Deregulation-Australia Pt.II

Each has his own automated reservation systems, with outlets through the TIAS system and, more recently, both have subscribed to the Apollo/Galileo based Southern Cross Distribution System, which will market a major CRS in Australia. Australian Airlines has marketing agreements with British Airways and United Airlines, as does Ansett with Qantas. At the retail level, Ansett’s participation in Ansett Coles Myer (which recently absorbed ANZ Travel) also provides a strong marketing capability; Australian may also shortly be acquiring a major existing outlet.

Throughitsownershipof such regional operators as AnsettNew South Wales, Ansett Western Australia, Ansett Northern Australia and – although it’s hardly any longer a regional – Eastwest Airlines, Ansett has an effective regional feeder service as well, particularly when coupled with its participation in Kendell Airlines, Skywest and Lloyds. Australian has been less active in acquiring regional carriers, partly because of the constraints of being a government owned airline. The fact that Australian has nonetheless managed to take a dominant position in the market suggests that regional feeder services alone do not provide a substantial marketing edge. If this is the case, the reason may to some extent be the same one that afflicts the whole of the Australian market – namely that there isn’t very much of it. A population of 17m in a country this size is not likely to support more than one or two major domestic operators in the long run.

There is, however, another factor which can begin to influence this, particularly if those carriers are able, through international airline alliance or otherwise, to tap into it and which may open up a whole range of other marketing potentials. Foreign wholesalers have often complained at the (relatively) high domestic fare packages available within Australia – a factor which is partly at least responsible for the concentration of inbound tourists on the eastern seaboard and particularly Sydney,Brisbane and Cairns.

As Graham Tucker, Managing Director of the tourism industry newsletter VisiTRENDS observes: “Overseas visitors will be an important part of the airlines’ deregulation marketing strategies. The reasons are not hard to find: inbound tourism (which is up 6. 8% for the half year) is one of the few markets that has actually been generating growth. Of the overseas visitors, the biggest users of airlines are the Japanese, whose numbers (total 349,500 in 1989) are growing at the rate of approximately 33% a year. Some 77% of all Japanese

Regional Carriers

For regional carriers like Kendell Airlines, deregulation may not spell a great deal of change. As Don Kendell, Managing Director, says: “We’ve been deregulated all our lives. We have six or seven competitors in most of our markets. ” (The Two Airline Policy restrictions applied only to the designated trunk routes, so that interstate routes between country centres have always been free of restrictions; the same does not apply to NSW intrastate operations, although this is currently under review. )

But the thin rural markets, not notable for growth, (“not one has grown in the last 15 years”, says Kendell) are a fragile passenger base. While only 12. 5% of Kendell’s traffic interlines, mostly to Ansett, Don Kendell believes that the route to survival is through equity shareholding by one or other of the major airlines. ATI has a substantial equity holding in Kendell: “I’m a realist. You can’t be independent and survive. Without the backing of a large airline, access to their reservations system, receiving routes that they hand over as uneconomical, there’s just no chance of survival. And if they have a financial interest in you they have an incentive to look after you. ”

This echoes the experiences of regional and feeder airlines already described in the last three issues of Australian Aviation in the US, Canada and New Zealand. Operating control, and often financial control, seem to gravitate towards the larger carriers. Although we don’t have the same type of hub and feeder system as the US – less than 4% of Ansett’s and Australian’s traffic on main trunk routes is interlined from feeders, whether subsidiaries or independent-there appear to be overriding forces which make these alliances attractive for smaller airlines.

Indeed, most smaller airlines in Australia are already affiliated financially or through marketing or operating alliances. Even the more independent minded, such as Hazelton, work closely with one of the majors, in their case Australian.

Deregulation or Different Regulation?

Whole forests have been felled in the interests of analysing deregulation, what it is and what it should and does achieve. More to the point in this case, is what the Australian Government hopes to achieve by Senator Evans’ October 1987 announcement of three years’ notice to terminate the Two Airline Policy.

