Monopoly in Australian Regional Air Routes - Assignment Example

Monopoly in Australian Regional Air Routes Student Name Date Institution Name Monopoly in Australian Regional Air Routes Part A: Characteristics of the Regional Air Transportation Market, and the Causes and Remedies for the Monopolistic Market International and local aviation links Australians with one another and with the world at large. The sector is central to the economy of Australia. The government of Australia, through the Aviation Department, plays a major role towards the prosperity of wellbeing and the economy of all Australians by developing a competitive, safe, and viable aviation industry. The industry is thus, regulated by the government regulatory framework and policies for the aviation industry (Kirby, 1996). Nevertheless, the Australian aviation industry has experienced turbulent times in its history. There has been a decline in international tourism following terrorism activities and contagious diseases experienced in different parts of Canada and Asia. Additionally, the domestic market has experienced serious structural changes, which have affected the domestic carriers starting from the 1990s. The chart below highlights the changes in the number of operators. In 1984, operators with RPT services were 53. The number rose to 58 in1993, but has been decreasing with time. By 2008, only 4 have offered RPT facilities. The major routes, commonly referred to as the 'domestic trunk routes', have only two airlines, down from four in 2000. In the same year, Ansett Australia and Qantas Airways controlled the domestic trunk routes with emerging entrants Impulse Airlines and Virgin Blue being restricted in the niche markets. Currently, the industry has an uneven two-airline framework, with Qantas dominating the market since it obtained the Impulse Airlines in early 2001 and the ensuing downfall of the Ansett group in late 2001 (Regional Aviation Association of Australia, 2011). Whereas Virgin Blue has speedily established its market segment, it still has less than one third of the sector. Competition levels widely vary within the international and domestic sectors. In the local trunk airline sector, the average vigorous competition, which previously occurred between Ansett, Qantas, and the emerging airlines have arisen and later on disappeared from the time the industry was deregulated in 1989. This resulted in a more restrained competition between Virgin Blue and Qantas because Qantas is the sole provider of countrywide, 'full-service' programmed services. The airline has the advantage of wide-ranging local and international frameworks and wide feeder traffic associations to overseas airlines systems through its One World Alliance membership (Kirby, 1996). On the other side, Virgin Blue does not belong to the alliance, but it offers modest services than Qantas. Its local network is far from that of Qantas. Conversely, in a low budget, cost travel niche, which Virgin Blue assisted in establishing, its competition with Qantas has intensified. In reaction to the success of Virgin Blue, Qantas is adopting measures to increase its grip of the budget travel marketplace, whereas Virgin seeks to increase beyond its leisure traveller market. The downfall of Ansett collapse has minimized competition within the regional airline industry. The regional airline QantasLink controls most routes and is the only airline on most routes. Most Ansett group former regional airlines are not associated with a network of the international alliance. However, the Virgin Blue, Regional Express established through the merger of Hazelton, Kendell, and Alliance Airlines compete in varying extents with Qantas amenities. Given that the regional airlines mainly operate intra-country services, the countries have a responsibility of economic control; most local states have liberalized their operations. The likelihood of rising competition within the local airline industry following the entry of new airlines is currently more favourable than it was previously. Even though Qantas has the probability of remaining the main player within the freight and local passenger markets, a few aspects that resulted in the downfall of previous emerging trunk route players are less destructive (Kirby & Albon, 1985). The airport terminal amenities are particularly more readily accessible to the emerging entrants given that several of Ansett terminals are free as common facilities for use. The map below displays the regional routes dominated by the key players within the industry. The facilities present relatively low prices for procuring aircraft because of the depressed nature of the airplane market favours possible emerging entrants. The open policy environment comprising the freedom of admission to local trunk routes by regional airlines, and strategies that permit foreign airlines to obtain nearly 100 per cent Australian airline equity to commence new local airline contradicts the nationwide focus by favouring emerging entrants. The future of the Australian airline industry is determined by the apparent economies of scales existing (Parliament of Australia, 2002). This is represented by the gains