The spatial effects of domestic aviation deregulation: A comparative study of Australian and Brazilian seat capacity, 1986-2010 KOO, TAY LOHMANN, GUI This is an abridged version of the paper presented at the conference. The full version is being submitted elsewhere. Details on the full paper can be obtained from the author. The spatial effects of domestic aviation deregulation: A comparative study of Australian and Brazilian seat capacity, 1986-2010 KOO, Tay; LOHMANN, Gui The spatial effects of domestic aviation deregulation: A comparative study of Australian and Brazilian seat capacity, 1986-2010 Abstract The aim of this paper is to examine the link between the volatility of aviation policy and the spatial evolution of air transport supply. We focus on the domestic aviation sector of two comparative cases – Australia and Brazil – each of which represents a large continental country with contrasting levels of policy volatility. We apply generalized entropy indices to measure the changing spatiality of air transport seat capacity over a 25-year period (1986-2010). We find evidence of a correlation between air transport policy volatility and spatiality. The study finds that the spatial evolution of Brazilian air transport capacity is governed by variations among very large airports, which are often subject to policy and regulatory intervention. In contrast, the distributional pattern of Australian airports was relatively stable and characterized by gradual and consolidative changes. Keywords: air transport policy volatility; spatial effects of aviation deregulation; Australia; Brazil; generalized entropy index 1. Introduction Globally, the new geography of air travel has been shaped by a number of forces, including the changing location of air travel demand, aircraft technology, capacity constraints in major airports and deregulation/regulation (O’Connor 2003, Derudder and Witlox 2009, Bowen 2010). In particular, spatial effects of aviation policy have been closely examined in the research literature; namely, from the perspective of accessibility (Chou 1993), the core-periphery pattern of development (Goetz and Sutton 1997), evolution of low-cost airline networks (Reynolds-Feighan 2001, Dobruszkes 2006), regional economic development (Papatheodorou and Arvanitis 2009), emergence and consolidation of airport hierarchy (Thompson 2002) and impacts on tourism (Costa et al., 2010), among others. Research in this domain encompasses, to a varying degree, the cause-effect relations between aviation policy (especially deregulation) and the spatial evolution of air transport. In regards to the spatial effects of aviation policy, differential experiences across geographic contexts are expected as the political and operating environments vary for airlines in different countries (e.g., Huber 2009, Shaw et al. 2009). Deregulation policy is formulated and implemented differentially in various countries, and this difference in contexts complicates the analysis of the spatial effects. One key contextual difference is volatility in aviation policy – defined here as the rapidity in which policy change from one direction to another (such as from deregulation to re- regulation). For example, Hooper (1998) shows that the Indian government often changed its regulatory guidelines at short notice, and partially contributed towards creating an environment that required continuous intervention after deregulation. 13th WCTR, July 2013 Rio de Jeneiro, Brazil 1 The spatial effects of domestic aviation deregulation: A comparative study of Australian and Brazilian seat capacity, 1986-2010 KOO, Tay; LOHMANN, Gui Developing nations where issues such as low air traffic density, infrastructure shortages, governmental financial constraints and lack of private investments are preponderant (Fayed and Westlake 2002) might expect greater policy uncertainty and volatility. This is supported by studies from other developing regions of the world, including countries in Africa (Akpoghomeh, 1999; Pirie, 2006), South America (Lipovich, 2012) and Southeast Asia (Rimmer, 2000). Against this background, this paper aims to examine the link between policy volatility and the spatial evolution of air transport supply. In the absence of an experimental design, the study focuses on two comparative cases, each representing contrasting levels of policy volatility. This paper provides an interpretative account of correlative evidence based on generalized entropy indices and the Gini index. Additionally, the paper adds to the existing body of research by introducing Australia and Brazil as comparative cases – two neglected regions in the study of the spatial effects of deregulation. 