Strategic Alliances in the Aviation Industry: An Analysis of Past and Current Developments

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In the absence of competitors, Qantas's market share on domestic trunk routes rose to a peak of 84 per cent. Qantas responded to the sudden upsurge in demand by scheduling more flights and by substituting larger for smaller aircraft. Further, as the initial Ansett group collapse coincided with the sharp decline in international air travel after the terrorist attacks in the United States in September , Qantas diverted aircraft from its international fleet to domestic routes. As a longer-term response, Qantas is building up the capacity and cost effectiveness of its domestic fleet by acquiring new, fuel efficient Boeing aircraft.

Qantas is also responding to Virgin Blue's 'no frills' approach by retaining and expanding no-frills, low-cost, all-economy class operations. Qantas inherited similar operations from Impulse Airlines and has added to them by expanding its fleet of the low operating cost Boeing aircraft that Impulse used on trunk routes. Qantas has also acquired additional terminal space to cope with its rapid growth in market share since Ansett's collapse. Following the withdrawal of the Tesna consortium's bid for Ansett, Virgin Blue, having low capitalisation, found itself short of capital needed for expansion.

The additional capital is assisting in the expansion of the airline's fleet and the leasing of former Ansett terminal capacity to service its growing market. As noted, Virgin Blue has also extended its route network, which now includes a number of regional centres such as Coffs Harbour and Alice Springs. All survived as going concerns after the Ansett collapse, albeit under administration for lengthy periods and after receiving considerable federal and state government financial support.

The most important purchase of former Ansett regional airlines was the acquisition of Kendell and Hazelton by Australiawide Airlines Limited, operating as Regional Express Rex. Most of the former Ansett regional airline operations do not have partnership arrangements with Qantas or Virgin Blue. Before Ansett collapsed, around 80 per cent of routes were operated only by airlines with partnerships with Ansett or Qantas; Ansett's regional subsidiaries were all tied in with the Star Alliance. Consequently, the former Ansett regional airlines are outside the international alliance network.

The future of regional services is unclear. Qantas's highly developed corporate linksacross the regional, domestic and international sectorsand scheduling to its non-regional services gives it a considerable advantage over potential competitors. This suggests that competitive initiatives by Qantas's regional carriers will be closely monitored by the competition authorities to ensure that Qantas does not take unfair advantage of its dominance in the market.

One proposal to reduce this dominance is that Qantas should be made to divest itself of its regional operations and other regional operators should be encouraged to merge into larger, more viable entities. Parts of the airline industry are characterised by economies of scale. The implication of this is that a larger service provider will achieve lower costs than his smaller competitors, making the latter vulnerable to takeover.

In the long run, the implication is that in the absence of government intervention, the industry will gravitate towards a single provider i. The policy was based on the premise that if Australia wanted two competing airlines in the domestic market, government intervention was necessary to ensure that both airlines were 'guaranteed' sufficient market share so that each could remain commercially viable over the long term. If economies of scale persist in the industry to this day, this could suggest that there is a need for on-going regulation of the airline industry to monitor and prevent any tendencies towards its monopolisation.

The airline industry is subject to economic regulation by the ACCC under the generic business conduct and competition policy provisions of the Trade Practices Act The High Court has, in the recent Boral case, addressed these provisions in detail in the context of claims of predatory pricing. The court's conclusions on predatory pricing could have significant longer-term implications for the Australian domestic airline industry; there is a widespread view in the small business sector that the Boral decision 'proved the Trade Practices Act did not protect small business from big-business predatory pricing'.

In the Boral case, the High Court undertook detailed consideration of the concept of 'predatory pricing' as a form of business conduct 'taking advantage' of market power. It has been suggested that:. This could be relevant in today's airline industry, with its 'David and Goliath' structure in the form of an emerging, relatively modestly sized and resourced Virgin Blue versus a dominant and well 'cashed-up' Qantas. Unlike the two airline policy, the Trade Practices Act has no specific provisions regulating 'cut throat' air fare competition.

Nor does it have provisions to ensure the maintenance of market shares and thus supporting the financial viability of smaller industry players. The Australian airline industry is heavily import-dependent, especially, in relation to purchases of fuel, aircraft and spare parts. The depreciation of the Australian dollar over the past two to three years increased costs in the aviation industry. However, the more recent appreciation of the Australian dollar, especially against the US dollar will ease these pressures. Qantas is able to offset the cost of import-dependence to an extent because some of its earnings are in foreign currencies.

In contrast, the market of Virgin Blue and the regional airlines is entirely domestic so all of their revenues are in Australian dollars. The implicit model in the post-deregulation eranamely two airlines of roughly equal size constrained by the actual or potential entry of new competitorsno longer exists. Competition between Qantas and Virgin Blue is arguably more limited than between Qantas and the Ansett group under the former industry structure. Virgin Blue focuses mainly on leisure travel over major trunk routes rather than an integrated trunk and regional network and it offers only one-class service and relatively infrequent flights.

In this sense, it is not a comprehensive replacement for the former full-service Ansett operation. Professor John Quiggin has summed up the new environment in the following terms:. Although Qantas is the dominant player in the domestic passenger and freight markets, some of the factors that led to the failure of previous new trunk route entrantssuch as EastWest Airlines, Compass Airlines and Southern Cross Airlines 'Compass Mark 2' are less of a barrier now.

In particular, airport terminal facilities are more readily available to new entrants, particularly now that some former Ansett terminals have been freed up as 'common-user' facilities. These are terminals and associated infrastructure that airports manage that are used potentially by a number of different airlines. Still, this is becoming less true over time as Qantas and Virgin Blue lease space that previously Ansett occupied. The relatively low cost of obtaining aircraft is another factor favouring potential new entrants.

Industry observers have identified a number of factors which make the present a good time for Australian airlines to obtain imported civil aircraft, namely It has been suggested that lifting the cabotage constraints on foreign airlines serving Australia and allowing them to carry freight and domestic passengers within Australia could increase competition. Ideally, liberalisation would be achieved on a reciprocal basis with other countries. If this proved unfeasible, a unilateral move to enhance competition in domestic aviation could be considered. The schedules of international airlines are generally not well suited to meeting domestic flight requirements, and complicated procedures would be necessary to allow domestic passengers to embark and disembark at international terminals bearing in mind customs, quarantine and security considerations.

