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Airlines won’t sabotage cabotage deals

WA Business News editor Mark Pownall takes a look at the issues involved with proposals to deregulate our skies.

 

CABOTAGE is the term to describe the rules that restrict international carriers from offering a domestic service.

For instance, if a Singapore Airlines plane stopped off at Broome before flying on to Sydney, it could not pick up domestic passengers looking for a return flight to the east.

This market restriction operates in Australia as it does in many parts of the world, including the giant US market, though evidence would suggest it does nothing to improve competition in those markets.

In the US, several major airlines are experiencing financial difficulties – and not just because of terrorist attacks – while in Australia’s skies we had the catastrophic failure of New Zealand-controlled Ansett before the arrival of Virgin, another airline with a big foreign ownership component.

Even Qantas, which stands to gain the most out of this protection, is 25 per cent UK-owned.

Ask almost anyone in the airline industry (or loosely connected to it) about cabotage and most are immediately defensive.

Some commentators are doomsayers who believe that altering such a system would jeopardise the stability of our air markets and threaten domestic travel in the longer term.

Most, though, simply think that deregulating our air market to allow international carriers to pick up and transport domestic passengers simply wouldn’t work because there isn’t the demand, the planes, destinations or the appropriate scheduling.

The latter answer makes you wonder why we need the rules at all – to protect incumbents from competitors that would never bother entering the market?

As for the former argument, it may well be the case that new entrants would seek to cherry pick certain profitable routes – but that is the nature of competition, and it’s meant to benefit the consumer.

Such destabilisation has occurred in many industries, such as telecommunications, media and banking, all to the benefit of users.

On the domestic front, both Virgin Blue and Qantas are regarded as extremely profitable airlines.

I am uncertain just how this benefits the traveller– but I have never noticed the National Competition Council use the profitability of the incumbents as a valid reason for allowing protection from competitive forces.

The NCC argument is that it is there to ensure the conditions for competition exist, not that competition exists.

However, cabotage also has its defenders outside the airlines, among them the tourism industry, one of the sectors I imagined would like to see open skies.

Tourism Council WA director Ian Simmonds, who runs a company called Hospitality Industry Marketing Services, is a staunch believer in stability – pointing to the detrimental impact on tourism when Ansett collapsed two years ago.

“We [tourist industry] want sustainable air services,” Mr Simmonds said.

“History has shown that three airlines or additional capacity would put more pressure on the existing airlines.

“You could conceivably end up with one collapsing.”

Less strident is SkyWest CEO Scott Henderson, who believes that deregulation would be “a good thing fundamentally” but says the timing is wrong.

“Our air market is very unstable; there needs to be a period of consolidation,” Mr Henderson, a former US airline executive, said.

One of the issues was the pressure that would be brought to bear on the big domestic carriers without them gaining much access to other markets, he said.

Singapore is a good example of a country that has genuine interest in an open skies policy in Australia yet, as an island, it has

little to offer in its own market.

“There is a push for multilateralism in world airline markets, but where has it worked?” Mr Henderson asked.

There are also other strategic reasons cited by various commentators opposed to deregulation, such as the national interest in having our own carrier. That may well have been the case in previous decades, but Qantas is now a world player and surely it can stand on its own two feet, so to speak.

Nurture and protection belongs to babies, not to mature adults.

So what would happen if cabotage was dropped?

Possibly nothing much. Singapore Airlines is one that might try a few new things, but its agenda is more about stopping off in Australia en route to New Zealand or the US rather than offering even a limited domestic service.

Singapore Airlines public relations manager South West Pacific Stephen Forshaw said ending cabotage might have benefits for regional centres in attracting international carriers.

“Some cities will not produce enough demand to make flights over international sectors economical all the time, but the opportunity to supplement those sectors with some domestic traffic is and should be an important tool to help attract investment,” Mr Forshaw said.

“Singapore Airlines welcomes any steps toward deregulation of some of the ageing principles which cover air service agreements internationally.

“Airlines should be able to operate flights between points based on economic judgements, customer demand, competitive choice of products, services, frequencies and prices – not just because the government says they can.”

Under the new Australia-Singapore Air Services Agreement, Singapore Airlines can now fly to any destination in Australia, landing slots permitting. That does signal an opportunity for Broome to become a new gateway for Australia, particularly on a regional basis.

But true deregulation would at least offer the opportunity for international airlines to take the long-term view needed to weigh up the market opportunities in flying domestically in Australia.

It might take years for them to plan something in their schedule. Then again, if profits (based on ticket prices) on a route such as the Nullarbor appear lucrative enough, they might just step in more quickly.

That is not my judgement to make.

What I am interested in is the price of air travel between WA and the rest of Australia, as well as opportunities for international airlines to put WA destinations on the agenda, possibly as stopovers, rather than simply seeing Sydney as the prime objective.

And I don’t understand how regulation of our skies and protection of domestic carriers improves things for consumers.

 

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