- Aviation
Current environment
8.1The domestic airline industry is one of the most concentrated industries in Australia, despite the recent domestic expansion of Rex Airlines and the entry of Bonza Aviation. The ACCC’s June 2023 report Airline competition in Australia highlighted that Qantas Group (including Jetstar) and Virgin Australia consistently accounted for approximately 95 per cent of the domestic passenger market over the preceding 12 months.
8.2The Committee received evidence from various stakeholders, including Qantas Group, Virgin Australia, Rex Airlines, Bonza Aviation, Sydney Airport Corporation, and aviation industry expert Mr Peter Harris.
8.3Key issues raised were the allocation and potential misuse of aircraft slots at Sydney Airport, current slot demand and management regulation, access to capital for new entrants, pilot training, and airport fees and charges.
8.4The Committee’s interest in the aviation sector follows prior reviews and inquiries, including the Productivity Commission’s 2019 Economic Regulation of Airportsinquiry, the 2021 Review of Sydney Airport Demand Management Scheme (‘Harris Review’) and the ACCC’s work on airline monitoring throughout 2023.
8.5There was considerable stakeholder support for the recommendations and findings of these reports. The Committee notes that many of the recommendations from the Harris Review are being considered by the Department of Infrastructure, Transport, Regional Development, Communications and the Arts’ Aviation White Paper, expected to be released in 2024.
Competition at Sydney Airport
Background
8.6Evidence presented to the Committee emphasised the strategic importance of Sydney Airport to the domestic aviation network. Any reforms aimed at increasing competition in the aviation sector must consider the current limitations at Sydney Airport, which ultimately have a major impact on the broader aviation network. These issues were raised consistently by witnesses.
8.7Sydney Airport is governed by a complex regulatory framework administered by the Sydney Airport Demand Management Act 1997 and supporting legislation, including the Sydney Airport Curfew Regulations 1998, Sydney Airport Compliance Scheme 2012 and the Sydney Airport Slot Management Scheme 2013.
8.8Evidence from the Harris Review and the ACCC’s Airline Monitoring Review suggests that elements of this framework are inhibiting greater competitiveness in the sector. There are unique regulations within the framework that differentiate Sydney Airport from worldwide industry standards, such as the 80 per hour movement cap, a regional ring fence, a size of aircraft test, and a compliance regime. In the view of Sydney Airport Corporation, these elements and the broader demand management framework, are ‘the most complex, unique and restrictive set of regulations of any major airport globally’.
8.9The main focus of the Committee’s discussions was slot management and related issues, such as access to slots for new entrants in peak times, cancellations of flights, allegations of ‘slot hoarding’, and the 80-20 ‘use it or lose it’ rule.
Slot access
8.10Access to slots at peak time periods are essential for an airline to establish a base of operations, expand its network, and compete for customers. The slot allocation mechanisms at Sydney Airport were discussed throughout the inquiry—particularly access to peak slots and their potential misuse by incumbent airlines.
8.11Airport slots are designed as a solution to a lack of airport capacity, where pre-assigned take-off and landing times are required at airports with high demands on their infrastructure. The stated primary objective of the Worldwide Airport Slot Guidelines (WASG) is to ‘ensure the most efficient declaration, allocation and use of available airport capacity in order to optimise benefits to consumers, taking into account the interests of airports and airlines’.
8.12Sydney Airport has operated as a ‘capacity-constrained’ airport since 1997. Its slots are a public asset owned by the Commonwealth but are administered and allocated by the Slot Manager at Airport Coordination Australia—with a Board consisting of members from Qantas, Virgin, the Regional Aviation Association of Australia, and Sydney Airport.
8.13The ACCC emphasised the importance of peak slots as an enabler of market access in its June 2023 report. It stated that the inability to access sufficient peak slots at Sydney Airport ‘disincentivises new entry and significantly impacts on how much meaningful competition expanding airlines can provide’.
8.14Expanding on this, the Australian Airports Association told the Committee that ‘what happens at Sydney affects all those other airports’, explaining that any constraints—such as access to slots—resulted in constraints across the rest of the network. The Association called for the recommendations of the Harris Review to be ‘looked at’, particularly those addressing more reliable access to slots.
8.15The newest entrant to the domestic aviation sector, Bonza, voiced frustration at not being able to access peak slots at Sydney Airport in seeking to establish a base of operations. While Bonza could access Sydney Airport in off-peak periods, that was not a desirable option. Bonza explained that:
…in terms of aircraft basing, is that it would be all well and good to be able to access slots in the middle of the day, which indeed you can access, between maybe 11 and two or thereabouts. That doesn't assist any airline in establishing a base whereby you are obviously wanting to fly in the morning as well as at lunchtime, and then again in the evening. The proposition of flying during the middle of the day is not a viable proposition for setting up a viable business in a location like Sydney. We would effectively have to base aircraft in Sydney. That necessitates us having access in the morning and in the evening to those peak slots, as well as in the middle of the day.