Qantas is trying to defend its market share through service upgrades and innovations such as the CityFlyer services on key trunk routes. These can be readily converted to an all-economy configuration, helping Qantas to compete with Virgin Blue. Virgin Blue's strategy seems to be one of 'cherry picking'that is focusing on a limited number of high-density routes and not operating a more traditional route system of a nationwide network that cross-subsidises less profitable routes.

Virgin Blue has also sought to minimise costs through more flexible working arrangements including multi-skilling relative to past standards and to Qantas , and low overheads for example not having lounges or catering. A key element of Virgin Blue's competitive strategy is expansion: Virgin Blue aims to gain 50 per cent of the trunk route market by Like Qantas, Virgin Blue is increasing its fleet capacity very quickly. Virgin Blue has been a private company for much of its existence, but media reports suggest it is 'cash poor' and is moving to sell equity on the British stock market.

The Virgin group is considering a public float of Virgin Blue to assist its expansion although Patrick Corporation reportedly has reservations about a float at this time. It has also been reported that Patrick would prefer a lesser degree of its own equity dilution as a result of the float than that which the Virgin Group has envisaged. The development of international routes would enhance Virgin Blue's competitive appeal. With Patrick Corporation acquiring 50 per cent of Virgin Blue, the airline has the potential to become an international carrier in its own right, as it is now deemed to be an 'Australian' company.

Virgin Blue has announced its desire to expand into overseas operations; a linkage with Virgin Atlantic flights from Europe to Hong Kong would be one way it could establish a presence on the AustraliaUK 'kangaroo route'. Virgin Blue has said that it will proceed with trans-Tasman services regardless of whether the proposed alliance between Qantas and Air NZ proceeds. Some factors may limit Virgin Blue's ability to compete. Over the longer term, there may be doubts about Virgin Blue's financial viability.

It does not participate in an international airline alliance and its market positioning excludes it from the higher-yield business travel market. If Qantas reduces operating costs to levels comparable with Virgin Blue, Virgin Blue would be at a disadvantage in light of its relatively small market share. With the overall level of competition in the industry less effective than before the Ansett group's collapse, it might be argued that it is only the threats of new entry and ACCC monitoring that keep Qantas competitive.

Ansett's collapse has focused attention on the adequacy of competition law in its application to the airline industry. Fulfilling a election pledge, the Treasuer, Mr Costello announced in May the terms of reference for a review of the competition provisions Part IV of the Trade Practices Act A key issue in this review is the operation of section 46 of the Trade Practices Act , which states that a firm with a substantial degree of market power must not take advantage of that power for the purpose of:.

In its submission to the Dawson Committee, the ACCC advocated an 'effects' test under which a breach of section 46 could be established if a firm with substantial market power had taken advantage of that power and this had resulted in an anti-competitive outcome. In this case, it would no longer be necessary to establish that the firm had an anti-competitive purpose. The ACCC has suggested that such an amendment would assist in dealing with the aviation industry in the wake of the collapse of the Ansett group.

Qantas criticised this proposal arguing that the measure would effectively prevent it from competing against Virgin Blue. While debate is continuing, the ACCC has begun litigation against Qantas alleging that it misused its market power by substantially increasing the number of seats on the BrisbaneAdelaide route after Virgin Blue entered the market in December a behaviour sometimes referred to as predatory 'capacity dumping'.

As has been noted, there is considerable debate in the Australian business community about the effectiveness of the Trade Practices Act 's market conduct provisions in the light of the High Court's decision in favour of the dominant player in the recent Boral case. Small business interests and others believe the decision reduces the effectiveness of section 46 of the Act in curtailing predatory pricing.

Although, The Dawson Committee addressed this issue, the committee ' s recommendations do not appear to envisage the type of changes in these provisions of the Act that might ease the concerns of smaller businesses confronted by a dominant competitor. The Commonwealth has, over time, divested itself of ownership of regional and local airports, while almost all capital city airports have been transferred to private operators on long-term lease arrangements. All international, domestic trunk and regional airports are now owned or controlled by private lessee companies and consortiums or local governments.

This includes joint-use defencecivil airports such as Canberra and Townsville. From the s to the s, the Commonwealth funded the transfer of local and regional airfields and aerodromes to local government authorities under the Aerodrome Local Ownership Plan. These smaller aerodromes have not been privatised and generally remain the responsibility of local government agencies such as port corporations. Before , the Commonwealth-owned Federal Airports Corporation operated most major trunk route airports.

The Hawke Government established the corporation in the s when responsibility for running major airports was separated from the Department of Transport. Although commercially-oriented, the corporation set landing and terminal charges on a network-wide, 'single-till' basis. In and , the Howard Government implemented the Keating government's plan to sell leases for 17 major Australian airports excluding Sydney to private operators.

In June , the Government privatised Brisbane , Melbourne and Perth airports the so-called Phase 1 airports under year leases. On 1 July , the Government privatised a number of other major airports within the so-called Phase 2 group of airports. The stated rationale was to improve the efficiency of airport investment and operations in the interests of users and the general community, and to facilitate innovative management. In the aftermath of the Ansett group's collapse, t he Government delayed the sale of the three 'Sydney Basin' airports at Bankstown, Camden and Hoxton Park because of adverse sale conditions, but on 9 April announced that all three would be sold this year.

The Government considered that competition between privatised airports could be encouraged by restricting cross-ownership of certain airport pairs and by limiting airline ownership to 5 per cent. These policies were implemented under the Airp o rts Act The Government, in the airport industry reform package that accompanied privatisation, noted that the single-till pricing that the federal airports corporation followed would not be mandated for the privatised airports.

Individual airport operators could retain profits, at their discretion, from non-aeronautical activities. Concern that privatised airports might abuse their market power with respect to aeronautical services led the Government to introduce transitional price regulation designed to allow all parties to adjust to the new environment.

