Senate Standing Committee On Rural and Regional Affairs and Transport

Committee Secretariat Senate Standing Committee on Rural and Regional Affairs and Transport PO Box 6100 Canberra ACT 2600 Email: [email protected]

Level 1, 9 Bay Road SA 5290

Telephone (08) 8723 7310 Email [email protected] www.lclga.com.au

INTRODUCTION

The Local Government Association (LCLGA) is formed from the seven Local Government Councils in the Limestone Coast, and leads coordination and advocacy for Local Government in the region. The Association is active on a number of regional issues, and works in partnership with other regional organisations to deliver benefits for the Limestone Coast economy and communities. We currently represent a population base of more than 65,000 residents.

The Board of the LCLGA has been made aware of the Standing Committees inquiry into the operation, regulation and funding of air route service delivery to rural, regional and remote communities and the desire to seek feedback.

This submission represents the views of the Constituent Councils of the Limestone Coast being:

• Naracoorte Lucindale Council • District Council of Grant • • Kingston District Council • Wattle Range Council • •

However, each member Council reserves the right to express their individual views direct to the Select Committee on the areas raised for comment.

GENERAL COMMENTS

Whilst much of our comment will be general in nature we will draw comparisons to our regional airport in the District Council of Grant - the Mount Gambier Airport. The airport is located on the in Wandillo about 9km north of the City of Mount Gambier. It is the only commercial airport servicing the Limestone Coast region of . Currently Regional Express Airlines has a monopoly in servicing the airport, with multiple daily flights to and with Saab 340 turboprop aircraft. Both the Adelaide and Melbourne routes are deregulated and open to other service providers.

Passenger numbers at the airport reached a high of 115,365 in 2007-081 but have steadily declined to circa 78,000 in 2016-17 with a 60:40 split between the Adelaide and Melbourne routes. The significant decrease of 30% over the past ten years has often been debated and in some ways, can be answered in the context of this review.

Over the years there has been a great deal of debate about regional airfares and the ‘apparent’ disparity in pricing from regional centres to that of our metropolitan cousins. Having said this we do not believe that there is a silver bullet that will address this disparity.

SPECIFIC COMMENTS

We congratulate the Standing Committee for the initiative to look into the operation, regulation and funding of air route service delivery to rural, regional and remote communities. Whilst we do not believe that we are experts in the operation of airlines we would like to think that as the closest level of government to regional communities we are well position to advocate and speak on their behalf.

1 https://en.wikipedia.org/wiki/Mount_Gambier_Airport

Page 2 of 10 “Regional aviation is inherently more expensive than domestic or international aviation due to poor economies of scale and higher operating costs.”2

This simple statement by Regional Express Airlines appears to condemn regional air routes to higher pricing models than our capital city counterparts. Regional Express are not alone in this mindset - in the same article a spokeswoman for Qantas similarly says, “We can understand it’s frustrating when regional fares can be higher than other parts of the network, and that has a lot to do with economies of scale”. a. social and economic impacts of air route supply and airfare pricing;

In responding to this question, we would like to quote Regional Express Airlines in their response to the Inquiry into Regional Airfares in Western Australia3.

Regional air services linking remote and regional communities with Capital Cities are critical to the socio-economic wellbeing of Regional Australia. Regional air services are essential in the provision of business, government, medical and education related travel. Discretionary travel, including visiting friends and relatives is also very important for the social wellbeing of regional communities. As such regional communities will be severely affected if air travel is out of reach.

We believe that once air travel becomes unaffordable, the entire socio-economic fabric of the regional communities will enter into a downward spiral. On the other hand, affordable fares will stimulate the economic activity of the regional cities as more industries will be attracted to set up their business there.

This Western Australia submission to an inquiry applies equally to the Limestone Coast region of South Australia and reflects the importance of a reliable and affordable airline for regional communities. b. different legal, regulatory, policy and pricing frameworks and practices across the Commonwealth, states and territories;

The aviation industry is complex but remains vital to many rural and remote areas. Whilst the sector is largely driven by demand there are many other factors that can impact on the viability of air services.

Local Governments are involved in the operation of many airports and the decisions that they make impact on the cost of air travel. The over-riding question that they are faced with is what level of subsidy is their community willing to pay for a Regular Public Transport (RPT) service.

