Giving people more access to flights is good for several reasons. Not only does it mean people like my friend can see more of the country and enjoy travelling, but it’s also a good thing for the economy.
We know Australia has a productivity problem: we’re not getting much better at using the scarce resources we have to provide the goods and services we want and need. Part of that is because of the very problem we see in the aviation sector: a lack of competition (think Coles and Woolworths dominating the supermarket space or the big four banks doing most of our lending), meaning many of our big businesses aren’t being pushed to innovate.
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But we could also improve our productivity if Australians could get around more easily. Businesses wouldn’t have to spend as much flying their workers around (leaving them with more money to spend on technology or research), workers could more easily travel to places with jobs that suit their skills better, and people could get to places faster or more frequently to make deals, connect with each other and share ideas.
The country’s tourism industry would also get a boost (the Treasury report authors reckon the growth in passenger demand would be especially strong on tourist routes at up to 58 per cent) as Australian travellers spend more on accommodation, food, shopping and transport. Overseas tourists could also decide to add an additional leg to another Australian city onto their trips if prices were lower.
The effect of lower air fares on passenger numbers isn’t as strong immediately as it is over the longer term according to the researchers. This reflects what’s called “elasticity”: in this case, how sensitive customers’ demand for flights is to a given change in price.
An additional airline in Australia (and therefore a 5 to 10 per cent fall in air fares) leads to an increase in demand from passengers of only between 0.5 per cent to 1 per cent in the month that follows, meaning demand is relatively “inelastic” – or unresponsive – to changes in price. But in the year that follows, the same change in price can lead to an increase in demand from passengers of up to 25 per cent, meaning demand is much more “elastic” – or responsive – to changes in price.
ANU public policy professor Bob Breunig, lead author of the Treasury report, says the difference is largely because, especially for non-essential travel, it can take a while for habits to change.
“In the month that follows a decrease in air fares, a business person who was going to do a video meeting [with someone interstate] might decide to do an in-person meeting instead because it’s suddenly cheaper,” he says, while someone flying for leisure might not immediately plan an extra trip. But a year down the runway, people are more likely to consider those additional domestic trips.
The research also found that the jump in demand is bigger over the long run for traditionally “tourist” routes such as those flying to Cairns or Coffs Harbour compared to those dominated by business travel such as Sydney to Canberra (bad news for me).
Of course, having an additional airline in Australia is easier said than done. Dozens of airlines, including most recently Rex and Bonza, have tried to break into the industry, or take on Qantas and Virgin on the capital city routes they dominate, but faced too many headwinds.
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Australia’s relatively sparse population certainly doesn’t help, but the regulatory maze airlines have to navigate and the battle for airport slots (dominated, of course, by the major airlines), has made things especially difficult for new airlines. Qantas and Virgin have been accused of “slot hoarding”, by which they book slots at airports and cancel them to block competitors from accessing peak travel times which tend to be the most profitable.
While other options such as high-speed trains between our major cities could introduce more competition, that will probably take decades and huge amounts of government spending to lay out the track and build the infrastructure needed.
One thing the government should do is remove the ban on foreign airlines operating purely domestic routes – a policy the Coalition at least promised to trial if elected at the last election. Many international airlines have the huge amount of money and existing processes and machinery needed to compete with Australia’s aviation giants.
Lower air fares might not immediately lead to Australia’s passenger numbers taking off. But the evidence is overwhelming for the need for more competition. It’s also our chance to boost the country’s productivity and make sure more Australians – including those who aren’t as well off – get to see more of the country we’re lucky to call home.
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