Price regulation comprised a five-year, consumer price index minus X annual cap on prices for aeronautical services at 11 of the largest privatised airports, where X was a pre-determined amount specific to each airport. These arrangements extendedfor the first five years of privatisationthe aeronautical charges in place before privatisation. Given the nature of the price cap, airport operator charges fell in real terms between and The Productivity Commission reviewed the application of price regulation in its report, Price Regulation of Airport S e rvices.

In its submissions to the commission 's inquiry, the airport lessees argued that the price caps and the methods that the ACCC used to implement them were preventing airports from securing adequate rates of return on their investment. Despite airports being a monopoly business, the commission recommended that commercial constraints impeded the ability of airport operators to extract a higher-than-reasonable profit. On 13 May , the Government announced that it had accepted the Productivity Commission's recommendation that the pricing regimes at Sydney, Melbourne, Brisbane, Perth, Adelaide, Canberra and Darwin airports be liberalised and subjected only to ACCC price monitoring rather than price capping for five years from 1 July The airport corporations charge airlines for the services they provide.

These charges are to cover the cost of providing:. Following the end of the price caps, some airports increased aeronautical charges considerably. However Productivity Commission chairman, Gary Banks , has stated:. These services remain a Commonwealth responsibility; the Airservices Act established Airservices Australia to discharge these services and to charge users of capital city and major regional airports to recover their cost.

Airservices Australia has moved from network to location-specific pricing for its airport-related charges. Under network pricing, the cost of providing services differed among airports, but charges did not reflect these differences. As a result, some airports cross-subsidised others. Airservices Australia first introduced location-specific pricing for airport rescue and fire fighting services on 1 July It also charges for en route air navigation services on a user-pays basis.

The move to location-specific pricing meant that airways charges at some airports those previously subsidised under network pricingrose considerably. To ease the transition, the Government's Budget introduced a subsidy for the transition to location-specific pricing for some regional and general aviation airports. To a large extent, it is a subsidy to regional and rural Australia as it is mainly regional airports such as Tamworth that benefit.

The Department of Transport and Regional Services administers the Payment Scheme for Airservices Australia's En Route Charges which subsidises Airservices Australia en route air traffic control charges incurred by around 30 small scheduled service airlines and operators of aero-medical services such as the Royal Flying Doctor Service.

The Government is committed to retaining ownership of Airservices Australia , but its corporatisation and the outsourcing of some of its services, such as fire fighting, are on the agenda. The Government is introducing the Air Services Legislation Amendment Bill that would, among other things, convert Airservices Australia into a company registered under the corporations law. This would distance it from theist current level of parliamentary scrutiny. The pattern of long-term investment in upgrading facilities at the major airports has tended to be'lumpy'with concentrated, large-scale infrastructure investments being undertaken every few decades in response to changing aircraft technology and spurts in demand for flights.

For example, large scale upgrading of Australia 's capital city airports occurred in the late s and early s to facilitate the transition to the large jet aircraft that replaced prop and turbo-prop trunk route aircraft. Likewise, the introduction of the Boeing jumbo jets in the late s and early s required large investments in longer, wider and stronger runways and new, larger terminals. A similar leap in infrastructure investment at Australia 's international airports will be required in preparation for the introduction from March of the Airbus A double-decker 'mega jets'.

In view of the strong long-term growth in Australian air traffic , efficient allocation of airport capacity, especially of runway capacity, is increasingly urgent. This is particular the case at airports like Sydney, where the opportunities to expand capacity are limited by severe space and environmental constraints. There are several approaches to dealing with this challenge. One is the use of administratively based airport slot systems. A ' slot ' is the concession or the entitlement to use runway capacity at a certain airport on a specific date and at a specific time.

Slots are typically allocated to airlines by administrative direction. An alternative approach that many economists now advocate is the use of market mechanisms, such as auctioning slots to the highest bidders. While slot systems are highly effective in rationing scare airport and airspace capacity, they can restrain competition among incumbent airlines and between incumbents and new entrants. Slot systems thus have the potential to negate the gains of aviation liberalisation if national governments misuse them or allow airport owners to use them to pursue parochial interests.

To promote competition, slot systems should ensure that new entrants have a fair chance of establishing viable operations. Market based solutions such as the sale of slots by tender would ensure that slots go to airlines whose passengers place the highest value on the slots see discussion below under 'Rationalisation of Sydney KSA Operations'.

Sydney KSA is the only Australian airport that has a slot management scheme. The system was introduced in to facilitate the movement 'cap' authorised under the Sydney Airport Demand Management Act Under the Act, the number of aircraft movements is capped at 80 an hour although the Minister for Transport may determine a different limit. Slots were allocated to airlines primarily on the basis of the services that the airline operated in A particular feature of the slot system at Sydney KSA is that slots for regional airlines are effectively protectedthe 'regional ring fence'because slots 'grandfathered' by regional airlines that is, those inherited from long-standing usage patterns can only be swapped for slots for interstate and international airlines within 30 minutes of their originally scheduled time.

In December , the Government announced that regional slots would be capped at current levels during peak periods. Outside peak hours, regional airlines would be free to bid for new slots, but would be subject to new rules about aircraft size. The intention is to encourage the use of larger aircraft. Costs are recovered through a levy on jet aircraft landings. These allow the Minister for Transport to declare an airport to be the subject of an aircraft noise levy a leviable airport. The Government announced the Adelaide airport program in May and applied the levy in the Budget.

The program involves the sound-insulation of around residences and five public buildings. The Labor Opposition has argued that proceeds should have been spent on transport infrastructure rather than just retiring government debt. The Government has emphasised that the sale would not change the Government's full regulatory control over the airport, including the noise abatement measures and guaranteed slots for regional airlines. The Government further pledged that the pricing regime for regional airlines would be maintained after privatisation: ' so that they cannot be forced out by an underhand policy of the landlord upping the rent'.

