Inquiry Into the Operation, Regulation and Funding of Air Route Service Delivery to Rural, Regional and Remote Communities

Professor Rico Merkert Professor and Chair in Transport and Supply Chain Management Deputy Director, Institute of Transport and Logistics Studies The University of Sydney Business School Sydney, 05 February 2018 Dr Jane Thomson 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 Dear Dr Thomson, Thank you for inviting me to make a submission to the above Inquiry. The aim of this submission is to address the operation, regulation and funding of air route service delivery to rural, regional and remote communities, with particular reference to a number of key areas that were pointed out in your letter which will form the structure of this submission. Paramount to finding equitable and efficient solutions to issues raised by the Inquiry is to recognise regional air services as being essential for the future development of Australia. The federal government has many options to improve requisite commercial viability of scheduled regional air services (i.e. through better integration at various levels and more relaxed security regulation) which should in return improve connectivity, accessibility of transport/mobility and frequency of flights and overall social, health, cultural and economic activity. 1. social and economic impacts of air route supply and airfare pricing; Aviation has a significantly positive impact on economies, businesses and communities. This has been evidenced by a large amount of empirical studies (e.g. Oxford Economics and ATAG, 2014)1. It is widely accepted that aviation plays an even more vital role in the regional, rural and remote (RRR) context. Local businesses, airline operators and remote airports frequently highlight the substantial economic impacts of air transport to geographically remote or isolated regions. 1 Oxford Economics, Air Transport Action Group (2014). Aviation benefits beyond borders. April 2014, Geneva. Institute of Transport and Logistics Studies T +61 2 9114 1883 ABN 15 211 513 464 CRICOS 00026A The University of Sydney F +61 2 9114 1863 The University of Sydney Business School E [email protected] 378 Abercrombie St (H73) W sydney.edu.au/business/itls NSW 2006 Australia Economic impacts usually refer to employment and income generated. The four main types of impacts are: direct impacts (generated by the direct construction and operation of remote aviation); indirect impacts (generated by the chain of suppliers of goods and services related to remote aviation); induced impacts (generated by expenditure of incomes from employees created by the direct and indirect impacts); and catalytic impacts (generated by the role of air transport in remote regions as a driver of productivity growth and an attractor of new firms). Research on these impacts has been limited to Europe (for example in Norway it has been shown that remote airports are important catalysts for local investment; see for example, Halpern and Bråthen, 2011)2), Canada, the US and Australia where I have with colleagues discovered a strong bidirectional relationship between regional aviation and economic growth (Baker et al., 2015)3. Our study results show a very significant impact of regional aviation activity (i.e. passenger numbers) around all regional, rural and remote airports in Australia on the aggregate taxable income of the local government agency in which the relevant airport is located. From further studies and from talking to stakeholders in the regions we know that air transport services are not only essential to the economic sustainability but also to the social sustainability of Australia’s regional communities. Hence in many jurisdictions these services are also called lifeline services. Approximately 171 regional airports across Australia account for 35% of all aircraft movements and over 4 million Australians rely on regional air services across the country (AAA, 2014).4 Although Rex has recently reported a slight improvement in outlook, other regional airlines including Virgin Australia Regional Airlines and QantasLink are still seeing tough trading conditions in the regional and domestic Australian aviation markets. With continued volatility in the resources sector and tourism being inherently seasonal, soft demand from regional and business communities has unsurprisingly resulted in lower profit margins for regional airlines. Profitability is an even greater issue for regional airports, with their number having dropped by 2 Halpern, N. and Bråthen, S. (2011): Impact of airports on regional accessibility and social development, Journal of Transport Geography, 19(6), 1145-1154. 3 Baker, D., Merkert, R. and Kamruzzaman, M. (2015): Regional aviation and economic growth: cointegration and causality analysis in Australia. Journal of Transport Geography, 43, 140-150. 4 Australian Airports Association (2014), Submission to New South Wales Legislative Council Inquiry into Regional Aviation Services. Institute of Transport and Logistics Studies T +61 2 9114 1883 ABN 15 211 513 464 CRICOS 00026A The University of Sydney F +61 2 9114 1863 The University of Sydney Business School E [email protected] 378 Abercrombie St (H73) W sydney.edu.au/business/itls NSW 2006 Australia 46% over the last 20 years. Additionally the Australian Airports Association (AAA) reported in 2016 that 60% of Australian regional airports are still operating at a loss with many of them struggling to fund infrastructure maintenance and ongoing operation. Being largely council run, they suffer from restricted access to capital markets, and lack management and incentive structures to grow profitably. Consolidation appears to be the name of the game, which is on one hand necessary and useful for improving profitability for both regional airports and regional airlines but can also lead to losses of essential air services to some communities. I am of the strong view that regular passenger transport is a critical service to rural Australia as it connects regional and remote centres to each other and to capital cities. Passenger transport service is closely linked to quality of life by maintaining strong social networks in rural communities. The service enables rural and remote residents to access everyday amenities that urban residents take for granted. In addition to facilitating movement for passenger and freight, regional airlines and airports provide special services across Australia including essential medical and flying doctor flights, search and rescue, education, social and law enforcement services to the bush, as well as business, and tourism travel. It is therefore no surprise that regional Australia has a vital interest in securing and maintaining regional air services. Interesting, our research (Merkert and Beck, 2017)5 further suggests that residents and businesses in metropolitan areas also have a relatively high willingness to pay for regional air services, which justifies public support. Our findings suggest that, compared to other modes of travel to regional areas, Sydney residents are willing to pay a premium for regional air services of on average $126 ($99 leisure; $153 business) for one hour of travel time savings. Regional airlines, for example QantasLink, could charge a premium of $189 as part of the ticket price from say Sydney to Port Macquarie, where the saved travel time is 1.5 hours compared to driving a car. The high premiums for time savings resulting from regional aviation services suggest that some form of industry support may be warranted, at the least through ensuring a business friendly institutional environment. Industry subsidies may not be required if the regional air services’ essential role is otherwise recognised as part of the future development of the regions. In the context of regulating Sydney Airport (KSA) our findings provide 5 Merkert, R. and Beck M.J. (2017): Value of travel time savings and willingness to pay for regional aviation, Transportation Research Part A: Policy and Practice, 96, 29-42. Institute of Transport and Logistics Studies T +61 2 9114 1883 ABN 15 211 513 464 CRICOS 00026A The University of Sydney F +61 2 9114 1863 The University of Sydney Business School E [email protected] 378 Abercrombie St (H73) W sydney.edu.au/business/itls NSW 2006 Australia justification for the mandated level of peak hour slots for regional carriers. Our findings also suggest that there is value in considering a further scheme to provide ‘medium’ and ‘large’ regional airports with guaranteed access to slots at KSA. This would include a minimum of two slots in both the morning and evening peak-hours (ideally six) which in turn would generate the potential for some true competition between regional carriers. Allowing multiple operators to compete for the lucrative business travel market, which demands morning departures and an evening return, would make regional air services more competitive and therefore attractive to the travelling public. This may prove more difficult in the regional context than at metropolitan airports and certainly won’t be the panacea to solve low passenger numbers. Attracting non-aeronautical revenues through car parking, adjacent business parks or freight is another option that some airports are currently exploring, for example in Wellcamp, Dubbo and Tamworth. Opportunities around jointly developing routes with all stakeholders (including tourism agencies) which could include federal or local government route development funds

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