What Australia’s Aviation White Paper said – and what we’d like it to have said…
In August the Australian government released its long awaited aviation policy statement, “Towards 2050”. Since the “Green Paper” was released a year previously for public comment, policymaking had more or less been in limbo.
So there were probably some inflated expectations that the White Paper would make definitive and helpful statements at a seminal time in the industry’s evolution. The expectations did indeed prove to be inflated.
We’d like to address three of the issues we see as most significant, both substantively and popularly:
1. Competition in the domestic market,
2. Consumer protection and
3. The environment (with special emphasis on electric-powered aircraft and regional services)
There are many other important issues, like planning to reduce skills shortages, but these three are the key policy areas.
Part 1: Competition in the domestic market
· This is a pivotal moment for the Australian airline market
· A transparent policy framework is needed, with settings that ensure two sustainable airlines and allows for new entrants
· Much revolves around access to Sydney Airport (and later to Western Sydney Airport), but there’s more to it
· A more active ACCC role in monitoring market behaviour and mergers
· The White Paper carefully avoids rocking the boat
A pivotal moment for domestic aviation
This year is, or should be, pivotal for the future of the domestic airline market. Achieving that outcome depends on getting the regulatory and airport access settings right.
Government is now in a position to build fences to deliver a more competitive domestic airline future. Unfortunately the White Paper hasn’t given much cause for optimism on that front.
Qantas is the 800 pound gorilla in Australia's domestic airline market, accounting for about two thirds of its capacity (a similar proportion to Woolworths and Coles combined) and an even higher proportion of its profits. Virgin Australia mops up most of the remainder.
Add to that the fact that two large jet airlines have recently gone out of business, Rex and Bonza, along with a massive amount of consumer disaffection with Qantas’ behaviour in the wake of the Covid pandemic and you have a lot of discussion about how to "fix" things.
For example, one populist – and rather silly – suggestion has been to force the divestiture of Jetstar from the Qantas group. That’s useful only for attracting media attention and has little rational basis. Short term proposals like that ignore the fragile nature of the airline business.
The answer is not to pull down what is one of the most successful and highly regarded dual-functioning airline models in the world. CEO Geoff Dixon made a brave move against all the supposed wisdom when he created Jetstar 20 years ago, and Alan Joyce honed it to where it is today. They created a two-brand operation that airlines around the world have since tried to imitate.
The framework for domestic competition needs to be elaborated and stated clearly
The focus instead needs to be on ensuring the regulatory environment is adequate to welcome competition – both for Virgin Australia and for potential new entrants.
Qantas is one of the few major world airlines that has not fallen into bankruptcy this century, narrowly avoiding it during Covid. Airlines are among the dodgiest businesses in the world. That’s why the ratings agencies rank almost all of them at junk bond status – yet almost our entire international passenger transport and tourism system relies on them, always a worrying thought. Qantas is one of literally a handful which retains investment grade ratings.
Consequently there’s an underlying concern that the country needs to support a strong airline, when all others have shown they can fail. There are some grounds for making that the dominant policy priority. It appears to be, but nowhere is it formally stated.
Internationally, Qantas is a relative minnow with a small share of Australia’s international activity and there’s a lot of overlap with domestic. Arguably, weakening the domestic arm could harm Qantas/Jetstar’s international efficacy.
Nonetheless, domestically it’s vital to underpin a system that sustains - at least - two profitable airlines.
Despite Qantas’ dominance, it’s wrong to think that is the reason it has gained such a powerful position. Certainly the flag carrier has had an occasional leg-up from governments on both sides of politics, but there’s a lot more to the story.
It wasn’t Qantas that destroyed Ansett in 2001; Ansett was an inefficient accident waiting to happen and the introduction of real low cost airlines (Virgin Blue and Impulse) in 2000 pushed it over the edge, with a large helping hand from its Air New Zealand owners.
Nor was Qantas responsible for Virgin Australia’s collapse in 2020 after Covid struck; Virgin was already shaky and the effects of the pandemic quickly finished it off. (Rex, although not in the same category, was under-funded and didn’t execute effectively on the trunk routes, collapsing recently; and Bonza was shortlived.)
