May 2001 acquisition of Impulse Airlines. It has retained Impulse as a stand-alone unit within Qantas, so deriving savings from utilising Impulse's low-operating cost, all-economy class Boeing 717 aircraft and streamlined staffing/work practice arrangements. Qantas has also further built on Impulse's value-based marketing approach by expanding its range of 'all-economy', leisure-oriented services and buying more Boeing 717s.

Virgin Blue

Virgin Blue Airlines is the Brisbane-based subsidiary of the Virgin group of companies and began operation in 2000. Its original owner and founder was British businessman, Sir Richard Branson.The Virgin Group owns 46 per cent of the equity in Virgin Blue company while Patrick Corporation—the large, diversified Australian transport and logistics company—acquired 50 per cent of the airline in 2001–02. Senior staff of Virgin Blue hold the remaining four per cent.

As a member of the Virgin group, Virgin Blue has loose links with Virgin Atlanticwhich operates international services out of Londonand Virgin Express, the group's low-fare European airline based in Brussels. Virgin Blue is not a member of any of the international airline alliances. In October 2002, however, Virgin Blue began to code-share with a Star Alliance member, United Airlines, somewhat compensating the latter for the loss of its Australian Star Alliance partner, the Ansett group.

Since the winding-up of the Ansett group in early 2002, Virgin Blue has provided the main trunk route competition for Qantas. Virgin Blue operates mainly on the busiest portions of the trunk network, offering single-class, no-frills, low-cost air travel, mainly between selected capital cities and other centres. To contain costs, Virgin Blue operates only one aircraft type, a Boeing 737 jet fleet, while crew costs are minimised through work arrangements which require crew to have a relatively wide range of skills and to perform a relatively broad array of work tasks. In this respect, Virgin Blue has many of the characteristics of the new breed of low cost airlines emerging worldwide known as 'value-based airlines'.⁽⁵⁾

At the start of this year, Virgin Blue estimated that it had 24 per cent of the domestic aviation market and established plans to increase this share to 30 per cent over the remainder of 2003.⁽⁶⁾ When established several years ago, Virgin Blue focussed its marketing efforts on passengers whose travel inclinations were relatively sensitive to fare levels but were not so concerned with travel times and service frequency consideration, such as leisure travellers. However, as its route network and service frequencies have expanded, it has shown an increasing marketing orientation towards travellers who are more concerned about travel times and service frequencies and less concerned about fare levels, such as business travellers.

Although initially reporting trading losses, the modestly capitalised airline's trading position has turned around, bolstered partly by the Ansett group's collapse. In its second year of operation (to 28 March 2002), Virgin Blue recorded a net profit of $35 million and it has been reported that its 200203 net profit result could be between $100 million and $120 million.⁽⁷⁾ The airline is planning a partial public float sometime over the next 12 months.

Virgin Blue has taken over much of the domestic terminal space that the Ansett group occupied at the major airports. For example, on 6 November 2002, Virgin Blue announced that it had entered an agreement with Sydney Airports Corporation Limited to move into the former Ansett group's Sydney KSA domestic terminalnow known as T2thus overcoming the problems of Virgin Blue's original, congested facilities at Sydney KSA.

Industry Finance

Revenue for domestic operators derives chiefly from the business sector and domestic and inbound tourism. It has been estimated that domestic tourism (which includes visiting relatives and friends) contributes 40 per cent of revenue, with the business sector contributing 35 per cent and inbound tourism 25 per cent.⁽⁸⁾

The Australian airline industry traditionally has been relatively profitable by world standards, although this varies among airlines and sectors, reflecting the on-going consequences of the two airline policy and airport leasing agreements. These gave the incumbents decided advantages over potential entrants in terms of long term contractual access to terminals and landing and take-off slots.

Since the Ansett group's collapse, the industry's profitability has held up well by world standards, despite the 20012003 inbound tourism slump. Qantas increased its profitability partly by picking up much of the 'high yield end' of the market (eg business travel) which Ansett Australia formerly filled. That the recent steep escalations in fuel prices do not appear to have had significant adverse consequences for the Australian airline industry's profitability is partly because airline operators hedge against large, short-term cost increases of this nature through forward purchase contract arrangements. In addition, Virgin Blue operates mainly new generation aircraft that are very fuel efficient, while Qantas has progressively withdrawn those aircraft types that are less fuel efficient.

Aviation war-risk insurance has become a significant issue since the September 11 terrorist events in the United States in 2001. War-risk insurance covers losses arising from acts of war, including acts of terrorism, strikes, riots and sabotage. Because existing aviation third-party war-risk insurance was withdrawn from the global marketplace after the September 11 attacks, the Australian Government, like those of many countries, agreed to provide third-party war, terrorist and hijacking indemnity cover for damage on the ground to airlines, airports and other service and facilities providers.

The Commonwealth indemnity covers the gap between the insurance available in the market and the level of insurance held prior before the September 11 attacks, and recipients of the Commonwealth indemnity are required to hold commercial war-risk insurance to the extent it is available. The Commonwealth indemnity is currently being extended at three monthly intervals until such time as a more permanent solution is found. The Government has recently announced its intention to charge for this cover, although details of the charging are still to be finalised.

Regional Airline Industry: Services, Structure and Prospects

A regional airline has traditionally been defined as:

Regional airlines mainly operate intra-state services. The aircraft used vary in size from those seating eight to ten passengers to small jets or turboprop aircraft seating 4080 and with capacity for up to two tonnes of cargo. Regional airline services are widely regarded in regional communities as economic lifelines to major markets and service centres, allowing the swift transport of residents, tourists and regional produce across Australia's vast distances. The accompanying map depicts some of the main regional air service routes.

Map: Regional Airline Services in Australia 2000-01

Note: This figure displays all routes with an average of three or more return services per week over 2000-01.
Source: BTRE, Working Paper 51, March 2003.

A Bureau of Transport and Regional Economics study found that regional airlines served 206 centres in 1997. They used about 286 aircraft and employed about 2700 people directly. Despite Australia's large size, more than half the flight sectors offered covered distances of less than 300 kilometres. About 80 per cent of these shorter routes were also serviced by land-based transport.⁽¹¹⁾

The rate of growth of regional services has been rapid. Over the ten years to 200102, regional airline passenger movements grew at an average annual rate of 12.1 per cent compared with 6.2 per cent for domestic services and 7.4 per cent for international services. Still, regional services account for about only 7 per cent of all domestic passengers.⁽¹²⁾

Over recent years there has been some blurring between regional and trunk airline services, in part because of the passing of the old two airline policy regulatory framework, which defined strict regulatory compartments for the respective sectors. Constitutionally, the states have implicit sole responsibility for the economic regulation of intra-state air services. Over the past decade, most states have deregulated airline operations to varying degrees. However, it is noteworthy that in Western Australia, there has been a recent move back to regulating the state's air services in order to 'protect vulnerable air routes'.⁽¹³⁾

QantasLinkwhich includes the former Qantas subsidiaries of Airlink, Sunstate, Eastern and Southern Airlinesdominates regional routes, serving 55 cities and towns. QantasLink is operated by Impulse Airlines which, since May 2001, has been a wholly owned subsidiary of Qantas Airways Limited. Impulse operates a fleet of Boeing 717 aircraft in the QantasLink livery and these are used on major regional routes as well as leisure-oriented trunk routes. employs over 600 people

As part of its more recent network expansion initiatives, Virgin Blue now provides links between the state capitals and regional centres such as Alice Springs, Cairns, Townsville, Launceston, Mackay, Rockhampton and Coffs Harbour.

