An ANZAC Spirit in the Air?

Since 1983, New Zealand has been more adventurous than Australia in opening up its market to competitors and investment. In contrast, only when Australian deregulation finally took effect in late 1990 did the Government agree to the sale of its domestic airline and part sale of Qantas.

The reticence of the Australian Government to follow the ideological lead of New Zealand in opening up the skies is because the issue of airline ownership had not been resolved. Unfortunately for the Australian Government, the experience in New Zealand was that it is the market which will ultimately decide what is an acceptable ownership arrangement. However, guidelines have been established for the degree of foreign ownership but it is unlikely that Australia will agree to any liberalisation of the aviation market until the sales are concluded satisfactorily.

The good news is that the evolutionary trend has been to gradually open up the trans-Tasman market. Freight is deregulated while air fare and capacity controls have been virtually removed since 1989. In the same year, experience of interline services by international carriers during the pilots dispute was a fortuitous test for the Australian Government of the consumer benefits that can be gained.

So as a first step, the study team was asked to assess the outcomes if the Australian, New Zealand and Tasman markets were combined. It was accepted that all operators should have complete access to the merged market although bilateral agreements with third countries would still apply.

The merged market amounts to 21 million annual trips with 70% being undertaken in Australia, 20% in New Zealand and the remainder across the Tasman. Overseas visitors are an important component on these routes. In terms of revenue passenger kilometres (RPKs), the percentage dominance of Australia stays roughly the same as for trips while the distances across the Tasman means that those services relegate New Zealand domestic routes to just 9% of the market.

The trans-Tasman routes are dominated by leisure travel with only 18% of passengers travelling for business. Between them, Qantas and Air New Zealand carry about 81% of the total market with foreign carriers ferrying the remainder. For example, Continental and United already compete across theTasman as part of their services to North America. Auckland is an optional intermediate point for Northwest Airlines which began operations to Australia during July. British Airways, Malaysian and Polynesian offer a few services each week under various bilateral arrangements. Cathay, UTA and Aerolineas Argentinashave the rights to fly the Tasman but currently do not exercise this prerogative.

The study calculated the net gain or loss of opening up the three markets simply by subtracting the airline costs from the consumer benefits. The study used two indicators to represent the benefit to consumers: seat availability and the cost of delays caused by indirect flights. This is because congestion at Sydney will continue to remain a costly problem while 57% of the trans-Tasman passengers pass through Sydney.

In the case of the airlines, the study calculated the amount that competition would reduce airline profits (and employee conditions!) even though new markets would be available.

The model accounted for 55 city pairs in both nations which accounted for all the Tasman traffic, 90% of the Australian market and 70% of the New Zealand market.

Assumptions had to be made about the effect ticket prices and altered timetables would have on patronage. This is always a tricky problem with no two airline executives ever agreeing on the public’s reaction to fare and service changes. Overall the ranges used by the model are thought to be reasonable.

With any modelling involving the Australian aviation market, a problem is encountered because of the break in reliable statistical series during the pilots’ dispute in 1989-90. Regardless, adjustments allowed that troubled year to provide the base case for the model. These adjustments included a calculation to remove the effect of Australian deregulation from the figures. Five situations were then compared to this base case. While other arrangements come to mind, these five situations at least cover a broad range of possibilities.

The first scenario took the existing situation and added the impacts of Ansett flying the Tasman along with Qantas and Air New Zealand offering limited domestic services in Australia. This single aviation market represents the most likely form of ‘open skies’. It would result in a gain for both economies of $53m.

A second scenario built on this situation with Air New Zealand responding to Ansett’s expansion by entering the Australian market as a major new entrant; this gave a net gain of $141m.

To put this into perspective, this benefit exceeds the gain calculated by this same model for Australian domestic deregulation by $24m. In other words, we’d all be better off with Air New Zealand as well as Compass. However, this attractive result is only realistic if Australian deregulation fails to provide ongoing competition for the three major domestic airlines. Even so, it is a compelling reserve option if Compass fails to maintain competition between the Ansett group and Australian.

The third scenario merged Air New Zealand and Australian Airlines to match Ansett’s network advantages in a combined market. This calculation also exceeded the single market case by coming out at $65m. Interestingly, it assumed that an inevitable capacity rationalisation by the combined airlines was offset by the consumer ‘advantages’ of a single carrier in all three existing markets.

Work was also done on two other concepts which fall short of open skies. One of these was the effect of deregulation of the Tasman only, which resulted in a net gain of $20m. The other simply allowed domestic rights for Qantas and cabotage rights for Air New Zealand and gave a gain of $27m.

In deciding between the options, an important negotiating point between the two Governments will be the potential gain for the parties. Happily, the model estimated where the gains would end up by looking at where the tickets were purchased and who owned the airlines. For example, in the single market scenario, Australia would get $36m, New Zealand $10m. and other nations $7m. This balance is surprisingly close to the proportion of the share currently carried in each of the three markets. T hus both New Zealand and Australia gain advantage relatively, even though third nations would enjoy a windfall if a single market was established.

One hopes this windfall could be used in the bilateral negotiations with the US A as its carriers would be the main beneficiaries of trans-Tasman liberalisation. Perhaps that challenge would unite the New Zealand and Australian Governments in a way that the Closer Economic Relations have begun in other trade areas The next step is for the Australian and New Zealand negotiators to agree to include air transport within the Protocol on Tradein-Services in the CER agreement. This liberalisation of the New Zealand and Australian markets may be the beginning of a process whereby the advantages can be extended as in Europe.

The twelve nations of the European Community will enjoy open skies after 1992 and be a model for foreign operators to increase competition. Witness the continuing attempts by British Airways to buy into Sabena and the consolidation of national airlines such as Air France and UTA. More importantly, as a result of this new common aviation market, the USA has already called for the European Community to negotiate transatlantic bilaterals as a block. If these talks ever allow European carriers to gain domestic rights within the USA similar to existing American rights within Europe, then an extended regional market for Australia, New Zealand and nearby countries may become an imperative.

A tacit recognition of the broader advantage occurred in July 1989 when the Australian Governmentironically decided that the benefits of tourism were being restricted by the then lack of carrying capacity of Qantas. This change meant that Australia would no longer deprive itself of tourist dollars just because Qantas could not match the seats available on foreign jets. This decision meant that the commercial interests of a government owned airline could be outweighed by a greater national opportunity. Unfortunately the decision came just weeks before the· inbound tourism market was decimated by the AFAP dispute.

This study suggests that such thinking is now being applied to the domestic market. However, the frustrated attempts by Northwest and United to service the Japan/Australia route as a stopover on their US services suggests that the Australian Government is still captive to a shareholder’s mentality. Therefore, the substantial dollar gains to be had from opening the skies across Australia and New Zealand will probably only be passed on to passengers when the sales of Qantas and Australian Airlines are completed.