Towards a level playing field. Australia needs at least two major viable airlines - but there is room for a third trunk route airline, if…
Now it's up to the government to create a framework that allows real competition – including addressing slots, mergers, and access to the new Sydney Airport. But the Minister wasn’t about to offer anything of substance to point a direction for that in the White Paper.
Defining the “national interest” in foreign airline investment
Today Qantas has undoubtedly become too powerful for the domestic market's good. In addition to its dual brand airline operation, along with regional and freight networks it has a powerful Loyalty/Frequent Flyer Programme and a Chairman’s Lounge product that is highly effective in capturing corporate travel contracts.
For Virgin Australia to function sustainably for even the medium term, it needs at least one foreign airline investor and an IPO – the two are linked. The airline’s current private equity owners were never intending to be there for the long term.
“The national interest" means among other things, moving to allow foreign airline investment in Virgin Australia. Australia has an unusual but sensible policy that allows unlimited foreign ownership of domestic airlines (that’s how Virgin Blue started up). Now that the Qatar Airways 25% investment proposal has been made public, hopefully it will move ahead quickly!
But specific investment cases require Foreign Investment Review Board (FIRB) approval, and the FIRB reports to the Treasurer – that is, it becomes a political issue. The White Paper offered no light on how this issue would be addressed, despite public speculation and its fundamental importance in creating greater market balance.
For the time being, capacity shortages and reasonably strong domestic demand have allowed Virgin to be mildly profitable, but it needs a much firmer base if it is to be a substantial competitor for the long term. There’s a bullet that needs to be bitten; it’s not a silver bullet, but it’s a necessary step.
Sydney Airport access is at the heart of the matter, but it’s not the only issue
Getting access to Sydney Airport is crucial to operating a viable domestic airline. It’s at the apex of two of the biggest air routes in the world and it’s where most of the expensive flying is done. And predictably Qantas and Virgin have much more than the lion’s share. In fact there’s almost no room for anyone else at the valuable peak times.
Slot hoarding occurs everywhere. It’s a ubiquitous competitive tool that all airlines use as far as they can get away with it. Removing the pejorative connotations, it simply means that airlines try to lock in as many timeslots as they can at congested, or slot-constrained airports, both to service their existing needs and to allow a bit of slack for expansion.
Qantas and Virgin quite rationally do all they can within the rules (even with a bit of bending) to make sure there aren’t enough slots to allow a new entrant the space to compete. That’s cynical, but it’s a fact of life and happens all over the world.
The Minister has come under sustained public pressure to “do something about it”. The White Paper only advanced some “look-over-there” platitudes about managing slot allocations more competitively to solve problems at Sydney, even though no country in the world has been able to solve the 80-20 use-it-or-lose-it rule” conundrum.
There’s no quick resolution to be had, but there is a role for a much more vigilant ACCC in monitoring slot usage. Even so, any improvements will be marginal at best.
And because nobody outside the industry the niceties of slot allocation, the actions will quickly be lost in the popular mist.
More slots at KSA could however easily be added by:
(1) increasing the 80 aircraft movements per hour cap; or
(2) at least amending the restrictive system that effectively prevents even 80 movements from being achieved (the system actually provides for 20 movements per 15 minutes; if 20 are not achieved, there can be no rollover into the next 15 minute period).
As a result of the 15-minute adjustments, average movements are in practice limited to around 70 in peak hours, a pathetic level when the two parallel runways are in use. World best practice for a similar airport is over 100 movements/hour. Getting another 10 slots in peak hours, to achieve 80 movements, could therefore theoretically allow almost a 15% increase.[1]
Aircraft noise has diminished enormously since the level was arbitrarily applied 30 years ago, so the impact on residents is vastly smaller today. The thing that hasn’t changed is that there are marginal electorates around the airport. It’s a fact of life they are more important than achieving a competitive airline marketplace. But the cost to the public and the economy is a very high one.
At present the only realistic opportunities to allow new entrants at Sydney KSA are to reduce the slots allocated to the incumbents, something both Qantas and Virgin would resist strongly.
Yet the key to greater competition is to guarantee adequate airport access at the one airport that’s vital to any trunk airline’s survival in Australia.
Western Sydney Airport will offer some hope for Sydney – but there needs to be a strategy for managing access
If, as seems likely, there is to be little or no competition improvement at Sydney’s existing airport, there is still time to take the great opportunity presented at the new Western Sydney Airport (WSA) when it opens in 2026. It offers a blank canvas for allowing entry by new airlines, provided the government puts in place a suitable framework.