Regional Express or Rex is one of the newest regional airlines. Regional Express is the operating name of Australiawide Airlines Limited, which was formed through the acquisition of former Ansett subsidiaries, Hazelton and Kendell Airlines, by a consortium including a group of Canberra-based businesses and former Ansett group-employee interests. The airline operates routes in New South Wales, Victoria, South Australia, Tasmania and the ACT with a focus on regional markets. South Australia and western New South Wales are important markets. Rex's route network can be seen by clicking here to view an interactive electronic route map. Rex is presently seeking official support for a greater share of Government travel business on its services to and from the National Capital; Qantas has dominated this market since the collapse of the Ansett group.⁽¹⁴⁾

The current operating environment of the regional airline industry is unusual in that a relatively large proportion of carriers operate in a stand-alone fashion, fairly independently of the trunk route airline companies and outside the global airline alliance system.⁽¹⁵⁾ This is in marked contrast with the trend up until the time of the Ansett group collapse, when regional airlines were increasingly being integrated with the trunk carriers, either through operational links such as ticketing and baggage handling, but also through equity links. This trend culminated only months before Ansett's collapse, when a QantasAnsett tussle for ownership control of the NSW regional carrier, Hazelton Airlines, was resolved in the Ansett group's favour.

Since the Ansett group's collapse and the re-establishment of some of the major regional airlines as independent companies, the industry has expressed concerns about the sustainability of the current arrangements and there have been calls for the Government to establish a coherent national strategic framework for the airline industry that defines the role of the regional sector.⁽¹⁶⁾

Responding to such concerns, a House of Representatives Transport and Regional Services Committee inquiry was established in July 2002 to review commercial regional aviation services in Australia as well as transport links to major populated islands. The inquiry is chaired by Paul Neville, MP, and is still in progress as at June 2003. The Neville committee's terms of reference require it to examine:

Government responses to the Neville Committee's recommendations could have a significant influence on the structure and financial outlook of the regional airline sector in years to come.

Australian International Airline Industry: Services, Structure and Prospects

During 200102, 50 international airlines (including dedicated freight operators) operated scheduled services to and from Australia.⁽¹⁸⁾ Qantas is the only international airline based in Australia; there is a legal requirement for Qantas to have its head office in Australia under the Qantas Sale Act 1992. The Australian airlines' market share fell from 37.5 per cent in 200001 to 35.2 per cent in 200102, partly because Ansett International ceased operations with the collapse of the Ansett group. Ansett International was a majority (51 per cent) Australian-owned company. In 200102, Qantas's market share of passenger routes to and from Australia was 34.5 per cent (in terms of passengers carried).⁽¹⁹⁾ This is considerably less than the 50 per cent share it had in the mid-1970s.

The concentration of companies in this segment of the aviation industry in 200001 can be described as medium. In 200102, the top ten airlines accounted for 83 per cent of international passenger trips and the top four for 61 per cent. The remaining passenger trips are served by a multitude of airlines using Australia's comparatively large number of international gateways. The relative importance of each of the main international airlines serving Australia is illustrated in the accompanying pie chart depicting relative market shares as measured by international passenger numbers by airline (inbound to Australia and outbound from Australia) for the year ended June 2002.⁽²⁰⁾

The Commonwealth Government effectively controls competition in the Australian international airline industry because of bilateral arrangements and associated landing rights provisions at designated locations. A consequence is that Qantas is effectively 'guaranteed' a major role in servicing the market. Qantas operates international services to 75 destinations (including code-share flights by other airlines on behalf of Qantas) in 32 countries.⁽²¹⁾ However, the intensity of competition varies between markets. On some routes, Qantas is the dominant operator, while on other routes, it faces strong competition. Competitive pressures have led Air NZ to withdraw from direct trans-Pacific flights and the future of United Airlines' services is uncertain.

Figure 1: Inbound and outbound passenger market shares by airline

(measured by passenger numbers by airline)
year ended June 2002

Qantas's new wholly owned, low-cost international subsidiary, Australian Airlines, began operations in October 2002. The airline was established to serve markets from which Qantas and other airlines had withdrawn and to service inbound tourists from Asia. Australian Airlines provides all-economy, full-service flights and reportedly has operating costs some 30 per cent lower than Qantas's international operations. Australian Airlines provides services between Cairns and Nagoya, Osaka, Fukuoka, Singapore, Taipei and Hong Kong and offers a daily connecting flight between Cairns and the Gold Coast for international passengers. Australian Airlines began with a fleet of four Boeing 767-300 aircraft, but proposes to increase this to 12 aircraft within the next two years. The airline also plans to provide outbound services, with flights from a second base in a southern Australian capital city to a number of ports in Asia late in 2003.

On 28 October 2002, Qantas initiated Jetconnect, a wholly owned subsidiary which commenced operations on domestic services in New Zealand, effectively taking over the role of the former franchised Qantas New Zealand operation.⁽²²⁾ Jetconnect flies Boeing 737-300 aircraft in Qantas livery, but without the Spirit of Australia caption. It has a New Zealand Airline Operators Certificate and its aircraft are registered in New Zealand.

Virgin Blue is considering providing international services from Australia to New Zealand, south-east Asia and the South Pacific.

Sydney KSA is the main hub for international air transport to and from Australia. In 200102, it accounted for 48 per cent of international passenger traffic and 49 per cent of international freight traffic. Melbourne was the next busiest airport with 20 per cent of international passenger traffic and 28 per cent of freight traffic.⁽²³⁾

B: Australian Airline Policies: Overview

Domestic Airline Policies

There are two main elements to the Commonwealth's economic policy framework governing domestic airlines. First, Commonwealth policy is that there are no restrictions on freedom of entry to domestic trunk routes by domestic airlines. However, federal cabotage restrictionsi.e. the government policy instruments which ensure that only Australian-based airlines carry domestic passengers and freight and that foreign-owned airlines do not carry domestic passengers on domestic sectors of their international servicesare in force.⁽²⁴⁾ In the aftermath of the Ansett collapse, the Government temporarily eased cabotage restrictions.

Individual States impose some restrictions on entry to intra-state routes. Some state governments control route entry (for example Western Australia and New South Wales) with a view to ensuring financial viability and stability in service provision, but in other states (for example South Australia), there is freedom of entry and exit. The former Ansett group subsidiary, Perth-based regional airline, Skywest, has been granted a monopoly on some of its internal Western Australia routes subject to it securing finance to upgrade its aircraft fleet.⁽²⁵⁾ This is consistent with the recommendations of a recent Review and Assessment of the Effectiveness of Air Services in Western Australia. The review was undertaken by the Centre for Asia-Pacific Aviation and Tourism Futures International; it recommended that the WA Government not allow more competition because it risked the loss of regular air services to many towns in the State⁽²⁶⁾.