On its face deregulation is a simple concept: remove regulations, allow the free market forces to flow. This assumes a perfect marketplace, with ease of entry and exit by competitors and economies of scale which permit more or less equal competitive ability for efficient operators. Not, in fact, a common picture in this or any other industry. As Michael Levine, one of the sculptors of US deregulation, said in a paper last December: “Airline markets (in the US under deregulation) have not demonstrated the nearly perfect competitive results expected by many of us”. Instead, he continued, “Airlines have adopted protective or aggressive strategies which . . . have been especially effective in suppressing new entrant competition. ”

These results are attributable to a number of causes – the de facto monopolies and duopolies at key hubs, the powerful position of travel agents (both pre-existing conditions in Australia), careful yield management possible through CRS and finally, the readiness of US anti-trust authorities to permit mergers between major players. In deregulating the Australian market, the Minister indeed recognised that “unlimited benefits do not always flow from the operation of market forces”2 but, quite simply, in today’s world it was clear that the Two Airline Policy could not actively encourage industry efficiency.

By removing the controls of the Two Airline Policy, the new benefits were to be: greater incentives for efficiency and responsiveness to consumer needs; more discount fares and a wider range of fares generally; market growth, particularly in the tourist market; and improved air services and better matching of aircraft types to route needs. (Note the strong emphasis here on lower fares and stimulating tourist growth. )

Deregulation was not to mean: lessening of safety regulation; withdrawal of consumer protection, with continuing protection to be provided by the Trade Practices Act, together with a ‘limited degree of price surveillance’ and ‘effective access’ to airport infrastructure for new entrants; or admitting foreign carriers to domestic routes. Overall, in political, cultural and economic terms, the time has come to terminate an outdated aviation policy.

Senator Evans’ decision to terminate the Two Airline Policy was preceded by a lengthy review of domestic aviation policy, the ‘May Review’. This didn’t actually propose one solution but offered 5 policy options, ranging from status quo to total deregulation.

Anyone not familiar with Australia’s political system could be excused for wondering why airline deregulation-which could well have a major impact on our national economy and a direct impact on a large number of Australians directly – could be introduced with so little fuss, while privatisation – largely irrelevant to the average citizen – could dominate the headlines for months.

There can be little doubt that the decision was correct (except that it should have come years ago). But the point is that, in the three years since the decision, little has been done to prepare the way for the economic impact. Certainly, the Federal Airports Corporation (FAG) and the Civil Aviation Authority (CAA) have been established as independent bodies with responsibility for the running of federally owned airports and aviation technical aspects respectively; these were significant and sensible moves.

Asa minimum, it would seem highly desirable that some transition provisions should have been put in place, particularly given the long lead time.

For example, data collection is an essential part of monitoring the deregulatory process and detailed recording processes are not yet in place; there is no provision for responding to the complaints of small communities when they lose air service; there are no labour protection provisions; there are no minimum financial viability requirements for new entrants; there is no provision for central policy control if and when problems arise (as they must), for example over access to limited infrastructure resources.

These are all issues which have been debated publicly in other countries prior to deregulation of their systems (and often also covered in legislation). Perhaps they will not create difficulties, but they are issues which should have been pursued. That other countries encouraged prior detailed public discussion may not alone be justification for doing the same. But it may well have picked up some potential problems and headed them off.

One thing is certain, if the Federal Government does wish to intervene in the future, it is going to be extremely difficult for it to re-enter this difficult area. Constitutional limitations on Federal powers over aviation will guarantee that any such attempt will be a very interesting one. Nonetheless, in the area of Air Navigation Regulations and Civil Aviation Regulations, which frequently are free of constitutional difficulty, we are still faced with an agglomeration of outdated, often irrelevant and contradictory provisions. Nowhere is this more true than in the area of economic regulatory controls.

