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Airline economics 100

By Jonathan J. Ariel - posted Wednesday, 10 August 2011

To the thousands of holiday makers stranded at one of Australia's many overpriced and understaffed privatised airports, the inconvenient and indeterminate grounding of Tiger Airlines means more than just the removal of an allegedly unsafe carrier from Australia's skies. It means more than the removal of a low fare airliner from the hangar of domestic options. It means the erosion of competition and the realisation by the flying public that the Big Two, Qantas and Virgin Australia, will have less impetus to compete and more reason to inconspicuously collude.

That's the very definition of how a duopoly acts.

The story of airline competition in Australia is as sad, as the understanding of consumer rights by our politicians is shallow. Both sides of politics are equally guilty of wanton ignorance of just how un-free so-called called "free markets" are or guilty of doing the bidding of the duopolists. Just as there is no free lunch, it's the taxpayers who have been footing the bills year after year by way of needlessly high airfares.


Frankly speaking, examining the way Paul Keating privatised airlines and John Howard privatised airports, you got to wonder: are politicians' economic numbskulls or are they in the pockets of lobbyists? Take your pick. Either scenario speaks appallingly of the calibre of our elected trough swillers.

Let's take a short history lesson on Australian aviation, shall we?

The First and Second Chifley (Labor) ministries established Trans Australia Airlines in 1947, after passing legislation establishing TAA in 1945. It was Labor's intention that TAA would be monopoly national carrier, subsuming all the routes flown by the dominant domestic carrier at the time, Australian National Airways. Regrettably for Labor, a challenge to the monopolistic hue of its legislation was successful in the High Court.

Five years later, in 1952, Prime Minister Robert Menzies formalised the arrangement barring new players entering the lucrative trunk routes of Brisbane-Sydney-Melbourne-Adelaide-Perth with the Two Airlines Policy, that took practical effect when Ansett purchased the failing Australian National Airways in 1957. This resulted in there being only one competitor for the government-owned TAA on the major routes.

This policy seriously limited growth and expansion opportunities for the airlines without government approval.

Flight numbers and schedules were strictly controlled, and TAA and Ansett invariably had flights departing airports for the same destination at exactly the same time with exactly the same equipment. The policy was so strict that even newly purchased identical aircrafts (one from each airline) were required on their delivery flights to enter Australian airspace at exactly the same time. Laughable isn't it?


By the end of the 1980s, there was some thought that the Two Airline Policy had outlived its usefulness and a radical shake-up of the industry was undertaken, influenced in part by the 1989 pilots' strike.

The early 1990s were essentially the sunset years for TAA/Australian. The Hawke/Keating governments, although technically having deregulated the domestic aviation sector, made it effectively impossible for a new entrant Compass Airlines to succeed. In 1987 the Labor Government announced that the then government-owned domestic air terminals that would be effectively privatised and leased to TAA and Ansett. Compass, a threat to the TAA/Ansett duopoly, was granted severely limited access to aircraft parking gates.

Medically speaking, it was as if instead of the Federal government treating a disabled Compass in the Emergency Department, the government ignored the airline for a period of time, letting its condition steadily deteriorate.

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About the Author

Jonathan J. Ariel is an economist and financial analyst. He holds a MBA from the Australian Graduate School of Management. He can be contacted at

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