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INQUIRY INTO THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON REGIONAL

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 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 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 Group operates to a range of destinations in regional Australia using both the Qantas and brands. QantasLink, as the Group's , 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

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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

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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.

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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 reducing the ability of regional Australia to secure funding for investment.

There is a significant cost for regional communities and airlines for the development and maintenance of aviation infrastructure. The Government has responded to this by allocating $500 million, in addition to the $300 million made available under the Regional and Local Community Infrastructure Program (RLCIP), for community infrastructure which includes airport infrastructure and terminals.

While Qantas strongly supports the need for investment in regional aviation infrastructure, it is important that airports take an appropriately balanced view of the need for improved infrastructure as against a speculative desire to upgrade infrastructure in an attempt to attract new passenger services.

In recent years there have been many examples of airports seeking to significantly upgrade infrastructure to levels that far exceed the needs of airlines or passengers. In such circumstances airports seek to recover the cost of this infrastructure from existing airlines and their passengers, notwithstanding that it may have been built without the support of airlines. In the absence of any mechanism to prevent such practices, airlines and passengers will continue to face significant charges not linked to the level of infrastructure they require, which would affect the flow-on benefits that aviation provides to tourism and the broader economy.

Unfortunately some regional airports also continue to see airport charges as a way of raising revenue for ancillary council services. When charges are indiscriminately raised and not linked with an improvement in airport infrastructure or services, it is very difficult for airlines to accept the reasonableness of such increases or to pass such increases on to passengers. Such pricing behaviour, particularly where there is no recourse to any regulatory pricing oversight, often leads to protracted disputes and, in extreme cases, RPT services being reduced or cancelled.

Industry regulation

While state and territory governments have regulatory jurisdiction over regional air routes, the federal Government has also been involved in maintaining some regional air services. The current framework of state regulation has seen a divergent approach in the licensing of regional operators including the allocation of capacity and routes.

The long-term viability of the regional aviation industry is dependant upon an efficient model for the regulation of regional air services. While the regulation of services to remote Australia would be unlikely to directly impact the Qantas Group, we would advocate a coordinated approach between federal and state and territory governments.

The proposed model would see the Australian Government set a consistent national framework for determination of regulation of regional routes. These routes would be determined by passenger numbers and regulated for a term of three to five years, with government subsidy where warranted.

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The framework for regulation of Australian regional routes would guide the utilisation of a federal budget allocation between the states and territories. The federal Government contribution should not form the sole basis for funding, but rather the baseline of funding which states and territories would 'top up' based on the needs of their regional and remote communities.

We would see the role of state and territory governments broadly as follows:

• Determining which air services are 'essential' and which require regulation using the national policy framework as a guide; • Determining the level of air services required by regional and remote communities on regulated routes; • Determining the funding at a state or territory level to be allocated to regional and remote communities using the federal contribution as the baseline; • Managing the tender and contractual process for awarding regulated routes to interested airline operators; • Awarding and managing the payment of total (ie federal and state/territory) subsidies to airline operators; and • Monitoring ongoing performance of the airline operator to ensure contractual terms are met.

We believe that this approach offers a number of advantages over the current arrangements. A national policy framework would underscore the importance of ensuring essential air services are provided to regional and remote communities in Australia. It would promote a holistic approach to the distribution of funding to remote and regional communities at a federal level, while enabling states and territories to add to these contributions based on their own assessments of the specific importance of essential air services in their respective jurisdictions. It would also ensure that states and territories remain responsible for determining the type of air services required by affected communities and managing these accordingly.

The features of the proposed model outlined above would, in Qantas' view, strike a balance between the involvement of federal and state and territory governments which should support effective and efficient decision making. Such a framework would also bring benefits for airlines in planning their regional networks.

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ATTACHMENT QANTASLINK

QantasLink makes a significant contribution to regional economies, operating over 2,000 flights each week to 51 metropolitan and regional destinations across Australia. Comprising three separate regional entities - Airlink, Eastern Australia Airlines and ~ QantasLink flies to more Australian destinations than any other airline.

Employment

QantasLink provides direct employment for more than 1,000 people in both metropolitan and regional locations, including , , , , and Tamworth.

In 2008, QantasLink launched a new pilot trainee program for over 90 pilots and continues to recruit cadets from the Qantas Group pilot cadet program.

Fleet

There is 46 aircraft in the QantasLink fleet -11 B717-200 jets, 5 Bombardier Dash 8 Q200,16 Bombardier Dash 8 Q300 and 14 Bombardier Q400 turboprop aircraft.

