Issue 324: Agile & Adaptable

A new bilateral air services agreement should allow more flights from more points in China to more points in Australia, helping alleviate congestion at major hubs at both ends of the route and facilitating the anticipated increase in Chinese tourists.

And there is a view that this negotiated outcome is the latest step on the way to an eventual open skies policy between Australia and China, given the two nations’ historic free trade agreement that was signed at the end of 2014.

But is the government’s policy of ensuring capacity remains ahead of demand and pursuing open skies the right way to go for all markets? Further, is the world moving away from Australia’s approach, preferring to take a more protectionist stance when it comes to air traffic rights? Department of Infrastructure and Regional Development secretary Mike Mrdak told a recent conference about half of all international passengers to and from Australia had come from nations that had an open skies agreement with Australia, highlighting Australia’s liberal market credentials.

Overseas carriers were falling over themselves about 18 months ago to grab a slice of the action in this country given the currency was strong and Australians keen to explore the world.

So they added seats. Lots of them. Either with new flights, using bigger aircraft on existing services or adding more frequencies to routes they were already flying on.

Figures from the Bureau of Infrastructure, Transport and Regional Economics (BITRE) show the number of available seats in and out of Australia rose 8. 1 per cent in the 2013/14 financial year, well above the long-term trend.

Consumers get excited at the prospect of a cheap overseas holiday as airlines put on sales in order to fill all these extra seats.

Airports are thrilled too, given the boost to the bottom line in the form of landing charges and fees.

However, the excitement in the tourism sector about the prospect of all those extra visitors Down Under has, according to Qantas, been misplaced.

Instead, Australia’s capacity ahead of demand (CAD) approach has resulted in the rapid growth of Australia’s outbound market and led, ultimately, to the detriment of both the tourism sector and Australian airlines, Qantas’s submission said.

Australia needs strong local carriers that can stand on their own.

Qantas, Australia’s largest international carrier, told the Productivity Commission’s study into the international tourism industry the current policy settings had benefited only a small number of airlines and a few of Australia’s monopoly airports.

Moreover, a study from Deloitte Access Economics found that years of record growth in airline seats ultra-low airfares and high levels of promotional expenditure by Australian international carriers and taxpayers, had failed to stimulate inbound tourism, with the notable exception of China.

Figures from Deloitte included in the Qantas submission showed the 6. 8 million inbound seats added into the Australian market since 2005 had only resulted in 1. 2 million more visitors to Australia.

There have also been more Australians heading overseas each year than visitors arriving into this country since 2007.

Qantas’s submission comes at a time when governments in Europe have shown a greater willingness to flex their muscle in managing foreign carrier capacity to certain markets.

And in the United States, the heads of American Airlines, Delta Air Lines and United recently met with Barack Obama’s Transportation Secretary Anthony Foxx, arguing for the existing open skies agreements with Qatar and the United Arab Emirates to be renegotiated.

Clearly, Australia needs strong local carriers that can stand on their own two feet without the hand of government or the use of artificial barriers to stifle competition from foreign airlines.

At the same time, it is inconceivable that either Qantas or Virgin Australia will be able to offer anywhere near the number of destinations overseas from Australia as their geographically-advantaged peers already do from their Middle East, Asian, European or North American hubs.

The concern is, will the rise and rise of foreign airlines mean the role of an Australian flag carrier is merely to act as a feeder airline without a meaningful international presence, sending passengers to partner hubs? There is also a danger that Australians, in the absence of strong national carriers, will be vulnerable to the whims of overseas airlines that understandably do not have Australia’s best interests as their number one priority. Capacity may be reduced as there are better opportunities elsewhere, which is what is happening right now as airlines either cut back or pull out of Australia in response to changed market conditions.

It is a delicate and unenviable balancing act for government, in trying to negotiate bilateral air service agreements that allow Australia to maintain strong air links with the rest of the world without leaving local carriers out in the cold.