Executive Summary
Introduction
A: Airline Industry Overview

B: Australian Airline Policies: Overview

C: Aftermath of the Ansett Group Collapse

D: The Domestic Airline IndustryEconomics and Competition

E: Airports and Air Services

Endnotes
Appendix 1: Principal Regional Airlines, Australia, May 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 industry's inherent instability and disproportionate political significance were key factors influencing the genesis of the two airline policy as set out in the Civil Aviation Agreement 1952⁽²⁾. The industry's turbulent tendencies have returned in the 13 years that have elapsed since the termination of the two airline policy in 1990. Unsustainable growth has occurred in the domestic airline industry marked by a cycle of the entry of new players, the collapse of some players and the emergence of others. High capital costs have contributed to high entry costs and have increased the market power of the incumbent airlines, impeding competition. This 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.

This research paper describes the current state of the Australian domestic and international airline industries, tracing the main changes since domestic airline deregulation and commenting on associated policy issues. It includes an analysis of the consequences of the Ansett collapse, changes in the airports industry and emerging competition and economic regulatory issues affecting both the airline and airports industries.

An earlier version of the paper is available as an audio brief, After AnsettAirline Industry Trends and Issues, by John Kain and Richard Webb, recorded in 2002. A chronology of the events leading up to Ansett Australia's last commercial flight on 5 March 2002 and covering the aftermath of the airline group's collapse is also available on the Department of the Parliamentary Library website.

A: Airline Industry Overview

Australia's airline industry can be classified into three broad categories:

Domestic Trunk Airline Industry: Services, Structure and Prospects

A domestic airline is:

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:

However, in recent years there has been a trend towards regional airlines operating much larger aircraft. The Bureau of Transport and Regional Economics therefore defines a regional airline 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

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:

The significant growth in the real average incomes of Australians over the past decade combined with the fall in real air fares, means that air fare affordability has improved quite markedly. Today, more Australians can afford to fly because incomes are higher relative to the level of fares. However, this does not necessarily mean that the competitiveness of air travel has improved relative to other transport modes; the continued rapid improvement in inter-capital and inter-regional road links, the trend decline in real motoring costs and improvements in regional rail services in some areas have served to make inter-modal competition more vigorous.

The viability of some regional air services is dependent on Commonwealth and state government subsidies. The Commonwealth subsidises parts of the regional and general aviation sectors. In 200203, the cost of the combined subsidies to both sectors is estimated to be $16.2 million:

The Commonwealth also provided ad hoc subsidies to regional airlines in the aftermath of the Ansett group collapse under the Rapid Route Recovery Scheme; this cost $11.3 million.

Taxes and Charges

The fare analysis undertaken by the Bureau of Transport and Regional Economics did not include the various taxes on air fares which the Commonwealth imposes nor did it include charges that the airports levy on airlines which they, in turn, add on to passenger air fares. Federal taxes are:

The passenger movement chargewhich replaced the departure taxwas introduced to recover the cost of customs, immigration and quarantine processing at Australia's borders and the issue of short-term visitor visas.⁽³⁰⁾ The charge (legally a tax) is levied under the Passenger Movement Charge Act 1978 and the Passenger Movement Charge Collection Act 1978 .

However, the charge has moved beyond cost recovery and is contributing to consolidated revenue. Evidence given to the Senate Legal and Constitutional Committee (Australian Customs Service program) on 28 May 2001 revealed that the amount collected exceeded the costs of customs, immigration and quarantine services by $80 million.

The Ansett and noise levies are discussed below under the Air Passenger Ticket Levy and Airport Noise Amelioration Programs respectively.

Foreign Investment

Foreign investment guidelines allow foreign airlines to acquire up to 100 per cent of the equity in an Australian domestic airline or to start a new domestic airline, unless this is contrary to the national interest. Under this policy, Air NZ acquired its initial 50 per cent stake in Ansett Australia in 1996 and full ownership of the airline in 2000. However, it had to confine its equity in Ansett International to 50 per cent in order for the international entity to retain its Australian nationality status under the bilateral air service system.⁽³¹⁾

A noteworthy exception to this policy relates to Qantas. Under the Qantas Sale Act 1992, the Commonwealth Government restricts foreign investment in Qantas through the following provisions:

Qantas has argued that the 49 per cent foreign ownership restriction should be lifted so that it can fund expansion.⁽³²⁾ However, on 13 August 2002, the Government decided to retain the restriction, apparently seeing Qantas as a special case.

Australia's International Airline Policies

There are a number of elements to the international policy framework.

Since 1992, a key element of Australia's international aviation policy has been 'multiple designation'. This allows more than one Australian carrier to operate international air services. So far, Ansett has been the only passenger carrier to have taken advantage of this liberalisation. Although there have been proposals for other new Australian flag international airlines, these have never materialised.

Proposed Qantas-Air NZ Strategic Agreement

In 2002, Air NZ and Qantas announced their plans to establish a joint strategic relationship entailing:

Qantas has argued that the strategic partnership would assist both airlines to retain their independence in an industry facing considerable and continuing difficulties. It would also allow both airlines to compete more effectively in an increasingly tough global aviation market.⁽³⁶⁾

The proposed strategic alliance requires the approval of the New Zealand Minister of Transport (in his role as New Zealand shareholder), Air NZ shareholders, the New Zealand Commerce Commission and the ACCC. Virgin Blue has expressed strong concerns over the proposal arguing that:

Virgin Blue's formal response to the application for the authorisation of the agreement calls for the authorisation to be provided only if Virgin Blue (or another carrier) has actually entered the trans-Tasman and New Zealand networks on a substantial scale prior to the QantasAir NZ alliance coming into effect. It argues that, to enable a new entrant to establish on this scale in a meaningful timeframe, 'a number of structural and other market changes' would be required:

On 10 April 2003, the ACCC issued a draft decision proposing to deny approval to an alliance between Qantas and Air NZ on the grounds that the alliance was 'very anti-competitive and not in the public interest'; that is, the alliance's anti-competitive effects outweighed any public interest benefits from the proposal.

Air NZ's fragile financial condition in the aftermath of the Ansett collapse, its limited market size and the lack of significant prospects for improvement in its finances were, and will continue to be, important factors driving the proposed agreement. In the circumstances, it is likely that Air NZ and Qantas will make renewed applications to the Australian regulatory authorities, including the Australian Competition Tribunal, possibly with proposals for more generous concessions to third-party airlines such as Virgin Blue.⁽³⁹⁾ There is strong 'nationalist' support in New Zealand for the retention of Air NZ as a separate, identifiable national carrier supported by predominantly local equity; in these circumstances, it seems unlikely that Air NZ will be subsumed within the Qantas group in the foreseeable future. The New Zealand regulatory authority is not due to make an announcement on its decision in the case until September 2003.

The proposed Air NZ alliance is not the first of this kind; eight years ago the ACCC approved a profit-sharing agreement between Qantas and its 19 per cent shareholder, British Airways, relating to their services on the AustraliaUK 'kangaroo route'. This is due to expire in July 2003 and it has been reported that the airlines will seek a renewal of the approval.

C: Aftermath of the Ansett Group Collapse

Capacity and Fares

An immediate consequence of the collapse of the Ansett group was the reduction of capacity in terms of seats available and the number of flights. This was inevitable as Ansett held 39 per cent of the domestic air travel market. The Bureau of Transport and Regional Economics has found that the immediate impact of Ansett ceasing flights was a reduction of 21 per cent in domestic airline capacity and 28.4 per cent reduction in the number of domestic flights for October 2001, compared to October 2000.⁽⁴⁰⁾

With respect to the effect on fares, the bureau found:

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:-