Second, Commonwealth policy is that there is no industry-specific economic regulation. In the area of competition policy, for example, despite calls for industry-specific legislation, the ACCC is responsible for the regulatory oversight and enforcement of competition. For example, the ACCC (and its New Zealand counterpart) are examining Qantas's proposal to take a 22.5 per cent equity stake in Air NZ.⁽²⁷⁾

Fares and Subsidies

There is no federal regulation of fares other than indirectly through the generic business conduct provisions of the Trade Practices Act 1974. This raises the question of what effect deregulation has had on fare levels. The Bureau of Transport and Regional Economics found the following:

Impact on Ansett group Operations

The Ansett administrators have maintained the Ansett Australia web site to record details of the company's progress under administration including the asset disposal process. Details of asset disposals can be found on the timeline that the administrators maintain.

Following the termination of Ansett's mainline operations in March 2002 after the collapse of the Tesna bid⁽⁴²⁾ for the airline, the Ansett administrators decided to continue the operations of the airline's subsidiaries pending their sale to third parties. In addition, aircraft maintenance personnel and facilities were retained to keep those parts of the fleet that Ansett owned in a fit condition for sale. Ansett's terminals were largely mothballed, although a 'trickle' of passengers from former Ansett regional airlines continued to use them. The respective airport companies subsequently bought a number of the terminals and leased them to Virgin Blue and Qantas.

The administrators have retained Ansett's airline operator's certificate; any prospective new domestic airline entrant could buy it and save a reported six months on the time it would take to process an application for it's own certificate. Some industry observers see Singapore Airlines as the most likely new entrant to the domestic market, especially as it is suffering from the lack of a Star Alliance domestic partner in Australia. Dubai-based Emirates Airline is also considered to be a possible contender.

Air Passenger Ticket Levy (the 'Ansett Levy')

In September 2001, federal legislation was passed that introduced a levy on air passenger tickets, bought on or after 1 October 2001, for flights originating in Australia. Funds collected from the levy are being directed towards the costs associated with the Special Employee Entitlement Scheme for the former employees of companies in the Ansett group. The Department of Employment and Workplace Relations was charged with administering the entitlements scheme. The scheme's 'safety net' was designed to ensure that the 15 000-plus former Ansett group employees would be paid unpaid wages and leave, and pay in lieu of notice. It was also to meet workers' redundancy entitlements up to the community standard of eight weeks.

On 17 December 2001, a private sector entity, SEES Pty Ltd, was contracted by the Commonwealth to secure a loan for the purpose of advancing funds to the Ansett administrators in respect of unpaid Ansett group employee entitlements. This approach was necessary so that an estimated $350 million for employee entitlements could be paid as quickly as possible, given that the revenue forecast was only $8 million to $10 million per month.

As of 31 March 2003, the levy had raised $225.6 million.⁽⁴³⁾ The levy raised $113 million in 200102 and was projected to raise $138 million in 200203.⁽⁴⁴⁾ Some 12 983 former Ansett group employees had been paid $335.6 million as at 31 March 2003.⁽⁴⁵⁾

The Government's stance on the levy has been that it would be collected until all money paid under the entitlements scheme has been recovered. On 21 December 2002, a spokesman for the Minister for Transport and Regional Services said that the Government would like to drop the tax but it could do so until the exhaustion of all legal avenues stemming from a Victorian Supreme Court ruling in favour of Ansett administrators. That decision would ensure that $200 million of entitlements from airline assets would not go to a superannuation fund.⁽⁴⁶⁾ A union superannuation fund has since exercised a right to appeal to gain access to funds that the administrators have recouped.⁽⁴⁷⁾

On 1 April 2003, the Government reiterated announced that while it wanted to remove the levy as soon as possible, it was necessary to retain the levy 'in order to protect taxpayers interests' following a decision by a union superannuation fund to exercise a right of appeal to gain access to funds recouped by Ansett's administrators.⁽⁴⁸⁾ However on 10 June 2003, the Government announced that it had decided to withdraw the Air Passenger Ticket Levy at the end of June 2003, even though the legal position in relation to the Ansett Ground Staff Superannuation action was yet to be resolved as was also the precise amount and timing of payments expected to be received by the Government from the Ansett Administrators.

In announcing the decision, the Minister for Transport and Regional Services, the Hon. John Anderson MP stated that:-

The Federal Opposition had previously argued that the asset sale process and the Court superannuation decision showed that the Government would get back from the administrators the original loan. Consequently, the levy was seen as redundant and merely another form of taxation.⁽⁵⁰⁾

Impact on Qantas Domestic Operations

As noted, the collapse of Ansett left a large gap in services. Lacking capacity and operating on a very limited number of routes, Virgin Blue was unable to 'fill Ansett's shoes'. Nor was Virgin Blue willing to provide full in-flight service, given its low-cost model. In the absence of competitors, Qantas's market share on domestic trunk routes rose to a peak of 84 per cent. Qantas also met the cost of ferrying 50 000 stranded Ansett group passengers free and providing reduced fares to another 65 000.

Qantas responded to the sudden upsurge in demand by scheduling more flights and by substituting larger for smaller aircraft. Further, as the initial Ansett group collapse coincided with the sharp decline in international air travel after the terrorist attacks in the United States in September 2001, Qantas diverted aircraft from its international fleet to domestic routes. As a longer-term response, Qantas is building up the capacity and cost effectiveness of its domestic fleet by acquiring new, fuel efficient Boeing 737-800 aircraft.

Qantas is also responding to Virgin Blue's 'no frills' approach by retaining and expanding no-frills, low-cost, all-economy class operations. Qantas inherited similar operations from Impulse Airlines and has added to them by expanding its fleet of the low operating cost Boeing 717 aircraft that Impulse used on trunk routes.

Qantas has also acquired additional terminal space to cope with its rapid growth in market share since Ansett's collapse. For example, in September 2002, Qantas commenced operations from Sydney KSA's Terminal 2 Domestic, the former Ansett domestic terminal.⁽⁵¹⁾

Impact on Virgin Blue

Following the withdrawal of the Tesna consortium's bid for Ansett, Virgin Blue, having low capitalisation, found itself short of capital needed for expansion. Virgin Blue entered into a joint venture with Chris Corrigan, representing the Patrick Corporation, who paid $260 million for a half-share of the company. The additional capital is assisting in the expansion of the airline's fleet and the leasing of former Ansett terminal capacity to service its growing market. As noted, Virgin Blue has also extended its route network, which now includes a number of regional centres such as Coffs Harbour and Alice Springs.

Impact on the Regional Airline Industry

Ansett owned a major proportion of the regional airline industry, including Kendell Airlines, Hazelton Airlines, Aeropelican, Sunstate and SkyWest. All survived as going concerns after the Ansett collapse, albeit under administration for lengthy periods and after receiving considerable federal and state government financial support. The most important purchase of former Ansett regional airlines was the acquisition of Kendell and Hazelton by Australiawide Airlines Limited, operating as Regional Express (Rex).

