Why is it so? Regional Qld airfares 2-3 times higher than in the city – guest post by Craig Wilson

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).

cw_table1.png

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

CW_Figure1

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

CW_Figure2

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.

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9 Responses to Why is it so? Regional Qld airfares 2-3 times higher than in the city – guest post by Craig Wilson

  1. Katrina Drake says:

    Regional Air Fares are really beyond the means of fare paying passengers, and are now only marketable to government and big business, with assisted patient travel schemes, and FIFO workers being a major share of passengers.

    Regional Air Fares are high, but remote Air Fares are another level of exorbitant all together.
    Try Millingimbi, Darwin, Brisbane return, or Thursday Island, Cairns, Brisbane return. Cheaper to fly to the moon.

    High remote air fares enforce social isolation of communities, and are a blight on our tourist industry.

    Hopefully the senate enquiry will result in some financial stimulation to the general aviation industry, currently our remote citizens are shouldering the burden.

  2. Jim says:

    Craig

    An interesting post. You ask “why is it so?” You have covered off on some of the main reasons (e.g. lack of competition by route), but perhaps missed some of the more fundamental ones:
    1) In addition to the fixed and variable costs of operating an aircraft, airfares also need to cover a bundle of fixed on-ground costs that are invariably higher in regional airports due to much lower utilisation rates (think airport security, terminal building, runways etc.). These costs are not insignificant and unless you understand and analyse those costs, you cannot credibly estimate any actual price gouging.
    2) For many regional destinations (think Mt Isa, Townsville, Gladstone, Moranbah), the bulk of passengers are business travelers, don’t pay for the airfare themselves, and are significantly less price sensitive. This makes price gouging a bit easier (if it actually occurs – but I doubt it).
    3) Regional destinations often have quite stable business passenger numbers (e.g. FIFO schedules are known, and many mines have bulk bookings on a take-or-pay type of basis). This makes matching supply and demand on routes pretty easy and the likelihood of excess capacity is often pretty low. So there is little need for discounting, and expanding capacity to see cheap airfares simply doesn’t make commercial sense.

  3. Glen says:

    Great post Craig, as someone who has made his away around Qld and NT for many years it is a subject that I have have found very frustrating and one that few seem to want to address with any real outcomes for change. What compounds the problem even more is that I spend a lot of time on regional air services, and a lot of that time is spent on planes that are only half full and sometimes down to single numbers of passengers. You point out the obvious two areas that need addressing,airports and airlines.
    There is no doubt the privatisation of regional airports has failed in the majority of cases. Mt Isa and Townsville are classic examples, both of these airports are owned by QAL, a very small player in the market with its main asset being Gold Coast airport. A small market operator like this doesn’t have the capital base required to invest in its assets and grow their business, so the assets remain neglected and business growth becomes stagnant or in the case of Townsville and Mt Isa passengers numbers actually decline over the last 7-8 years. A larger owner like Brisbane or Sydney airports would have the ability to leverage off their other assets and invest in smaller airports like Townsville or Mt Isa.
    The second part of the equation is most regional carriers are either large airlines new like QF or VA or are subsidiaries of larger airlines who work off the same businesses model that doesn’t work in regional areas. That model dictates discount seats for early purchase fares and then margin comes from corporate , Govt or those booking closer to departure time, this doesn’t suit regional operations and leads to half empty planes flying on a very regular basis. Airlines in regional areas need to look at once again introducing stand by fares where the thousands of empty seats can be filled.
    Let’s hope something is done to address the current situation but I have been watching it happen for over 20 years so I won’t hold my breath.

  4. Michael Roche says:

    Those of us who travel up to Mount Isa for work were excited when Virgin started up a Brisbane to Mount Isa service. Under the Qantas monopoly you paid through the nose and you could not do a return trip on the same day. With competition fares and flight options improved but with the mining slowdown and cutbacks the flight options have fallen away. The earliest you can get into Mount Isa is 11.50am, so if you want a full day in Isa you really have to go up the afternoon before. Virgin seem to only offer one flight a day between Isa and Brisbane. Craig’s analysis is interesting but things are only going to improve when if there is a pick-up in demand and Virgin again offers some real competition.

  5. Pingback: The secular decline of Mt Isa | cairnseconomy

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