One clear product of deregulation in the US – which we can expect to emulate here – has been the flurry of reregulation bills introduced at the least pretext. No amount of previous debate could head off that trend, but solutions would possibly have emerged which will be more effective in dealing with criticism and opposition. One possibility would have been to find a more suitable administrative infrastructure for dealing with problems.

Do We Need a Regulatory Authority?

Of the five options presented by the May Review in 1987 to the Minister, all proposed that there should be some independent and specific regulatory authority: “No matter what the desired degree of Commonwealth economic regulation, the task of regulating the industry should be entrusted to a single, independent body that is specific to the industry. ” In his October 1987 statement, the Minister however dismissed this with one short sentence, as “creation of a separate aviation specific (authority) would appear to be an unnecessary duplication of functions”. No more was said on the subject.

One function of such a body would have been the phasing in of deregulation; under the option adopted by the Minister, the May proposals recommended that such a specialist body would also monitor developments and manage transition post-deregulation. (In the US, the 1978 Deregulation Act provided for phased withdrawal from regulation in pricing, route access and a variety of other areas; the regulatory authority, the Civil Aeronautics Board, was prescribed to continue in existence for another five years. In Canada, a somewhat similar process has been followed. )

While we should not necessarily have followed suit, and there is certainly nothing to be said for duplication of bureaucracy, the simple fact is that a number of Departments and Authorities will have a real de facto role under ‘deregulation’. And importantly, after October 30 there will be no consistent coordinating and supervisory focus. The complex of roles performed by these different bodies – often overlapping – will make implementation of desirable economic policies unnecessarily difficult.

The Post-Deregulation Regulators

1. Infrastructure

The complexity of this problem may be most acute in the area of that great de facto regulator, shortage of available airway and airport space. Here, the FAC and CAA, two independent self funding bodies, have the heavy responsibility of providing for the potentially vast traffic expansion of the 1990s. And if recent trends are anything to go by, much of that growth will be focussed on the eastern seaboard, where Sydney in particular is already stretched to the limit. The two main constraints on aircraft movement, landing slots and airport (parking and terminal) space, are the responsibilities of different bodies – the former, the CAA; the latter the FAC. 3 But, because they’re dealing with the same aircraft, there is a clear need for close co-operation.

Unfortunately, our infrastructure has a long way to catch up.

Many years of inadequate expenditure has meant that the airways facilities are outdated and not sufficient to handle the recent higher traffic growth levels. Solutions to the problem require joint efforts from the DoTC, CAA, FAG and airlines. As Senator Collins, Shipping and Aviation Support Minister said in July this year: “Aircraft congestion and passenger delays at Sydney Airport are to be reduced through the CAA improving air traffic services and the FAC upgrading taxiway capacity and introducing a new peak period surcharge regime. Airlines are also being asked to cooperate to remove cluster scheduling. ”

The CAA in particular has a tough task ahead of it. Its ‘resource’ constraints include air traffic controllers, as well as inflight hardware needs. Now that the CAP. s funding is primarily from its airline customers, the expenditures needed must be projected with _ that revenue flow in mind, knowing that the Federal Government will no longer inject capital. So, to deal with the immediate problems, notably Sydney, the Authority – working with the FAG – is focussing on areas where efficiencies can be introduced.

One initiative has been revised simultaneous operations (‘simops’) procedures, improving the utilisation of both existing runways. In August this permitted an approximately 10% increase in movements during peak hours over pre-simops levels in May. New traffic flow management procedures – which include using historical data and keeping operators advised of likely delay times – are a further step towards cooperation with the airlines in fighting the problem.