2. Domestic aviation in Australia and Brazil Comparative analyses have been widely employed in air transport studies, addressing airlines (Barbot et al., 2008), airports (Nijkamp and Yim, 2001; Oum et al., 2003; Wang et al., 2004), networks (Reynolds-Feighan, 2010) or countries as a whole (Lohmann et al., 2009). The similarities and differences between Australia and Brazil provide an opportunity to explore the reality of domestic aviation in two similarly large countries with respect to their geographic size as measured by their surface areas. The World Economic Forum Tourism and Travel Report (2009) shows that Australia exhibits the characteristics of a developed economy given its high GDP per capita, a population with a relatively high propensity to fly and a higher ranking in air transport infrastructure quality, among other indicators (Table 1). Both nations commenced deregulation of the domestic aviation sector around the same time period (Australia in 1990 and Brazil in 1992), which is useful for comparative purposes. However, in the years following deregulation, the two nations developed very different domestic aviation policy trajectories. These are briefly described below. Table 1 Key indicators: Australia and Brazil (source: compiled from World Economic Forum 2009). Australia Brazil Population (million) 20.6 191.3 GDP/Capita (US$) 36,225 9,703 Surface area (1,000 square km) 7,741 8,514 Quality of air transport infrastructure (world rank)* 19th 101st Airport density (airport per million people, world rank) 7.3 (4th) 0.6 (78th) Departures per 1,000 population (world rank) 17 (22nd) 3 (62nd) Domestic ASK (world rank) 1,388m (5th) 1,354m (6th) Note: *Based on Executive opinion survey (2007‐2008) (WEF 2009) In order to provide a systematic comparison of domestic aviation environments between Australia and Brazil, the following subsections discuss key considerations such as deregulation, competition, airport policies and safety issues in the period 1986-2010. 13th WCTR, July 2013 Rio de Jeneiro, Brazil 2 The spatial effects of domestic aviation deregulation: A comparative study of Australian and Brazilian seat capacity, 1986-2010 KOO, Tay; LOHMANN, Gui 2.1 Australia 2.1.1 Deregulation and re-regulation In October 1990, the Australian government-enforced duopoly on inter-state domestic aviation terminated. Constraints were removed from control of aircraft imports, the capacity allowed and supplied on trunk routes by airlines, the abolishment of the Independent Air Fares Committee in setting fare levels, and the entry/exit barriers to domestic trunk routes (BTCE 1991). 2.1.2 Competition During the period analyzed, domestic air transport competition in Australia can be divided into four main stages: • First wave of entry: 1990-1993 (Compass I and Compass II entry and exit within one year of operation); • Duopoly: 1994-1999 (Ansett and Trans-Australian, acquired by Qantas in 1996). It is argued that despite the failure of two new entrants, their effect on competition perpetuated because it fostered greater competition between the two incumbents (Sinha 2001); • Second wave: Impulse (1994-2000) and Virgin Blue (inaugurated in 2000) entered with a low-cost model. Impulse was absorbed by Qantas in 2000, while Virgin Blue was successful in cementing a position in the domestic aviation market, partly helped by the collapse of Ansett in 2001; • Third Wave: three more carriers entered the market (OzJet, Jetstar and Tiger) of which Jetstar (in 2004, as a subsidiary of Qantas) and Tiger (in 2007) cemented positions in the domestic market alongside Qantas and Virgin Blue. Forsyth (2001) has shown that Australian domestic airlines have improved in productivity during the 1990s and argued that the gains have been passed onto consumers, despite limited competition. While the same cannot be said for the years 2000-2010 due to data limitations, the combination of strong competition and the proliferation of low-cost carrier services (and the longevity of their presence in the market) may be indicative of improvements in airline efficiency. 2.1.3 Airport policies As part of a series of microeconomic reforms in many sectors of the economy, the Federal Airports Corporation (FAC) was established by the Australian federal government in 1988, administering 22 airports in the country (Hooper et al., 2000). All major airports managed by the FAC were eventually privatized in 1997 and 1998; Sydney airport, in 2002 (Kain and Webb 2003). Pricing caps were removed on aeronautical charges in most airports in 2002, while pricing reforms also took place in the air traffic control and airspace management services provided by Airservices Australia, which involved shifts toward user-based and cost-reflective pricing strategies (Kain and Webb 2003). 2.1.4 Safety Between 1999 and 2008, accidents (both fatal and non-fatal) fluctuated between