Submission by Virgin Australia February 2018
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SENATE RURAL AND REGIONAL AFFAIRS AND TRANSPORT REFERENCES COMMITTEE INQUIRY INTO THE OPERATION, REGULATION AND FUNDING OF AIR ROUTE SERVICE DELIVERY TO RURAL, REGIONAL AND REMOTE COMMUNITIES SUBMISSION BY VIRGIN AUSTRALIA FEBRUARY 2018 Introduction The Virgin Australia Group of Airlines (Virgin Australia) welcomes the opportunity to lodge a submission to the Senate Rural and Regional Affairs and Transport References Committee’s Inquiry into the operation, regulation and funding of air route service delivery to rural, regional and remote communities. As an integrated airline group, Virgin Australia offers services in all major segments of the Australian aviation market. This includes regular public transport (RPT) flights offered by Virgin Australia Airlines (VAA) as a premium service carrier operating on 71 domestic and 30 international routes, and low-cost carrier Tigerair Australia’s (Tigerair) services on 23 domestic routes catering to the budget/leisure segment of the market. Virgin Australia Regional Airlines (VARA) principally serves the charter flight requirements of a number of our corporate clients, in addition to operating RPT flights on routes to the Indian Ocean Territories under a contractual arrangement with the Commonwealth Department of Infrastructure and Regional Development. Virgin Australia Cargo offers air freight transport, utilising the cargo hold space on VAA’s RPT flights and through the operation of a network of dedicated freighter aircraft. In addition to our own operations, Virgin Australia offers travellers access to flights operated by our international airline alliance partners to over 450 destinations across the world. Our key alliance partners Air New Zealand, Delta Air Lines, Etihad Airways, HNA Aviation Group and Singapore Airlines also offer code share services on VAA’s domestic flights, including on regional routes. This provides an important additional source of passenger feed on to these routes, enhancing their commercial performance. Virgin Australia’s contribution to the Australian economy is significant. Our operations as an Australian business with more than 10,000 employees involve the transport of overseas and domestic travellers to tourism destinations across the country, including to regional locations, and also facilitate domestic and international trade through the movement of goods. Deloitte Access Economics estimates that Virgin Australia’s total economic contribution through these activities was $3.4 billion in FY16, which directly and indirectly supports more than 75,000 Australian full-time equivalent jobs, representing 0.75% of total employment in Australia.1 Virgin Australia’s presence in the regional aviation market Our regional RPT services comprise a large component of our domestic network, with flights operated to 33 regional (non-capital city) ports2 across Australia. Of the 75 domestic RPT routes served by Virgin Australia, 53 include at least one regional (non-capital city) destination.3 In regional markets, VAA’s services are operated with Boeing 737-700/800, Airbus 320, Fokker 70/100 jets and ATR72-600 turboprop aircraft, while Tigerair operates both Airbus 320 and Boeing 737-800 aircraft. 1 Deloitte Access Economics, The economic contribution of the Virgin Australia Group to Australia, January 2017, commissioned by Virgin Australia. 2 Albury, Alice Springs, Ayers Rock, Ballina, Broome, Cairns, Christmas Island, Cloncurry, Cocos (Keeling) Islands, Coffs Harbour, Emerald, Geraldton, Gold Coast, Hamilton Island, Hervey Bay, Mt Isa, Kalgoorlie, Karratha, Kununurra, Launceston, Mackay, Mildura, Newcastle, Onslow, Paraburdoo, Port Hedland, Port Macquarie, Proserpine, Rockhampton, Sunshine Coast, Tamworth, Townsville and Newman. 3 Includes the Onslow-Perth route, which is principally served by VARA for charter operations but also has a limited number of seats available for sale by VAA to the public on a RPT basis. 1 Virgin Australia has made large investments to expand our presence in regional Australia over the past seven years. This includes the deployment of ATR72 aircraft on regional routes, the acquisition of regional operator Skywest Airlines, the commencement of services in a number of regional markets and the establishment of Lounges at four regional airports (Alice Springs, Cairns, Gold Coast and Mackay). Our growth in these markets has boosted competition, supporting regional tourism and economic development, as well as providing increased options for local residents to access air services. Virgin Australia has been unable to sustain services in some regional markets due to poor commercial performance over an extended period. This includes the withdrawal of services from four intrastate routes