Most of the former Ansett regional airline operations do not have partnership arrangements with Qantas or Virgin Blue. Before Ansett collapsed, around 80 per cent of routes were operated only by airlines with partnerships with Ansett or Qantas; Ansett's regional subsidiaries were all tied in with the Star Alliance. Consequently, the former Ansett regional airlines are outside the international alliance network.

The future of regional services is unclear. Qantas's highly developed corporate linksacross the regional, domestic and international sectorsand scheduling to its non-regional services gives it a considerable advantage over potential competitors. This suggests that competitive initiatives by Qantas's regional carriers will be closely monitored by the competition authorities to ensure that Qantas does not take unfair advantage of its dominance in the market. One proposal to reduce this dominance is that Qantas should be made to divest itself of its regional operations and other regional operators should be encouraged to merge into larger, more viable entities.⁽⁵²⁾

D: The Domestic Airline IndustryEconomics and Competition

Economic Characteristics of the Airline Industry

Economies of Scale

Parts of the airline industry are characterised by economies of scale.⁽⁵³⁾ Economies of scale occur when expanding the production of a service results in a lowering of the average cost of its production. The implication of this is that a larger service provider will achieve lower costs than his smaller competitors, making the latter vulnerable to takeover. In the long run, the implication is that in the absence of government intervention, the industry will gravitate towards a single provider (i.e. a 'natural monopoly'), a concern that underpinned the economic rationale for the two airline policy from its outset.

The policy was based on the premise that if Australia wanted two competing airlines in the domestic market, government intervention was necessary to ensure that both airlines were 'guaranteed' sufficient market share so that each could remain commercially viable over the long term. If economies of scale persist in the industry to this day, this could suggest that there is a need for on-going regulation of the airline industry to monitor and prevent any tendencies towards its monopolisation.

The airline industry is subject to economic regulation by the ACCC under the generic business conduct and competition policy provisions of the Trade Practices Act 1974. The High Court has, in the recent Boral case, addressed these provisions in detail in the context of claims of predatory pricing. The court's conclusions on predatory pricing could have significant longer-term implications for the Australian domestic airline industry; there is a widespread view in the small business sector that the Boral decision 'proved the Trade Practices Act did not protect small business from big-business predatory pricing'.⁽⁵⁴⁾

In the Boral case, the High Court undertook detailed consideration of the concept of 'predatory pricing' as a form of business conduct 'taking advantage' of market power. It has been suggested that:

It has been suggested that lifting the cabotage constraints on foreign airlines serving Australia and allowing them to carry freight and domestic passengers within Australia could increase competition. Ideally, liberalisation would be achieved on a reciprocal basis with other countries. If this proved unfeasible, a unilateral move to enhance competition in domestic aviation could be considered.⁽⁵⁷⁾ However, it is questionable to what extent easing cabotage would increase competition. The schedules of international airlines are generally not well suited to meeting domestic flight requirements, and complicated procedures would be necessary to allow domestic passengers to embark and disembark at international terminals bearing in mind customs, quarantine and security considerations.

Airlines' Competitive Strategies

Qantas is trying to defend its market share through service upgrades and innovations such as the CityFlyer services on key trunk routes. It is reportedly considering investing about $1.5 billion to expand its fleet of Boeing 737-800s to around 30 aircraft. These can be readily converted to an all-economy configuration, helping Qantas to compete with Virgin Blue.⁽⁵⁸⁾

Virgin Blue's strategy seems to be one of 'cherry picking'that is focusing on a limited number of high-density routes and not operating a more traditional route system of a nationwide network that cross-subsidises less profitable routes. Virgin Blue has also sought to minimise costs through more flexible working arrangements including multi-skilling (relative to past standards and to Qantas), and low overheads (for example not having lounges or catering).

A key element of Virgin Blue's competitive strategy is expansion: Virgin Blue aims to gain 50 per cent of the trunk route market by 2007. Like Qantas, Virgin Blue is increasing its fleet capacity very quickly. Virgin Blue has been a private company for much of its existence, but media reports suggest it is 'cash poor' and is moving to sell equity on the British stock market. The Virgin group is considering a public float of Virgin Blue to assist its expansion although Patrick Corporation reportedly has reservations about a float at this time. It has also been reported that Patrick would prefer a lesser degree of its own equity dilution as a result of the float than that which the Virgin Group has envisaged.⁽⁵⁹⁾

The development of international routes would enhance Virgin Blue's competitive appeal. With Patrick Corporation acquiring 50 per cent of Virgin Blue, the airline has the potential to become an international carrier in its own right, as it is now deemed to be an 'Australian' company. Virgin Blue has announced its desire to expand into overseas operations; a linkage with Virgin Atlantic flights from Europe to Hong Kong would be one way it could establish a presence on the AustraliaUK 'kangaroo route'. Expansion into trans-Tasman markets is another possibility although Qantas, Air NZ and a no-frills operator, Freedom Air, which is part of the Air NZ group, already service this route. Virgin Blue has said that it will proceed with trans-Tasman services regardless of whether the proposed alliance between Qantas and Air NZ proceeds.⁽⁶⁰⁾

Some factors may limit Virgin Blue's ability to compete. Over the longer term, there may be doubts about Virgin Blue's financial viability. It does not participate in an international airline alliance and its market positioning excludes it from the higher-yield business travel market. If Qantas reduces operating costs to levels comparable with Virgin Blue, Virgin Blue would be at a disadvantage in light of its relatively small market share.

With respect to freight, Air Cargo Partners (ACP)operating as Virgin Blue Freight Managementis the designated freight group for Virgin Blue Airlines. Through ACP's association with Air Cargo Partners Worldwide, ACP can offer air cargo services across Virgin Blue's entire national network as well as international cargo services. In addition, Virgin Blue's half owner, Patrick Corporation, acquired the Ansett International Cargo Handling business during the first half of 2002.

Adequacy of Competition Law in its Application to the Airline Industry

With the overall level of competition in the industry less effective than before the Ansett group's collapse, it might be argued that it is only the threats of new entry and ACCC monitoring that keep Qantas competitive. Ansett's collapse has focused attention on the adequacy of competition law in its application to the airline industry. Fulfilling a 2001 election pledge, the Treasuer, Mr Costello announced in May 2002 the terms of reference for a review of the competition provisions (Part IV) of the Trade Practices Act 1974. Former High Court judge, Sir Daryl Dawson headed the review, which released its report on 16 April 2003.⁽⁶¹⁾

A key issue in this review is the operation of section 46 of the Trade Practices Act, which states that a firm with a substantial degree of market power must not take advantage of that power for the purpose of:

In its submission to the Dawson Committee, the ACCC advocated an 'effects' test under which a breach of section 46 could be established if a firm with substantial market power had taken advantage of that power and this had resulted in an anti-competitive outcome. In this case, it would no longer be necessary to establish that the firm had an anti-competitive purpose.

