International Air Services Inquiry Report Report No. 2 11 September 1998 Commonwealth of Australia 1998 ISBN 0 646 33568 5 This work is subject to copyright. Apart from any use as permitted under the Copyright Act 1968, the work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgment of the source. Reproduction for commercial use or sale requires prior written permission from AusInfo. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Legislative Services, AusInfo, GPO Box 1920, Canberra, ACT, 2601. Enquiries: Media and Publications Productivity Commission Locked Bag 2 Collins Street East Post Office Melbourne VIC 8003 Tel: (03) 9653 2244 Fax: (03) 9653 2303 Email: [email protected] An appropriate citation for this paper is: Productivity Commission 1998, International Air Services, Report No. 2, AusInfo, Canberra. 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TABLE OF CONTENTS Page Abbreviations XI Glossary XIII Terms of reference XIX Overview XXI Recommendations XXXIX 1 Introduction 1.1 This inquiry 1 1.2 The Productivity Commission’s approach 3 1.3 This report 5 2 The airline industry 2.1 Australian airlines in the global airline industry 7 2.1.1 Passengers 10 2.1.2 Freight 11 2.1.3 Non-scheduled services 12 2.2 Growth and distribution of world air traffic 14 2.3 Growth in Australia’s international air transport industry 16 2.3.1 Traffic carried to and from Australia 17 2.3.2 Major Markets 18 2.4 Demand characteristics of air travel 19 2.4.1 Income elasticity 20 2.4.2 Price elasticity 21 2.4.3 Non price effects 23 2.4.4 Yield management 23 2.5 The demand for freight 24 2.6 The economics of airlines 25 2.6.1 Economies of network size and traffic density 26 2.6.2 Comparison of productivity and costs 28 2.6.3 Vertical linkages 32 2.7 Airline profitability 33 V INTERNATIONAL AIR SERVICES 3 Regulation of international air services 3.1 History of bilateral air services regulation 37 3.2 The bilateral framework 39 3.2.1 Australia’s ASAs 41 3.3 Regulation of non-scheduled services 43 3.4 The role of ICAO and IATA 44 3.4.1 International Civil Aviation Organization 44 3.4.2 International Air Transport Association 44 3.5 State assistance to airlines 45 3.6 Application of competition policy to international air services 48 3.7 Regulation of safety 50 4 Trends in liberalisation of air services 4.1 International trends towards liberalisation 53 4.1.1 Unilateral liberalisation 53 4.1.2 Bilateral liberalisation 54 4.1.3 Plurilateral and regional liberalisation 59 4.1.4 Multilateral liberalisation 62 4.2 Recent changes to Australia’s aviation policy 64 4.2.1 Domestic deregulation and privatisation 65 4.2.2 Changes to foreign ownership and control requirements 66 4.2.3 Multiple designation and the IASC 68 4.2.4 Australia–New Zealand relations and the Single Aviation Market 69 4.2.5 Recent developments in charter and air freight policy 74 4.2.6 Privatisation of Australian airports 75 5 Australia's international aviation policy 5.1 Policy objectives 77 5.2 Economy wide approach 79 5.2.1 Need for clear policy statement 80 5.2.2 Consultation and transparency 83 5.2.3 Government handling of negotiations 87 5.2.4 Public access to air services arrangements 90 5.3 Responding to market demand 92 5.3.1 Negotiating capacity ahead of demand 92 5.3.2 Responsiveness of the policy 97 VI TABLE OF CONTENTS 5.4 Balance of benefits 100 6 Economic effects on airlines, users and the economy 6.1 Effects on airline costs 104 6.1.1 Factor costs 104 6.1.2 Input costs 107 6.1.3 Operating costs 107 6.1.4 Compliance costs 112 6.2 Effects on airline revenues 112 6.2.1 Fifth freedoms 113 6.2.2 Stopover rights and city designation 113 6.2.3 Cabotage 114 6.3 Competition among airlines 116 6.3.1 Market entry and competition 117 6.3.2 Market concentration 121 6.4 Effects on passenger airfares and services 123 6.4.1 Price competition 123 6.4.2 Non-price effects 126 6.5 Effects on users of air freight 129 6.5.1 Capacity constraints 130 6.5.2 Competition from third country carriers 131 6.5.3 Cabotage and interconnection issues 132 6.5.4 Conclusions 134 6.6 Regional effects 134 6.7 Economy wide effects 137 6.7.1 Effects on the Australian economy 138 6.7.2 Effects on the world economy 142 7 Capacity allocation and the IASC 7.1 Multiple designation in Australia 145 7.2 Has multiple designation and the IASC provided a net benefit? 