in Queensland between August and September 2017. To provide passengers with access to the affected regional destinations, we entered into a commercial arrangement with Alliance Airlines, which elected to operate these routes in its own right after our withdrawal, with the use of the VA designator code to support the distribution of its airfares. Alliance Airlines bears all the commercial risk associated with these services. Regional route economics From an economic perspective, the operation of services on regional routes is more challenging than on routes between capital cities, principally due to difficulties in achieving economies of scale in regional markets. As with all routes we serve, the sustainability of our regional services relies heavily on our ability to match the capacity we deploy with the demand for our flights, as well as the effective management of costs. In general terms, it is not commercially viable for an airline to indefinitely maintain a service on a route for which revenues earned are insufficient to offset the corresponding costs. While airfares are influenced by a complex range of interrelated factors, airlines operating on a rational commercial basis will price their services in order to cover their costs and, if possible, earn a reasonable return on invested capital. If costs are outweighed by revenue on a particular route for an extended period, an airline will inevitably look to withdraw its services and redeploy aircraft to higher-yielding routes. For the impacted route, the result will be fewer air services, and depending on the prevailing circumstances, potentially reduced competition, higher airfares and the loss of RPT services altogether. In this regard, we would highlight that many of the regional markets we serve do not deliver acceptable commercial returns to Virgin Australia at current pricing levels. Virgin Australia and all other airlines manage the sale and pricing of their seats in the same manner as perishable inventory sold in other industries, such as hotel rooms, hire cars, seats at special events and advertising space. Regulatory restrictions which are preventing the expansion of services on regional routes with latent unmet demand, such as those in effect at Sydney Airport, also warrant consideration. Additional services on regional routes will increase competition, placing downward pressure on airfares. For Virgin Australia, the operation of a sustainable network of air services provides us with the greatest opportunity to facilitate the economic development and social cohesion that aviation brings – in metropolitan and regional communities alike – as well as deliver returns to our shareholders as a private commercial enterprise. Government policy and initiatives which have a positive impact on the competitiveness and sustainability of air services will support the long-term viability of the sector and position the industry to play a more effective role as a critical enabler of Australia’s growth, economic transformation and engagement with our geographic region. 2 (a) Social and economic impacts of air route supply and airfare pricing Virgin Australia appreciates that safe, reliable, regular and affordable air services are vital to regional communities, providing local residents with access to essential medical, financial, educational and other services, while also supporting regional economic development and social connectedness. In many regional centres, the existence of air services plays a key role in reducing isolation from capital cities and metropolitan areas and enhancing the quality of life in such communities. Air services connect regional centres not only to the rest of Australia, but to the rest of the world. This is important for passenger transport and the carriage of freight, whether it be medical supplies or time-sensitive exports. The supply of air services to regional areas, and the economic and social benefits they deliver, is ultimately dependent on the commercial viability of such flights. In broad terms, the commercial viability of air services on any route will depend on the existence of sufficient demand, an airline’s ability to recoup its costs and competitor dynamics. These are the key factors which underpin airfare pricing. From a cost perspective, one of the most challenging issues we face as an airline is the disproportionately high charges imposed by a number of regional airports, as outlined in further detail under section (d). Virgin Australia is aware that some regional communities hold a perception that airlines are seeking to earn unreasonable returns in setting airfares on regional routes and/or that airfares on such routes are cross-subsidising pricing on trunk routes. As many of the regional routes we serve do not deliver acceptable commercial returns at current levels of