Deregulation, Friend or Foe?

The Government could conceivably abandon control of fares, capacity, routes, entry to the industry and so on “but not everyone has recognised that while these together comprise the essence of the Commonwealth regulatory framework there are other controls and policies which influence domestic airline operations,” he said.

State powers, curfews, offsets and industrial awards and others can affect differently the competitive positions of various players in the game.

It appears to us from the submissions that we are receiving that it is not always appreciated that the State Governments, including the Northern Territory, have policies and in most cases legislation, concerning the conduct of air transport within their borders.

“Such regulatory economic powers as the States choose to exercise has a powerful effect, not only on the regionals and commuters but on the trunk airlines as well. ”

The review has initiated consultancy reviews including consumer perceptions – both passengers and the public at large and hopes this will assist in understanding what the effective demand really is in Australia for air travel.

Professor John Meyer, of Harvard, said that overall he believed US airline deregulation had been a success – “but if I was a 50-year-old airline pilot on $100,000 before Frank Lorenzo took over Continental and now had the choice of being unemployed or earning about $40,000 I would come to a very different conclusion. ”

Airline regulation effectively started in 1937 in the US when those on the scene at the time were “grandfathered in” and the scene remained almost the same until deregulation in 1978.

Stability was the CAB’s number one priority for both services and the financial well-being of airlines.

This meant there were no new entrants on trunk or local routes and the industry was fairly permissive about passing costs through to fares.

“Weak airlines got particularly juicy route awards to help beef up their financial performance and if that did not work and an airline looked like a candidate for bankruptcy, the CAB acted as a marriage broker and arranged a merger with one of the richer, more affluent trunk airlines to maintain stability. ”

He said that historically, right up to the bitter end of regulation, the “rate taper” established in terms of cents per revenue passenger kilometre meant for most trips under 150 miles the far rate was below the cost taper and the airlines lost money on that part of their business.

The biggest markup with the widest gap between rates and cost was in the very long-haul business of 1500 miles or more.

“I think the original reason this came into being was the desire for cross-subsidisation,” Professor Meyer said.

The short hops tended to be more to small towns. In an attempt to get out of this cross-subsidy, the US government became involved in direct subsidisation of small-town services and the CAB was spending about $70m per year for so-called local service carriers.

“This led to many airlines flying their jets on the good business routes during peak travel periods then putting them into less profitable centres at off-peak times – like midday or midnight, to qualify for subsidies. ”

He said that under regulation airlines had an incentive to settle strikes quickly by being accommodating to union demands, while new technological developments which boosted the productivity of the industry helped to pay the bill for increased wages.

The CAB was also egalitarian and seemed to be seeking size equalisation among airlines by tending to award new routes to smaller airlines.

Under deregulation, the money was in the long-hauls – the trans-continental flights and the longer runs down the East Coast to Florida.

This meant a strong tendency for increased service competition – piano bars, new uniforms, canapes – and competition for new route awards saw a lot of “creative” and expensive competition.

In seeking new routes to Hawaii, Eastern undertook to establish a magnificent new hotel – but its break-even load factor proved to be about 125 per cent and it finally took two managerial re-organisations to make it economic.

This airline’s emphasis on more and more wide-body airliners for long hauls meant there was a surplus of these at the time of deregulation, one of the prime reasons for cheaper fares on the long hauls.

“After deregulation and the tumbling of fares, particularly on the long routes, only the high-density short-haul routes were profitable and there was a shortage of smaller aircraft which could provide the reasonable frequency of service on these routes. ”

Deregulation brought a number of new factors – pressure on unions for “give-ups” – concessions on work rules and wage reductions, often for ownership shares in the airlines and there has been more intense scrutiny of tradeoffs between fares and services.

For example, you can get better productivity out of an aircraft if you turn it around faster and do not try to bunch its departures in the business travel hours 7-9am and 4-7pm.

Under regulation, airlines tended to hold aircraft on the ground long to put them in the key slots.

Under deregulation airlines can think about taking off at 3. 30 rather than holding to 4. 30, perhaps making a fare concession to fill up the plane.

“By making more careful calculations between fare concessions and scheduling you can get more utilisation of equipment and still fill planes. Professor Meyer said very few consumers were worse off but some were “a heck of a lot better off” as a result of US airline deregulation.

Man being what he is, invidious comparisons are made – “I am not doing quite as well as my friend next door” – has led to grumbling about deregulation.

But the facts are that very few are paying more than they did before.

