SUBMISSION 47 QANTAS AIRWAYS SUBMISSION INQUIRY INTO THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON REGIONAL AUSTRALIA The vast distances between towns and the relatively small population of many of the regional areas of Australia mean that aviation plays a vita! role in providing essential links to these communities through safe, reliable and affordable air transport services. It is important that the viability, sustainability and accessibility of these regional air services are maintained. The global financial crisis has seen some of the world's largest economies enter a recession, including the United States, the United Kingdom, Japan and parts of Europe such as Germany and France. The global aviation industry is also experiencing the impact of deteriorating economic conditions, with substantial reductions in traffic and revenues. The current revenue environment has been described by the International Air Transport Association (IATA) as the toughest in 50 years, with industry losses expected to be US$4.7 billion this year, following a US$8.5 billion loss in 2008. Many airlines have reduced profit forecasts and modified performance expectations. According to IATA, over 30 airlines ceased operations last year and there is a risk of more failures and bankruptcies in the coming years. Among these airline failures are a range of business models from full-service to low cost carriers (LCCs) and a number of American regional carriers including Skyway Airlines, Big Sky Airlines and Air Midwest. The Qantas Group operates to a range of destinations in regional Australia using both the Qantas and Jetstar brands. QantasLink, as the Group's regional airline, operates the majority of these services and provides air links to 51 metropolitan and regional destinations across Australia. (Further details on the destinations served by each brand are set out in the Attachment). Impact of the global financial crisis on regional Australia Regional airlines in Australia have also been adversely affected by the global financial crisis, experiencing weakening levels of demand for passenger services. The operating conditions have been untenable for some, with Macair and SkyAirWorld going into voluntary administration in recent months. While there are marked similarities in the financial performance of most regional operators and the rest of the aviation industry in Australia and globally, there are some unique challenges at a regional level. The economics of regional aviation are particularly demanding due to the capital intensity, high costs and thin margins characteristic of operating smaller aircraft over relatively short distances with thin passenger volumes. As a result, regional airlines are more vulnerable to deteriorating economic conditions, such as the current global crisis. QantasLink operates a number of marginal or loss-making routes across regional Australia. As a result of the global financial conditions, there are fewer international tourists visiting Australia's regions, as well as reduced demand for Australian primary 024-mm SUBMISSION 47 produce and resources. Both these effects curb the flow of economic benefits of tourism and trade to regional communities. Although the economic conditions and associated exchange rate movements have seen a decrease in Australians holidaying internationally, the ability for modal substitution to regional destinations, for example road and rail, places further pressure on demand. Regional airlines play an integral role in supporting many industries, and similarly, the level of economic activity in regional communities has a flow-on effect to the regional aviation industry. The impact of a reduction in profitability of regional services may translate into a reduced level of services. In the longer term, reduced profitability ultimately means less capability to invest in technology that supports growth and greater cost efficiency. The introduction of the Government's proposed Carbon Pollution Reduction Scheme (GPRS) will present a further challenge to regional activity and aviation. It is expected that the scheme will have a greater impact on demand in regional Australia, where the ability to pass on price rises is limited due to the already marginal nature of regional routes. In response to the effects of the global financial crisis, QantasLink has reduced the rate of growth and is adjusting capacity in line with weakening demand, while maintaining vigilance on cost reduction, avoiding where possible the need to reduce or eliminate services. In 2007, QantasLink made a significant investment in its regional fleet and will take delivery of another seven Bombardier Q400 aircraft over the next 12 months. These deliveries are part of a $400 million investment in the QantasLink fleet and demonstrate an ongoing commitment to regional air services to Australia. Role of the Commonwealth Government It is the responsibility of airlines to ensure that they are able to adapt and respond to challenges in what is an inherently volatile industry. This requires that airlines develop their businesses to be competitive, efficient and sustainable. However, there is also a role for governments in terms of creating policy settings that support this activity. In this regard, a number of proposals have been put forward in the context of the consultation process towards the Government's development of a National Aviation Policy Statement (Aviation White Paper). Implementation of these initiatives could provide some immediate relief for regional airline operators affected by the global financial crisis, as well as fostering the sustainability of the sector over the longer term. It is important that these are linked to broader policy settings to ensure a coordinated framework that effectively generates intended outcomes. Aviation charges - security Many regional routes are marginal in terms of profitability and airport charges can be a significant determining factor in the affordability of air travel and on the viability of airlines flying a particular route. As highlighted above, the smaller the aircraft and shorter the sector length flown, the higher the unit cost per passenger or seat. Low passenger numbers over which to 024-mtn SUBMISSION 47 spread costs can lead to a significant increase in the charges for operating to an airport. Regional ports therefore suffer from disproportionately higher costs associated with the provision of border control facilities (if international services are operated), security services and infrastructure such as air traffic control and aviation rescue and fire fighting services. During an economic downturn it is an even greater imperative that this inequitable burden of costs, which has the potential to further dampen lower passenger demand, is addressed. To support the sustainability of operations and continued growth of air services to regional communities, the Government should further explore avenues to assist industry meet the expenditure required for these facilities and services. In particular, where mandated security costs are concerned, for example passenger and baggage screening, the Qantas Group advocates a fixed fee per passenger or a network pricing model for security charges which would see security costs apportioned across the industry as a fixed fee per passenger cost, or failing that, a mode! that differentiates between regional and capital city airports. This would provide immediate relief to regional passengers, airports and airlines. Aviation charges - air navigation Under the Enroute Charges Rebate Scheme, which has been extended until 2012, the Government provides financial assistance to subsidise the enroute air navigation charges paid to Airservices Australia by regional airlines. Eligibility for this subsidy is restricted to airlines operating aircraft with a maximum take-off weight (MTOW) of 15 tonnes or less and sole operators based in Western Australia with aircraft weighing up to 21 tonnes. These criteria exclude all QantasLink services including turbo prop and B717 services which operate to 45 regional centres throughout Australia, excluding capital cities. All QantasLink services are operated with aircraft that have MTOW's of 15.65 tonnes and above, or in the case of WA, above 21 tonnes. The air navigation charges paid on these services have increased over time and are a substantial component of QantasLink's cost base. There is only a marginal difference between the type of aircraft operated by QantasLink and other regional airlines and the economics of our operations are similar. However, the scheme enables other regional airlines to offset a portion of their costs on a number of these routes. This has not only a direct impact for the economics of QantasLink's network, but also competitive implications. in the current economic conditions, it would be appropriate for the Government to extend the Enroute Charges Scheme to include aircraft, such as QantasLink's Dash 8-200/300, that have a MTOW of 20 tonnes or less. This would ensure that this disparity does not further hamper operations in the already challenging regional sector. Inclusion in the scheme would lower QantasLink's operating costs and have a positive impact on the viability of existing regional routes, and therefore, scope for growth and investment. 024-mm SUBMISSION 47 Regional infrastructure Local authorities often do not have the means to maintain, support and develop regional airport infrastructure. As a consequence of the global financial crisis the availability of credit has declined, further