148 7.3 Alternative allocation approaches 149 7.3.1 Rule based allocation approach 150 7.3.2 Public interest test approach 150 7.3.3 Market approach 151 7.3.4 The Commission’s preferred approach 153 7.4 The International Air Services Commission Act 154 7.4.1 Objectives of the IASC 154 VII INTERNATIONAL AIR SERVICES 7.4.2 General approach of the IASC 155 7.5 Policy statement of the Minister for Transport and Regional 156 Development 7.6 General capacity allocation criteria 157 7.6.1 Rationale for the tests 159 7.6.2 Costs of the tests 161 7.6.3 Objections 164 7.7 Allocation on contested routes 165 7.8 Start-up provisions 169 7.9 The use-it-or-lose-it principle 173 7.10 Renewal of determinations 175 7.11 Relationship with the ACCC 178 7.12 Conclusion 182 8 Access to airports 8.1 Australian and overseas international airports 183 8.2 Existing operational constraints on airport access 185 8.3 Pricing at airports 187 8.3.1 Efficient pricing during peak periods 188 8.3.2 Proposed changes in airport charges at Sydney Airport 190 8.3.3 Constraints on pricing 192 8.4 Slot management 193 8.4.1 Concerns with current slot management processes 194 8.4.2 Formal and informal slot markets 196 8.5 Promoting competition in airport services 199 8.5.1 Ground Handling and other ‘soft rights’ 200 8.5.2 Promoting competitive services at Australian airports 201 8.6 Conclusions 204 9 Conclusions: towards further liberalisation 9.1 The liberalisation agenda 207 9.2 International production and trade in air services 209 9.2.1 Nature of production and trade in international air services 209 9.2.2 Assistance to airlines through the bilateral system 211 9.3 Ownership and control in the designation of airlines 212 9.3.1 The problem 212 VIII TABLE OF CONTENTS 9.3.2 Ownership and airline safety 214 9.3.3 Options for reform of designation 215 9.4 Unilateral reform 218 9.4.1 The unilateral ‘open skies’ option 218 9.4.2 Effects on airlines 220 9.4.3 Consumer effects 220 9.5 Bilateral liberalisation 221 9.5.1 Strategic sequencing 222 9.5.2 Reciprocal ‘open skies’ agreements 223 9.5.3 Implementation of a reciprocal ‘open skies’ policy 228 9.6 Regional reform option 230 9.6.1 The Glenda Jackson offer 231 9.6.2 Unilateral options 231 9.7 Plurilateral open club 234 9.7.1 Characteristics of the club 234 9.7.2 Implementation 236 9.8 Multilateral liberalisation 239 9.9 The Commission’s preferred approach 241 9.10 Competition principles legislative review findings 243 Appendices A Conduct of the inquiry 245 B Competition principles agreement 253 C The Australian international air services market 255 D Australia’s international trade agreements covering air 269 services E Australia’s international air services arrangements 281 F Impact of liberalised international air services agreements 301 F1 Independent reference panel reports 337 Dr Christopher Findlay 337 Dr Ralph Snyder 338 IX INTERNATIONAL AIR SERVICES X ABBREVIATIONS ABS Australian Bureau of Statistics ACCC Australian Competition and Consumer Commission ACTO Australian Cargo Terminal Operators AGPS Australian Government Publishing Service AIPA Australian and International Pilots Association ANZAM Australian and New Zealand Aviation Market ANZCERTA Australia-New Zealand Closer Economic Relations Trade Agreement ANZSIC Australian and New Zealand Standard Industrial Classification APEC Asia-Pacific Economic Cooperation ASA Air Services Arrangements ASC Airport Scheduling Committees ASEAN Association of South-East Asian Nations ASG Air Services Group ASU Australian Services Union AWSCOT Aviation Working Group of the Standing Committee on Transport BA British Airways BIMP-EAGA Brunei, Indonesia, Malaysia and the Phillipines East Asian Growth Area BTCE Bureau of Transport and Communications Economics BTR Bureau of Tourism Research CAA Civil Aviation Authority CASA Civil Aviation Safety Authority CER Closer Economic Relations CPA Competition Principles Agreement CRS Computer Reservation System DFAT Department of Foreign Affairs and Trade DIST Department of Industry, Science and Tourism DOT United States Department of Transportation DTC Department of Transport and Communications DTRD Department of Transport and Regional Development EC European Commission EFTA European Free Trade Association EU European Union FAA Federal Aviation Authority