The ACCC has suggested that such an amendment would assist in dealing with the aviation industry in the wake of the collapse of the Ansett group. Qantas criticised this proposal arguing that the measure would effectively prevent it from competing against Virgin Blue. While debate is continuing, the ACCC has begun litigation against Qantas alleging that it misused its market power by substantially increasing the number of seats on the BrisbaneAdelaide route after Virgin Blue entered the market in December 2000a behaviour sometimes referred to as predatory 'capacity dumping'

As has been noted, there is considerable debate in the Australian business community about the effectiveness of the Trade Practices Act's market conduct provisions in the light of the High Court's decision in favour of the dominant player in the recent Boral case. Small business interests and others believe the decision reduces the effectiveness of section 46 of the Act in curtailing predatory pricing. Although, The Dawson Committee addressed this issue, the committee's recommendations do not appear to envisage the type of changes in these provisions of the Act that might ease the concerns of smaller businesses confronted by a dominant competitor.

E: Airports and Air Services

Background on the Structure of the Airports Industry

The Commonwealth has, over time, divested itself of ownership of regional and local airports, while almost all capital city airports have been transferred to private operators on long-term lease arrangements. All international, domestic trunk and regional airports are now owned or controlled by private lessee companies and consortiums or local governments. This includes joint-use defencecivil airports such as Canberra and Townsville.⁽⁶²⁾

From the 1950s to the 1980s, the Commonwealth funded the transfer of local and regional airfields and aerodromes to local government authorities under the Aerodrome Local Ownership Plan. These smaller aerodromes have not been privatised and generally remain the responsibility of local government agencies such as port corporations.

Before 1997, the Commonwealth-owned Federal Airports Corporation operated most major trunk route airports. The Hawke Government established the corporation in the 1980s when responsibility for running major airports was separated from the Department of Transport. Although commercially-oriented, the corporation set landing and terminal charges on a network-wide, 'single-till' basis.⁽⁶³⁾ Consequently, profitable airports subsidised unprofitable or less-profitable ones, and revenues from non-aeronautical activitiessuch as car parking and retailingsubsidised the cost of providing aeronautical services such as the use of runways, taxiways and terminals.

Airport Privatisation

In 1997 and 1998, the Howard Government implemented the Keating government's plan to sell leases for 17 major Australian airports (excluding Sydney) to private operators. In June 1997, the Government privatised Brisbane, Melbourne and Perth airports (the so-called Phase 1 airports) under 99-year leases. On 1 July 1998, the Government privatised a number of other major airports within the so-called Phase 2 group of airports.⁽⁶⁴⁾

The stated rationale was to improve the efficiency of airport investment and operations in the interests of users and the general community, and to facilitate innovative management. In the aftermath of the Ansett group's collapse, the Government delayed the sale of the three 'Sydney Basin' airports at Bankstown, Camden and Hoxton Park because of adverse sale conditions, but on 9 April 2003 announced that all three would be sold this year.⁽⁶⁵⁾

The Government considered that competition between privatised airports could be encouraged by restricting cross-ownership of certain airport pairs and by limiting airline ownership to 5 per cent. These policies were implemented under the Airports Act 1996 .

Reform of Airport Pricing

The Government, in the airport industry reform package that accompanied privatisation, noted that the single-till pricing that the federal airports corporation followed would not be mandated for the privatised airports. Individual airport operators could retain profits, at their discretion, from non-aeronautical activities.

Concern that privatised airports might abuse their market power with respect to aeronautical services led the Government to introduce transitional price regulation designed to allow all parties to adjust to the new environment. Price regulation comprised a five-year, consumer price index minus X annual cap on prices for aeronautical services at 11 of the largest privatised airports, where X was a pre-determined amount specific to each airport. These arrangements extendedfor the first five years of privatisationthe aeronautical charges in place before privatisation. Given the nature of the price cap, airport operator charges fell in real terms between 1997 and 2001.⁽⁶⁶⁾ Sydney KSA was subject to price surveillance by the ACCC.

The Productivity Commission reviewed the application of price regulation in its report, Price Regulation of Airport Services . In its submissions to the commission's inquiry, the airport lessees argued that the price caps and the methods that the ACCC used to implement them were preventing airports from securing adequate rates of return on their investment. Despite airports being a monopoly business, the commission recommended that commercial constraints impeded the ability of airport operators to extract a higher-than-reasonable profit. The Bureau of Transport and Regional Economics has found that the return on assets of ACCC-regulated airports ranged from 2.4 per cent at Adelaide to 7.5 per at Melbourne.⁽⁶⁷⁾

On 13 May 2002, the Government announced that it had accepted the Productivity Commission's recommendation that the pricing regimes at Sydney, Melbourne, Brisbane, Perth, Adelaide, Canberra and Darwin airports be liberalised and subjected only to ACCC price monitoring (rather than price capping) for five years from 1 July 2002.⁽⁶⁸⁾ The new framework comprises a package of measures under the Airports Act 1996 and the Trade Practices Act 1974. From 1 July 2002, the ACCC's responsibilities include:

These services remain a Commonwealth responsibility; the Airservices Act 1995 established Airservices Australia to discharge these services and to charge users of capital city and major regional airports to recover their cost.

Airservices Australia has moved from network to location-specific pricing for its airport-related charges. Under network pricing, the cost of providing services differed among airports, but charges did not reflect these differences. As a result, some airports cross-subsidised others. Airservices Australia first introduced location-specific pricing for airport rescue and fire fighting services on 1 July 1997. It also charges for en route air navigation services on a user-pays basis.

The move to location-specific pricing meant that airways charges at some airports those previously subsidised under network pricingrose considerably. To ease the transition, the Government's 199899 Budget introduced a subsidy for the transition to location-specific pricing for some regional and general aviation airports. To a large extent, it is a subsidy to regional and rural Australia as it is mainly regional airports such as Tamworth that benefit. The estimated cost of the subsidy in 200203 is $7 million.

The Department of Transport and Regional Services administers the Payment Scheme for Airservices Australia's En Route Charges which subsidises Airservices Australia en route air traffic control charges incurred by around 30 small scheduled service airlines and operators of aero-medical services such as the Royal Flying Doctor Service. Regional airlines that operate small aircraft will also be exempt from en route charges from 1 January 2002 to June 2005. The subsidy will cost $6 million in 200203.

The Government is committed to retaining ownership of Airservices Australia, but its corporatisation and the outsourcing of some of its services, such as fire fighting, are on the agenda. The Government is introducing the Air Services Legislation Amendment Bill 2003 that would, among other things, convert Airservices Australia into a company registered under the corporations law. This would distance it from theist current level of parliamentary scrutiny.

Airport Infrastructure Needs

The pattern of long-term investment in upgrading facilities at the major airports has tended to be'lumpy'with concentrated, large-scale infrastructure investments being undertaken every few decades in response to changing aircraft technology and spurts in demand for flights. For example, large scale upgrading of Australia's capital city airports occurred in the late 1950s and early 1960s to facilitate the transition to the large jet aircraft that replaced prop and turbo-prop trunk route aircraft. Likewise, the introduction of the Boeing 747 jumbo jets in the late 1960s and early 1970s required large investments in longer, wider and stronger runways and new, larger terminals.

A similar leap in infrastructure investment at Australia's international airports will be required in preparation for the introduction from March 2006 of the Airbus A380 double-decker 'mega jets'. It has been estimated that Sydney, Melbourne and Brisbane airports will have to spend around $250 million each in order to accommodate the new aircraft.⁽⁷⁴⁾

Slots Systems

In view of the strong long-term growth in Australian air traffic, efficient allocation of airport capacity, especially of runway capacity, is increasingly urgent. This is particular the case at airports like Sydney, where the opportunities to expand capacity are limited by severe space and environmental constraints.

