This paper would present an important issue at hand which is being faced by Australian Airlines and what policies would need to be recommended in order to overcome these issues. The problem is being addressed as outlined in the report titled “International Air Services”. At present, the Australian International Airline Service makes use of a bilateral agreement set-up with a number of countries given the status of an International Treaty Status. However, post-1996 certain recommendations were put forward in order to change this situation. A number of issues were considered as part of this review process which included the current regulatory/legislative framework such as the multilateral and bilateral structures. This would mean a direct reference to the commercial rights hence this review also sought out to identify the effect that these subsequent changes would have on the global competition. Another important point to be considered was that of the effect on Australia’s existing and potential international aviation markets with reference to the international agreements which it had its bilateral partners.
Introduction
At present, the International Air Services Commission was providing certain benefits to the Aviation industry and even these benefits were reviewed in order to verify their effectiveness. The costs/benefits approach used was a method of confirming the effectiveness of the overall industry and its efficiency. Different options were reviewed which had allowed the aviation industry more liberalized.
After carrying out the comprehensive review outlined above, the commission was able to diagnose certain significant findings which varied from the system being ineffectual, its inability to meet the demands of the expanding system. It was especially seen that these very deficiencies in the system were resulting in major repercussions such as customer dissatisfaction and industry loss.
The following excerpt from the report highlighted certain significant issues:
“The global aviation industry has reached a critical point in its development. The inefficiencies imposed on the world aviation industry by the current bilateral system and the benefits of more efficient, internationally competitive air services are now apparent. Reciprocal ‘open skies’ agreements are spreading.” Inquiry Report (1998).
Main Recommendations
The Australian Government was outlined as a body that had not been to catch up with the chain of change and progress and hence, adding to the failures of the system. In order to improve the status quo, a Commission was set up in order to tackle the issue. As is the case with any Aviation industry, the need for a Commission was recognized for the purposes of monitoring and ensuring better service provision.
The following section of the paper will outline those recommendations in brief detail.
The solution provided by the Commission was one that included a policy of reciprocal open skies:
- Bilaterally
- Plurilateral
- Multilaterally
For the Commission safety was a major concern and hence, one of its major conclusions was its emphasis on safety which could not be comprised under all possible circumstances. In order to ensure that the Australian Aviation industry was able to attract more and more clientele, the commission supported changes that would allow it to do so through the introduction of special measures.
Hence, the Commission was able to identify a dire need for much more transparency in the system and greater consultative processes in order to achieve greater development in the International Air Services. Inquiry Report (1998)
The above highlighted the Commission’s findings and the areas which it felt were significant to the success of Australia’s Aviation Industry.
Analysis of the Recommendations
The following paper would examine the impact while also outlining any possible altercations in order to ensure that the Aviation industry of Australia would be able to achieve the greatest possible success in its international endeavors.
History
If one was to analyze the history of the Australian Aviation industry, then one would find an impressive one for sure as it has had the honor of being the world’s sixth-largest airline in terms of its ability to generate revenue and passenger attraction. However, as of recent the growth rates of the Airline industry were lower than the average which resulted in the review process and the consequent recommendations.
As had been the case always, the restrictions regarding the Australian Aviation Industry were always strict and ensured strict compliance; a case different from the rest of the world as worldwide the trade liberalizations have been getting more and more popular amongst them. An example can be quoted of the United States which has effectively removed most of the market and trade restrictions and has created an example of itself for others to follow.
Recent Developments
However, as of recent, the bilateral system has been under pressure as a result of the more liberalized agreements, numerous changes in the existing systems as a result of institutions such as the International Civil Aviation Organization and the WTO.
While the Australian Aviation Industry has made significant changes in its policy following the increase in competition, stiff pressures on the bilateral system, etc.
Added to the above issues are certain restrictions are factors such as restrictive ASAs which have not allowed the Australian Aviation Industry to develop at the same pace as others.
Thus the recommendations of the Commission would be analyzed in order to comprehend the effect and the sort of improvements that would take place in the Australian Aviation Industry. The following paper will seek to do so in great detail.
Findings of the Committee and their subsequent effects
The Commission’s recommendation has been that these restrictions should be modified or removed which would result in the Australian Aviation Industry gained certain important economic benefits.
According to this recommendation, the greater would be the liberalization, the more would Australia be able to benefit from greater access to newer markets, more freedom to carry out trade, etc.
Thus, the effect on the Aviation industry would be first to carry out unilateral trade liberalization which would benefit it surely. Hence, proving that the aftermath of the recommendation would certainly prove to be fruitful.
Other certain options which could be looked into by the Aviation industry could be the Unilateral Open skies, bilateral, plurilateral, and multilateral liberalization policies as advised by the WTO.
The option of Unilateral Trade was viewed by the Commission and the eventual conclusion was that the Australian Aviation industry would not be effectively carried out these policies by itself.
In addition, certain areas need to be analyzed for the Improvement of any airline industry; the same is the case with the Australian Aviation Industry. In order to increase the efficiency as the US airline was able to do so effectively, the Australian Aviation industry must increase its load percentage; attempt to decline its real costs per revenue ton-mile.