8.16In Virgin’s view, however, while peak access to Sydney Airport is not currently available, choosing to operate in non-peak slots is still a valid option for airlines to participate in the slot system—potentially aiding their ability to shift into peak slots as they become available. Virgin commented that it has had ‘less than ideal slot timings on a number of routes’ but had worked with the slot coordinator to improve its position over time.
8.17Rex’s experience, in gaining additional slots as it expanded operations, was that it was ‘very hard’ for a new or smaller operator to be a competitor in the domestic airline market. It told the Committee that:
For Rex to move into the domestic airline market, which we did just over two years ago, we have to apply for a slot. When we applied for slots, there were no slots. The previous government had grandfathered all the slots so that anybody who had a slot before the pandemic got to keep it during and after the pandemic. When we applied for slots, we got no slots and had to then wait for the international airlines, primarily, to hand back slots which they felt they couldn't use, and those slots became available to us.
8.18Qantas’ view was at odds with those of other witnesses. It said that the smaller domestic airlines had either received significant additional peak slots during 2023 or had chosen not to participate in the seasonal slot allocation process.
In 2021, Rex commenced domestic jet operations out of Sydney, including during peak periods. In summer and winter 2023, Rex was awarded the overwhelming majority of the additional peak slots it sought, or perhaps all of them: 108 additional peak slots in total. Bonza chose not to participate in the seasonal slot process in summer or winter 2023 and, accordingly, did not obtain any slots.
Historic slots and slot misuse
8.19A major barrier to freeing up peak Sydney slots for new operators was that incumbent airlines received priority allocation for particular slots indefinitely (known as historic slots), as long as their number of cancellations stayed within the 80-20 ‘use it or lose it’ threshold.
8.20The 80-20 rule and historic slots are not unique to Sydney Airport. However, given the fact that the aviation sector is heavily concentrated with two major airlines, stakeholders voiced concerns about the potential misuse of market power via ‘slot hoarding’ by Qantas and Virgin. ‘Slot hoarding’ refers to airlines holding slots for services they do not intend to actually operate – they then cancel the services but retain the slot under “historic usage” rules for the next season (provided they meet the 80-20 threshold).
8.21The 80-20 rule, according to the WASG, is designed to promote effective utilisation of scarce airport capacity at the most in-demand airports, as well as to provide flexibility for unforeseen events. The rule also allows airlines the certainty to publish tickets almost a year in advance, and provides predictability of service patterns. This is beneficial for the planning and investment of both consumers and carriers.
8.22Criticisms of slot misuse are not new and have been raised prior to this inquiry. Sydney Airport Corporation has been advocating for reform to the Slot and Demand Management Scheme since 2017, and has contributed to the Productivity Commission’s 2019 review, the Harris Review in 2021, and the ACCC’s reviews between 2020 and 2023.
8.23The Harris Review acknowledged the debate over whether the 80-20 rule was being responsibly observed, noting that:
…the potential for slot hoarding and other slot misuse is sufficiently present around the world that the WASG now deals explicitly with it. The Review believes it is unlikely that Australia is fully insulated from global bad practice.
8.24In its submission, Sydney Airport Corporation viewed the framework as no longer fit for purpose because it allowed incumbent airlines to ‘accumulate more slots than they need’. Its main frustration was that airlines were ‘incentivised to misuse the slot scheme as a reservation mechanism’ where there is ‘no cost to apply for a slot, no cost to hold a slot, and no cost to cancel a slot’.
8.25Similarly, the Productivity Commission’s review into the economic regulation of airports found that Sydney Airport’s historical precedence provisions ‘could be exploited by incumbents to limit competition between airlines’. Further, the Harris Review found that for popular routes (Sydney-Melbourne for example) operated by incumbents, ‘by being the most attractive (profitable), these routes are exposed to potential slot misuse if it can impede competition’.
8.26Another issue relating to potential slot misuse was the current preference for historic slot allocation over new entrants. An operator is defined as a ‘new entrant’ if, after the initial allocation of historic slots, it has been allocated less than four slots on the particular day it is applying for. A new entrant, therefore, can vary from each scheduling season and the label of ‘new entrant’ does not necessarily mean that the airline is a new operator.
8.27Mr Peter Harris told the Committee that unlike at international airports, new entrants did not get the same priority under Sydney Airport’s Scheme, and that the Harris Review had made a recommendation to alter this.
The hierarchy of preferences favours incumbents still, and altering it was a recommendation in the report, that is, to alter the position such that new entrants were able to obtain slots more readily at Sydney Airport. I think it's a straightforward recommendation because it just brings us into line with international practice. Really it shouldn't be terribly difficult for the Government to respond and put that in place.