There are several approaches to dealing with this challenge. One is the use of administratively based airport slot systems. A 'slot' is the concession or the entitlement to use runway capacity at a certain airport on a specific date and at a specific time. Slots are typically allocated to airlines by administrative direction. An alternative approach that many economists now advocate is the use of market mechanisms, such as auctioning slots to the highest bidders.

While slot systems are highly effective in rationing scare airport and airspace capacity, they can restrain competition among incumbent airlines and between incumbents and new entrants. Slot systems thus have the potential to negate the gains of aviation liberalisation if national governments misuse them or allow airport owners to use them to pursue parochial interests. To promote competition, slot systems should ensure that new entrants have a fair chance of establishing viable operations. Market based solutions such as the sale of slots by tender would ensure that slots go to airlines whose passengers place the highest value on the slots (see discussion below under 'Rationalisation of Sydney KSA Operations').

Sydney KSA is the only Australian airport that has a slot management scheme. The system was introduced in 1998 to facilitate the movement 'cap' authorised under the Sydney Airport Demand Management Act 1997. Under the Act, the number of aircraft movements is capped at 80 an hour (although the Minister for Transport may determine a different limit). Slots were allocated to airlines primarily on the basis of the services that the airline operated in 1997.

A particular feature of the slot system at Sydney KSA is that slots for regional airlines are effectively protectedthe 'regional ring fence'because slots 'grandfathered' by regional airlines (that is, those inherited from long-standing usage patterns) can only be swapped for slots for interstate and international airlines within 30 minutes of their originally scheduled time. In December 2000, the Government announced that regional slots would be capped at current levels during peak periods. Outside peak hours, regional airlines would be free to bid for new slots, but would be subject to new rules about aircraft size. The intention is to encourage the use of larger aircraft.⁽⁷⁵⁾

Airport Noise Amelioration Programs

There are two noise amelioration programs: one at Sydney KSA and the other at Adelaide airport.

The Department of Transport and Regional Services administers the Sydney Airport Noise Amelioration Programme, which began in 1994 when the third runway was opened. Since then, buildings have been bought or sound-insulated at a cost of more than $400 million. Costs are recovered through a levy on jet aircraft landings. This raises between $37 million and $38 million annually; the total collected, as at 31 December 2002, was around $267 million.⁽⁷⁶⁾ The enabling legislation is the Aircraft Noise Levy Act 1995 and the Aircraft Noise Levy Collection Act 1995 . These allow the Minister for Transport to declare an airport to be the subject of an aircraft noise levy (a leviable airport). The Collection Act specifies qualifying airports as those having a public building within a 25 Australian Noise Exposure (ANEF) contour or a residence within a 30 ANEF contour.⁽⁷⁷⁾ In the 199697 Budget, the Government announced that it would extend the period of the levy at Sydney KSA from 10 years to 12 years to recover the additional compensation costs associated with the reopening of the east-west runway.

The Government announced the Adelaide airport program in May 2000 and applied the levy in the 200001 Budget. The program involves the sound-insulation of around 600 residences and five public buildings.

At the end of June 2002, about $395 million had been spent on noise reduction measures at both airports.

Sydney (Kingsford-Smith) Airport

Privatisation

The Government announced the lease sale, by tender, of Sydney KSA on 25 June 2002. A Macquarie Bank-led consortium known as Southern Cross was the successful bidder and paid $5.6 billion for the 99-year lease⁽⁷⁸⁾ and trades as Sydney Airports Corporation Limited. Net proceeds are estimated at $4.23 billion and have been used to pay off government debt. The Labor Opposition has argued that proceeds should have been spent on transport infrastructure rather than just retiring government debt.⁽⁷⁹⁾

The Government has emphasised that the sale would not change the Government's full regulatory control over the airport, including the noise abatement measures and guaranteed slots for regional airlines. The Government further pledged that the pricing regime for regional airlines would be maintained after privatisation: ' so that they cannot be forced out by an underhand policy of the landlord upping the rent'.⁽⁸⁰⁾

Provisions of the Airports Act require that:

These restrictions are designed to safeguard competition in the Australian aviation industry.

Rationalisation of Sydney KSA Operations

The airport's new owners have indicated that there is no need for a second Sydney airport as there is still considerable potential to expand Sydney KSA's capacity. The airport's life could be extended if its operations were changed because its technical capacity far exceeds its actual (regulation-constrained) capacity. In 2000, Sydney KSA averaged 77 passengers per aircraft movement compared with 94 at Melbourne, 155 at Singapore, 169 at Hong Kong and 204 at Narita airport near Tokyo.⁽⁸¹⁾

Two key constraints are the regional slots at peak times and the (noise-related) cap on the number of hourly movements. The Government-guaranteed regional slots are, in effect, a quota system. If a market were to operate whereby rights to land or take off in peak times were auctioned, or if there were peak-load pricing to discourage marginal flights, the outcome would be different. In all likelihood, regional flights would be confined to non-peak times and/or relocated to sites such as Bankstown Aerodrome in peak times. The Government has indicated that it wants the lessee of Bankstown to develop it as an 'overflow' airport to take excess traffic from Sydney KSA, with an extended runway and new terminal facilities.⁽⁸²⁾

The Sydney Airport Curfew Act 1995 provides for a curfew on most operations between 11pm and 6am. During the curfew, only certain categories of operations are permitted. They relate principally to small aircraft and 'low-noise' jets. The curfew also provides for runway use restrictions between 10pm and 11pm and between 6am and 7am. The Act imposes a fine of $110 000 on operators who breach the curfew.

The curfew, which contributes to a classic peak-load problem, affects mainly long-haul international airlines. They arrive when the curfew is lifted, leading to a peak in demand for international terminal services between 7am and 10am. This coincides with peak demand for domestic services, which begins at 7am and continues to 9:30am. Consequently, facilities such as the international terminal and runways have considerable surplus capacity at non-peak times. The curfew thus has considerable economic and financial costs.

In short, regulation of the operations at Sydney KSA shows that the Government prefers administrative rather than 'economic' solutions such as peak-load pricing and the sale of slots by auction. Regional airlines are major beneficiaries of regulation. They are probably effectively subsidised by passengers of non-regional services.

Future of a Second Sydney Airport

Since the 1940s, federal and state governments formed from both Coalition and Labor parties, have grappled with the need to build a second Sydney airport. A chronology of policies and developments associated with second Sydney airport issues since 1946 is available on the Department of the Parliamentary Library website.

Of the 19 sites that have been considered, two remained under discussion in the 1990s, namely Badgery's Creek and Holsworthy, although the latter was subsequently rejected. As campaigns against both sites were mounted, discussion continued on a 'Sydney West second airport and the possibility of using the Richmond RAAF base.

