Aviation Outlook

No such arguments can be found in the Australian aviation debate.

In an industry such as national communications networks, which parallels domestic aviation in many ways, deregulation throughout the OECD countries has been accompanied by a strong debate on the supposed natural monopoly features of public switched networks. What is most relevant for aviation in those debates is the recognition that natural monopolies and duopolies, if they exist, are almost certainly inherently unstable and that technology changes, which affect the fundamental economics of providing services can effectively remove, or make irrelevant, those features which characterise a market as one traditionally held to be most suited to a single player or to a very small number of players.

Applying this analysis to domestic aviation implies that even if it is true that only two firms can profitably operate trunk routes in Australia, such an economic reality itself will not deter new entrants and that while subsequent shakeouts may tend towards the present number of operators, the identity of those operators may change.

Furthermore, technology changes and the use of substitute technologies, such as turboprop aircraft over jets, may alter the basic operating economics of carriers sufficiently to allow for the profitable operation of more than the ‘natural’ number of players in this market. But even before these considerations are relevant, why should it be true that only two carriers can profitably operate trunk routes in Australia?

In the United States, an area of comparable size, but with a significantly larger population and very different demographics, no less than 10 (1987 figures) National (National are smaller than Major carriers) carriers operate, only 3 of them carrying more passengers over more miles than did Ansett and Australian in that year. And seven of them, five of whom have smaller operations than either of the two Australian carriers, were profitable. Furthermore, available figures show that profitability is not directly correlated with size and the two carriers closest in size to Ansett and Australia were unprofitable in the year in question.

In short, IF there is a size of operation which represents critical mass for National carriers, it is a great deal smaller than Australia’s incumbent players currently are. So even if one were to assume Australian trunk route demand to be fully satisfied, there seems no reason to suppose that current market penetration could not support at least double the present number of firms.

. Market penetration is another interesting variable. Again comparing the United States and Australia in 1987 we can see that, on average, every US resident travelled nearly three times as many domestic revenue miles with a Major or National carrier than did her Australian counterpart.

Similarly, the average number of tickets sold (Revenue Passenger Enplanements, or RPEs) by these carriers in the States was 1. 3 per capita compared with only 0. 8 per head in Australia. And despite the closer proximity of Americans to each other and to major centres, the average trip length for the data under consideration is comparable: nearly 800 miles in the US and just over 600 in Australia.

In searching for some economic basis for Canberra’s current belief that deregulation will be a major non-event, some indications may be found in the 1986 Report by the May Committee which was supported in its economic analysis by the work of the Bureau of Transport Economics.

The Findings section of that report (p. 15, Vol. 1) refers to the facts that the industrial relations systems of Australia and the USA are very different, that Australia has a small domestic aviation market and that there are airport capacity limitations in Australia. Like most facts, of course, these can all be viewed in different lights.

While no-one would suggest that it is possible to operate an airline with non-union labour in Australia, wage costs are not the only way of reducing operating costs and wage costs can be significantly reduced within the Australian system by different aircraft choices or by greater efficiencies in indirect cost accruing activities.

While Australia’s domestic air travel market is indeed much smaller than that of the US, it is generally agreed that the non-business air travel market in Australia shows very low penetration rates. Regional demand in Australia has been shown, at least in NSW, to be significantly unsatisfied by the monopoly route licensing on intrastate routes currently practised by the NSW Air Transport Council.

While there are indeed capacity limitations at some (probably only three) Australian airports, these are currently being addressed by the FAC who are confident that they will be able to provide parking spaces for the aircraft of new entrants. They will have the increasingly keen eye of the Trade Practices Commission to deal with if they cannot.

Only time will tell if the current Canberra complacency is justified.

For now it must be of some concern to know that the apparent basis for that complacency is at the least arguable. It must also be of concern to know that policies with a far wider reach than the domestic trunk carriers are currently being formulated on the assumption that nothing much will change.

Certainly, there are, at last count, up to seven organisations, most of them made up of astute and experienced business people, out there in the market positioning themselves for October 1990 and who between them, with the backing of quite a few millions of dollars, say that Canberra is wrong.