Cluster scheduling,where several flights are timetabled for marketing reasons to depart at the same time, is an old problem. It may well best be addressed in future by airline scheduling committees. This procedure has been used worldwide by international carriers, under IATP. s auspices, for many years. Lucio Cardone, Executive Director of the Board of Airline Representatives of Australia (BARA), whose members include domestic and international airlines, says his organisation supports setting up a airline scheduling committee to embrace domestic operations as well, BARA is discussing the matter with the Department, as well as with the CAA and FAC; its domestic airline members are currently seeking to draw up guidelines for such a committee. “Overall”, says Cardone, “there seems to be a strong will at all levels to come to grips with this problem and find realistic solutions. As users of the system, and the ones who pay for most of it, the airlines should have a central and preferably independent role. ”

There are differences between international and domestic infrastructure needs. The International airline Scheduling Committee has operated here to allocate the scarce international terminal space. The problem for the domestics is primarily runway usage (or as Wes Willoughby, CAA’s General Manager, Flow Management Project, more comprehensively states, “the runway and taxiway configuration, the noise preference for runways, the curfew and air traffic control procedures based on safety requirements. “). Here the line between FAC and CAA responsibilities is not so clear. Close coordination is going to be essential.

FAC’s General Manager-Commercial, Steve Collins, stresses too that the Corporation is now well equipped to deal with this type of issue and the pressures of deregulation, both institutionally and practically. “The FAC has been through a rapid learning curve in its short existence. We have had to spend to catch up with user needs and, our Strategy Plan (for Sydney Airport operation through to 2010, issued in draft in July this year) will see significant improvement in scheduling”, he says. “A good relationship exists between ourselves and the CAA at both corporate and airport level and we’re confident that, together with the airlines, we can make the system work. ”

Clearly there is a strong will to ensure that infrastructure does not become the de facto regulator of the deregulated industry. The new tripartite aviation administration is still in its early days and there are many encouraging signs that its managers have the ability and the will to address infrastructure planning and allocation aggressively and effectively. It clearly won’t be easy, even assuming that the third runway is operational by 1995. And success will depend on clear communication channels between the CAA, FAC, DOTC and the airlines. Here the Department is taking “primarily a coordinating role to ensure that all interested parties air their views”, says Rob Elder, Acting Principal Advisor, Domestic Avtion Industry Branch of the DOTC. “The worst system, if all else fails, would be for bureaucratic regulation of slots”.

But the story doesn’t end there. There are other authorities waiting to take on a role in the post-deregulation environment (See Box)

2. The Trade Practices Commission

The TPC is clearly the focal point in regulatory policy post deregulation. It’s the body primarily responsible for pursuing anti-competitive practices, with jurisdiction over a wide range of issues.

These include mergers, where one objective is to prevent the emergence of a monopoly on interstate routes; abuse of market power, designed to prevent powerful competitors from using a competitive conduct to drive their opposition out of business pre-datory pricing, one form of abuse of market power and one which despite the extensive popular discussion of it, is unlikely to form the basis for a real challenge given the current definition and standards of proof.

The provisions of the Trade Practices Act also apply on many occasions where competitors discuss their mutual problems. Thus for example, the TPC is already monitoring discussions concerning airline scheduling. Likewise, any discussions on commercial issues such as pricing will also be subject to intervention by the TPC (or by any individual who purports to have suffered a loss by such discussions). Regulation by competition laws is not always a happy process. It involves a great deal of uncertainty as to what is acceptable and what is not, there are long delays in obtaining a judgement if processes are followed through the courts and even then they are generally very costly and debilitating for a company. Moreover, regulation in this way suffers from a lack of continuity and of consistent oversight. This means that in a highly complex industry with interwoven vertical and horizontal links between competitors, regulation can be very uneven and, in certain circumstances, result in major industry changes if one court case produces an unexpected outcome. From a practical point of view also, the TPC is going to have to be quite selective in the way it allocates its own resources to oversee the industry. As Bob Baxt, Chairman of the TPC. said earlier this year by way of understatement “The workload before the Commission in this matter is large. Staffing available for this work is modest. ”

3. The Prices Surveillance Authority

The Authority has power to require filing of price increases before they are introduced and a number of other pricing supervisory powers. Authority Chairman. Professor Alan Fels, has stated publicly that the Authority has been compiling data on the economic structure of the industry and that it would be looking closely at price and cost structures post deregulation. He also stated that an enquiry into airline pricing practices was a possibility. “We would not wish to do so in a deregulated industry. But the possibility of doing so cannot be ruled out because the power to subject airline companies to scrutiny is in the PSA,”