However, the sale of Sydney KSA reinforced its status as the primary airport in the region, something that is unlikely to change over the next two decades. In any event, current policy is that a future federal government will decide if development of the Badgery's Creek site should proceed. Specifically, under the sale arrangements for Sydney KSA, Southern Cross will have the first right of refusal to build and operate any second major airport within 100km of the Sydney central business district if the Federal government of the day decided that it was needed.

The Government has stated that any decision by a federal government to build a second airport would be subject to a review of Sydney's airport needs in 2005, although it does not believe that a second airport will be necessary before the end of this decade.⁽⁸³⁾ As at 16 June 2003, the Commonwealth had spent more than $144 million buying land at the proposed Sydney West airport site at Badgery's Creek.

Furthermore, while the Howard Government had indicated that Bankstown Airport, the largest of the three general aviation airports in the Sydney Basin, would be expanded to cope with overflow from the recently privatised Sydney KSA, it has recently retracted this strategy. In announcing the sale of Bankstown Airport in April 2003, Acting Transport Minister Wilson Tuckey indicated that the 'overflow' role for Bankstown was no longer necessary because of a decline in air traffic after the terrorist attacks of September 11 2001, the collapse of Ansett and the trend to larger aircraft on regional routes. He indicated that the sale would proceed without development obligations.⁽⁸⁴⁾

Endnotes

Appendix 1: Principal Regional Airlines, Australia, May 2003

Aeropelican

Description: Is now a subsidiary of Horizon Airlines, after being purchased from the Ansett Administrators.

Aircraft: DHC-6-300 Twin Otter (4)

Routes: Newcastle/ Belmont and Newcastle/ Williamstown to Sydney

Airlink

Description: airlink has been involved in charter operations out of Dubbo for about 31 years and commenced regional airline services in 1991 on routes vacated by Hazelton Airlines. In late 2001 Air Link moved its on-carriage to QantasLink/ Eastern flights after Hazelton had temporarily suspended operations. Air Link introduced in March 2003 a Beech 1900D, used exclusively for the Dubbo-Sydney route.

Routes: Dubbo to Sydney, the Mudgee; Dubbo-Coonamble, Walgett and Lightning Ridge; Dubbo to Cobar; and Dubbo to Bourke.

Aircraft: Beechcraft 1900D (1), PA-31-350 (5), Cessna 310R (4)

Airlines of South Australia

Description: founded in 1998, Airlines of South Australia currently operate flights from Adelaide to Port Augusta and Port Lincoln and from Port Augusta to Leigh Creek, Innamincka, Birdsville and Boulia.

Aircraft: Embraer 110-P1 (2), Embraer 110-P2 (1), PA-31-350 (4), Commander 500S (1).

Alliance Airlines

Description: Founded in mid-2001, alliance Airlines in March ceased all operations from Rockhampton and Gladstone. The company cited financial reasons for the decision.

Routes: Alliance operates services from Brisbane to Norfolk Island and Townsville; and a weekly Sydney to Norfolk Island service.

Aircraft: Fokker F100 (2), Embraer EMB 120ER (2).

Australian Air Express

Description: Established in 1992 as a joint venture between Qantas (the Australian Airlines) and Australia Post, Australian air Express currently wet leases seven Boeing 727F freighters from Trans Australian Air and three BAe 146s from National Jet Systems.

Aircraft and Routes: The airline has Boeing 727F's based in Perth, Melbourne, Hobart and Cairns, BAe 146's based in Brisbane and Adelaide, Hawker Siddley's based in Sydney and Metro 3's based in MacKay, Sydney, Canberra and Melbourne. Australian Air Express's fleet of 727's service the following routes: Perth/ Melbourne/ Brisbane/ Townsville/ Cairns; Perth/ Sydney/ Melbourne/ Perth; Perth/ Melbourne/ Perth; Cairns/ Townsville/ Brisbane/ Melbourne/ Perth; Hobart/ Launceston/ Melbourne/ Launceston/ Melbourne; Melbourne/ Brisbane/ Melbourne/ Hobart. The 146's operate Brisbane/ Sydney/ Melbourne/ Sydney/ Brisbane; Adelaide/ Sydney/ Brisbane/ Sydney/ Adelaide and Adelaide/ Melbourne/ Sydney/ Melbourne/ Adelaide.

Australian Airlines

Description: is wholly owned by Qantas but operated independently and managed separately. Set up as a low cost international airline in October 2002, Australian

Routes: Airlines currently operates four Boeing 767-300s but plans to increase its fleet in the near future. Operating from Cairns, the airline offers daily services to Osaka, Nagoya and the Gold Coast; with three services every week to Fukuoka, Hong Kong, Singapore and Taipei.

Aircraft: Boeing 767-300ER (4)

Cape York Air

Description: Cairns-based Cape Yok Airlines provides air services to 67 airports on Cape York and throughout Far North Queensland. Additionally the company has a base located on Badu Island in the Torres Straits. The company is a contractor to Australian post and reciecves as Australian Federal Government subsidy under the Rural Air Service Scheme (RASS). The company's air mail delivery service is the longest service of its type in the world.

Routes: Horn Island to Boigu, Badu, Kubin, Mabuiag and Saibai.

Aircraft: Cessna 208A (1), BN Islander (1), PA-31-310 (2), Partenavia P.68B (1).

Emu Airways

Routes: Adelaide to Kingscote; Adelaide to Wudinna.

Aircraft: Beech 1900C (2), PA-31-350 (2), Cessna 402B (1).

Golden Eagle Aviation

Description: are agents for Australian air Express and the company have a comprehensive delivery and pick up service.

Routes: Port Hedland, South Hedland, Wedgefield, Derby, Karratha, Dampier, Karratha's light industrial area, Wickham and the surrounding areas.

Aircraft: The airlines current fleet are located over three bases throughout the Kimberly and Pilbara. These bases have the following aircraft: Port Hedland Piper Chieftain (1), Piper Seneca (1); Derby Cessna 206 (3), Britten Norman Islander (2), Piper Navajo (2), Cessna 310 (1); Kununurra: Cessna 206 (1), Piper Chieftain (1), Piper Seneca (1).

Horizon Airlines

Description: provides a wide range of aviation services to the Australian public and industry. Operations vary from Regular Passenger Services (RPT) with Metro 23 aircraft, to charter operations in Metro 2's, through to ad hoc charters in the 44-seat turbo prop BAe-748. Additionally Horizon Airlines operate three, BAe-748 freighters Australia wide.

Routes: Horizon services Sydney to Taree, Newcastle (Williamstown), and Cooma.

Aircraft: BAe-748 (5), metro 23 (2, soon to be 3), Metro II (1)

King Island Airlines

Routes: operate two daily flights Monday to Friday between Melbourne / Moorabbin and King Island; and one daily service on Saturday and Sunday.

Aircraft: EMB-110P1 Bandeirante (1), PA-31-350 Chieftain (4).

Macair Airlines

Routes:The Macair network connects the following ports: Bedourie, Boulia, Brisbane, Birdsville, Burketown, Cairns, Charleville, Cloncurry, Cunnamulla, Doomadgee Mission, Dunk Island, Edward River (Pormpuraaw), Hughenden, Julia Creek, Kowanyama, Lizard Island, Longreach, Mornington Island, Mount Isa, Normanton, Oakey, Quilpie, Richmond, Thargomindah, Toowoomba, Townsville, St George, Windorah and Winton.