Regional network

« ACT (1)- « NSW (11) - , Armidale, , , , Moree, Newcastle, , Sydney, Tamworth, • Northern Territory (4) - , Ayers Rock, Darwin, Qove • (21) - Barcaldine, Biloela, Blackall, Blackwater, Brisbane, , Cairns, Charleville, Cloncurry, Emerald, Gladstone, Hamilton Island, , Horn Island, Longreach, Mackay, Mt Isa, , Roma, , Weipa • (2) - Devonport, Launceston <» Victoria (2) - Melbourne, Mildura • Western Australia (8) - Broome, , Karratha, Newman, Paraburdoo, , Port Hedland, Kununurra • South Australia (2) - , Olympic Dam

Affiliate Airlines

QantasLink flights also provide connections with services by the following affiliate airlines that serve more than 40 additional destinations:

• Aeropelican, based in Newcastle • , based in Canberra » National Jet, based in Adelaide • , based in Darwin

QantasLink commenced codeshare services with Airnorth from Kununurra to Darwin, Broome and Perth |n September 2007 and with from Adelaide to Olympic Dam in November 2007.

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Engineering

QantasLink's fleet is serviced in a number of city and regional locations. Heavy maintenance is undertaken in Tamworth, while line maintenance bases are located in Brisbane, Melbourne and Sydney.

Regional Sponsorships

Sponsorship of events and the promotion of tourism demonstrates QantasLink's commitment to rural and regional Australia and the airline works closely with other parts of the Qantas Group to promote regional and destination tourism within Australia and overseas. QantasLink's support for community, cultural, educational and sporting events, festivals and conferences, includes:

Ag-Grow Field Days Mildura Arts Centre Australian Wool Fashion Week Miss Wagga Wagga Quest Country Music Association of Australia New England Regional Art Museum Destination Albury Wodonga NSW Country Rugby Union Dorothea MacKellar Poetry Awards National Breast Cancer Foundation Fraser Coast South Burnett Tourism Port Hedland Business of the Year Gladstone Harbour Festival Qantas Founders Outback Museum in Kalgoorlie-Gofdfields Arts Centre Longreach Kimberley Tourism Awards Queensland Outback Tourism Awards Lifeline Kids Health Expo, Karratha Wide Bay Australia International Airshow Lord Howe Island Tourism Association

Tourism

The Qantas Group engages in various marketing campaigns and initiatives to assist in the dispersal of visitors to regional Australia. To promote regional tourism, the Qantas Group maintains close relationships, both at a state and regional level, with various tourism authorities.

JETSTAR

Jetstar operates more than 1,300 services each week to 20 destinations across Australia and 10 international destinations.

The introduction of Jetstar has seen significant growth in services and associated passenger traffic growth to many regional destinations. For example, Jetstar has grown services into Newcastle Airport in regional NSW at an annual average growth rate of almost 420 per cent since commencing services in 2004. Over the same period the airline has grown services into the Gold Coast by 582 per cent and Cairns by 96 per cent.

Fleet

Jetstar currently operates domestic and short haul international flying with a fleet of 32 Airbus A320 and two A321 aircraft. Jetstar's long haul routes are operated with six wide body aircraft.

In an extension of its narrow body fleet, Jetstar will participate in a future Qantas Group fleet order over the next six years comprising up to 65 A320/A321 aircraft with options and purchase rights for an additional 40 A320 family aircraft. This is separate

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to the airiine's future wide body order of at least 15 Boeing 787 Dreamiiners, with the first anticipated for delivery in May 2010.

Regional network

• - Ballina, Newcastle » Queensland - Cairns, Fraser Coast (Hervey Bay), Gold Coast, Proserpine (Whitsunday Coast), Hamilton Island, Rockhampton, Townsville, Mackay, Sunshine Coast • Tasmania - Launceston

QANTAS

Regional network

® ACT-Canberra » New South Wales - Albury, Armidale, Ballina/, Coffs Harbour, Dubbo, Lord Howe Island, Moree, Newcastle, Port Macquarie .Tamworth, Wagga Wagga • Northern Territory - Alice Springs, Ayers Rock-Uluru, Gove ® Queensland - Barcaldine, Biloela, Blackall, Blackwater, Bundaberg, Cairns, Charleville, Cioncurry, Emerald, Gladstone, Gold Coast, Hamilton Island, Hervey Bay, Horn Island, Mackay, Mt Isa, Proserpine, Longreach, Rockhampton, Roma, Sunshine Coast, Townsville, Weipa • South Australia - Olympic Dam » Tasmania - Devonport, Launceston « - Mildura s Western Australia - Broome, Kalgoorlie, Karratha, Kununurra, Newman, Paraburdoo, Port Hedland

RECEIVED .1 APR 2009

HOUSE OF REPflESENTATIVM STANDING COMMITTEE ON INFRASTRUCTURE, TRMttnMT

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