8.28This recommendation was supported by the ACCC, which told the Committee that:
We also support the recommendation of looking at the rule which currently favours the incumbent airlines by prioritising them first for a change of slot rather than making it equal for new entrants and incumbents, for example.
Cancellation rates
8.29Cancellation rates are often referenced as an indicator of potential slot misuse, particularly at Sydney Airport. High cancellation rates along certain popular and profitable routes (such as Melbourne-Sydney, and Sydney-Canberra) potentially indicate misuse when compared to overall rates and accounting for factors such as inclement weather.
8.30The Bureau of Infrastructure and Transport Research Economics (BITRE) reports regularly on the on-time performance and cancellation rates for the aviation industry. Sydney Airport Corporation referred to BITRE’s reported cancellation rates on the Sydney-Melbourne and Sydney-Canberra routes in June 2023 as potential evidence of slot misuse:
…8.3% by Qantas, 8% by Jetstar and 10.3% by Virgin on the Sydney-Melbourne route for the month of June 2023. For the same month, Qantas cancelled 11.5% of flights on the Sydney-Canberra route, against an average of 3.1% for June at Sydney Airport.This has been a recurring theme, noting that in the first half of 2023, Jetstar cancellations on Sydney-Melbourne reached as high as 16%.
8.31Qantas and Virgin defended the level of cancellations on some of their routes and rejected assertions that they intentionally exploit and misuse the slot system to restrict competition. Both airlines raised other factors necessitating flight cancellations—such as the complexity of Sydney Airport, staff shortages at Air Services Australia and Air Traffic Control, and unexpected weather.
8.32However, this view was not shared by other witnesses, such as Rex, which viewed the cancellation rates as ‘clear evidence of an airline gaming the slots’. It provided comparative evidence to the Committee as a direct criticism of Qantas misusing its slots—citing the cancellation rates of Rex and Qantas on the same route, with the same aircraft, at similar times:
Qantas will say, 'We cancel these slots for good reasons; because of matters outside our control.’… in June of this year Rex had a cancellation rate of 0.7 of a per cent and Qantas had a cancellation rate of 8.3 per cent. Over the last financial year, Qantas had a cancellation rate on the Sydney-to-Melbourne route of 8.1 per cent, and Rex had a cancellation rate of 2.7 per cent. So you can see that, where Rex is trying hard to utilise its slots—we only cancelled 2.7 per cent on that route—somehow Qantas, operating the same planes in the same weather conditions and in the same circumstances as we do, had an average cancellation rate of 9.6 per cent.
8.33This point was reinforced by Sydney Airport Corporation. It asserted that over the decade prior to the COVID-19 pandemic, the data showed a pattern of behaviour of the major incumbent domestic airlines strategically cancelling flights ‘over and above weather and the reasonable management of operational impacts’.
8.34Qantas, however, in its defence referred to Sydney Airport’s strategic centrality to its domestic aviation network. Cancelling flights on Sydney routes, it said, is often preferable to imposing delays, which can impact multiple flights in one day across its broader network and affect more customers. Qantas added that while it understood that cancellations are frustrating for customers, overall it had achieved the highest level of scheduling performance:
…Qantas has had the highest level of on-time performance of the major domestic airlines for 11 months in a row and the lowest level of cancellations nationally for the past 12 months. Cancellations and runway throughput are driven by a range of factors, including weather and air traffic control staffing shortages. In June alone, a combination of these factors reduced capacity at Sydney Airport on 17 out of 30 days.
8.35A related issue raised by Qantas was Sydney Airport’s inability to deliver the legislated 80 movements per hour. Qantas viewed this as more of a concern than the 80-20 rule, stating that:
When you're not delivering eight out of 80 in a peak hour, there is going to be a challenge in the system and it is going to result in either delays or cancellations throughout. A better planning process, which is done in the global industry, and even some of the Worldwide Airport Slot Guidelines—should be a part of the normal planning process. This has not happened in Sydney. That would be a focal point. We would actively welcome the consideration of what constraints in the system are causing ongoing concern.
8.36Overall, both Virgin and Qantas stated that they were trustworthy players in their approach to slots, scheduling, and the reliability of the broader flight network.
8.37Virgin explained that it had returned 6,000 slots between the 2022 and 2023 scheduling season.
8.38Similarly, Qantas claimed that it had lost slots, particularly on the Sydney-Canberra route. However, while Qantas retained approximately 99 per cent of its historic slots in Sydney, it did concede that this was not the case for the Sydney-Canberra route:
We've lost slots. We have not satisfied the 80:20 on that market. As we look towards our future schedules, it will likely require fewer flights, which is not necessarily a benefit to customers in terms of choice and connectivity. But, to that point, we want to make sure that we can deliver an operationally reliable schedule system-wide. What we have seen with Sydney-Canberra has been an unacceptably high level of cancellations. That is something we are actively working towards for future seasons. The hope is that we can get there and reduce that cancellation rate on Sydney-Canberra.
