I am delighted to publish this guest post from my former colleague Craig Wilson, who is now Managing Director of DeltaPearl Partners. Craig will be well known to many readers as a result of his former senior executive position in the Queensland Department of Premier and Cabinet. His guest post is based on recent work he has undertaken for Mount Isa City Council. The post contains Craig’s views, and they should not necessarily be attributed to me. I am sure Craig would very much welcome comments on this guest post. GT
Why is it so? Regional Queensland airfares 2-3 times higher than in the city
by Craig Wilson
Toward the end of 2017 the Australian Senate announced an inquiry into the operation, regulation and funding of air services into rural, regional and remote in Australia. Among other things the inquiry will consider air fare pricing, competition, regulation and service quality as well as the socio-economic impacts of these things on communities and the economy. The announcement of such an inquiry is not surprising – the issue of high air fares and poor service quality on flights in and out of regional centres has been a hot button issue for communities across the country for some time.
Let’s take Mount Isa, for example, whose City Council has prepared a detailed submission to the Senate inquiry investigating regional air services.
Mount Isa is a significant regional centre in northern Australia and lies at the heart of the North-West Minerals Province, the largest zone of mineralisation of its kind in the world. The Mount Isa economy generates around $2.4 billion annually in value-added output and $1 billion annually in tax revenues for the state and federal treasuries.
Despite this significant economic contribution, regional centres such as Mount Isa feel second class because of the price and quality of air services they receive and, as a consequence, communities and local governments are becoming increasingly vocal in their demands for a better deal. At a headline level, the analysis in the Mount Isa submission has found that, on a per kilometre basis, Mount Isa travellers are paying two to three times more in air fares than passengers flying out of Australia’s major metropolitan centres on comparable journeys (Table 1).
Mount Isa residents state that it is often cheaper to fly overseas than to fly to Brisbane. To compound the disparity, service standards are typically lower with older aircraft and fewer onboard services such as food and entertainment.
Excessively high air fare prices impede the growth of business, especially small business, and isolates residents and lessens their quality of life. Local residents argue that this is a bitter pill to swallow when they see high subsidies for public transport in south-east Queensland, and high subsidies going to under-utilised passenger rail services in regional Queensland. They do not understand why they are exposed to the high price of market failure and/or monopoly pricing, and they believe the second-round economic effects of this policy failure are adverse.
It is also difficult for young families to move to, and remain in, Mount Isa as it is so expensive to fly and to keep in contact with family and friends outside Mount Isa. For example, a family of four thinking about flying to Brisbane will save over $2,000 by driving 900 km to Townsville to catch a flight. In cases of unplanned travel such as a medical emergency, residents can expect to be hit with one-way fares of more than $1,000.
Since the aviation reforms of the 1990s, passenger numbers on most major Australian aviation routes have boomed off the back of lower airfares and greater choice of carriers (Figure 1).
Figure 1: Index of real airfares, 1992 to 2017
Source: BITRE, 2017, Domestic air fares indexes.
However, in preparing its submission, the Mount Isa City Council found that the benefits of these reforms have largely by-passed Mount Isa and other similar centres. The submission concludes that discounted air fares are rare and passenger numbers through the local airport have barely changed in 30 years (Figure 2).
Figure 2: Index of domestic passengers, 1985-86 to 2016-17
Source: BITRE 2017, Airport Traffic Data.
A range of factors contrive to generate these untenable high cost and low-quality air services in regional centres. These factors include lack of competition, exposure to monopoly-owned asset operations (i.e. regional airports), government policy restrictions, high taxes and charges, and lack of transparency on costs.
Analysis has shown that Queensland Government transport subsidies in south-east Queensland are not replicated for transport services for communities in regional Queensland. An examination of Queensland Government expenditure on public transport shows that it is concentrated in south-east Queensland, especially on the city rail network. The result is that the state government supports public transport to the extent of $568 per person per annum in the south east. This is almost two times (85%) more than the $308 per person the Queensland Government spends on public transport in the remainder of Queensland.
Meanwhile, federal government support is limited to modest subsidies for tiny rural airports servicing communities of less than 200 people. Known as the Remote Airstrip Upgrade Program, this subsidy provides funds to improve runway surfaces, storm water drainage and navigational aids. For example, in 2015 $11.8 million was provided for upgrades at 52 aerodromes and a further $11.6 million was committed for 2017.
It is defensible to say that the Mount Isa City Council submission reflects a commonality of issues facing other comparable regional centres. The Mount Isa City Council has, consequently, developed a set of hard-hitting recommendations, arguing that a half-hearted response won’t suffice.
Mount Isa City Council recommendations on regional airfares
Airfare Parity: that the Australian and Queensland Governments introduce a scheme to ensure that airfares in regional and remote Queensland are price-equivalent (allowing for differences in efficient costs) to comparable air services between the major metropolitan centres in Australia and along coastal Queensland as is the case with, for example, electricity prices.
Price Monitoring: that the Australian Government:
- directs the ACCC to initiate a price monitoring regime to monitor regional and remote airfares to identify and report any profiteering by the airlines.
- establishes and manages a standing public information system dedicated to regional and remote Australia through which passengers in regional Australia can adopt strategies to take advantage of any airfare discounts.
- provides funding to a small group of local governments across Australia, perhaps one or two from each state and territory, to form a collective local government mechanism to maintain an ongoing policy dialogue and monitoring role on this topic, for an initial five-year period.
Cost Reductions: that the Australian Government reduces the operating cost of regional and remote airlines, by:
- introducing an access regime, or other appropriate measures, to ensure that there is effective competition in the supply of aviation fuels at Australia’s major airports.
- removing excise taxes on aviation fuels used by regional and remote airlines.
- removing impediments (e.g. insufficient visas) for qualified foreign pilots and other key airline staff to work in Australia.
- directing the ACCC to monitor prices at Australia’s regional airports and to approve the prices at the major airports for regional air services.
- exempting regional airlines from paying Airservices Australia’s charges.
Competition Enhancements: that the Australian Government:
- establishes an ongoing, formalised program of cooperation with the regional airlines to identify further opportunities to reduce airline costs.
- allows overseas airlines to operate in regional Australia, by removing the requirement that regular public transport airlines operating in Australia need to be an Australian company.
Subsidies: that the Australian and Queensland Governments expand their direct financial support for regular public transport to aviation in regional and remote Australia, in line with other forms of public transport in metropolitan areas.
Craig Wilson is Managing Director of DeltaPearl Partners, a strategic economic and policy advisory firm. He was previously a long-term executive at the World Bank and Senior Executive Director for Economic Policy in the Queensland Department of the Premier and Cabinet. DeltaPearl Partners provides ongoing economic advice to Mount Isa City Council and recently supported preparation of their submission to the Senate Inquiry.