4. The DoTC, FAC, CAA

In addition to their role in the areas of infrastructure provision and allocation, each of these bodies has a number of other activities to perform. The DOTC retains control over some safety and security issues, along with full economic regulatory control over international air services. The CAA also has a range of technical licensing responsibilities, although significant steps have been taken recently to relieve the adverse economic impact for operators by greatly simplifying many procedures. Every decision taken today by the FAC and the CAA concerning provision of infrastructure for the next decade will be certain to have a large impact on the future of the industry.

Meanwhile, the FAC has to grapple with potentially vital de facto regulatory activities in connection with access to domestic terminals and provision of aircraft parking areas. (In the short term, however, these problems may not be as acute as were originally thought. The FAC’s Steve Collins says that, with the exception of Compass, the FAC has had no approach at corporate level from any other proposed entrant for several months. This is not to say there won’t be problems; accommodating Compass’ large A300-600s will create problems at some domestic gates. )

5. DASETT

Green Power will ensure that environmental issues are always relevant to the aviation and tourism industry. The Departmenthas broad oversight for coordination of these policies but the chances of formulating an integrated aviation policy (domestic and international) are remote. This will lead to conflict and delay and additional costs in developing tourism driven infrastructure.

6. State Governments

State Governments have full constitutional ability to determine the nature of economic regulation of intrastate services. There is at present a great variation between regulatory policies in each of the states. Intrastate traffic obviously relates significantly to interstate movements, particularly where linkages are at capital city airports in peak times. These intrastate services must operate within the broader network including interstate services, particularly when it comes to airport planning and development.

State Governments also play an important political role in seeking to influence the nature of air services and in their attitude to development of federally owned airports, Sydney again being a notable example.

7. Local Governments

Local Governments also play a political role, generally in seeking to have airports built elsewhere or in extending curfew hours. Port Authorities such as Cairns have their own funding needs and policies which will need to be integrated federally in order to maintain appropriate infrastructure growth.

8. The Foreign Investment Review Board

The FIRB-under the Federal Treasurer-also has a potentially highly important role to play in determining the level of foreign investment in Australia’s airlines. Alliances are going to be very important in determining the competitive environment and, quite apart from the TPC’s role in this area the FIRB could greatly influence the competitive direction by the level of foreign participation permitted.

9. Pressure Groups

Finally, in all normal democratic pro- cesses, pressure groups play an essential role. This role becomes progressively greater as the decision making process is fragmented, enabling pressure to be placed on a number of different points.

This list is not by any means exhaustive, but it indicates some of the more substantial areas where strains may be felt in the smooth operation of an aviation system. Market forces under deregulation do not ideally create a smooth system, nor is it desirable that they should. The point is that it needs a coherent framework to ensure that any bumps in the system are the result of competitive processes and not of extraneous and unproductive ones.

There is certainly a need for constant review of the policy direction in which we are headed and a process which will maintain some continuity through what is bound to be a turbulent decade. Airline deregulation in Australia is probably more important to this country than most people believe-not just for aviation and tourism but as an example of what might be done to make our industries more efficient and to provide direct benefits to all Australians. It will need some help to get it right.

Sydney Morning Herald Magazine, 17 March, 1990. * October 1987 Statement.

One further complicating factor is that the FAC does not own all of the Australian airports. It controls the capital city airports in all states, Canberra, Darwin, and Townsville, as well as most of the main secondary airports. The balance are owned still by the Federal Government or by local authorities, the most notable example of this being Cairns, which is administered by the Cairns Port Authority.

(Peter Harbison is the Managing Director of BDW Aviation Services, a major airline and tourism consulting company associated with Blake Dawson Waldron, Solicitors. )