Regional access to Sydney Airport
8.39Regional access to Sydney Airport is an important part of the Slot Management Scheme. The Scheme provides for the allocation of slots to operators of regional services, where a regional service is defined as a service that takes off and lands within New South Wales. The design of the Scheme guarantees at least some regional access to Sydney Airport through Permanent Regional Service Series (PRSS) slots, a concept known as a ‘regional ring fence’—though Sydney Airport has previously questioned whether the ring fence, designed in 1997 based on regional flying patterns at that time, is sufficient to meet contemporary regional demand.
8.40The Harris Review considered regional access to Sydney and PRSS slots. It observed that not all PRSS slots were being used, with the number of regional carriers and ports served by access to Sydney Airport having fallen over the past 20 years. As an example, 59 per cent of PRSS slots in the 6am-7am hour remained unallocated at the time of the Review.
8.41The Review favoured improving nationwide access to Sydney Airport and using unallocated PRSS slots to increase services to the regions. It recommended revising the definition of a regional service to cover services from airports that were not core regulated airports within the Airports Act 1996.
Australian government aviation policy should favour national objectives rather than parochial State-based preferences. Sydney Airport is a national facility, as constantly emphasised by the airport, airlines and major users such as the tourism industry. This Review can find no reason to deny services from genuine regional centres outside the State to access PRSS slots.
8.42The Committee raised the issue of PRSS slots with witnesses throughout the inquiry.
8.43Rex told the Committee that the initial design of the regional ringfencing of slots aimed to ensure that regional NSW residents still had access to their major capital city airport at a time when the airports were beginning to be privatised. It commented that while the system had been in operation for 26 years and had ‘worked reasonably well’, it was ‘in desperate need of reform’.
8.44Mr Harris shared this view, explaining the importance of reforming, rather than ‘getting rid of’, the ringfence to ensure continued regional access to Sydney Airport:
…as long as regionals are given first preference in how reallocation occurs as a result of reforming the ringfence—it's not getting rid of the ringfence, it's reforming it—we'll guarantee continued regional access to Sydney Airport, and at the same time we will free up a small number of slots per hour, which will be a material contribution in an efficiency sense to the operator of the airport and therefore benefit the consumers.
8.45In a similar vein, Bonza proposed that the definition of regional be broadened to include regional locations across the country, which would allow it to start more non-stop services, including to Sydney. From a competition perspective, Bonza explained, the current definition was an ‘impediment’—while some regional markets already had services, they were generally operated by full-service carriers without a low-cost carrier alternative.
Proposed solutions
Changes to the 80-20 rule
8.46The Committee heard from various stakeholders on changes to the 80-20 rule that would disincentivise the potential misuse of slots and enhance competition for peak Sydney Airport slots.
8.47The Harris Review considered a recommendation to impose a stronger test on domestic interstate flights than the present 80-20 rule. However, the Review ultimately concluded that ‘the evidence is not there to justify this’. Instead other measures, such as revising and better resourcing of governance arrangements to be able to better identify slot misuse, would be essential in addressing slot misuse.
8.48Both Virgin and Qantas also viewed potential changes to the 80-20 rule as unnecessary. Virgin, while understanding that improvements might be required, told the Committee that it felt the ‘slot system works well’. Similarly, Qantas saw any changes as a ‘divergence away from global standards’.
8.49However, other witnesses supported changing the rule. Rex, whose Chair John Sharp was involved in the enabling legislation for Sydney Airport’s operating restrictions as Minister for Transport and Regional Development in 1997, explained that at that time the 20 per cent cancellation figure was considered reasonable. In the contemporary era, though, Rex viewed the 80 per cent threshold as too low, stating that:
…when I put in place the 80 cap there was no science to that. The previous Labor Government were going to implement a cap of 85. There were a lot of aircraft noise complaints at the time; the airport had been blockaded on a couple of occasions.
There were a lot of political issues at the time about aircraft noise….so the figure of 80 is not a reflection of the capacity of Sydney Airport; it is just a political thing. It could have been 85. If Labor had been elected in 1996, it would have been 85.
8.50Rex proposed instead a 90-10 rule, citing Qantas reports that it uses 90 per cent of its allocated slots. In doing so, other airlines would then have greater opportunities to access peak slots at Sydney Airport.
If Qantas is only using 90 per cent of their allocated slots, clearly, 10 per cent are not being used, and those unused slots should all go into a pool, which others can then draw upon, whether it's a Rex, a Bonza, a Qatar Airways or another international airline operator. It would be to everybody's advantage, if that were the case.
