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University of Western Sydney
1. List all the microeconomic reforms that have had an impact on these industries since the mid-1980s. These may involve privatisation, deregulation, competition policy or trade policy; in some cases the reforms may be general, in other cases aimed at your chosen industry specifically.
The airline industries in Australia have changed rapidly over the past few decades. Since the end of the 1980s many reforms have affected the industry, transforming it from the rigid government mandated duopoly of the 80s into the relatively open market that exists today. Chief among these reforms would be the decentralisation for the early 90s, which paved the way for many of the other reforms and which this paper seeks to investigate in detail.
The domestic air travel industry in Australia in the 1980s was essentially a duopoly of Ansett Airlines and Australian Airlines, and was enforced by legislation. The market for international travel was a monopoly dominated by Qantas and similarly enforced. Since then a number of reforms have caused the industry to become drastically different in composition. In the early 1990s, the system was deregulated and the legal barriers to entry were softened or removed. Legislative separation between domestic and international markets was also removed at this time, allowing firms to participate in both markets (Schulte & Zhu 2005). Qantas was part-privatised in 1992/93 and then fully privatised in 1995/96 (Reserve Bank 1997). In the early 2000s, Australia and New Zealand removed restrictions on each other’s airlines travelling between the two countries and onwards to additional countries under the “Open Skies Agreement” (Kain & Webb 2003).
2. Choose one important item from your list in (1). What specific market failure was that reform intended to fix? Was the objective to improve productive efficiency, allocative efficiency or both? How was the reform supposed to improve matters?
Focusing specifically on the case of deregulation, which was in many ways the first step away from the legal oligopoly that had existed in the industry for so long, the intention was to enable more firms to join the industry and thereby improve productive efficiency. The belief was that the government mandated duopoly (or, in the case of international flights, monopoly) was not conducive towards market efficiency and that the major firms, in lieu of competition, would employ profit maximising strategies to the consumer’s detriment.
3. What have been the consequences of the reform in terms of the industry’s structure, conduct and performance? Have the results been studied systematically or quantified?
Consequently, several changes have been aroused since domestic airline deregulation. It includes an analysis of the consequences of the Ansett collapse, and emerging competition and economic regulatory issues affecting the airline. The results have been studied systematically by John Kain and Richard Webb, recorded in 2002. A chronology of the events leading up to Ansett Australia’s last commercial flight on 5 March 2002 and covering the aftermath of the airline group’s collapse is also available on the Department of the Parliamentary Library website.
After the deregulation, rapid expansion mergence and international cooperation can be found in the domestic airlines. “In the past two years, the trunk airline industry has changed from a four-airline structure – Qantas Airways, Ansett Australia, Virgin Blue and Impulse Airlines – to a lopsided two airline system.” Qantas, for example, has extensive commercial and ownership links with a number of regional carriers. At the same time, Qantas has code-sharing4 and alliance arrangements with international carriers through the One World Alliance. It also developed strong equity links with British Airways. Since the Ansett group collapsed, Qantas has increased its domestic market share from 55% to around 70%. (Qantas’s extensive domestic and international route network can be seen on its home page)
In addition, Professor John Quiggin has summed up the new environment of the airline industry as “the end of the trunk airline duopoly”, which means “two airlines of roughly equal size constrained by the actual or potential entry of new competitors – no longer exists.” New entrants are favoured because of the fewer barriers and the relatively low cost of obtaining aircraft.
4. What claims or arguments have been made for or against the reform in hindsight? Is there agreement that it succeeded/failed, or is there controversy amongst the experts about this?
According a publication summary of BTE (bureau of transport economics), the impact of deregulation was not 100% positive. Clear evidence shows that production efficiency in the industry had enhanced, with lower costs of providing service. Therefore, we can conclude that the reform is successful. However, every coin has two sides. To be specific, greater price competition and the large increase in overall capacity had a negative impact on the airlines’ profitability. A drop in high yield business traffic due to the recession makes it even worse. Conclusions on the consumer benefits from deregulation remained the same from the initial study. In addition to this, the net benefits of interstate aviation deregulation were estimated to be in the order of $100 million in the year following deregulation.
SUMMARY OF BENEFITS:
- Lower average air fares
- More people travelling by air
- Increased competition
- More efficient carriers
- Improved quality of service
- Continuing aviation reform
- (Source: Bureau of Transport Economics, 1995)
SUMMARY OF DRAWBACKS:
- Greater price competition
- Large increase in overall capacity
- Drop in airlines’ profitability and business traffic
5. Is there a need for more reform in the market in question?
Reliable facts indicate that competition between the incumbents is much more vigorous than before deregulation. As we can see from the publication summary of BTE, with the significant rise in the ‘discount fare’ market, the structure of the market for interstate air travel has also obviously altered. However, there is still a need for more reform in the market, because the former reform has not resulted in sustained competition by new entrants. Deregulation of interstate aviation was a crucial step and a catalyst for the continuing reform of the aviation sector in Australia. As we can see in the later history, subsequent reforms have been taken to modify the situation, including the integration of domestic and international aviation operations, and privatisation of Qantas. In other words, the later reforms prove the necessity of subsequent reforms.
Some experts have discussed a company called Compass about deregulation experience in 1992, and have listed a number of management mistakes made, which include that the aircraft was more expensive than necessary; the demand was overestimated; the rivals were underestimated; the lack of class service; the management was insufficiently yield. It is evidence indicating that those mistakes which are rarely seen nowadays have been largely modified due to the execution of later deregulation the following reforms.
In conclusion, the decentralisation of the airline industry drastically changed the industry. The effects of this reform are numerous and varied, there are many benefits but also many drawbacks. Ultimately, the reform could be said to promote change in the industry, paving the way for later reforms. At the time of writing, the market is still in need of reform but thanks to this initial reform such reform is possible.
- Kain, J. and Webb, R. (2003), ‘Turbulent Times: Australian Airline Industry
- Issues 2003′: www.aph.gov.au/library/Pubs/RP/2002-03/03RP10
- Qantas, http://www.qantas.com.au/infodetail/about/FactFilesNov2002
- Quiggin, John, ‘Competition policy takes a nose dive’, Australian Financial Review, 14 September 2001, p. 13.
- Reserve Bank of Australia Bulletin (1997). Privatisation in Australia: http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_dec97/bu_1297_2
- Schulte, P. and Zhu, Y. (2005), ‘Globalisation and labour relations in Australian airlines industry: A case study of pilot experience’: http://airaanz.econ.usyd.edu.au/papers/schulte_Zhu
- Bureau of Transport Economics (1995), ‘Deregulation of Domestic Aviation in Australia’, http://www.bitre.gov.au/publications/27/Files/IS006
- Evan J. Douglas and Lawrence J. Cunningham(1992), ‘Competitive strategies in Australia’s airline deregulation experience’ http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1030&context=discussion_papers
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