Whilst some may hold the view that airports are just the same as any other piece of infrastructure that a council oversees and airports should not be seen a cash cow, Councils across Australia are continually being challenged to produce balanced budgets and often within an environment of State imposed rate capping.

State Governments on the other hand have the power to introduce a regulatory environment that can strike a balance between regulation and deregulation of RPT routes. Deregulation of certain routes capable of sustaining competition can maximise the potential for industry and economic growth. In saying this, the protection of certain routes below a certain threshold could go through a tender process for the RPT service and this could lead to better outcomes for many air routes.

2 Quote by Regional Express airlines: http://www.abc.net.au/news/2017-08-03/fact-check-is-it-cheaper-to-fly- overseas-than-alice-springs/8754958 3 http://www.parliament.wa.gov.au/parliament/commit.nsf/a7b778ee55fef62a4825772700174a2c/8dcb036e75d531b14825817d002c7fde?OpenDocument

Page 3 of 10 The Federal Government through a range of initiatives and incentives looks to underwrite the sustainable of RPT services in those rural and remote regionals that are considered marginal. Having said this, they need to recognise the changes in policy can have a dramatic impact on the costs of operating an airport. An example is the costs related to the installation of airport security scanning equipment and retrofitting of terminals. The capital costs are in the hundreds of thousands of dollars and the ongoing costs related to security will push up ticket prices. This is not intended in any way to imply that security at regional airports is not important.

Lastly are the air service operators. There is a need for these entities to acknowledge that many airport owners operate in a highly regulated environment and that they also answer to shareholders. In the case of community owned and controlled assets their shareholders are often local communities, State and Federal governments. It is not as simple as saying that an airport is a public asset and should be run at less than breakeven when air service operators are primarily concerned with generating profits for long term viability. c. how airlines determine fare pricing;

We can provide no logical response to this question. We understand and appreciate that airlines need to make a profit but when regional airports are being blamed for high costs and that they should not be allowed to make a profit that can ultimately be reinvested into regional airports that is very difficult position to support.

A Case Study published in the Bureau of Infrastructure, Transport and Regional Economics Statistical Report 2017 provides the following example of some of the issues that regional airport operators are faced with.

In this example the Mount Gambier Airport was used.

Case Study 1 – Mount Gambier Airport

Mount Gambier Airport is a regional airport owned by the District Council of Grant. The airport serves the local GA community and regular airline services to Adelaide and Melbourne with Regional Express.

Regional Express provided 3,972 flights into and out of Mount Gambier Airport in 2016, carrying 76,109 passengers.

The airport manager reports not insignificant costs associated with apron repairs from GA aircraft fuel spills. These spills originate either directly from the refuelling process or from aircraft fuel tanks being overfilled and then left out in hot weather to expand and overflow. These spills cause bitumen to deteriorate rapidly and need to be cut out and patched immediately to minimise spreading of the damaged area.

Airport costs are recovered from airport tenants and VH- registered aircraft operators, retaining a small surplus each year which is held in reserve for airport maintenance and upgrades, when required. RAAus registered aircraft operators are not charged as their contact information is not freely available. As with most airports, the depreciation costs at Mount Gambier Airport are high, amounting to around $600,000 per year out of an annual income of about $1 million.

Mount Gambier Airport operates with a level of financial independence from the Council and does not borrow funds for upgrades or maintenance.

Page 4 of 10 Regional Express’ flights to Mount Gambier use 34 seat Saab aircraft. These aircraft have been out of production since 1999 and airport management assume that they will be nearing the end of their useful life by 2030. As there are no aircraft of a similar size currently in production, Airport management expect replacement aircraft to be larger. The pavement classification number (PCN) of the main runway at Mount Gambier, while adequate for the 34 seat Saab, will not be sufficient to accommodate larger aircraft.

Mount Gambier Airport selected the Bombardier Dash 8-Q300 as the design aircraft for the main runway into the future. DC Grant plans to upgrade the runway through a thickening of the runway surfacing as part of their regular runway maintenance program. The airport manager expects the use of Q400 aircraft will also be possible, but on a restricted basis.

This case study illustrates the increasing costs faced by airports as they cater for larger aircraft, with costs necessarily passed on to airport users.4

In stark contrast to this, Regional Express Airlines5 is on record stating that they believe there are several actions that the State and Local Government authorities can take to limit increases to airfares without undermining the commercial viability of RPT services.

