INDUSTRY COMMISSION INTRASTATE AVIATION REPORT NO. 25 17 JULY 1992 Australian Government Publishing Service Canberra © Commonwealth of Australia 1992 ISBN 0 644 25447 5 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Australian Government Publishing Service. Requests and inquiries Concerning reproduction and rights should be addressed to the Manager, Commonwealth Information Services, Australian Government Publishing Service, GPO BOX 84, Canberra ACT 2601. Printed for AGPS by Pirie Printers Pty Limited, PO Box 438, Fyshwick ACT 2609 INDUSTRY COMMISSION 17 April 1992 The Honourable J S Dawkins M P Treasurer Parliament House CANBERRA ACT 2600 Dear Treasurer In accordance with Section 7 of the Industry Commission Act 1989, we submit to you the Commission’s report on Interstate Aviation. Yours sincerely Gary Banks Ken Wraith Presiding Commissioner Associate Commission COMMISSIONER Benjamin Offices, Chan Street, Belconnen ACT Australia PO BOX, Belconnen ACT 2616 Telephone: 06 264 1144 Facsimile: 06 253 1662 CONTENTS Page ABBREVIATIONS viii TERMS OF REFERENCE x OVERVIEW 1 FINDINGS AND RECOMMENDATIONS 9 1 INTRODUCTION 13 2 INDUSTRY STRUCTURE AND MARKETS 17 2.1 Structure of domestic aviation 17 2.2 Intrastate aviation markets 29 3 THE POLICY ENVIRONMENT 35 3.1 The powers of the Commonwealth and states/territories 35 3.2 Regulation of interstate aviation 36 3.3 State and territory licensing systems 42 4 ECONOMIC REGULATION OF INTRASTATE AVIATION 55 4.1 Objectives of regulation 55 4.2 Costs of regulation 69 4.3 Conclusions 78 4.4 Summary of recommendations 87 CONTENTS V 5 PROVISION OF AIRPORT INFRASTRUCTURE 89 5.1 Relationship to government 91 5.2 Cost recovery 97 5.3 Structure of airport charges 111 5.4 Access to terminals 124 5.5 The need for competitive discipline 127 5.6 Summary of recommendations 130 6 REGULATORY FRAMEWORK FOR AVIATION SAFETY 133 6.1 Role and operations of the Civil Aviation Authority 133 6.2 Relationship to government 138 6.3 Charges for CAA facilities and services 144 6.4 Summary of recommendations 156 APPENDICES A Inquiry participants 159 B Evolution of interstate aviation policy 163 C Rural air subsidies 173 D Overseas experience 179 E Analysis of intrastate air fares 191 F Deregulation and thin routes 197 G Principles of efficient airport pricing 205 REFERENCES 211 VI INTRASTATE AVIATION Tables 2.1 Passenger embarkations by airline category, 1985-86 to 1990-91 19 2.2 Hours flown by industry sector and activity, 1991 21 2.3 Passenger markets for principal airlines, 1990-91 30 2.4 Major intrastate routes, 1990-91 31 2.5 Hours flown by general aviation aircraft by state and territory, 1988 to 1991 31 4.1 Service provision on thin routes in South Australia 58 Boxes 2.1 Classifications within the domestic aviation industry 18 3.1 Summary of intrastate licensing requirements, 1992 43 4.1 Concentration, contestability and ‘effective’ competition 72 4.2 Cross-subsidisation 73 5.1 Profile of Australia’s airports 90 5.2 Major functions of the Federal Airports Corporation 92 5.3 Site valuation of Essendon airport 110 5.4 Aeronautical charges at FAC airports 112 5.5 Efficient pricing principles 114 6.1 Summary of CAA charges for airways services 146 Figures 2.1 Ownership links between affiliates of Ansett and Australian 22 2.2 Indicative air transport networks 24 6.1 CAA revenue, 1990-91 136 CONTENTS VII ABBREVIATIONS ABS Australian Bureau of Statistics ALOP Aerodrome Local Ownership Plan AMATS Airspace Management and Air Traffic Services ANA Australian National Airways AOC Air Operator’s Certificate ASK Available Seat - Kilometres BTCE Bureau of Transport and Communications Economics CAA Civil Aviation Authority CRS Computer Reservation Systems CTC Canadian Transport Commission DATP Domestic Air Transport Policy Review DOTAC Department of Transport and Communications DSD New South Wales Department of State Development FAC Federal Airports Corporation GAIT General Aviation Infrastructure Tariff GBE Government Business Enterprise GDP Gross Domestic Product IAC Industries Assistance Commission IAFC Independent Air Fares Committee IC Industry Commission ICAO International Civil Aviation Organisation KSA Kingsford Smith Airport MTOW Maximum Take-Off Weight PSA Prices Surveillance Authority RASS Rural Air Services Subsidy RPK Revenue Passenger - Kilometres RPT Regular Public Transport TAA Trans Australia Airlines TAAATS The Australian Advanced Air Traffic System TPA Trade Practices Act TPC Trade Practices Commission ABBREVIATIONS VII VIII INTRASTATE AVIATION OVERVIEW Intrastate aviation encompasses airline and general aviation activities within a state or territory. Airline operations involve regular scheduled flights, primarily for transporting