These restrictions are designed to safeguard competition in the Australian aviation industry. The airport's new owners have indicated that there is no need for a second Sydney airport as there is still considerable potential to expand Sydney KSA's capacity. The airport's life could be extended if its operations were changed because its technical capacity far exceeds its actual regulation-constrained capacity. Two key constraints are the regional slots at peak times and the noise-related cap on the number of hourly movements.

The Government-guaranteed regional slots are, in effect, a quota system. If a market were to operate whereby rights to land or take off in peak times were auctioned, or if there were peak-load pricing to discourage marginal flights, the outcome would be different. The Government has indicated that it wants the lessee of Bankstown to develop it as an 'overflow' airport to take excess traffic from Sydney KSA, with an extended runway and new terminal facilities.

The Sydney Airport Curfew Act provides for a curfew on most operations between 11pm and 6am. During the curfew, only certain categories of operations are permitted. They relate principally to small aircraft and 'low-noise' jets. The curfew also provides for runway use restrictions between 10pm and 11pm and between 6am and 7am. The curfew, which contributes to a classic peak-load problem, affects mainly long-haul international airlines. They arrive when the curfew is lifted, leading to a peak in demand for international terminal services between 7am and 10am.

This coincides with peak demand for domestic services, which begins at 7am and continues to am. Consequently, facilities such as the international terminal and runways have considerable surplus capacity at non-peak times. The curfew thus has considerable economic and financial costs. In short, regulation of the operations at Sydney KSA shows that the Government prefers administrative rather than 'economic' solutions such as peak-load pricing and the sale of slots by auction.

Regional airlines are major beneficiaries of regulation. They are probably effectively subsidised by passengers of non-regional services. Since the s, federal and state governments formed from both Coalition and Labor parties, have grappled with the need to build a second Sydney airport.

A chronology of policies and developments associated with second Sydney airport issues since is available on the Department of the Parliamentary Library website. Of the 19 sites that have been considered, two remained under discussion in the s, namely Badgery's Creek and Holsworthy, although the latter was subsequently rejected. As campaigns against both sites were mounted , discussion continued on a ' Sydney West second airport and the possibility of using the Richmond RAAF base.

However, the sale of Sydney KSA reinforced its status as the primary airport in the region, something that is unlikely to change over the next two decades. In any event, current policy is that a future federal government will decide if development of the Badgery's Creek site should proceed. Specifically, u nder the sale arrangements for Sydney KSA, Southern Cross will have the first right of refusal to build and operate any second major airport within km of the Sydney central business district if the Federal government of the day decided that it was needed.

The Government has stated that any decision by a federal government to build a second airport would be subject to a review of Sydney's airport needs in , although it does not believe that a second airport will be necessary before the end of this decade. Furthermore, while the Howard Government had indicated that Bankstown Airport, the largest of the three general aviation airports in the Sydney Basin, would be expanded to cope with overflow from the recently privatised Sydney KSA, it has recently retracted this strategy.

In announcing the sale of Bankstown Airport in April , Acting Transport Minister Wilson Tuckey indicated that the 'overflow' role for Bankstown was no longer necessary because of a decline in air traffic after the terrorist attacks of September 11 , the collapse of Ansett and the trend to larger aircraft on regional routes. He indicated that the sale would proceed without development obligations. Description: Is now a subsidiary of Horizon Airlines, after being purchased from the Ansett Administrators. Description: airlink has been involved in charter operations out of Dubbo for about 31 years and commenced regional airline services in on routes vacated by Hazelton Airlines.

Airlines of South Australia. Alliance Airlines. Description: Founded in mid, alliance Airlines in March ceased all operations from Rockhampton and Gladstone. The company cited financial reasons for the decision. Australian Air Express. Australian Airlines. Description: is wholly owned by Qantas but operated independently and managed separately. Set up as a low cost international airline in October , Australian. Routes : Airlines currently operates four Boeing s but plans to increase its fleet in the near future. Aircraft : Boeing ER 4. Cape York Air.

Additionally the company has a base located on Badu Island in the Torres Straits. The company's air mail delivery service is the longest service of its type in the world. Emu Airways. Routes: Adelaide to Kingscote; Adelaide to Wudinna. Golden Eagle Aviation. Description: are agents for Australian air Express and the company have a comprehensive delivery and pick up service.

Aircraft: The airlines current fleet are located over three bases throughout the Kimberly and Pilbara. Horizon Airlines. Description: provides a wide range of aviation services to the Australian public and industry. King Island Airlines. Macair Airlines. National Jet Systems. Description: provides aviation services such as wet leasing, scheduled airlines operations, charter and resource industry air services for major corporate and government organisations.

Norfolk Jet Express.


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Aircraft: Boeing L7 1. Northwest Regional Airlines. Aircraft: Cessna 3 , Cessna R 1. O'Connor Airlines. Qantas Airways. Description: Founded in the Queensland outback in , Qantas is the world's oldest continually operating airline and is Australia 's largest domestic and international carrier. Qantas is also one of the world's leading long distance airlines, having pioneered services from Australia to North America and Europe. Qantas operates a fleet of aircraft, Routes: Serves 67 domestic destinations including a number of major regional ports and 75 international destinations in 32 countries.

Description and Aircraft: Qantas' regional airline, QantasLink regional airlines are wholly owned subsidiaries of Qantas and operate in excess of flights each week to 55 destinations across Australia. QantasLink flies more frequently and to more destinations that Qantas domestic. QantasLink comprises four separate. With 61 aircraft in the QantasLink fleet, three aircraft types are used: Boeing jets BAe jets 15 and De Havilland Dash 8 turboprops Whitsunday Airport ,Rockhampton, Sydney and Townsville. Aircraft: Boeing Aircraft: Dash 8Q 5 , Dash 3 , Dash Aircraft: Dash 4 , Dash 2 , and Dash 5.

Regional Express Rex. Description: Rex is one of Australia 's newest regional airlines and was formed through the merger of Hazelton and Kendell Airlines. Its headquarters are in Sydney with its main operational, engineering and maintenance base in Wagga Wagga. Rex is about to commence an interlining agreement with Virgin Blue.