8.51Sydney Airport Corporation also supported a tightening of the rule. It proposed 95-5 as a possibility, noting that dispensation was often given to airlines for weather and other adverse events. This would still provide an adequate buffer of 2.5 times the long-term cancellation rate at Sydney Airport of 2.1 per cent.
Transparency, compliance and auditing
8.52The Committee heard evidence that to benefit competition any changes to the slot management system at Sydney Airport must be accompanied by greater transparency and compliance from airlines around flight cancellations.
8.53Currently, the Sydney Airport Demand Management Act 1997 provides for a compliance Committee. This Committee’s primary role is to develop, amend and administer the Sydney Airport Compliance Scheme 2012. Committee members are appointed by the Minister (or delegate) and Committee membership comprises up to 7 members with at least:
- Three members nominated by airlines that regularly use Sydney Airport with at least one nominated by a regional service operator,
- One member nominated by the operator of Sydney Airport, and
- One member nominated by the body that provides air traffic control services at Sydney Airport.
- At present there is a lack of cancellation data, inhibiting the slot manager’s ability to pursue potential slot misuse. Accordingly, Sydney Airport Corporation expressed deep concern with the current regime, viewing it as not meeting the industry’s requirements for transparency and greater certainty to enable planning.
We don't have full transparency of how the slot coordinator makes decisions, so I don't have a view about whether they are or are not following the rules adequately. Some of the rules they are being asked to follow, like the 80-20 rule and the rules around potential patterns of cancellations and whether they have the requisite powers to address categories of slot misuse, need to be considered.
8.55Further, Sydney Airport Corporation noted that any reform to the 80-20 rule would require a more meaningful compliance Committee framework, one with the authority to issue penalties for slot misuse. Not only did the compliance Committee lack these necessary powers, the Sydney Airport Corporation continued, the Committee had not met in its current form since 2015.
[the compliance Committee] is limited in its scope to determining only if an airline purposefully arrived late, or arrived without an allocated slot. With such a limited scope, even if the Committee had been meeting, it has no ability or power to consider or sanction slot misuse. In this sense, the Compliance Committee is a 'toothless tiger', and is not an effective deterrent to airlines cancelling services for strategic reasons and hoarding slots.
8.56The Harris Review made recommendations to strengthen the compliance Committee’s scrutiny and enhance the transparency of cancellation data. In particular, the Review proposed that additional compliance resourcing focus on scrutinising cancellations data for selected domestic slots where gross cancellations materially exceeded the domestic services average. Additionally, the Review recommended independent auditing of slot management and cancellations, with the data and conclusions of the audits to be published in a timely manner.
8.57Expanding on this, Mr Harris told the Committee that a ‘forensic audit’ would obtain meaningful cancellation data, enabling determinations to be made about whether alleged cancellation reasons were legitimate. He believed that:
With better data it’s quite plausible that a compliance Committee can pursue allegations of slot hoarding to a conclusion, which at the moment it’s quite difficult to do. What I’ve suggested is there are good forensic and audit techniques to follow up a particular slot and get a report on each of the performances that did result in a cancellation and report that back to the Committee.
8.58Airlines also supported greater transparency and a functional compliance Committee, including as a forum for data audits.
8.59Qantas told the Committee that:
Anything that improves transparency and alignment with the global standards, the Worldwide Airport Slot Guidelines, we are very supportive of. We have nothing to hide. Anything that supports this transparency we would support. The Department of Infrastructure, through the Sydney Airport Demand Management Act, has a slot compliance Committee, which we have actively participated in in the past. That would be the appropriate forum for any audits to occur, should it be resurrected and continued.
8.60Rex told the Committee that auditing, while it was ‘low-hanging fruit’, would have significant benefits for Sydney Airport if it resulted in misused slots being reallocated to other operators. It explained that:
…four extra flights could go into Sydney Airport to allow for more competition, to bring more people, more tourists, and more income into the country. That alone would make a difference.
8.61More broadly, the Australian Airports Association proposed to the Committee that the Government reestablish monitoring of the airlines by the ACCC—introduced by the Morrison Government during the pandemic, the ACCC was previously directed to monitor prices, costs and profits relating to the supply of domestic air passenger services, a practice that was discontinued in June 2023. The Association described the decision to end monitoring as ‘disappointing to consumers and to the airports, regarding understanding what’s happening in the market’.
Reform intent
8.62Projecting forward, Treasury told the Committee that it was considering aviation as part of the Government’s current competition review (for more on the review, see Chapter 4: Economy-wide measures to boost competition and economic dynamism). Though still in the early stages of its review, Treasury was ‘very interested’ in compliance mechanisms regarding demand management at Sydney Airport and noted that auditing had been put forward consistently by the Harris Review and by stakeholders as a reform imperative.