With the costs coming down on the short hauls and discounts spreading to more and more markets, this kind of inequity in terms of benefits is beginning to disappear.

“The main way consumers have benefitted is the proliferation of promotional fares – special fares usually with some restrictions on them, them restrictions have been eroding over time too so that business travellers are using special fares increasingly. ”

He said another more ”tricky” consequence of deregulation which he believed was at least as good as it was before and probably better – but the reason I hesitate is that most service improvements involve trade-offs.

For example, hubbing means fewer direct flights but you get better connections to more places, while many smaller towns do not have jet services which have been replaced by smaller and arguably less safe commuter aircraft.

It depends on your travel pattern whether you benefit or not.

Competition has worked as the economists said it would – costs have come down and there has been rationalisation of much of the operation.

Consumers generally pay less although benefits are unevenly shared.

Markups over costs are much the same as before deregulation but very few people are paying more than they did before.

The industry has more jobs than if regulation continued but at lower average wage rates.

“This is understandable with new entrant airlines but it appears that older established airlines are also employing more people because in responding to recent severe downturns in business, they have been able to cut rates, rather than load factors, which would mean reduced employment”.

Some evidence suggested slightly higher productivity under deregulation but it was inconclusive.

Industry finances do not seem much harmed and even slightly improved, although they can go bankrupt as Braniff, Continental and Air Florida and many others have proven.

But the industry has learned to live with bankruptcy more easily than most because its capital is very mobile and aeroplanes can rapidly be placed elsewhere.

On stock prices airlines have caught up and then some.

The only real losers are the older organised labour groups. The benefits are not evenly distributed – long-distance travellers have benefitted more than short-haul and pleasure travellers have benefitted more than business travellers.

A final reason why there is still room for doubt and worry is that change is always difficult.

“As a result of deregulation in the US everyone, especially management, has had to learn some new ways of doing things. ”

He ended by quoting Alfred Khan, often called the “father” of US airline deregulation, who, returning to the scene after some years, commented that the only thing that surprised him was that he never thought it would take the airlines so long to learn how to operate an oligopoly.

The second US speaker on airline deregulation, Professor N. K. Taneja of Ohio State University was less fulsome in his praise of airline deregulation.

He pointed out that a handful of giant airlines still carry 80 per cent of traffic and that they are in a good position to increase this.

Reducing labour costs through two-tier wage systems has been a major reason for this- the big airlines have an incentive to expand rapidly to bring average prices down.

Airlines have gone rapidly to two-engine-two crew aircraft to reduce costs from older aircraft with more engines and crew.

“There are both advantages and disadvantages but what weight does one give to these,” he asked.

Fares are still high during holidays when demand is high and are high on smaller routes which can attract only one airline or a limited number of airlines.

Businessmen have gained some access to lower fares but at the cost of lower cabin service, more waiting, lost baggage and so on.

Large airlines with national identity and services covering all states have a number of cost benefits in advertising, computer reservations and other areas.

Dr Taneja said the well-known fares discounter, Peoples Express, put its costs per available seat mile at 5. 3 cents while the small, but more upmarket Empire Airlines comes out at 13. 3 cents.

But while PE has a yield of 7. 6 cents per seat, Empire has a yield of 30. 5. According to Dr Taneja, this gives a yield/cost ratio of 1. 43 for PE and 2. 29 for Empire.

With PE, load factors are running at about 70 per cent and Empire at 43 per cent, Dr Taneja calculates that the relative profitability index for both on a basis of 100 is almost equal at 100. 1 for PE and 99. 5 for Empire.

Of 12 recent new entrants only four had a profitability index of over 101 which is necessary to break even, he said.

Discounting had taken many creative forms – long-distance phone calls can build up credit towards airline tickets, and there are other incentives like fare reductions when you buy a camera, and frequent flyer programs.

“There are winners and losers from deregulation,” he said.

There is a greater degree of concentration with many airlines buying up their competitors.

“The mere threat that a low cost carrier will enter a marketplace is not enough to bring fares down- they have to actually enter to make that happen. ”

Australia already has airline deregulation – although on an absurdly small scale compared to the US.

Some States, such as Queensland, are quite convinced that deregulation would be counterproductive to ensuring a fair spread of intrastate air services – although it has different views on interstate services.

Queensland Transport Commissioner, Mr Neil Kent, is amused by the federal philosophy that no airfare should subsidise another.

“Cross subsidisation is endemic to all forms of transport,” he told the seminar.