Aircraft: Saab 21 , Fairchild Metro 23 7. Description: Skytrans Airlines is a Queensland-based airline and air charter business with bases in Cairns and the Torres Strait. The company also flies charter operations throughout Australia , Papua New Guinea and the south western Pacific. Skywest Airlines. Aircraft: Fokker 50 5 Fokker Sunshines Express. Aircraft: PA 4 , Commander S 3. TransAustralian Air Express. Aircraft: Boeing 4 , Boeing C 1. Virgin Blue Airlines. Virgin Blue is about to commence an interlining agreement with Regional Express Rex. Aircraft: 9 , 14 , 1 , 1.

Source: Aircraft and Aerospace magazine, May edition, p. For copyright reasons some linked items are only available to Members of Parliament. Executive Summary These have been turbulent times for the Australian airline industry. Introduction The Australasian airline and aviation infrastructure industries have experienced major changes to their policy and operating environments in the past decade.

From the mids to the mids, it [ civil aviation] was one of the most debated topics in the Federal Parliament, attracting attention beyond its economic significance. To many people civil aviation became a battleground for conflicting political philosophies. A: Airline Industry Overview Australia's airline industry can be classified into three broad categories:. An airline performing regular public transport services and whose fleet contains exclusively high capacity aircraft, defined as aircraft with more than 38 seats, or with a payload of more than 4 kg.

Players In the past two years, the trunk airline industry has changed from a four-airline structure Qa n tas Airways, Ansett Australia , Virgin Blue and Impulse Airlines to a lopsided two airline system. Qantas The Qantas Airways Group has extensive commercial and ownership links with a number of regional carriers.

Virgin Blue Virgin Blue Airlines is the Brisbane-based subsidiary of the Virgin group of companies and began operation in Industry Finance Revenue for domestic operators derives chiefly from the business sector and domestic and inbound tourism. An airline performing regular public transport services and whose fleet contains exclusively low capacity aircraft, defined as aircraft with 38 seats or less, or with a payload of 4 kg or less.

An airline performing regular public transport services and primarily servicing regional centres. Australian International Airline Industry: Services, Structure and Prospects During , 50 international airlines including dedicated freight operators operated scheduled services to and from Australia. Compared to domestic fare levels in when the BTRE [Bureau of Transport and Regional Economics] started reporting on domestic air fares, real discount fares in the September quarter were almost 18 per cent below the December quarter However, in real terms the fully flexible full economy and business fare series were almost 9 per cent and The BTRE notes that the business and full economy fare series diverged significantly in the mids with the change from three classes to two classes on domestic services.

This will be discussed below. Taxes and Charges The fare analysis undertaken by the Bureau of Transport and Regional Economics did not include the various taxes on air fares which the Commonwealth imposes nor did it include charges that the airports levy on airlines which they, in turn, add on to passenger air fares. Foreign Investment Foreign investment guidelines allow foreign airlines to acquire up to per cent of the equity in an Australian domestic airline or to start a new domestic airline, unless this is contrary to the national interest.

Australia 's International Airline Policies There are a number of elements to the international policy framework. First, there is the bilateral air services agreements system. These arrangements usually comprise an Air Services Agreement and there are some registered treaties within this framework. The Howard Government has taken the stance that, for efficiency reasons, it is essential to move away from the bilateral system of international air services agreements towards a free world in aviation. Second, as noted, cabotage prevents foreign-owned airlines carrying domestic passengers over domestic sectors of their international services into and out of Australia.

Third, the Australia-New Zealand 'open skies' agreement a llows Australian and New Zealand international airlines to operate across the Tasman and then to third countries without restriction. Previously, 'beyond services' of this kind were restricted in terms of allowable capacity 12 Boeing s per week and third-country destinations a maximum of 11 countries.

Analysis Reports

In addition, the international airlines of both countries can operate dedicated freight operations from any international airport in Australia and New Zealand to third countries. Australia and New Zealand endorsed the agreement in August thus formalising the memorandum of understanding in place since November Fourth, under 'regional open skies agreements', Australia allows foreign international carriers unrestricted access to all international airports except Sydney , Melbourne , Brisbane and Perth. Regional open skies policies incorporated into air services agreements enable regional gatewayssuch as Cairns , Darwin and Adelaide to market themselves as attractive destinations without concern about bilateral restrictions on local market access.

Qantas and Air NZ forming a group, made up of an equal number of representatives from each airline, that would co-ordinate the entire Air NZ domestic and international network and Qantas flights to, from and within New Zealand. Air NZ would need to divest itself of its low-cost carrier, Freedom Air. Qantas should be restrained from flying Australian Airlines in addition to Impulse and Jetconnect aircraft on the trans - Tasman , New Zealand and Pacific routes for a period of three years. Air NZ must enter satisfactory commercial arrangements for maintenance services, spares and parts, ground handling services and equipment at all major airports as Air NZ is currently the monopoly supplier of many of these services.

Qantas and Air NZ should provide an undertaking that they will not increase capacity on any route for a period of two years after a new entrant enters the market. C: Aftermath of the Ansett Group Collapse Capacity and Fares An immediate consequence of the collapse of the Ansett group was the reduction of capacity in terms of seats available and the number of flights. Despite a widespread perception that domestic discount air fares increased following the demise of Ansett, this is not evident in the BTRE's [Bureau of Transport and Regional Economics] published domestic real airfare series It is more likely that the large reduction in flights and capacity reduced the availability of discount seats.

Impact on Ansett group Operations The Ansett administrators have maintained the Ansett Australia web site to record details of the company's progress under administration including the asset disposal process. Air Passenger Ticket Levy the 'Ansett Levy' In September , federal legislation was passed that introduced a levy on air passenger tickets, bought on or after 1 October , for flights originating in Australia.

Import Dependence The Australian airline industry is heavily import-dependent, especially, in relation to purchases of fuel, aircraft and spare parts. End of the Trunk Airline Duopoly The implicit model in the post-deregulation eranamely two airlines of roughly equal size constrained by the actual or potential entry of new competitorsno longer exists. It now seems that the best we can hope for is a one-and-a half airlines policy, similar to the pre telecommunications regime, with Qantas playing Telstra and Virgin or Singapore playing Optus. Airlines' Competitive Strategies Qantas is trying to defend its market share through service upgrades and innovations such as the CityFlyer services on key trunk routes.