These suggestions by the Commission would aid the Aviation Industry in order to maintain its competitive position in the international industry.
The proposed deregulation policies of the Commission would add to aiding the Australian Aviation’s issues. By redefining its corporate policy to one defined by the Commission the aviation industry would benefit from lesser truckload costs, lesser empty miles, more return on equity.
At the same time, the proposed deregulation policy has also resulted in greater competition for the Airline industry in general meaning that there would be more supply for the existing demand hence creating competitive prices.
The exact effects of deregulation would be hard to predict due to the fickle nature of the international market, operating systems, and even the technological systems. The real people to gain from deregulation are hence the consumers who benefit from the greater competition and also from the lower prices as a result.
As outlined by John Quiggin in his book titled “Evaluating Airline Deregulation” :
“With the repeal of the Two Airline agreements under hQ Airline Agreement Termination Act, which came into effect on 30 October 1990, restrictions on the setting of fares were abandoned, along with limits on entry to the industry. Compass Airlines entered the domestic aviation market as soon as the Act came into effect, offering a single class of service at prices well below those of the incumbents.” Quiggins (pp 45-56).
According to the theory of Neoclassical, a profit-maximizing firm is one that operates in a manner that will allow it to minimize its costs. However, those firms which face regulation as was the case with the Australian Aviation industry was quite different as their choices are to a great extent controlled by the government. However, the recent moves and suggestions by the commission portray a different side to the entire situation.
Hence what is coming across is a picture of a totally different government structure; one that is more willing to allow the Australian Industry to take charge and monitor its own decisions.
As it has been proved in Australia’s case that regulation can cause inefficiency, thus these changes would mean that the Australian Aviation industry would be completely revolutionized.
In order to catch up to its low-cost competitors, the Australian Aviation industry would need to display certain distinct advantages which would allow it to attract a greater demand. However, the industry would need to be provided certain incentives by the government such as the subsidization of carriers, etc which would allow it to grow and develop internationally. (Lecture Three).
One of the major reasons for the growth of any Airline is Innovation and hence, the Commission’s proposal of introducing greater ties would prove to be beneficial as this way the Australian Aviation Industry would benefit from the greater exchange of knowledge.
This greater communication of service provision would aid the Aviation industry to gain a more competitive position in a market strongly influenced by the forces of demand and supply. (Lecture One).
One of the means to measure any customer’s happiness is through marginal utility and hence, as long as the airline is providing competitive prices and services the marginal utility would remain high. In order for the Australian Airline to achieve that, it would need to cross its present restricted quote and be innovative, competitive. (Lecture Two).
Since Australia at present enjoys better bargaining power, that will allow it to truly experience better trade relations as this is not a common feature in the airline industry. As ordained by the Commission in its report, through a policy of reciprocal liberalization, the Airline industry would be able to truly become much more competitive and an airline recognized for its efficiency amongst its bilateral partners.
Thus, the above section of the paper analyzed the effects of the Recommendations and it was found that these could go a long way in aiding the Australian Aviation Industry.
Conclusion
The above paper highlighted certain significant findings of the Commission and reviewed them against a background that has grown much more competitive and fierce than it ever was. Hence, for the Australian industry to catch up has become much more difficult but if it is able to impose the above changes then it would be on the path to achieving more economic efficiency. There are other issues that need to be looked at such as the sort of constraints that are imposing on the Australian Aviation Industry’s air services. In order to be truly competitive, more freedom and liberalization would be required in order to ensure that the Australian Airline is able to catch up with the rest of the International Airlines.
The issues of peak-load pricing would need to be analyzed as well as only through the provision of competitive prices can Australian Airlines can hope to survive in this cut-throat competitive world. Though liberalization is required, yet regulation is still needed in certain areas such as aeronautical charges. Otherwise, it would be difficult to monitor this particular area. The potential for the basis of the introduction of the market/segment for slots would have to be reviewed in order for the current situation in order to improve.
Another important recommendation that would have to be enforced would have to be the legalization of the access provisions.
Therefore, a number of changes and options would have to be looked into as the global environment has totally revolutionized for the Airline Industries.
Thus, it would be imperative that the review’s findings be analyzed in the context in order for the implementation to be as successful as possible.
References
International Air Services, 1998 “Inquiry Report’
Formby, J & Thistle & Keeler, J“Costs under Regulation and Deregulation: The case of US Passenger Airlines”
Graduate School of Economics “The Nature and Method of Economics” Lecture One.
Quiggin, J” Evaluating Airline Deregulation in Australia” The Australian Economic Review, vol, 30, no, 1, pp, 45-56.
Graduate School of Business” Pricing in Monopoly, Oligopoly and Monopolistic Competition” Lecture Four.
Graduate School of Business” Consumer Behaviour” Lecture Two.
Graduate School of Business “Costs of Production and Product Pricing under Perfect Competition” Lecture Three.