“We protect some airlines on profitable coastal routes so they can also service unprofitable internal routes where Queenslanders regard air services as a right. ”

But South Australia and Victoria make no attempt to regulate their interstate routes- with results that may come as something of a surprise to most Australians who seem to believe that Australia-wide deregulation on the US model would see all airfares tumbling dramatically overnight.

According to Margaret Starrs, who recently resigned as the chief economist of the State Transport Department to move to Sydney, the results of deregulation in South Australia have been positive but modest.

‘The extent of ‘better-offness’ is probably very small,” she told the seminar.

Standard economy fares have increased in real terms but there is a lot of discounting on competitive routes while on regulated interstate domestic trunk routes economy fares have jumped 20 per cent more than on deregulated South Australian routes, she said.

The smaller airlines in South Australia have lower fares than Ansett Airlines of South Australia, but this reflects their lower standards of service, comfort and perhaps safety, according to Ms Starrs.

Of the five SA airports that have competition, four are served by Ansett South Australia with Fokker F27 aircraft, while other airlines operate much smaller aircraft, predominantly Cessna 402s.

One notable effect of deregulation has been that timetables and services have become more oriented to the travel requirements of non-Adelaide residents, whereas previously with an ASA monopoly, services were geared to Adelaide residents wanting to make day trips – out in the morning and back in the evening.

After some bankruptcies when deregulation was first introduced the scene has become remarkably stable – but the major Adelaide-based helicopter and jet charter operator, Lloyd Aviation, has announced it will start regional airline services soon and Margaret Starrs expects this to lead to a further shakeout in the market. “The existing airline’s market shares will fall as a result and there may be further bankruptcies”, she said.

One airline has already gone bankrupt and two others have merged as a result of financial difficulties.

There is no evidence of parallel scheduling on competitive routes although Margaret Starrs admits that flights tend to be close together during peak periods in the early morning and late afternoon.

“The South Australian community in general has benefitted because the State Government has not chosen to spend money on regulation and has let the market assume control”, she said.

‘This demonstrates that there is no requirement for regulation to achieve a stable market with reasonable levels of consumer benefit. ”

Victorians in some country centres have also enjoyed lower fares and more frequent services in smaller aircraft since commuter airlines moved in as Ansett and TAA progressively withdrew from country routes which were unprofitable with 45- 45-passenger F27s.

Leading commuter airline operator Don Kendell, who flies between Tullamarine and a number of Victorian centres, as well as to three other States, says he could “wake up tomorrow and find four new competitors on every route. ”

On most routes, Kendell Airlines has more than doubled the amount of traffic carried compared to previous very low-frequency operations by larger airlines with larger F27s.

But Don Kendell recognises that without the reservation and handling services big airlines provide for commuters on a marginal cost basis in return for on-carriage of the passengers the commuters feed into major airports, most commuters probably would not exist.

“Some of us can survive in complete and total deregulation in Australia in the commuter airline industry,” he said.

“But when the real competitive bunfight starts and there is blood on the floor I am quite certain that many of us would get trodden underfoot. ”

In an interesting reversal of usual roles, East-West is seen by commuters such as Mr Kendell as the large and predatory airline which will not give its smaller and lower-cost competitors a fair chance to compete.

“Anyone who thinks East-West never indulged in predatory pricing needs a lesson in reality,” Mr Kendell said.

In 1982 we started to operate Melbourne-Albury and EastWest cut their fares in what I would call predatory pricing, and there were statements in the paper that we would be out of business in three months.

At the other end of East-West’s orbit, TAA is somewhat ambivalent about the relationship as East-West grows from being a regional airliner to a direct challenger on the trunk routes.

It is having much the same problem with East-West that many parents have with their adolescent offspring (or in this case, foster child) before the offspring begins to show the effects of maturity, responsibility, commitment and independence.

As TAA General Manager, Frank Ball, puts it: “They can tread on our toes occasionally, but when they jump on them we will react with the competition. ” _

Frank Ball and on Kendell agree that East-West’s different style of fare-setting is generating significant numbers of new air travellers.

“Our figures show growth on all Ansett and TM routes except those where we are in competition with East-West,” he said.

Australia’s two major labour organisations covering airline pilots and ground staff are firmly opposed to any attempts to deregulate Australian domestic aviation.

The ACTU and the Australian Federation of Air Pilots claim it would lead to lower safety standards with no overall gain to the community in lower fares or other benefits.

Labour has been the big loser in the US with most cost savings being made in this area- but the ACTU and AFAP claim that there is little fat to cut in Australia and made it plain that they will react strongly against any attempt to apply the knife.

