Pressure to let foreign airlines fly domestic

[Ellis Taylor]

If this does end up happening, I would hardly think that we'll see foriegn airlines setting up major networks to take on QF and DJ on major trunk routes with the frequencies to really make a good go of it. If anything, it would be those tag type routes, such as SYD-MELs, SYD-BNEs etc.

I think the Australian market isn't that attractive to most airlines anyway. It's a competitive, commoditised market which really doesn't yield all that well - especially when the economy's unstable. And if it was an attractive market, why have more airlines not started their own domestic subsidiaries as Tiger has done?

I personally think it'd be great. More competition is always good for the consumer, and it may put a rocket up the US and EU and get them to agree to offer their own cabotage rights.

[Will T]

The Australian Government obviously needs to weigh up a number of factors when it formulates its long-term position on cabotage.

A critical part of that evaluation will be the importance to Australia of its indigenous aviation industry (which is in no small part driven by the airlines at the top end), versus the potential consumer and public benefit achievable by effectively 'outsourcing' (through cabotage rights) the provision of some or all domestic air services to cheaper or more efficient foreign providers who - for reasons of domicile geography, government, tax and labour arrangements, scale etc - may well be able to develop a lower cost airline operation than any Australian-based operator ever would.

Our Government would need to test factual and couterfactual scenarios, and would need to examine the impact on the size, scope and sustainability of Australian-based/indigenous airlines that the granting of cabotage rights might have, as well as the flow-ons throughout the entire Australian aviation industry (skills, E&M, R&D etc). It would need to evaluate the desirability of these impacts, and calculate a net public benefit or detriment deriving therefrom. There may also be national defence and strategic implications from allowing the indigenous airline industry to be materially weakened by foreign competition.

Lastly, assuming major foreign-based carriers were able to quickly scale up domestically, and displace some of their less-efficient Australian competitors (economics 101), one would need to consider whether in fact long-run airfares would then return to historical levels, or whether this consumer Utopia - touched on by Andrew and Ellis - would persist.

These aspects - and many more - would be critical in the formulation of any long term position on domestic air rights to foreign carriers, on any scale.

[D Chan]

Originally Posted by Ellis Taylor

And if it was an attractive market, why have more airlines not started their own domestic subsidiaries as Tiger has done?

possibly a few factors:

- foreign ownership cap
- difficulty in starting up operations
- risks involved and capital required
- previous history of the domesic market (demise of Ozjet (as an all business class RPT, Ansett, Compass etc.)
- difficulty with operating with small fleets e.g. less than 5 aircraft etc.

[Will T]

Further to D Chan's points, a number of studies done in the 1990s, post Compass Mk II, concluded that the Australian domestic market (as currently regulated) was a natural duopoly. What's changed since then has been the emergence of a very clear distinction between the price-sensitive/low-end leisure and premium/high-end leisure markets, driven largely by the advent of LCCs (ie. Virgin Blue).

I don't think the market's tendency to duopoly has changed, but in order to be a sustainable player in the duopoly, you need to have both of these segments covered (ie. two brands) such that each duopoly player is now a coordinated airline grouping.

In this way, Tiger's entry was probably catalysed by a perception that Virgin Blue had lost its (cost) competitiveness in price-sensitive leisure, and that there existed an opportunity for a cost-efficient rival to Jetstar at that end. And while Virgin has attempted to move upmarket, it has never stated designs on becoming a full-service, differentiated network carrier, but rather a 'bit of both' New World Carrier strategy.

For all of the reasons listed by D Chan, there are significant barriers to entry domestically. Consider, however, that cabotage rights were granted to Singapore Airlines, with its deep pockets, substantial fleet and network assets, and ability to rapidly achieve sustainable scale in full-service domestic operations. Were it allowed to do so, a rapid scale-up of Singapore Airlines (Australia), as a full-service premium differentiator, in conjunction with its low-cost Tiger entity could form a viable second player in the duopoly (with the Qantas Group as the other), and this would almost certainly squeeze Virgin Blue out of the market in the long run. In any case, such a possibility would likely give SQ ample cause to lobby our government for domestic rights!

[Ellis Taylor]

Originally Posted by D Chan

possibly a few factors:

- foreign ownership cap
- difficulty in starting up operations
- risks involved and capital required
- previous history of the domesic market (demise of Ozjet (as an all business class RPT, Ansett, Compass etc.)
- difficulty with operating with small fleets e.g. less than 5 aircraft etc.

...Which are some of the reasons it is an unattractive market to enter. The only exception is that there is no foreign ownership cap if you want to fly domestically. It's how Virign Blue got started (remember they used to a wholly owned subsidiary of the Virgin Group back then) and TT is 100% owned by Tiger Aviation Group Pte Ltd.

What I'm saying is that if any Tom, Dick or Emirates wanted access to the domestic market to seriously take on the likes of QF, they could already do it, but they would likely not do well out of it. I think even if the routes are opened, at best we'll just see a few widebodies doing some extra tag flights with maybe some interesting aircraft rotations, eg DXB-PER-SYD-DXB.

[Arthur T]

Originally Posted by Ellis Taylor

What I'm saying is that if any Tom, Dick or Emirates wanted access to the domestic market to seriously take on the likes of QF, they could already do it, but they would likely not do well out of it. I think even if the routes are opened, at best we'll just see a few widebodies doing some extra tag flights with maybe some interesting aircraft rotations, eg DXB-PER-SYD-DXB.

I think CX is doing what you want, but just they cannot sell the domestic sectors:

HKG - MEL - ADL - HKG
HKG - BNE - CNS - HKG

Under the one market agreement, NZ just don't want to start it after the pain of Ansett Australia (Otherwise what an opportunity they can have while having some A320s flying major ADL/MEL/SYD/CBR/BNE routes to connect with their *A partners?), where Australia government can negotiate with some countries open domestic skies while ask for something in exchange. For example:

1. If Singapore wants to have domestic rights, Changi Airport must make a special discount to Australian carriers;
2. If Hong Kong wants it, HK Govt must open its sky fully to Australia (that QF DJ etc may even able to operate HK - China flights freely to compete with CX KA and have rights to fly anywhere from HK at their wish, so that Qantas may be able to make some adventurous profits from operating SYD - HKG - PVG/PEK routes, even extend their European network through HKG by operating SYD - HKG - KPH/OSL/ABR/MAD/MAN/DME etc., where even they can't attract Australian passengers, they can attract Cathay's OneWorld passengers to switch to Qantas. Note: Recently there is more and more Northern Europeans would like to go to Hong Kong, so that's a thing that QF worth to think about)
etc...