Adequacy of Competition Law in its Application to the Airline Industry With the overall level of competition in the industry less effective than before the Ansett group's collapse, it might be argued that it is only the threats of new entry and ACCC monitoring that keep Qantas competitive. While debate is continuing, the ACCC has begun litigation against Qantas alleging that it misused its market power by substantially increasing the number of seats on the BrisbaneAdelaide route after Virgin Blue entered the market in December a behaviour sometimes referred to as predatory 'capacity dumping' As has been noted, there is considerable debate in the Australian business community about the effectiveness of the Trade Practices Act 's market conduct provisions in the light of the High Court's decision in favour of the dominant player in the recent Boral case.

E: A irports and Air Services Background on the Structure of the Airports Industry The Commonwealth has, over time, divested itself of ownership of regional and local airports, while almost all capital city airports have been transferred to private operators on long-term lease arrangements. Airport Privatisation In and , the Howard Government implemented the Keating government's plan to sell leases for 17 major Australian airports excluding Sydney to private operators. Reform of Airport Pricing The Government, in the airport industry reform package that accompanied privatisation, noted that the single-till pricing that the federal airports corporation followed would not be mandated for the privatised airports.

The Scope of Airport Charges The airport corporations charge airlines for the services they provide. Sydney Airports Corporation Limited is seeking to recover the increased cost of terrorism insurance, effective 1 April Some have interpreted recent hikes in aeronautical charges at particular airports as evidence of the damaging exercise of market power. However, that largely misses the point of the increases. The price agreements which have been reached set prices for several years for example, for 5 years at Melbourne and Brisbane airports and importantly will cover major investment programs.

It is also worth noting that the new investment would have led to increased charges under the old price cap regime. Big increases can be called for. In sum, price increases that generate appropriate investment levels at airports without excessive returns accruing to airports are to be encouraged, not condemned. Airways Services Airways services comprise:. Airport Infrastructure Needs The pattern of long-term investment in upgrading facilities at the major airports has tended to be'lumpy'with concentrated, large-scale infrastructure investments being undertaken every few decades in response to changing aircraft technology and spurts in demand for flights.

Rationalisation of Sydney KSA Operations The airport's new owners have indicated that there is no need for a second Sydney airport as there is still considerable potential to expand Sydney KSA's capacity. Future of a Second Sydney Airport Since the s, federal and state governments formed from both Coalition and Labor parties, have grappled with the need to build a second Sydney airport. Sir Billy Snedden, 'Foreword' in H. Code sharing is a commercial agreement between two airlines that allows an airline to put its two-letter identification code on the flights of another airline as they appear in computerised reservations systems.

Airlines that share coders typically coordinate schedules to minimise connection times as well as provide additional customer services, such as one-stop check-in and checking baggage right through to the final destination. Value-based airlines are typified by business models based on high frequency direct flights using a very limited set of aircraft types, with a single rather than basic class of service, no or extremely little interlining, a strong regional focus and very low marketing, ticketing and revenue management costs.

Bureau of Transport and Regional Economics , loc. Full Name Comment goes here. Are you sure you want to Yes No. No Downloads. Views Total views. Actions Shares. Embeds 0 No embeds. No notes for slide. Air Canada External Analysis 1. Apart from the two major players, Air Canada and WestJet; the other players are companies with head offices outside of Canada and as such compete on numerous routes.

These foreign- owned companies are big enough to subsidize routes and recoup in other areas. They also can spread their overhead cost to numerous departments economies of scope. Unfortunately, the Canadian government takes issue with the companies who decide to transfer their profits to another country if the profits are realized in Canada. It believes that these profits should be taxed in Canada and not in a host country where tax benefits can be taken advantage of. The taxation is for normal custom taxes up to environmental taxes for air pollution. All these taxes are passed to consumers and reflected in a higher priced fare.

This will impact their profits and their capacity to expand beyond the domestic market. It added baggage prices to a mix of non-standard prices to offset the taxes it pays to the government. However, this is being met with mixed feelings by customers. This has saved them on operational costs. In addition, electronic communication using messaging systems to solve customer problems has become standard across the industry. To this end, many carriers went belly-up in the market Zip and Zoom Airlines. The low cost of fuel has really assisted many carriers with lower operational costs and thus more profits.

Implications on Air Canada - Air Canada has to compete with companies on certain routes that can provide bargain prices without the hassle of higher overhead due to higher taxes and environmental fees. With new entrants using secondary airports, they cut into the profits of the bigger players in the market.

Air Canada has benefitted from low fuel prices that have increased profits. The coloration between crude and fuel is already established as an increase in crude oil normally means an increase in fuel prices which raises operational costs. This is a huge factor in transportation services and in the airline industry in particular. There are strict regulations in Canada on safety from arrival to the airport to destination. Many airlines try to differentiate themselves with this feature. Planes are routinely checked at the airport after every flight. This impacts the bottom-line as planes need to be physically fit to fly and also ensure the safety of their passengers.

The introduction of online sales, third party seat sales, and mobile services, have greatly improved the way customers interact with air transportation. Customers purchase their own tickets instead of going through an agent, pay for baggage fees and check-in online before entering the airport. Implications on Air Canada - Air Canada has to pass through tough regulations in safety standards to compete with other carriers. In addition, Air Canada has already established online and mobile presence for booking, check-in and monitoring of flights although WestJet also has a significant presence in these areas as well.

This means that airlines are important investments. These airlines compete for the most recent technologically advanced planes from the airplane manufacturers. In addition, many companies have infused technology into their processes such as booking and check-in services. They have also adapted to mobile services providing customers to interact on the go. Implications on Air Canada — Air Canada has included aerodynamic technology to differentiate itself in the market. Boeing, an airplane manufacturer, has designed and built Boeing planes that Air Canada has configured to include more economy passengers than first class ones.