However, both organisations claim they agree to the evolutionary development of aviation regulation and the ACTU has made proposals for changes in fare-setting methods in a submission to the May independent inquiry which commenced public hearings on the two airline policy as we closed for press.

Ian Oldmeadow, an industrial officer for the ACTU, which claims to represent 95 per cent of employees in 25 unions covering domestic aviation, told the seminar.

“The ACTU is opposed to deregulation because there has not yet been any definitive statement that there will be positive, identifiable net gains to the Australian Community.

“If deregulation creates an industry structure where there is a dominant firm-which we believe would occur – then that dominant firm would be able to use its monopoly power in the pricing area against the public interest and the government would have to look at re-regulation.

“On the evidence that we have, there will be a reduction with deregulation in the quality and frequency of service to places such as Darwin, Alice Springs, Rockhampton, and Mackay. Townsville, Launceston and Mt Isa.

On labour costs as a proportion of total airline costs, Mr Oldmeadow said it was a misconception that the Australian aviation industry was fat and ACTU members were being paid too much.

Australian airlines were not higher-staffed than world averages and had trimmed their staff over the last three years.

“We have seen the knife go through the airline industry and 2000 of our members have had to go from TAA and Ansett during the downturn in the economy”, he said.

Mr Oldmeadow admits that in US airline deregulation, labour had been “the big loser” with most cost-savings made in its area -and made it plain that any such moves in Australia would strike major problems.

Although figures are hazy, US airline labour costs appear to have been reduced from well over 40 per cent, with most airlines aiming to get them down to about 30 per cent in the mid-term future.

According to TAA general manager, Mr Frank Ball, in an off-the-cuff comment at the seminar, TAA’s labour costs are about 39 per cent of total costs.

Although figures from other sources vary somewhat, this tends to back up Mr Oldmeadow’s contention that the potential for cutting costs and therefore fares by cutting labour costs in Australian airlines may be more limited than many people assume.

Captain Buck Brooksbank, AFAP president and sometimes captain of a TAA Airbus, made it clear that the AFAP strongly opposed total deregulation but were for “constructive change”.

“The main argument for deregulation is that it will substantially reduce air fares but since the Australian domestic airlines are not making excessive profits then major airfare cuts can only come from substantial cost reductions and improved efficiency. “Australian airlines have one of the highest aircraft utilisation rates and highest load factor rates of aircraft throughout the world, making them highly efficient in those terms.

“Since there is an occasional discussion about pilot salaries, I should point out that in government charges, Australia is amongst the highest in the world. Rentals at Perth airport for instance were increased 1400 per cent recently- I have yet to see a log of claims at that level from us.

*Fuel costs are 40 per cent of direct operating costs in Australia, which is very much higher than America. ” (Seventy per cent of the cost of fuel used by domestic airlines goes to the government in tax and excise – costs which Qantas largely escapes because it operates on international routes). Čapt Brooksbank said air traffic delays at Sydney currently cost $9 million per year and under deregulation with extra aircraft in busy periods, clearly, those costs will rise.

In capital servicing, since America deregulated, 129 operators had gone bankrupt, the American credit industry had lost heavily in its aviation activities and hence capital servicing costs had risen for new entrant airlines.

“Australian domestic operators have spent $2500 million on new aircraft orders recently and you can see the significance of increasing capital servicing costs,” Capt Brooksbank said.

“If none of these costs are to be reduced, we come to the areas where they can be reduced is salaries and the other is safety.

“Both Ansett and TAA have reduced staff by more than 15 per cent in recent times. We are a lean operation.

“Australia’s very high standards cost money.

“At the same time our airfares compare favourably with overseas.

“If you move to an environment in which competition is the primary motive, then there is intense pressure to reduce costs and hence standards.

Capt Brooksbank quoted as an example the loss of the Air Florida 737 with all lives at Washington as “a classic example”.

(Official NTSB investigation of this accident, when a snow and ice-laden aircraft crashed into the Potomac after one engine failed to develop full power, uncovered a history of marginal competence by the captain, who had to be re-tested several times to pass recent currency tests, as well as shortcomings in the company’s operations manual, and other problems).

Capt Brooksbank said many people assumed that the Department of Aviation would ensure that standards were maintained- but although the department would issue pieces of paper it did not have the resources to police and enforce the regulations.

“The department has repeatedly stated that it is not a policeman. I am advised that there are 7000 aircraft on the Australian register, over 40,000 licenced pilots and, I understand, five department enforcement officers investigating and gathering legal evidence for prosecutions,” Capt Brooksbank said.