earned through reduced expenses from the rising size of processes within the domestic airline sector. This implies that there has to be regulation in order to avoid monopolization in the long term. Lack of efficient economic supervisory oversight within the industry has the possibility of evolving into a Qantas monopoly. High set-up and capital costs have customarily led to high costs of entry and these have augmented the market supremacy of the existing airlines, hindering competition. If such situations continue to triumph in the long term, the issue of whether the domestic market in Australia is big enough to accommodate modest supply is still questionable (Regional Aviation Association of Australia, 2011). Even though the previous two-airline legislation was not substituted with an economic regulatory regime, which is not industry-specific for air companies, the industry is a matter of the overall competition policy requirements of the Act of Trade Practices of 1974, which is directed by the Australian Commission of Competition and Consumers (Parliament of Australia, 2002). The Trade Practices Act is meant to hinder unfair competition within the industry. However, there are queries posed by some proponents over the effectiveness of the policy in protecting smaller organizations from the predatory pricing by leading companies. This is principally applicable in the current domestic airline industry, which is unevenly structured in the form of a new, comparatively sized, and modestly resourced Virgin Blue against a dominant and sufficiently resourced Qantas. The regional airline sector’s future is far-off from perfect. There is a possibility that the regional operations of Quanta will commence as a major strength. Nevertheless, the sustainability and the role of the non-affiliated, recently rationalized airlines like the Alliance Airlines and the Regional Express is yet to be recognized. While the state governments are mainly accountable for the commercial moderation of the airline sector, state policies have a major effect on its long-term outlook and structure. Qantas is efficiently guaranteed a big role in its abroad markets, even though the concentration of rivalry with Qantas differs from one marketer to the other and could upsurge if emerging Australian flag airlines access the Qantas ways (Borenstein & Rose, 2013). The ‘multiple- designation' policy of Australia means that several Australian-owned airlines can possibly control planned air passenger services within the country. The expansion of low-costing international airlines like the Australian Airlines will help in cultivating financially feasible traffic development. Their likelihood to promote more traffic through exceedingly high attractive prices is predominantly significant in the present global climate. Intensified political uncertainties and security alarm have led to stagnation of global tourism resulting in documentation of immense financial losses, long-recognized 'full-cost' carriers, especially in North America. The additional growth of low-cost global airlines will aid in countering this tendency and in supporting Australia's important tourism industry. Another aspect of the shifting airline industry in the recent past has been the withdrawal of the Commonwealth from airport operations (Kirby & Albon, 1985). Private owners who have been leased by the Commonwealth run most airports. This has resulted in an emerging framework of economic supervisory plans for such airfields. On privatizing the main airports, the state imposed price covers on Airport Company fees for the aeronautical facilities, which they provide to the airlines, but afterwards substituted the lids of a price monitoring command. Airport firms attracted criticisms within the industry for raising aeronautical costs upon lifting of the caps. They later on justified these increases on the premise that they will be applied in financing major airport investments. This includes upgrades for accommodating the new generation and large capacity, international aircraft, which Qantas as well as other international airlines will present to their Australian routes in the coming years. Continued growth in traffic in the medium term implies that the airports will be pressured into utilizing infrastructure more competently and it is apparent that the Commonwealth will commence in involving itself in tackling these challenges. There are significant competition policy matters at stake. These are closely linked with the challenges of congestion at the airport. Slot systems authorization for aircraft movement are efficient in controlling scarce airspace and airport capacity but can contain competition (Borenstein & Rose, 2013). Kingsford-Smith (Sydney) Airport is the sole Australian airfield to have a slot organization in airport capacity amongst competing carrier users. The life of Sydney KSA could be prolonged if its processes were altered because its mechanical capacity exceeds its real regulation-controlled capacity. The Australian Government has to currently show an inclination towards administrative solutions like a guaranteed figure of local carrier slots at peak seasons, control on the hourly