8.63It is also noteworthy that the ACCC ‘strongly supports’ the implementation of the Harris recommendations relating to independent auditing and the capacity to enforce the 80-20 rule. Summarising the potential benefits to competition, the ACCC told the Committee that:
…there are a number of the Harris recommendations that we think are very important, and it's very timely to do it. We have Bonza, a new entrant, we have Rex wanting to expand, and we have a substantial level of demand by travelling customers, who are looking for the improvement in service and reduction in price which more competition would bring.
8.64On demand management at Sydney Airport, the Committee notes the overwhelming weight of evidence supporting reforms to slot management, with an emphasis on improved transparency on cancellations, and on compliance. In particular, the Committee notes the Harris Review as an authoritative reference point.
8.65It is also clear to the Committee that promoting competition and removing barriers to entry through stronger compliance are different issues to other elements of Sydney Airport’s framework, such as curfew and the rolling movement cap—which should not be considered as within the purview of this inquiry.
Other competition issues
Pilot training
8.66The ability to train and recruit pilots is crucial for smaller airlines seeking to expand their operations and achieve scale. Without dedicated investment in pilots and training, airlines are unable to operate larger schedules. Evidence provided to the Committee by Rex and Bonza—which have significantly smaller operations than Qantas and Virgin—highlighted to the Committee the challenges of obtaining and retaining pilots.
8.67In Australia, there is both a ‘gap in the market’ and ‘significant local constraint’ on pilot numbers. Many pilots retired early or left the profession during the COVID-19 pandemic. Additionally, higher salaries overseas had contributed to the shortage.
8.68Generally, smaller startup airlines and potential future entrants to the aviation sector lack the pilot training capacity to inject greater depth into the Australian market. Currently, Bonza sends its pilots overseas for training and uses a simulator in Fiji for its operator proficiency checks and line training. 777 Partners, which owns Bonza, explained to the Committee that it would prefer to be able to train onshore—which would also help retain jobs in Australia.
8.69Rex, however, has made significant investments in its pilot training capabilities domestically. It explained to the Committee the importance of investing in pilots for its future and the sector’s future, and how its approach differs from Virgin and Qantas:
We invest heavily in our pilots because we believe we need to invest heavily in our future, and pilots and the training of them are a very big part of our future. You won't find that with Virgin. Qantas pays some lip-service to it in Toowoomba with a service which is operated by another company, but which has the 'Qantas' name over the door.
…
We train both our cadet pilots and pilots for other airlines around the world; and we also train our flight attendants there. We are the only airline in Australia that actually has made that investment. We're the only airline that's trying hard to build people with the right skills to take our industry and our business forward. They are the main areas of training: engineering, flight attendants and pilots. As for the others, we have a facility in Sydney, for example, for check-in staff, ground staff and so forth; we have facilities in Sydney and other capital cities where we train those people in a much smaller training program.
8.70Rex also accused the major airlines of potentially anti-competitive recruitment practices. It claimed that Qantas and Virgin have actively recruited large numbers of already trained pilots from Rex, restricting its ability to grow its operations.
In 2008 we lost just over 50 per cent of our pilots to Qantas and Virgin Airlines over a matter of months. They had ordered a significant number of new aircraft but hadn't planned any training of pilots and hadn't prepared to organise pilots until the last minute. They just came to Rex and took pilots from us. We are going through that same experience today. If you are a Qantas and you want to keep Rex on a short leash, the way you do it is you say from time to time, 'We'll take 40 or 50 of their pilots.' You don't take first officers—you take captains. You take those captains and you put them in your own airline business, knowing that it takes many years to take a first officer to the role of a captain. So taking our pilots from us will restrain our ability to grow and meet our schedule.
8.71To help tackle the pilot shortage and its impact on airlines’ daily operations and growth potential, Rex proposed enforcing training requirements on airlines. This would be a ‘great help to the industry’.
If you are in government, why wouldn't you say to an airline: 'You need to invest in your future. You need to train people. You need to train them in-house for your own needs, rather than relying on other people to do it for you and then taking those people from them’.
Airport fees and charges
8.72Evidence provided to the Committee by Qantas, Rex, Bonza, and Virgin Australia pointed to airport fees and charges, particularly security charges, as a factor in their rising cost bases. Increasing cost bases can erode competitiveness by reducing profit margins and potentially lead to higher ticket prices. If airlines struggle to offer competitive fares, this can negatively impact their market position.
8.73Qantas said that airport pricing was a ‘major cost pressure’ and that the current regulatory regime covering commercial dispute resolution between airports and airlines was not working. Qantas explained that the issue ‘is made worse by high levels of cross-ownership by the large funds buying into these monopoly assets’.
Dedicated pricing principles, for instance, drafted to solve this problem have never been formally enshrined and are, therefore, unenforceable and typically ignored by airports. In this Committee and in the upcoming Aviation White Paper process, consideration must be given to policy settings that will help with the efficient resolution of commercial disputes between airlines and airports, helping to unlock growth and put downward pressure on airfares.