That’s a big proviso. And in the meantime, there’s another Federal election, so chances are there’ll be no boat-rocking or big decisions made.
The Minister offered some broad hopes about how the new airport would provide additional market access after 2026, without putting forward any specifics on what steps would be taken – or were even being considered – to make sure new entrants would get a look-in.
Ideally, at least 50% of all the prime time access at the airport should be reserved for new entrants; the opportunity should be advertised widely, to make it obvious to any company that the government is keen to encourage more competition. These “slots” are national assets, which should be ring-fenced to allow innovation.
After all, the airport is owned by the taxpayer and represents one of the most valuable government infrastructure assets. Anything that can be done that also enhances the value to the taxpayer should be welcome.
That said, WSA is only planned to have one runway for the foreseeable future and although it’s designed as a 24-hour airport, the valuable time slots will not be at 3AM. Meanwhile Qantas and Virgin will be making offers the airport management can’t refuse, and before we know it, the key gaps will be filled unless there are guidelines.
Anyway, WSA is no silver bullet either. For a first world airport, 30 years in the making, it’s an aberration. There’s no direct rail connection to Sydney, a key ingredient, undiminished by hopeful noises about Parramatta becoming the centre of the world. Nor, remarkably, is there even a fuel pipeline; sustainable aviation fuel will have to be carted in on diesel trucks, or “tankered in” on incoming flights – a shocking addition to carbon emissions.
The ACCC. Enhancing the competition body’s oversight
A well-recognised fundamental in a deregulated market such as the airline business is ready availability and transparency of data. Conversely, the airlines are reluctant to provide any more information than they are obliged to.
Where there are only two main competitors that reluctance increases considerably. For one thing, each competitor is able to determine the performance of its rival by deducting its own data from the aggregate numbers. So it’s understandable they don’t wish to disclose that.
At the same time, it is very much in the public interest that ley data about fares and specific route performance be available for scrutiny – if not publicly, at least in confidence to bodies responsible for overseeing the competitive environment.
The White Paper notes that the Government “has directed the ACCC to monitor domestic airfares until the end of 2026”, to include regional routes and to “help identify instances of airlines misusing market power”.
Abuse of market power is notoriously difficult to prove, unless there is a “smoking gun”; there needs broadly to be proof that the activity is intended to drive a competitor out of a particular market. But a more active and vigilant ACCC would perhaps act as a disincentive to misbehaviour. The body is not to be given added powers, but there is something of a nod to be more active.
The White Paper however focusses more on the ACCC’s role in consumer protection (See Part 2 of our Report) and has the airlines’ footprint firmly on the many recommendations concerned with airport pricing, an issue that is far from central in the wider competitive scenario.
As for merger authorisations, where it might be argued that there has in the past been a generous view towards allowing the incumbents to take out competition and strengthen their already strong market power, the Paper just notes the government has “announced reforms to make Australia’s merger approval system faster, stronger, simpler, more targeted and more transparent, including in the aviation sector”.
That can mean all things to all people. But again, at least the ACCC is seemingly being urged to be more proactive.
The government also apparently sees a role for the Productivity Commission, but remains vague on the issue, aside from investigating “the determinants of regional airfares” (a current political hot potato following the demise of Rex Airlines) and once again looking into airport pricing.
Government travel
Finally in the context of airline competition, some crumbs are thrown to the old problem of government travel contracting: The Department of Finance will (“in 2024”) conduct a “Review of government travel purchasing policies to consider whether changed policy settings could better support competition.”
Overall assessment on competition policy: Could do better
All in all, the White Paper contains no shortage of what are little more than platitudes, given all policy announcements had been put on hold for a year to await its publication.
That leaves the proof of progress to be in the pudding. At this stage it appears to have little flavour. This is a disappointment, given the general belief – supposedly recognised by the government - that there is a lack of effective domestic competition.
[1] There is some minor tinkering with the slot rules, including a provision for a “temporary” catch up, allowing up to 85 movements per hour, following “a significant and sustained disruption, such as a severe weather event, or a maximum of 2 hours “. In other words, in these extreme conditions a total of 10 more movements is permitted, over two hours – maximum. Hardly allowing for a significant and sustained recovery.
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