“Some say the safety issue is overplayed but the level of breaches of air navigation orders and regulations in the deregulated section of the Australian aviation industry has reached serious proportions. ” These breaches included aircraft taking off overweight. Engines being operated well beyond their overhaul time limits. Maintenance being disregarded. Pilots breaching regulations on a daily basis to retain their jobs.

Capt Brooksbank quoted from the Australian, the federal vice chairman of the General Aviation Association, MR Noel Bellamy, who said: “Illegal operators are carrying out maintenance operations without proper equipment to fly the public around in unairworthy aircraft.

“They are breaking every rule in the book just to make a quid. ” Capt Brooksbank said Australian aviation was the safest in the world but accident rates in the deregulated general aviation section of the Australian industry compared to the regulated area, is significantly greater.

(While it is true that Australia regularly comes top or very near the top in annual international surveys of air safety. Capt Brooksbank’s comparison of safety standards between RPT airlines and the commuter airline-general aviation sector requires some qualification which he did not make at the seminar.

GA-commuter operations are still statistically far safer than driving on the roads although throughout the world they have a fairly uniformly higher accident rate than RPT airlines – including those in the deregulated US environment.

While Capt B. is right to draw attention to undesirable pressure which can induce all aircraft operators to cut corners on safety and maintenance, some allowance must also be made for the different nature of commuter, charter and private aircraft operations which are often far from well-developed and serviced airways and airports. ) Capt Brooksbank said that since 1972 neither Ansett nor TAA had hurt a passenger in an aircraft accident but between 1972 and 1984 there were 36 commuter accidents in Australia.

A third of them were landing gear failures due to poor maintenance, there were 43 night commuter and charter accidents and 312 charter accidents.

“I am not criticising officers of the Department of Aviation. The current regulations are difficult to enforce and out of date,” he said.

“Australian pilots welcome constructive change and improvement but we insist that adequate resources are allocated to maintenance and training and this can only be assured, for a country of this size and population, in a regulated economic environment. ” Don Kendell noted at the end of Capt Brooksbank’s address: “I do not think it is a very valuable exercise to get too much into the safety angle. He mentioned some statistics which I do not intend to argue with although I could say certain things about our airline system.

“But here we have a system which has been going with protection in finance, public funds to build up an airline system over 33 years.

“We have none of that in the commuter field – no protection and no government willing to put its hand in its pocket. What we have in safety with our two airline policy I think we have all paid for. ” Capt Brooksbank was asked to explain why Ansett and TAA pilots only flew about 350 “stick hours per year while East West pilots flew about 600 and commuter pilot’s such as Don Kendell flew about 700 (with US airline pilots apparently flying close to the higher figures).

He said there was an enormous difference between the stick hour, which is when pilots were physically flying the aircraft with engines powered up, and duty hours which start about an hour before starting engines, and whilst they are on turnaround at the various ports of call.

“A domestic operator with an hours average flight time, there is half an hour to and hour on the ground while it is refuelled and passengers disembark and embark, while pilots are still on duty and in charge.

“In addition, there is a substantial amount of reserve duty. I am a reserve pilot and although I am on duty 12 hours a day five days a week, available to get to the airport and get an aircraft into the air as quickly as possible (I usually can do it in an hour) I may not have done a single stick hour although I have been available for 60 hours in a week.

“Stick hours do not cover time spent in simulators, on training courses, and so on.

“The reasons for differences between TAA/Ansett and East-West basically revolve around fleet patterns.

“East-West have F27 and F28 aircraft with very little juxtaposition of one type on a scheduling demand for passengers.

“If you look at the utilisation of TAA Friendship pilots and East-West Friendship pilots-comparing like with like-stick hours are very comparable. In fact I have a suspicion TAA’s are a bit higher than East-West’s.

“In both Ansett and TAA the most efficient utilisation of bigger aeroplanes costing between $35m and $45m a copy is to have the aircraft best suited for the number of passengers a flight may have.

“You may have an Airbus sitting in Sydney and if for some reason such as a P&O cruise ship comes in a little late and where you were going to have 200 passengers off the ship you are suddenly down to 50-it is crazy to put the Airbus on when you have a spare DC-9 floating around.

“But you now have two sets of crews to handle one operation. With fleets of significant numbers of types of aircraft in them, you will have a greater requirement for supporting the operation in terms of pilots.

“Cancellation and substitution do not occur in the US and therefore their utilisation is higher”.