Aircraft: Saab 340B (2), DHC-6-300 92), Fairchild Metro 23 (4), Fairchild Metro III (4).

National Jet Systems

Description: provides aviation services such as wet leasing, scheduled airlines operations, charter and resource industry air services for major corporate and government organisations.

Routes: Darwin to McArthur River, Perth to Christmas Island and Cocos Islands.

Aircraft: BAe 146-100 / RJ70 and Dash 8-200.

Norfolk Jet Express

Routes: Norfolk Island to Brisbane, Melbourne and Sydney.

Aircraft: Boeing 737-4L7 (1).

Northwest Regional Airlines

Routes: Broome to Port Hedland, Karratha and Exmouth, Broome to Fitzroy Crossing and Halls Creek.

Aircraft: Cessna 404 (3), Cessna 310R (1)

O'Connor Airlines

Description: carries around 80 000 people each year.

Routes: currently provides daily flights to and from Mount Gambier, Melbourne, Adelaide, Whyalla and Mildura.

Aircraft: BAe Jetstream 32EP (3), Cessna 441 (1).

Qantas Airways

Description: Founded in the Queensland outback in 1920, Qantas is the world's oldest continually operating airline and is Australia's largest domestic and international carrier. Qantas is also one of the world's leading long distance airlines, having pioneered services from Australia to North America and Europe. Qantas operates a fleet of 185 aircraft, Routes: Serves 67 domestic destinations including a number of major regional ports and 75 international destinations in 32 countries.

Aircraft: Boeing 747-400 (29), Boeing 747-338 (6), Boeing 767-300ER (25), Boeing 767-238ER (7), Boeing 737-838 (15), Boeing 737-400 (22), Boeing 737-300 (17), A330-200 (3).

Qantaslink

Description and Aircraft: Qantas' regional airline, QantasLink regional airlines are wholly owned subsidiaries of Qantas and operate in excess of 2700 flights each week to 55 destinations across Australia. QantasLink flies more frequently and to more destinations that Qantas domestic. QantasLink comprises four separate

regional airline entities - Airconnex (Impulse Airlines), Airlink, Eastern Australia Airlines and Sunstate Airlines. With 61 aircraft in the QantasLink fleet, three aircraft types are used: Boeing 717 jets (14)

BAe 146 jets (15) and De Havilland Dash 8 turboprops (32).

Qantaslink / Airconnex (Impulse Airlines)

Routes: Airconnex currently serves 14 ports throughout Australia: Adelaide, Brisbane, Coolangatta (Gold Coast), Hamilton Island, Hobart, Launceston

Mackay Maroochydore (Sunshine Coast), Melbourne, Newcastle, Proserpine

(Whitsunday Airport),Rockhampton, Sydney and Townsville.

Aircraft: Boeing 717-200 (14)

Qantaslink / Eastern Australia Airlines

Routes:Eastern operates from Sydney to Albury, Armidale, Ballina, Canberra, Coffs Harbour, Dubbo, Grafton, Lord Howe Island, Moree, Mount Hotham, Narrabri, Newcastle/William town, Port Macquarie, Tamworth and Wagga Wagga and from Melbourne to Burnie/Wynyard, Canberra, Devonport, Mildura, Mount Hotham and Newcastle/William town.

Aircraft: Dash 8Q300 (5), Dash 8200 (3), Dash 8-100 (13)

Qantaslink / Sunstate Airlines

Routes: Sunstate operates a network of services from Brisbane to the following ports: Barcaldine, Blackall, Blackwater, Bundaberg, Cairns, Charleville, Coffs Harbour, Coolangatta, Emerald, Gladstone, Hamilton Island, Longreach, Lord Howe Island, Mackay, Melbourne, Newcastle/Williamtown, Rockhampton, Roma, Thursday Island, Townsville and Weipa.

Aircraft: Dash 8-300 (4), Dash 8200 (2), and Dash 8-100 (5)

Regional Express (Rex)

Description: Rex is one of Australia's newest regional airlines and was formed through the merger of Hazelton and Kendell Airlines. Its headquarters are in Sydney with its main operational, engineering and maintenance base in Wagga Wagga. Rex is about to commence an interlining agreement with Virgin Blue.

Routes: Rex services the capital cities of Adelaide, Canberra, Melbourne, and Sydney and the regional centres of Ceduna, Port Lincoln, Coober Pedv, Kangaroo Island (Kingscote), Whyalla, Olympic Dam, Broken Hill, Mt Gambier, Portland, King Island, Burnie, Devonport, Wagga Wagga, Albury, Merimbula, Dubbo, Bathurst, Griffith NSW, Lismore, Mildura, Moruya, Narrandera, Orange, Parkes and Ballina.

Aircraft: Saab 340 (21), Fairchild Metro 23(7)

Rex recently announced a major upgrade of its Saab aircraft fleet, replacing 10 34-seat Saab aircraft with 10 updated and `as new' versions of the Saab 340B starting March 2003

Skytrans

Description: Skytrans Airlines is a Queensland-based airline and air charter business with bases in Cairns and the Torres Strait.

Routes: With a fleet of 17 aircraft, the company operates scheduled services from Cairns to Aurukun, Coen, Cooktown, Karumba, Lockhart River, and Yorke Island with a connection to Horn Island. The company also flies charter operations throughout Australia, Papua New Guinea and the south western Pacific.

Aircraft: King Air 200 (1), BN Islander (2), Cessna 404 Titan (7), Cessna 402C (2), Cessna 310R(6)

Skywest Airlines

Routes: Skywest operates a network of services from Perth to Albany, Carnarvon, Esperance, Exmouth, Geraldton, Kalgoorlie, Laverton, Leinster, Leonora, Meekatharra, Mt Keith, Shark Bay/Monke Mia and Wiluna.

Aircraft: Fokker 50 (5) Fokker 100

Sunshines Express

Routes: Sunshine Express operates services from Brisbane to Biloela/Thangool, Hervey Bay, Maroochydore and Maryborough and also offers charter services. Aircraft: Shorts 360-300 (1), Metro III (2)

Tasair

Routes: Tas Air operate RPT services on the following routes: Hobart/Wynyard; Devonport/Wynyard/King Island

Aircraft: PA-31-350 (4), Commander 500S (3)

TransAustralian Air Express

Routes: Trans Australian Express regularly services the following cities: Melbourne, Perth, Sydney, Cairns, Townsville, Hobart and Launceston.

Aircraft: Boeing 727-200 (4), Boeing 727-77C (1)

Virgin Blue Airlines

Routes: Virgin Blue's network includes links to a number of larger regional centres including Broome, Cairns, Coffs Harbour, the Gold Coast, Launceston, Mackay, Rockhampton, the Sunshine Coast, Townsville and the Whitsunday Coast. Virgin Blue is about to commence an interlining agreement with Regional Express (Rex).

Aircraft: 737-800 (9), 737-700 (14), 737-400 (1), 737-300 (1)

Source: Aircraft and Aerospace magazine, May 2003 edition, p. 16.

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Research Paper no. 10 2002-03