Kun hee Chang, Natalie Stianos and Peta Stevenson
On 26 August 2024, the Federal Government published its “Aviation White Paper: Towards 2050” (White Paper), and Treasury’s Competition Taskforce published the report “How competition impacts prices: the Australian aviation sector” (Aviation Report). Together these documents provide an important insight into how the Government is considering competition in the industry, and upcoming changes.
This post summarises the context in which these documents have been published and sets out the key findings and recommendations. The key takeaways are:
- Competition in the aviation sector is a key focus area for the Government, which is proposing a variety of reforms to strengthen competition.
- Competition in the aviation sector has increased over the past decade, however the liquidation of Bonza and administration of Rex, combined with the consolidation by each of Qantas and Virgin Australia post-COVID, threatens to weaken competition.
- Increased competition in the aviation sector benefits consumers through lower airfares and better consumer experience.
What’s happened?
The aviation industry has had a turbulent 18 months, being the subject of numerous high-profile incidents, and increased scrutiny.
There has been a notable tightening of the belt by the ACCC in airline merger and coordination requests:
- In November 2022, Qantas’ proposed coordination agreement with China Eastern Airlines was withdrawn after the ACCC indicated strong headlines to the proposal.
- The same month, the codeshare agreement between Qantas and Emirates was renewed subject to price and capacity monitoring.
- In April 2023, the ACCC opposed Qantas’ proposed acquisition of FIFO operator Alliance Airlines.
- The next month, the regulator denied Virgin Australia’s proposal to jointly tender for and supply FIFO services with Alliance Airlines.
And the activity has not stopped there:
- In July 2023, the Department of Infrastructure, Transport and Regional Development (DITRDCA) blocked a bid by Qatar Airways for an additional 28 flights a week into Australia. A subsequent Senate inquiry recommended that the Government review its decision.
- In August 2023, the ACCC commenced proceedings against Qantas, alleging that Qantas was advertising “ghost flights” which it had already cancelled. Qantas reached an agreement with the ACCC in May 2024, admitting that it had misled consumers and agreeing to a penalty of $100 million.
- In October 2023, the Government directed the ACCC to monitor domestic air passenger services, complementing the ACCC’s existing role in monitoring competition at certain airports.
- In February 2024, the Government announced that it would reform the slot management scheme at Sydney airport to address concerns of anti-competitive behaviour and a potential conflict of interest for the slot manager.
- Finally, in 2024, both Bonza and Rex were placed into voluntary administration, with Bonza being liquidated in July 2024, whilst Rex continues limited operations with an uncertain future.
Government White Paper
The White Paper, published by DITRDCA, sets out the Government’s policy aims in the aviation industry for the next 25 years.
A “plane” lack of competition
The White Paper acknowledges that the Australian aviation industry is highly concentrated, with the Qantas Group (including Jetstar) holding a 61.8% market share and Virgin Australia 31.3%.
The Government has adopted a ‘light-touch’ approach to aviation regulation since the sector was privatised. The White Paper maintains that this remains the appropriate approach, but concedes that incremental reforms are necessary.
Consumer experience nosedives
The White Paper examines the worsening experience for consumers in the aftermath of the pandemic, which the paper partly attributes to a lack of competition.
To address this issue, the Government is introducing the aviation industry ombuds scheme (AIOS). The AIOS will provide independent dispute resolution mechanisms and monitor the performance of the aviation sector.
The scheme will have the power to investigate complaints against airlines, and compel airlines to provide remedies to customers. It will also publish independent reports on the management of complaints by airlines, and can make recommendations to the Government. In cases of systemic misconduct, it may report airlines to the ACCC. Additionally, airlines will be required to report reasons for delays and cancellations.
The Government will also introduce the Aviation Customer Rights Charter. This charter will set out the minimum standards of customer service required, and provide customers greater certainty about their rights.
Sydney Slot Management Scheme
The White Paper proposes a number of reforms regarding Sydney Airport’s slot management, including new governance arrangements for the slot manager and a stronger compliance regime.
Changes to the compliance regime include:
- appointing independent members to the Compliance Committee
- adopting a broader definition of slot misuse which will enable improved enforcement
- providing greater powers for monitoring and investigation of non-compliance
- adopting new penalties which punish anti-competitive behaviours such as requesting extra slots which the operator does not intend to use
- transferring responsibility for the compliance framework away from the Compliance Committee to the Government, and
- undertaking independent audits with public results to better detect and deter anti-competitive behaviour.
With respect to the slot manager, the Government agrees that there should not be a perceived conflict of interest for the slot manager (majority owned by Qantas and Virgin Australia), which allocates access to a critical piece of national infrastructure. The Minister of Transport has announced a selection process for a new manager, under which actual and perceived conflict of interest will be a key consideration.
Competition Taskforce Aviation Report
In August 2023, the Treasurer announced that the Competition Taskforce would undertake a review into the Government’s priorities for modernising the Australian economy in key sectors. One such sector is aviation. The Aviation Report published by the Taskforce last month is a deep dive into how competition in the aviation sector has evolved.
The Aviation Report confirms many of the findings from the White Paper with respect to the competitiveness of the aviation sector, with the key takeaways being:
- There is a strong link between the degree of competition and airfares across the aviation network.
- Generally, the presence of an additional airline on a route can reduce airfares by 5-10%.
- Competition in the aviation sector is estimated to have saved consumers between $27.2 billion and $35.2 billion over the period between 2010 and 2023.
- Competition has a positive impact on the aviation industry and results in better outcomes for passengers, such as lower prices, and higher quality offerings.
Competition has grown in the aviation sector over time
The Aviation Report examines the competitive landscape in Australia and how it has changed over time. Australia has two large legacy carriers, Qantas and Virgin Australia. In 2010, Qantas (excluding Jetstar) and Virgin Australia had 70% market share of domestic flights. This is markedly different to European and North American markets where low-cost carriers (LCCs) have far greater market share.
The report found that between 2010 to 2023, competition has increased, with LCCs in Australia increasing their market share over time:
- LCC market share has increased from 27% to 37%;
- the average number of airlines on the top 200 routes increased from 2.4 to 2.8; and
- the share of top 200 routes with only 1 airline has decreased from 39% to 19%.
However, COVID was a major disruption and allowed incumbents to stabilise market share. Since then, LCCs have regained some of their market share but the level of growth has slowed compared to pre-COVID.
Despite this, the competitive threat of LCCs continues to increase. With the exit of Bonza and administration of Rex, it is clear that the Australian aviation industry is subject to regular periodic entry and exit by airlines. However, the report suggests that this isn’t necessarily an issue to the quality of competition, as long as the threat of entry remains. The report found that generally, where the threat of entry by other competitors is lower, then airfares have tended to rise.
What’s next?
These papers together highlight the Government’s continued focus on the aviation sector. The next steps will be for the Government to finalise and implement its proposals.
The ACCC will continue its quarterly reports into the major domestic airlines until at least December 2026, with the possibility that the Government will extend or expand the scope of these reports. Through the ACCC’s continued monitoring of the aviation sector, we will be able to assess whether the Government’s reforms successfully improve competition in the aviation sector.
Separately, the Productivity Commission periodically undertakes inquiries into the economic regulation of airports to assess whether additional regulation is required to encourage competition and efficient pricing. Whilst the focus of the next inquiry has yet to be announced, it would provide the Productivity Commission the opportunity to evaluate the effectiveness of these reforms.