Airline economics 100

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.

The ambitious new airline was allocated arguable the worst airport gates, in the least attractive sections of domestic terminals across the country. The Keating Government saw that Compass would operate from the international terminal at Perth airport, thereby inconveniencing the bulk of its passengers.

Due to constant problems, the government's airline safety watchdog, the Civil Aviation Authority effectively forced the airline to cease trading on the 20^th of December 1991; just days before the revenue rich Christmas holiday season. In the process, the government delivered a great deal of pre-Christmas cheer at Coward Street Mascot.

You could be forgiven for thinking Keating worked for Qantas as his behaviour was not in the interest of the Australian flying public. (As an aside it is worth noting that the National Leader for a period in John Howard's government, John Anderson, was too so one eyed one could be forgiven for thinking he was the Member for Qantas, and not for Gwydir, NSW).

Unable to stay airborne given many government made hurdles, Compass I and later Compass II were soon enough dead and buried, leaving Ansett and Australian as the sole remaining players. In effect, the industry was flying back in time.

The Two Airline policy was in force once again.

In 1992, for reasons best known to themselves, the economic vandals in the Keating government decided to fold 100 percent of TAA now rebranded Australian Airlines into Qantas. Thereby granting Australia's international carrier a domestic pawprint overnight and allowing it to leverage its huge bulk against the far smaller Ansett. A true David versus Goliath struggle. Qantas outspent and out-marketed Ansett on both domestic and international routes, using every tool a dominant player can muster. I clearly recall flying to Shanghai on one of Ansett's few long haul jets, just before the airline closed down. The flight was memorable for the exceptional service and sadly the very few passengers.

Then Treasurer Keating proceeded to offload 25 percent of Qantas to British Airways before selling the balance of Qantas to the public. By the spring of 1993, Qantas and Australian were operationally merged into the near monopolistic colossus it remains today.

Ansett's collapse soon after 9/11 only suspended the Two Airlines Policy for a short time, until Sir Richard Branson's Virgin Blue shocked Qantas from its joyful monopolistic position by fast tracking its operations, which began a year earlier in 2000.

Why Keating didn't put the public interest first by selling Australian Airlines to a well-managed and robust foreign carrier like Singapore Airlines and then allowing both Qantas to enter the domestic market and granting Ansett international rights, in order to maximise competitive aviation tension both within and without Australia is just one more of Paul Keating's long list of unexplained misdeeds.

The longer Tiger sits grounded, the higher the stock prices of Qantas and Virgin Australia will soar, in the knowledge that domestic fares will rise in proportion to the erasing of competition.

Let there be no mistake: the incapacity or the death of Tiger means a boon to Virgin Australia and Qantas (as well as its subsidiary Jetstar) and a king hit to travellers who should expect airfares to rise and load factors to improve (for you and me that means a more crowded jet).

What we really need is a commitment for someone in the Labor/Green Coalition to come out and defend the interests of consumers by encouraging competition in air services. Maybe Sen. Brown is up to the task; given Labor's Chris Bowen's history in defending consumer rights is a disappointment to say the least.

Credit Suisse analysts questioned Tiger's longevity in Australia, given it could make more money per aircraft in Asia compared with continuing losses in this country and noted how its pricing was 'disruptive to the leisure market". This is jargon for setting prices in tune with consumers' demand rather than stock market analysts' carefully calibrated profit maximising preferences.

Macquarie Equities analyst Russell Shaw estimated that the grounding of Tiger's 10 A320s would cost the company at least $2 million a week in non-flying costs, with no revenue offset. Macquarie upgraded its recommendation for Virgin to "outperform" on the back of the Tiger developments.

Once again, the industry has flown backwards. Back to the time considered the 'natural' state of Australian aviation, when the skies were open to the duopoly: TAA and Ansett or Australian/Qantas and Ansett.

Until further notice, domestic aviation is still a duopoly, with only Virgin Australia standing between much buffeted consumers and the very poor corporate citizen called Qantas.