activities, and sound curfew to commercial answers like peak-load valuing as well as the auctioning of slots. The major regional airlines are main beneficiaries of managerial regulation. Possibly, passengers of non-regional services control them. Sydney KSA is still the core airport amenity for the Australian aviation industry, regardless of growth in emerging air service paths that go through Sydney. This increases the functioning capacity of the current Sydney KSA, which apparently delays the necessity for another airport in Sydney. Part B: Pricing and Production Mechanisms for the Monopoly Pricing and production strategies employed by the regional airlines in Australia are characterized by economies of scale. Economies of scale result when increasing the production of services resulting in minimizing the regular production costs (Homsombat, Lei, & Fu, 2014). The inference of the economies is that bigger service provider will attain lower costs compared to the smaller competitors, rendering the latter vulnerable to overthrow. In due course, the effect is that without government intervention, one provider (natural monopoly) will dominate service provision. This concern underpins the economic foundation for the existing two-airline policy from their onset. Without efficient regulatory oversight in this industry, there is great potential to evolve into a Qantas monopoly. This trend has seen Quantas, which has higher economies of sales setting up costs and using their high capital to increase their grip on the market and in the process avoiding competition (Australian Government, 2001). These circumstances have in the long term led to doubts about whether the local Australian market can sustain the markets. Pricing strategies such as QantasLink encompasses different subsidiaries of southern, Sun State, and Eastern Airlines, which dominate the local routes, operating in 55 towns and cities. Impulse Airlines, a subsidiary of the Qantas Airways Limited, manages QatasLink, which operates several Boeing 717 planes. These comprise central routes and other leisure-oriented trunk ways. The pricing strategy employed by Qantaslink has recently been used in creating a monopoly as the sole service provider on numerous research and regional routes. The strategy assisted the airline to push successful their competitors out of cities in which entered (Kirby & Albon, 1985). For instance, the Impulse Airlines while it was still a small local turboprop function, and seemed to attain a free pass. This went a long way in eliminating all the new entrants with capacity dumping and price-cutting. As a recent network expansion mechanism, Virgin Blue now offers links between the regional centres and the state capital. Nevertheless, this does not imply the end of the regional airline competition. Curbing the Monopoly Behaviour The Australian government has committed in developing a liberalized system of air services in order to free up the economic structure of the industry. For instance, the government has enhanced the Trans-Tasman route in order to benefit all carriers through an 'open skies' objective (Parliament of Australia, 2002). Whereas the state government is considering the primary responsibility for regulating this, state policies can assist in establishing long-term outlook and structure. Some state governments enforce economic regulation of the interstate ways, while the Australian Competition and Consumer Commission monitor the nation’s competition within the industry in line with its general trade responsibilities and practices. From the collapse of the Ansett group, and the recreation of a few regional airlines as sovereign firms, the industry is concerned about the current arrangements and their sustainability. Appeals have been forwarded to the state to come up with coherent nationwide strategic structures for the airline sector, which defines regional sector’s role. This includes the adequacy of regional air services within Australia, and the role of main air transport airlines in offering regional services. There Commonwealth Government has established two aspects in the domestic airline policies. These policies form the structure for governing domestic carriers. First, the Commonwealth policy offers no limits on freedom of admission into domestic trunk ways by local airlines (Borenstein & Rose, 2013). Nevertheless, federal cabotage constraints such as the government policy tools, which guarantee that only the Australian-based carriers carry local freight and passengers and that alien-owned carriers do not transport domestic passengers on local industry of their international services. In the aftereffects of the collapse of the Ansett, the Government shortly relieved cabotage limitations. In addition, individual States enforce several restrictions on entering the interstate ways. Some state governments manage route entries. For instance, New South Wales and Western Australia. This will ensure that there is stability in service provision, and financial viability. However, in other states like South Australia, entry and exit is free. The past Ansett group subsidiary, the SkyWest, has been given a monopoly on several of its interior