In Rex’s vast non-Western Australia network of 55 airports, around 70% of the council owned regional airports are not able to even recover the operating expenses from the airport charges. However, they understand that charging a head tax rate to cover operating expenses would make the marginal air service completely not viable.

Regional airports were vested to the local councils at no cost (often with a large sum to offset future maintenance costs) by the Federal Government prior to 1991. Regional airports are a vital piece of community infrastructure and form a valuable community asset.

Local Councils should not consider the airport as a cash cow. Regional airports should be treated no differently than local roads and bridges as critical local infrastructure that has broad ranging benefits across the entire council municipalities. Yet, most regional airports adopt a user pays approach that requires the airport business to stand-alone at no cost to the council ratepayer and in many situations generate a substantial surplus back to council.

Regional airports are dynamic with ever-changing passenger throughput and activity levels. In a competitive environment, regional airports should consider passenger and activity growth (and subsequent improved airport efficiencies) rather than simply applying routine increases of either CPI or greater.

Rex estimates that it costs about $600,000-$700,000 annually to effectively operate a regional airport, which includes having an adequate sinking fund to undertake significant airport works. In the case of the WA regional airports to which Rex operates, Rex generates airport revenue of between $1.0M to $1.6M – some $0.4M to $1M above the normal operational needs. The Standing Committee should seek to understand why the needs of the WA airports are so high when 70% of the airports in Rex’s network can sustain an air service with less than $600,000 revenue a year.

From Rex’s experience, the high cost of depreciation is often cited as the basis for needing much higher airport revenue. It is well and good for regional airports to receive State and Federal Government funding for airport investment however this increases the asset value of the airport which in turn causes

4 Bureau of Infrastructure, Transport and Regional Economics Statistical Report 2017 5 http://www.parliament.wa.gov.au/parliament/commit.nsf/a7b778ee55fef62a4825772700174a2c/8dcb036e75d531b14825817d002c7fde?OpenDocument

Page 5 of 10 airport depreciation costs to spiral out of control.

The concrete steps that the local councils can take to lower the cost of airfares are:

- Reduce airport charges / reduce the airport passenger tax. If this reduction is translated into lower ticket fares, there will be a stimulatory effect on the passenger numbers. More importantly it will create a positive impact on the socio-economic well-being of the community. The net gain to the community far outweighs, in our opinion, the drop of airport revenue and local councils should get out of the myopic mindset and think of the bigger and longer term good of their community. Separate from the social advantages, the economic activity generated through a regional airport far exceeds any perceived short-falls in a regional airports financial position.

- Work in Partnership with the airline. Rex has pioneered and successfully implemented many partnership programmes with various cities where both parties invest into growing the passenger numbers by reducing the airfares. This has also been successfully implemented in the WA ports Rex services as will be described below.

Using the Mount Gambier airport as an example the head tax equates to approximately 5.4% of the Rex lowest published fare excluding promotional published fares. At these levels it is difficult for the District Council of Grant to offer any further concessions. The District Council of Grant have not increased its passenger head tax since 2010 – this does not appear to be a sustainable business practice.

Further to the issue of fare pricing, the Bureau of Infrastructure, Transport and Regional Economics (BITRE) conducts a survey of domestic air fares as published on airline web sites. Fares are collected each month for the top 70 routes based on traffic volume. The lowest fare available for travel on the last Thursday of the survey month in each fare class is recorded for each route. Broome-Perth, Geraldton- Perth, Kalgoorlie-Perth, Karratha-Perth, Paraburdoo-Perth, Perth-Newman and Perth-Port Hedland are the only intra Western Australian routes for which information on fares is currently collected. It should be noted that all these routes except for perhaps the Broome-Perth route are likely to have a significant proportion of mining traffic and therefore, may not be representative of fares on other intra Western Australian routes.

Based on an average of the minimum fares collected over July 2016 to June 2017 for Restricted Economy air fares, Geraldton-Perth was the most expensive of the intra Western Australian routes in terms of dollars per kilometre at $0.75 and was the 14th most expensive route nationally based on this measure.

The most expensive route nationally was Canberra-Sydney at $1.40 followed by Cairns/Townsville at $1.36, Bundaberg-Brisbane at $1.28, Dubbo-Sydney at $1.08 and Adelaide- at $1.06. The cost per kilometre for Perth-Newman was $0.64, for Paraburdoo-Perth it was $0.55 and for Karratha-Perth it was $0.54. The Perth-Sydney route had the lowest cost per kilometre of all the surveyed routes at $0.13.