passengers and freight. General aviation covers a wide range of other activities, including aerial spraying, survey and photographic work, pilot training and charter operations. Of the many hundreds of general aviation operators, most are small businesses with only a few aircraft. Although charter work and some operations near state or territory borders can involve interstate flights, most general aviation occurs within state or territory boundaries. In contrast to general aviation, there are relatively few operators engaged in airline services. Most operators providing airline services to small communities are themselves small, whereas intrastate services linking regional centres to capital cities tend to be provided by larger businesses, some of which conduct operations in a number of states. In Queensland, major intrastate routes are serviced by the nation’s major domestic airlines. Importance of efficient performance Intrastate airline services form an integral part of Australia’s transport network. In many regions, they supplement services provided by road, rail and, in some instances, coastal shipping. However, in some remote areas, intrastate air services provide the only practicable means of transporting inhabitants, tourists, food, medical supplies and other goods. Similarly, general aviation operators provide services on which many rural communities are heavily reliant, such as crop dusting and medical services. Given their important role in Australia’s transport system, it is imperative that intrastate aviation services are provided efficiently. If they are not, segments of the community may be disadvantaged and the overall performance of the economy impaired. In the Commission’s view, the intrastate aviation sector is currently not performing to its full potential. Its present performance and future development is being hampered by a number of factors which are subject to the control of governments in Australia. The most significant of these is ‘economic’ regulation which continues to apply to intrastate airline operations in a number of states. This encompasses restrictions on entry to (and exit from) the industry, as well as regulations specifying conditions of service, such as fares, schedules, routes and even aircraft type. The Commission considers that all economic regulation should be dismantled. OVERVIEW 1 The performance of intrastate aviation is also affected by the efficiency of providers of airport infrastructure and safety and air navigation services. These services also affect the performance of interstate and international aviation. Regulation by state and territory governments Since the 1920s, intrastate aviation has been subject to extensive Commonwealth regulation and, in most parts of Australia, regulation imposed by state and territory governments. Although regulation has predominantly focussed on the activities of airline operators, this in itself has required the regulation of some general aviation activities (for example, to prevent charter flights from eroding traditional airline markets). Following the Commonwealth’s decision to assess applications for licences to operate on commuter routes on safety grounds only, regulation of most other areas of intrastate aviation has been in the hands of state and territory governments since 1979. In subsequent years, most governments followed the lead of the Commonwealth and relaxed or withdrew regulation. Today, intrastate aviation in Victoria, South Australia and the Territories is no longer subject to state or territory regulation. Minimal regulation remains in Queensland, while in Western Australia only the relatively small non-jet network is regulated. The New South Wales Government has announced that entry to most routes will continue to be restricted, but that an additional operator will be permitted on some major routes. Licence conditions will continue to specify the standard of service on some regulated routes. In Tasmania, intrastate aviation continues to be subject to extensive regulation: scheduled intrastate airline services are currently provided by a licensed monopolist - Airlines of Tasmania. Licences are also required for all other commercial intrastate aviation activity, such as agricultural spraying, charter work and freight services. The underlying rationale for the economic regulation of intrastate aviation has not always been clearly enunciated. Over the years, it has been perceived as serving a range of objectives, including: maintaining ‘essential’ services to rural communities; improving the quality of services; providing services at ‘affordable’ prices; and increasing the stability of regional air services. Over the past decade or so there have been significant