This vastly increases the number of seat sales as most customers buy economy instead of first class. Air Canada has also infused technology within their internal systems to meet customer demands. Therefore, weather monitoring is imperative to ensure that the staff and passengers are safe. Due to this fact, the Canadian government charges an environmental tax on all flights. This environmental tax is passed on to customers.

Implications on Air Canada — the environmental tax impacts Air Canada as the fares are not competitive with other North American companies. The overall cost of the airfare to customers is higher than some of its rivals Delta and American and thus affects its bottom line. Many companies self-monitor and use their governance and Corporate Social Responsibility CSR structure to lower their carbon footprint. Another newly added piece of legislation is the opening up of the airline industry to accept foreign airlines to compete with the Canadian airlines in the Canadian market. Implications on Air Canada - the Act and regulatory oversight body make it expensive to operate an air carrier in Canada as there are heavy start-up costs.

In addition, Air Canada has to compete with new discount carriers planning to enter the market such as Southwest Airlines due to favorable increase in acquisition shares. This can be attributed to the fact that the competition from cheaper airlines on traditional carriers is enormous. There are also higher cost carriers who serve as competition in a different way as their primary point of differentiation is through their superiority in customer service. Furthermore, more traditional businesses in this industry will have more variety with regards to where consumers can fly to and depart from.

Therefore, although the traditional carriers possess most of the market share in this industry; there is no doubt that the smaller carriers are closing the gap through offering flights of lower costs and concentrating on popular flights in the market. This variable is a huge detractor to the attractiveness of the airline and aviation industry because of the fact that the high number of smaller carriers in the industry who are entering the industry with aggressively low prices are making the competitive rivalry in the industry very high.

Consumer trends today in the airline and aviation industry also have began to focus more on finding cheaper flights than comfort due to the high prices that most traditional carriers display. The smaller airline carriers have strictly aligned themselves with the most popular consumer trend which is cheaper airline flights and together; it is changing the attractiveness of the industry.

This variable has a negative impact on the industry because consumers are becoming more cost 6. However, there exists no mode of transportation unlike air travel. Air travel will always be most popular choice of transportation because it is the fastest mode of transportation and the most comfortable. This variable would not hinder the attractiveness of the airline and aviation industry due to these reasons. This variable actually shows that the industry is very attractive because air travel is the most popular mode of transportation. The impact of this variable is low because most people prefer flight as their preferred mode of transportation for mid to long travel times.

For example, in Canada, there exists the Canadian Aviation Act that governs the parts, service of aircraft, licensing of aircraft, licensing and training of airline staff, operations of the air as well as airworthiness. Furthermore, Canada also has their Environmental Regulation Act where all airlines are charged an environmental tax and so firms in the industry are always conscious of the importance of lowering their carbon footprint.

Therefore, this variable makes the industry somewhat attractive because although there are strict legislations firms must follow in certain countries; the threat of new entrants is moderate for the same reason. Therefore, this makes entering this industry less attractive due to the massive capital commitment that would be required for any firm thinking of joining the industry. The price of fuel is linked to the fluctuations in the global market for oil which can be an extremely volatile market as oil is a commodity. Labour costs are associated with the relationship between firms and the union.

Unions attempt to collectively bargain and receive benefits and other concessions from airline companies which can drive up costs for a firm in the industry. Finally, firms within the industry obviously need aircrafts and are bought as a sales transaction or on a lease basis. The two biggest suppliers of aircraft requirements are Airbus and Boeing. The power of the suppliers is very high with regards to aircraft, fuel and labour costs. This does not bode well for the attractiveness for the 7. As in, the consumer market for this industry consists of people of all ages and all nationalities that can afford a flight.

Therefore, the large consumer segment decreases buyer power due to the fact that the effect of losing one customer to any airline company is marginal.


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  4. The consumers in this industry are highly price sensitive as their main priority is securing flights for the lowest possible price or for the best deals that include lodging, food, etc. Therefore, buyer power is at a moderate level within this industry. However, this does not bode well for the attractiveness of the industry at least for the larger firms because of the fact that there are numerous smaller airlines entering the market offering competitively low prices which means that the larger and more reputable firms are taking a hit.

    This is due to the plethora of reasons outlined in the five forces analysis outlined above. There is a high supplier power which means suppliers have leverage over firms in the airline and aviation industry. Furthermore, the buyers in this industry also have leverage over the firms because they can constantly compare prices and look for the best deals that are tailored towards their personal needs. There are huge barriers to entry into the market with the numerous legislations that airlines are subjected to. Furthermore, firms in the industry also require huge capital investments to enter.

    There is a high degree of threats by substitute firms who are entering the market with competitively low prices. This has also resulted in a higher intensity of competitive rivalry between firms in the industry. Airline companies are using these technologies to control their fuel, and operating costs, thus improving their financials.

    A Bad Time to Be Average

    The creation of online travel websites such as expedia. Increase in oil prices would increase expenses, and reduce profits for the airline companies, and increase airfare for passengers. Decrease in oil prices would have the opposite effect; that is, it would reduce expenses, and increase profits for the airline companies, and reduce airfare costs for passengers. Given the heavy reliance on fossil fuels, oil market has impacted the airline industry for decades, and will continue to affect the industry until better, cheaper fuel efficient technologies are available.

    This trend has forced companies in the airline industry to find ways to reduce 8. Such programs are becoming popular in many industries. The green trend is also putting a financial burden on the airline industry due to the large amount of environmental tax imposed on the airline companies. To avoid paying large amounts of tax, airline companies are making their planes fuel efficient by installing fuel efficient engines. Some wealthy companies are disposing their old planes, and using the money to purchase new fleet of planes that consume less fuel.

    The environmental regulations are driving the industry towards green alternatives. This is creating more competition among airline companies in the economy class, which is driving industry growth. Changes in population and customer travel activities are also affecting the growth in sales for airline companies.

    Implications on Air Canada - Air Canada needs to ensure that it has prepared mechanisms to handle the above factors. The company has included aerodynamic technology to differentiate itself in the market. The company ordered custom planes from Boeing which were configured to include more economy passengers than first class ones.