When the intra Western Australian routes are compared with other national routes of similar distance, it does seem that the cost per kilometre is higher in most cases. The cost per kilometre for Broome-Perth (1,677 km) was $0.36 while for Sydney-Townsville (1,690 km) it was $0.20. The cost per kilometre for Perth-Port Hedland (1,312 km) was $0.50 while for Adelaide-Alice Springs (1,316 km) it was $0.33.

The cost per kilometre for Kalgoorlie-Perth (538 km) was $0.69 while for Newcastle-Gold Coast (539 km) it was $0.44. The cost per kilometre for Geraldton-Perth ($0.75, 370 km) compares favourably with Sydney-Wagga Wagga (367 km) where the cost was $0.89.

Page 6 of 10 As a comparison, the average dollars per kilometre for the Mount Gambier to Adelaide route ranges from circa $0.47 to $1.31. This disparity creates difficulties with the cheaper airfares often being purchased well before the day by frequent flyers, corporates and government departments. This often leaves the more expensive flights to those in the community that can least afford them and need to fly at short notice for a range of reasons including health, education and family reasons. The issue of the pricing disparity is often a cause for anxiety and leads to individuals choosing to drive the five hours between the two destinations during periods of distress.

It is worth noting that in many rural and regional areas they have low scores on the SEIFA Index (Socio- Economic Indexes for Areas). The Index is a nationally recognised index that measures the relative level of socio-economic disadvantage based on a range of Census characteristics. As an example, the City of Mount Gambier has a relatively low score (9116). As a comparison Warrnambool in has a score of 970, Mount Barker in South Australia 1,021 and Burnside in the eastern suburbs of Adelaide has a score of 1,090.

It should be noted that distance is only one of many factors that affect the economics of operating a service on a route, passenger volumes and airport charges are some other factors.

As can be seen by the above data it is difficult to identify a consistent pricing model but it is also clear that there are many variables that need to be considered. d. the determination of airport charges for landing and security fees, aircraft type and customer demand;

Airport operators across the nation understand the importance of air services to their respective communities. Ensuring that the facilities are fit for purpose and can cater for the demands asked of them can be difficult to manage and at times become political. Some of the questions they are faced with include;

1. At what level do we set our fees to ensure air travel remains sustainable? 2. At what level does an airport operator set their fees to ensure air travel remains safe through appropriate airport infrastructure that meets the requirements of aviation audits? 3. What service levels need to be provided? 4. What other options are available to generate income that can offset landing fees and other costs related to RPT services? 5. What are the legislative requirements placed on our operations to ensure we are compliant and how are these paid for? 6. What level of subsidy is our community prepared to pay to ensure air travel remains in the community when not all the community utilises the service?

Whilst larger regional centres and metropolitan airport operators have options available to them due to their size and patronage, many rural and remote centres have difficulty generating sufficient levels of income to pay for the operations of the airport.

In recent times airport security has been widely discussed and with the ever-increasing threat of terrorism governments are considering significant policy changes that will impact on regional airport operators. It is unclear what these decisions mean for the viability of regional airports and air services.

The following stories from the ABC provide insight into the issue of increased security and the potential impacts this may have on regional communities. The issue of added security will have an immediate

6 http://stat.data.abs.gov.au/Index.aspx?DataSetCode=ABS_SEIFA_LGA#

Page 7 of 10 impact on airport operators and if regional communities are being asked to subsidies these costs it will be a large impost on already stretched budgets. Counter-terrorism crackdown at airports could threaten regional flights

New counter-terrorism measures will soon be unveiled to improve security at regional airports, but concerns are growing the costs involved could make flights to some towns unviable.

The Federal Government's plans for major security upgrades to regional airports are expected to be announced in the next few weeks. The ABC understands the changes will include mandating more scanning of passengers and baggage at regional airports and in some more remote locations.

Earlier this year, a terrorism plot to smuggle a bomb aboard a flight at was thwarted, but it prompted the Federal Government to re-assess airport security. Regional airports were identified as a weak link and around 170 have now been reviewed. Currently, there is no mandatory screening of passengers when a plane weighs less than 20 tonnes, meaning travellers can arrive at major capital city airports unchecked.