8.74Virgin Australia highlighted that lowering its cost base was key to being more competitive—however there was limited transparency around the basis for airport fees and charges. It viewed an intervention mechanism as potentially beneficial in arbitrating airline discussions with airports about charges when negotiations have broken down. The intervention mechanism could potentially be administered by the ACCC. Virgin told the Committee that:
As airports are not incentivised to reduce operating expenditure, these costs are simply being passed on to airlines, increasing our cost base and increasing airfares. The same issues remain with negotiating with airports as have existed for many years. We have no choice but to accept their price offers, there is little to no transparency in relation to price and service levels are poor.
8.75The ACCC, in its Airline competition in Australia report released in March 2023, expressed concern that the current regulatory regime for airports, based on monitoring of Sydney, Melbourne, Brisbane and Perth, ‘does not adequately constrain airports from using their market power in setting airport charges’. Further, the ACCC viewed airport charges as a barrier to competition, entry and expansion where lower-cost airlines are ‘unlikely to be able to operate out of high-cost airports’.
8.76Additionally, the Committee heard from Treasury that the mutual interests of dominant airlines and monopoly airports in Australia would likely be considered in its competition review. This would include the price new entrants face when trying to access particular airports as a barrier to entry.
Security fees at regional airports
8.77Another element that can affect an airline’s cost base is security charges at regional airports, which can be prohibitive and add to difficulties in operating services where profit margins are already minimal.
8.78Airport operators and screening authorities are responsible for delivering the minimum legislated security requirements, and therefore impose fees on airlines. In some cases, an airport may even choose to implement security arrangements beyond the regulatory requirement, such as screening all passengers. Rex, for example, explained that security screening costs were a factor in it exiting the Whyalla to Adelaide route in July 2023—when the Whyalla City Council decided to impose legally non-required passenger security screening charges. Rex described the screening costs as ‘in the order of $40 to $50 per passenger’ and ‘prohibitive for us’.
8.79To assist with these security cost pressures on regional routes, Bonza proposed that a national charging mechanism, such as allocating a national charge based on national throughput (rather than the throughput rate of the individual airport), would assist with growth. Bonza explained that:
Security costs are levied by airport, based on the throughput of the airport. That basically means that if you happen to have an airport with a couple of hundred thousand customers going through it each year, you may pay $15 to $20 per customer to go through that airport. That's a very prohibitive cost if you're trying to encourage people to fly. Driven by volume, in the capital city markets the security costs may be sub $1.
Access to capital
8.80The aviation sector is a high-cost and high-risk sector. It is often subject to external shocks. For prospective entrants, access to capital to fund operations is considered a barrier to entry and greater competitive activity.
8.81The ACCC notes that while barriers to entry into the airline industry remain, most of the new entries over the past 30 years have been made by airlines adopting the low-cost carrier (LCC) model as opposed to operating as a full-service carrier, which require interconnected routes, airport lounges, frequent flyer programs or interline agreements with other airlines.
8.82LCCs generally need ‘less capital to enter and less revenue in order to cover their costs and remain profitable’, therefore supporting competition by increasing the number of airlines that can sustainably operate in the market. Bonza is the latest LCC to enter the Australian domestic market—the most recent since Tiger Airways in 2007.
8.83Qantas told the Committee that barriers to entry in Australia were ‘very low’ and that the successful entry into the market of Virgin, Rex and Bonza demonstrated this. It pointed out that Australia’s rules on foreign owned carriers differed from other international jurisdictions, in allowing wholly foreign-owned entities to commence operations in Australia:
Unlike virtually every other jurisdiction in the world, any foreign carrier, any foreign entity—take Virgin and Rex, for example—can set up here and start a domestic airline. In the US you have to be no less than 25 per cent American-owned. In other jurisdictions it is well above 50 per cent. The ability for well-cashed operators to start in this country is easy. Bonza's entry is an example of that. With very limited capital and using leased aircrafts they have started full jet operations between regional ports in the country and some main-line operations.
8.84While airlines with adequate capital may face few barriers to entry, the Committee heard very different views from Rex and Bonza.
8.85Rex stated that:
As for access to capital, if you want to start an airline in Australia, it is extremely difficult to find anybody who will provide you with the capital to do that. When we decided to expand into the domestic market, we found a source of funding via a private equity firm called PAG. But capital is a problem.
8.86Similarly, Bonza emphasised to the Committee that while Australia is ranked the 8th largest domestic aviation market in the world, it is the only market that had no independent low-cost carrier prior to Bonza commencing operations in 2023. It stated that:
…the fact that, unfortunately, the last three major high-capacity airline start-ups in Australia have been funded by overseas investment is a sad indictment of competition and the centralised control of this market segment here in Australia. That is an unfortunate reality.