Western Australia ways in securing financing to improve its airplane fleet (Homsombat, Lei, & Fu, 2014). This is in line with the commendations of the assessment and reviews of the efficiency of air facilities in Western Australia. ‘The Centre for Asia-Pacific Aviation and Tourism Futures International’ assumed this duty of assessment (Australian Government, 2001). This body recommended that the Western Australian Government allow more competition due to the danger of the loss of normal air services to numerous towns within the State. The Commonwealth policies offer no industry economic regulation. For instance, in the competition policy area, despite demands for industry-specific moderation, the ACCC has a responsibility of regulating the enforcement and oversight of competition. In terms of subsidies and fares, there is no federal moderation rather than the indirect generic conducts of business provisions of the Act of Trade Practices (Australian Government, 2001). This increases the queries of the impact of deregulation on fare levels. The significant expansion in the actual average proceeds of Australians in the last decades combined with a reduction in real airfares, suggests that the affordability of airfare has improved remarkably. Currently, more Australians can manage to fly because their earnings are greater relative to the fare levels. Nevertheless, this does not ordinarily imply that the attractiveness of travel by air has improved in relation to other modes of transport. The continued prompt development in inter-regional and inter-capital road links, the tendency fall in real improvements and motoring costs in local rail services in several areas serves to make inter-modal competitiveness more vigorous. The Commonwealth government also offers adhoc subsidizations to county airlines after the collapse of the Ansett group under the Scheme of Rapid Route Recovery, which cost 11.3 million dollars. Foreign investment procedures permit foreign airlines to obtain up to 100 % of the equity within any domestic Australian airline, or to commence a new local airline, except if this contradicts the national interest. Through this policy, Air New Zealand obtained its initial fifty per cent stake of Ansett Australia in 1996, as well as full possession of the airline by 2000. Nevertheless, it had to restrict its stakes in Ansett International to fifty per cent for the international body to maintain its Australian status underneath the system of bilateral air service. A notable exclusion to this rule is associated with the Qantas. Under this act, the Commonwealth Government inhibits alien investment in Qantas under several provisions as, control of 49 % on collective foreign stakes to ensure Qantas maintains its Australian roots, a cap of 35 % on cumulative foreign airline equity capitals, as well as a cap of 25 % on any foreign person possessing share capital. Qantas has claimed that the 49 % alien ownership, control should be removed so that it can finance expansion. However, the Government opted to retain the contraction by considering Qantas as a special situation (Borenstein & Rose, 2013). In conclusion, the Australian Aviation industry has an uneven two-airline structure, whereby Qantas dominates the market, while Virgin Blue has rapidly increased its market share. In the local trunk carrier sector, the competition, which previously existed between Ansett, Qantas, and the emerging airlines, has risen. Additionally, the regional airline QantasLink controls the market. Without efficient regulatory oversight in this industry, there has been a great potential of the market evolving into a Qantas monopoly. This tendency has seen Qantas, setting up costs and using its high capital to increase their grip on the market to avoid competition. In order to curb the monopoly behaviour, the government has improved the Trans-Tasman route in order to benefit all airlines. Some state governments impose economic regulation to monitor competition within the industry. References Australian Government, (2001). Regional and remote aviation. Retrieved from: http://www.infrastructure.gov.au/aviation/regional/ Borenstein, S., & Rose, N. L. (2013). How airline markets work or do they? Regulatory reform in the airline industry. In Economic Regulation and Its Reform: What Have We Learned? USA, University of Chicago Press. Homsombat, W., Lei, Z., & Fu, X. (2014). Competitive effects of the airlines-within-airlines strategy–Pricing and route entry patterns. Transportation Research Part E: Logistics and Transportation Review, 63, 1-16. Kirby, M. G. (1996). Airline Economics of" Scale" and Australian Domestic Air Transport Policy. Journal of Transport Economics and Policy, 339-352. Kirby, M. G., & Albon, R. P. (1985). Property Rights, Regulation and Efficiency: A Further Comment on Australia's Two‐Airline Policy. Economic Record, 61(2), 535-539. Parliament of Australia, (2002). Australian airline industry. Retrieved From: http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp0203/03RP10 Regional Aviation Association of Australia, (2011). The regional aviation industry. Retrieved from: http://www.raaa.com.au/issues/the-industry.html Read More