    These planes will not doubt give company an advantage over its competitors. These planes will consume less fuel and will reduce the operating costs for the company in the long term. However, the company is known for a quite poor overall customer service record. This is why Air Canada received a lower ranking on overall customer satisfaction because of their loss of focus toward customer service during the aggressive targeting of the international market.

    Implications on Air Canada o To contrast, Porter Airlines is regarded as being one of the most customer friendly aviation companies within Canada, which is why they are positioned much higher on this ranking. However, they are still quite small, and do not come close to having as much market share within the airline and aviation industry in Canada compared to Air Canada and WestJet. Their customer service records are estimated to be only moderately better than Air Canada, but they currently lack definitive strategy on how to increase their market share within Canada.

    They do not possess key competitive advantage that differentiates them from Air Canada. WestJet primarily focuses on price when competing with Air Canada, which is not a sustainable strategy in the long-term. Aircraft, fuel and labour costs are the three main inputs for firms in this industry. Maximizing revenue by implementing competitive pricing structures is made even more crucial with smaller airlines entering the industry offering competitively low flight prices.

    Therefore, sustaining a profitable customer segment is a crucial factor for firms within the industry. In terms of cost management of the three main inputs, focusing on price hedging during volatile times and maintaining fuel procurement can be beneficial in the long-run. Establishing a global presence can be difficult because gaining a market share in other major regional markets where customer loyalty lies with other companies can be difficult.

    Therefore, the value of strategic alliances in other markets outside your own can help open up a totally new customer base. Strategic alliances can also help build competitive advantages over other firms in the industry. Service promotions can be a way to enhance the experiences of loyal flyers and can be focused on keeping regular customers as well. Services such as ease of booking, flight type, seating type, class of service offerings can ensure continued customer loyalty between high-revenue customers and a firm in the airline and aviation industry.

    Simple services can go a long way in being a major critical success factor. Furthermore, labour costs are compounded by the fact there is a union to collectively bargain with. Finally, aircraft cost and maintaining aircrafts is a costly ordeal as well and so cost management can prove to be difficult for firms in this industry.

    These costs have a huge impact on the industry and can be the difference between success and failure for airline companies within the industry. This can hold true especially for airline companies in diverse countries such as Canada where there are people from all over the world who would Countries whose population consists of a high number of immigrants will find flights to countries such as Japan, China, and India very popular. This is even more imperative in the fact that are numerous smaller airlines coming into the market offering aggressively low prices in an attempt to attract customers.

    Therefore, the importance of service promotions can help a firm in the airline and aviation industry build customer loyalty and build a great reputation for their brand. In this stage, creating competitive advantages is primarily through cost efficiency. Cost efficiency through economies of scale, lower wages and lower overhead costs are key success factors for firms within this industry.

    It is clear that the airline and aviation industry is entering the maturity phase of the industry life cycle. This is because in this industry there is an increase in focus of the leading firms on the mass market which creates a new phase of entry as new firms enter the market creating niche positions for themselves within the industry.

    This is clearly evident in the airline and aviation industry as new airline companies such as WOW Air are entering the market using low prices as their niche and trying to attract consumers with their penetrative pricing style which has them entering the market offering artificially low prices to attract customers and then reacting to the market in the long-term. Furthermore, the airline and aviation industry is clearly in the maturity phase when you look at the fact there is a mass market leading to replacement buying with more options in the market.

    Customers in this industry are also knowledgeable and price sensitive so they look for the best deals and compare airlines. These are some of the strategic implications of the airline and aviation industry being in the maturity phase of the industry life cycle.

    Air Canada External Analysis

    All of these companies within the airline and aviation industry contribute to the Canadian airline market place. Air Canada is the strongest player within this market and faces high levels of competition from Porter than it does from WestJet. Air Canada has focused on international expansion and establishing their brand as a rising key player internationally. However, they have also created their Air Canada Rouge line to directly target the Canadian marketplace. Air Canada maintains a select few of key competitive advantages over their domestic competition, which includes the contracts they have negotiated and arranged with the major airports across Canada which provides them with the most premier landing time slots and faster and easier access to the passenger terminals.

    To further distance themselves from the competition, Air Canada formed a key partnership with Boeing, a company that is regarded around the world the premier manufacturer Technology is constantly changing, and new disruptive technology can either be very successful or cause significant limitations for any company, no matter what their market share may be.

    These planes provide more economy seats than traditional airplanes do, which serves as an advantage for Air Canada, since the majority of customers fly on economy class compared to first class within Canada. While Air Canada has developed a very strong brand reputation and implemented some of the newest aviation technology and equipment into their airline services, they are not excluded from having problems.

    The financials of the company appear to be one of the major weaknesses of the company.

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    In fiscal , a large deficit was reported in the equity section. This deficit was due to the fact that total liabilities of the company exceeded total assets at the end of the fiscal year. Additionally, the return of capital and employed and the debt-to-equity ratios also had negative values because of the deficit. Air Canada has received an alarming rate of customer complaints over the past decade, which has resulted in a loss of trust in the brand and their loyalty toward their customers.

    The most important thing for Air Canada is that they do not rest on their laurels and assume that they will always be at the head of the pack for airline services within Canada. They must continue to improve upon their current competitive advantages and strengths, and also constantly consider new strategies and tactics to maintain their profitability, and especially, their strong brand reputation. Air Canada — Internal Analysis 9. They have admitted that it has hit their bottom line but has met expectations. In terms of whether this strategy is working or not; although these routes One such expense is landing fees.

    In addition, they would be competing against those national airlines for premier times slots, terminals and route domination. If the Air Canada Management team can ensure that forecasting measures and the benefits of revenue per seat weighs favorably against the operational cost per flight, it could work. By way of caution, Air Canada has to first address its debt issues if it needs additional capital to embark on this expansion. There is still a disconnect especially with after—service care. Hence, deliverables should be tied to employee performance and lead times measured against benchmarks.

    This is necessary to examine improvements. There needs to be a sense of customer—focused attitude from employees throughout the organization so that the process flow becomes seamless.


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