8.87Access to capital in the broader economy is discussed in Chapter 6: Finance.
International best practice in consumer protections
8.88Travel services come with basic consumer rights. These include the guarantee that services will be provided within a reasonable time after being delayed or cancelled. However, there is no set definition of what constitutes a reasonable time.
8.89Consumer rights are crucial to ensure that passengers are treated fairly in the event of disruptions. Various jurisdictions around the world have implemented measures to safeguard consumer rights.
8.90For travel in Europe, Regulation (EC) No 261/2004, passed by the European Parliament, establishes common rules on compensation and assistance to passengers in the event of flight cancellations, delays or they are denied the right to board a flight.
8.91In the United States, there is no statutory compensation scheme for flight delays or cancellations. Instead, each airline follows its own set of policies, detailed in its ‘Contract of Carriage’.
8.92The European Union, through Regulation (EC) No 261/2004, has set a precedent by establishing comprehensive rules around consumer protection for air travel. The various protection is laid out in the regulation’s various articles.
- Passengers have the right to compensation in the event of a flight cancellation, unless they are informed of the cancellation at least two weeks before the scheduled departure time, or are offered re-routing that allows them to depart no more than two hours before the scheduled time.
- Compensation is also available for flight delays. Article 7 specifies that compensation is determined by the flight distance and the duration of the delay and ranges from €250 to €600.
- There are also consumer rights around due care. Article 9 states that regardless of the reason for the delay or cancellation, airlines must provide passengers with meals, refreshments, and potentially hotel accommodation. Where passengers are denied boarding because of overbooking, they are entailed to compensation.
- Compensation is not required where airlines can prove the cancellation or delay was caused by extraordinary circumstances, such as extreme weather conditions or security risks.
- In the United States, the Department of Transportation (DOT) has begun implementing rules that mandate airlines to compensate passengers and cover specific costs for delays and cancellations. The US Transportation Secretary Pete Buttigieg has stated that:
When an airline causes a flight cancellation or delay, passengers should not foot the bill.
8.94Evidence suggests that following a two-year effort by the DOT, there has been a noticeable improvement in the treatment of travellers. The ten largest airlines now guarantee meals and free rebooking on the same airline, while nine of them also offer hotel accommodation.
8.95The Department of Transportation provides an Airline Customer Service Dashboard, highlighting the airlines that provide cash compensation, travel credits, vouchers, or frequent flyer miles to compensate for delays or cancellations. The DOT's forthcoming regulations will mandate such compensation and services.
8.96The Committee raised the idea of specific consumer entitlements for delays and cancelations with various witnesses.
8.97Mr Harris viewed the design of a regulatory regime in relation to passenger rights in the event of a cancellation as ‘complicated’, particularly when considering the threshold between a delay and a cancellation. Further, Mr Harris commented that while it was ‘plausible’ to design a scheme without creating perverse incentives, he did not view financially compensating passengers as the ‘highest priority’.
8.98Sydney Airport Corporation also shared its view on a specific consumer entitlement and framework around cancellation and delays. Sydney Airport Corporation told the Committee that compensation does not ‘address the root cause’ of delays and cancellations—and that addressing these would also address the need for a specific compensation scheme.
Committee comment
8.99It is the Committee’s view that to promote greater competition in the aviation sector, previously discussed reforms to help new and expanding airlines obtain slots at Sydney Airport should be implemented. While aviation was not the sole focus of the inquiry, the sector is one of the most concentrated industries in the country, and this has significant impacts on the lives of Australians and the functioning of the economy.
8.100Reforms, such as those recommended in the Harris Review, would allow greater competition through providing more choice to consumers, which is essential in a market where two operators control 95 per cent of the market. The evidence received by the Committee has demonstrated that there is resistance to change from incumbent airlines, which only serves to reinforce the importance of this issue.
8.101There is also clear support for some, if not all, of the Harris Review’s recommendations from across much of the aviation sector and other stakeholder groups, such as the ACCC. The Committee encourages the Government to consider these recommendations as part of current and future work in the sector, such as the Aviation White Paper and the Competition Review.
- Flight cancellations and delays have increased in frequency on some routes.
- It is not clear that high rates of cancellations and delays are solely or primarily due to factors beyond the control of airlines.
- These trends have had significant negative effects on consumers.
- Accordingly, consideration should be given to greater monitoring of cancellations and delays and, in addition, consumer protection measures.
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8.102That the Government explore which longer term competition policy settings can provide appropriate oversight of the airlines.
8.103That the Government consider, as part of the Aviation White Paper, strengthening consumer compensation arrangements and consider adopting measures to enhance consumer protection in aviation services, similar to other jurisdictions.
8.104That the Government examine the suitability of current ‘use it or lose it’ arrangements for airport slots.
8.105That the Government progress reforms to Sydney air traffic demand management.