In some regional airports, there are carriers flying larger jets that have to scan their passengers, while competitors with smaller jets flying exactly the same routes do not have to. The ABC understands this will be altered under the changes to be announced, as well as the option of full body scanners being introduced to some of the larger regional airports.

The extra scanning would be a prominent security upgrade, but not necessarily the most effective, according to experts.

"You can scan their bags but if you want to put a bomb on board, you can still do it," aviation security consultant Roger Henning told the ABC.

"You just put the parcel in as air freight, hand it over the counter, it goes on the aeroplane.

"It's a shemozzle."7

Regional air service 'already borderline'

Newly-appointed Home Affairs Minister Peter Dutton is expected to announce the changes in January, as transport safety issues have been absorbed into his new wide-reaching home affairs portfolio. That concerns Opposition infrastructure and transport spokesman Anthony Albanese, who wants safety and the needs of regional communities to be factored in alongside counter-terrorism concerns.

If the cost of new security regulations is passed on to owners and operators of regional airlines and airports, it could threaten the viability of services.

"[They] provide essentially a lifeline to the economy of those regional cities by giving access to the capital cities on a daily basis."

"These airports are vital to people who live outside of capital cities and we've been very slack indeed in terms of addressing their needs."

7 ABC news 30 December 2017, Political reporter Melissa Clarke

Page 8 of 10 He believes there needs to be a differentiation between security concerns facing major airports and the safety issues for regional and remote airports.

"It's a security risk but not a terrorist security risk. It's a risk that something will go wrong, an incident will involve an aeroplane."

Mr Dutton declined to comment.

Aviation security consultant Roger Henning agreed some of the regional air services were "already borderline, if not already, trading on the edge of absolute insolvency." e. pricing determination, subsidisation and equity of airfares;

This has been partly answered above but in addition to the comments provided thus far we acknowledge that the Federal Government supports regional commercial airlines on low volume and new routes to small and remote communities while continuing to provide reimbursements of enroute charges for aeromedical services to regional and remote areas.

Funding for the Scheme is limited to the annual financial year amounts listed in the Australian Government's Portfolio Budget Statements.

An airline wishing to apply to have a route designated as eligible under the commercial passenger services component of the Scheme or the aeromedical component of the Scheme should read the Airservices Australia Enroute Charges Payment Scheme Guidelines, familiarise themselves with the eligibility criteria and complete the Airservices Australia Enroute Charges Payment Scheme Application Form. This process applies for existing as well as new and proposed routes.

Eligible airlines flying commercial passenger routes can obtain assistance of up to 60 per cent of the Enroute charges incurred. For new routes, additional assistance of up to 100 per cent of the Enroute charges incurred is available for a period of up to three years.

Since the Scheme was re-introduced in 2014, 14 new commercial services have been established between Taree and Newcastle, Mt Isa and Cairns, Newcastle and Canberra, Sydney and Cooma, Mudgee and Sydney, Dubbo and Cobar, Perth and Onslow, Newcastle and Dubbo, Dubbo and Cobar, Armidale and Brisbane, Coffs Harbour and Brisbane, Narrabri-Moree-Brisbane, Newcastle and Coffs Harbour, and Canberra and Dubbo. Some 94 routes are currently eligible for assistance under the Scheme.

With regard to the issue of an airport head tax, in the example provided above it should also be noted that many regional airport upgrades can only be carried out via government grants or schemes. Many regional airport operators including Councils rely on this funding to upgrade their facilities, runways and other airport operations due to the airports being run at a loss or on very marginal profits.

The fact that upgrades are being subsidised by other levels of government is a form of subsidy on regional air fares. In the example provided by REX, ‘In Rex’s vast non-Western Australia network of 55 airports, around 70% of the council owned regional airports are not able to even recover the operating expenses from the airport charges. However, they understand that charging a head tax rate to cover operating expenses would make the marginal air service completely not viable’.

In this example, to ensure sufficient funds are set aside for future upgrades and capital replacement the operator has limited options including; charging a head tax to cover the true costs of operating the airport,

Page 9 of 10 borrowing funds but given the potential negative cash flow this would need to be offset by other income generators or the securing of government assistance via grant funding.

Thank you for the opportunity to provide feedback to the Inquiry. If you would like to discuss this further, please do not hesitate to contact either myself on or our Executive Officer Dom Testoni on .

Yours sincerely

Mayor Erika Vickery President LCLGA

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