In a submission to the Senate Rural and Regional Affairs and Transport Committee’s inquiry into the operation, regulation and funding of air route service delivery to rural, regional and remote communities, Virgin Australia said regional services were more challenging from an economic perspective compared with routes between capital cities, given the difficulties of achieving economies of scale.
“Virgin Australia is aware that some regional communities hold a perception that airlines are seeking to earn unreasonable returns in setting airfares on regional routes and/or that airfares on such routes are cross-subsidising pricing on trunk routes,” Virgin Australia said.
“As many of the regional routes we serve do not deliver acceptable commercial returns at current levels of pricing, this perception is inaccurate.
“As with all routes we serve, the sustainability of our regional services relies heavily on our ability to match the capacity we deploy with the demand for our flights, as well as the effective management of costs.”
The Virgin Australia submission noted the special arrangements for regional flights at the busy Sydney Airport, where a certain number of slots are dedicated to regional flights during the morning and afternoon peak.
It said these regulatory restrictions were preventing the expansion of services on regional routes with latent unmet demand.
The Virgin Australia submission said there were 42 fewer slot pairs available for regional services in 2017 between 0700-0900 and 1700-1900 in 2017, compared with 2001, a decline of 10 per cent.
“This has created a situation where the availability of slots at Sydney Airport for NSW regional services in the morning and afternoon peak periods is extremely limited,” Virgin Australia said.
“Timings in these periods are necessary for the operation of viable services by airlines, as they enable day trips to be undertaken by travellers originating both in Sydney and regional communities. Accordingly, the current legislative arrangements equate to less competition, fewer choices and potentially higher airfares on routes between Sydney and destinations in regional NSW until Western Sydney Airport becomes operational.”
Sydney Airport said in its submission to the inquiry 28 per cent of slots in the morning peak between 0600 and 1100 and 35 per cent of slots in the evening peak between 1500 and 2000 at Sydney Airport were allocated to regional services.
However, it said although the “Permanent Regional Services Series” slots, also known as a “regional ring fence”, was designed to support regional aviation, it had the unintended impact of disincentivising airlines to operate regional services.
This was because while a domestic airline was able to move from operating an interstate flight to a regional flight, once it did so it was unable to move to once again use that slot to operate an interstate route.
“Therefore, a disincentive exists to use the slot to operate the regional service in the first place, as doing so limits the airline’s ability at a later point in time to use that slot in line with demand and where they will achieve a commercial return,” Sydney Airport said.
Qantas described regional aviation in Australia as “operationally and commercially difficult” in its submission to the inquiry, given the inelastic demand profiles of many regional markets due to low populations and limited tourism appeal, as well as the high costs associated with flying to regional airports.
It told the committee passenger service charges were on average $16 per passenger for airports in New South Wales, South Australia, Tasmania and Victoria, compared with $25 in the Northern Territory, Queensland and Western Australia.
Moreover, 13 of top 15 most expensive airports in Australia that Qantas flew to were in WA and Queensland.
“Regional airports – particularly in regional Queensland and Western Australia – are by far the most expensive in the group’s network, charging significantly more than their capital city equivalents.”
“Whilst airfares in regional Australia may be higher than between major population centres, due to the confluence of supply and demand challenges, these services are not significant profit centres for the group.”
The peak industry body Airlines for Australia and New Zealand (A4ANZ) said airport charges represented a “significant proportion of airfares”, particularly on regional and rural routes.
The A4ANZ submission said Australian airports collected more revenue per passenger and generated significantly higher profits than their international benchmarks.
“In some cases the charges add more than 30 per cent to the base ticket price,” A4ANZ said.
“Indeed, one of biggest roadblocks to the airlines’ ability to introduce new and grow existing routes is high airport charges.
“Greater oversight by government to encourage and, where required, force constructive, commercial engagement is needed to minimise the negative impact of the airports’ monopoly powers.
“The threat of regulation would result in a genuine commercial negotiation, greater investment by airlines and improved efficiency in the allocation of resources.”
“Therefore, over the 16 years to 2017, regional aeronautical charges at Sydney Airport have fallen in real terms by 49 per cent,” Sydney Airport said.
“Therefore, any increases to airfares on regional routes cannot be attributed to Sydney Airport charges.”
Australia’s two major airline groups also reiterated their opposition to giving foreign airlines the right to operate domestic routes – aviation cabotage – arguing it would do nothing to boost air services to regional communities.
The issue of aviation cabotage has been raised a number of times in recent years, including in 2015 when the federal government considered opening up some domestic routes in northern Australia for foreign carriers.
The government’s 2015 Competition Policy Review, led by Professor Ian Harper, recommended removing cabotage restrictions for “all air cargo as well as passenger services to specific geographic areas, such as island territories and on poorly served routes”.
Then, as now, it was opposed by Qantas and Virgin Australia.
Qantas said aviation cabotage would “destabilise Australia’s aviation market with far-reaching impacts on the commercial and operational viability of Australia’s aviation network”.
“The group is opposed to aviation cabotage in all circumstances,” Qantas said.
“The group bases its strong opposition to aviation cabotage on the significant adverse consequences for Australia’s workforce and broader economic interests.
“There is no data or credible evidence demonstrating aviation market failure on regional routes that warrants moves towards cabotage.
“The presence of carriers operating on Foreign Air Operator Certificates would lead to a reversal of current safety arrangements applicable to domestic aviation. The domestic travelling public could not be assured the same high safety standards as foreign airlines operate under foreign safety regimes.”
Virgin Australia said removing cabotage restrictions would have “far-reaching consequences for the long-term sustainability of the Australian aviation and tourism industries”.
Further, the airline said cabotage represented “an opportunistic play for foreign carriers without a long-term commitment”.
“Operating alongside Australian airlines, foreign carriers would earn marginal revenue by offering capacity that could be priced at levels lower than the average cost faced by domestic airlines on these sectors,” Virgin Australia said.
“Over time, this could be expected to lead to network rationalisation by local operators, with aircraft redeployed to higher-yielding routes.
“This would come at a cost to tourism in regional areas, as domestic airlines play a key role in terms of investment in marketing and promotional activity.”
