Archive (Q2 2015); Northern Territory Open Skies & APTC

Northern Australia is defined by the region above the Tropic of Capricorn. It covers nearly 40% of Australia’s land mass, over 1 million in population, 200 billion dollars in GDP contribution, 5.9% of workforce, and 56% of tangible export value. The area includes major economic and tourism powerhouses like major cities and towns, and diverse natural environments with 6 world heritage sites. Northern Australia has a geographical advantage for being within narrow-body aircraft range with many ASEAN Tiger economies. In 2011, major airports handled passenger movements above, along with numerous other regional airports being served. Northern Australia had nearly 1.1million domestic and international visitors in 2014 that spent 1.85 billion dollars. Typical Northern-Australian airport visiting purposes are 65% holiday and tourism, 13% VFR, and 10% business or employment. Tourism accounts for more than 67,000 jobs, or around 9.5% of work-force. The Northern Australia White Paper 2014 is a 200 page detailed Federal government report underlying key issues and projects for the North, with a vision to promote development, and create a strong, diverse, secure, and a competitive North. The tourism and trade elements were considered in the research, with sources such as the white paper, the ABS, BITRE, and analysis on the ASEAN Open Skies.

A little about The All Pacific Travel Concept, or APTC. ITs is a tour operator and destination management consultancy, managing and representing many clients in Australia, New Zealand and South Pacific areas. APTC push inter-disciplinary conversation to provide sustainable operations, strong feedback, stringent quality and market testing, and paving growth for our clients. The tourism operator industry especially in Northern Australia is similar to airlines in a lot of ways.

  • There’s is a strong licensing requirements and regulatory structure under Tourism Services Act 2003, Fair Trading 1989, and other OHNS, nature conservation and competitive regulations.
  • Extraneous competition such as the internet, lack of accessibility and scale to regional areas, and “metropolitanization” of major cities shrivelling business in the North.
  • Lower yields, consolidation, more demanding customers, and macroeconomic conditions that impact tourism.
  • Failing recognition from government.
  • And finally Northern Australia is an expensive tourist destination to travel, stay and indulge. Bringing the customers to our shores is the motif of today’s talk, and APTC believe and support that Open Skies is the best way to materialize it.

Airlines bring business to our reach, and hence why this conversation of a Northern Australian Open Skies is so crucial. Taking visa costs on-board, much of the ASEAN tourist market would need the same travel time and more money to travel to smaller Northern Australia cities than European and even the US cities. Even the typical Southern Australia traveller would find it cheaper to holiday further afield rather than Northern Australia. And this is reflective of the market; lack of accessibility means higher prices, which chokes demand to the current situation. High barriers of entry for airlines are also high barriers for consumers. This impacts APTC, our clients, 70,000 tourism workers and their families’ dependant on these visitors, and 1 million residents requiring vital access to other ports. This results in receding airport traffic figures, low outreach, minimal growth in real GRP at 0.228% in Northern Australia, high barrier of entry for international airlines, and a growing unemployment with Youth unemployment at 21%.

Current legalities from the Chicago Convention restrict up to 5th freedom passenger. Capacity growth is slow and rapid route consolidation is undertaken thanks to demand volatility and unprofitability of major airlines. Northern Australia’s Air Connectivity is limited to the following:

  1. Trunk domestic services to southern Australia by narrow bodies. Strong duopoly, high pricing and strong price-discrimination of Qantas and Virgin Australia.
  2. Australian LCCs subsidiaries like Jetstar and Tigerair alongside full service counterparts with trunk domestic and some international services. Strong price-discrimination
  3. Northern-Australian major airline AirNorth operating niche inter-north Australian services, regional and proximate international services using regional jets and props. Highly priced with low customer satisfaction
  4. Pure regional Airlines with niche destinations and low capacity. Very highly priced. This includes QantasLink, Fly Tiwi, Hinterland Aviation and REX
  5. International regional airlines: High price, O/D oriented. Includes Air Niugini, Asia Pacific Airlines, Airfast Indonesia
  6. International full-service operating frequent narrow body operation or widebody seasonally .Competitive products, high value and moderate prices. This includes ASEAN legacies
  7. International LCCs: Very cheap, low presence, high price discrimination, proximate narrow body operations and low presence. Includes Indonesia Air Asia and Jetstar Asia.
  8. Charter Services like Alliance Airlines and Skytrans. Depends on contract.

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An Open Skies consists of regulatory paper changes with minimal overheads. These fundamentally require:

  • Free market competition with no route rights, designated airlines, frequencies and types of aircraft. This will allow any airline to operate freely between airports adjusted to business drivers purely.
  • Market-driven pricing with ACCC observation of inventories to facilitate liberalized non-discriminatory competition.
  • Fair and equal opportunity to compete through removal of business operations facilitations naturally restricted in bilateral. This will allow offices, centres, facilities and hangers to be built, creating many high-skilled jobs.
  • Cooperative marketing arrangements, with airlines able to enter codeshares and lease agreements freely. This will be a major boost for many regional airlines and international carriers willing to expand outreach on respective virtual networks.
  • Provisions for dispute settlement
  • Liberal Charter Agreements. Australia Charter carriers would benefit from demand outreach and flexibility.
  • And Seventh freedom cargo rights seen limited in Australia.

 

Australian LCCs and AirNorth’s trunk services will be theoretically most impacted by an Open Skies, while some regional Australian airlines, and international airlines benefit in ability to increase services or volume, and bring down travel times and costs. From the IATA Elasticities report, the APTC can show that including price, population and connective elasticities, total demand should increase by 90.46% in 10 years under conservative open skies, as oppose to 37% forecasted with all development plans. That’s 53.46% more O/D passenger presence which results to increases in 0.6 million visitors to Northern Australia, up to 925 million dollars increased spending contribution to our GDP, thousands of tourism-affiliated job openings, lower fares, more choice for destinations, and recovery of domestic businesses.

ABS & IATA elasticities report (mean elasticities)

PRICE; -1.4*20% lower fares = 1.28

Population; 12% growth over 10 years*1.1 = 1.132

Connectivity; 20% more routes *1.35 = 1.27

Stage length elasticity; 7% longer * 0.5 = 1.035

Income; 8% * 1.4 = 1.112

=1.9046 (90.46% growth over 10 years)

. Population density is displayed above. Northern Australia is made up of 40% of Australia’s land mass which include Queensland, Northern territory and northern half of Western Australia. The dry arid climate results in high distribution and population saturations decentrally consolidated to regional centres and the coast as displayed above.

Through Northern Australia’s Open Skies, foreign carriers will be encouraged to international and domestic services from Northern Australian ports, hence increasing competition, decreasing prices and increasing passenger movements and O/D traffic in Northern Australia, particularly price sensitive leisure travellers. The ‘tourism boom’ benefits industries directly, particularly tourism-affiliated industries.

 

The ASEAN Open Skies consisting of 10 nations excited 2.7 billion dollars in additional GDP and 16,000 jobs by 2025 directly, while 5.7 billion and 29,000 jobs catalytically. With details of the White Paper, BITRE and tourism-advocate sources, benefits hence can be implied as follows:

  • Increase in tourism-oriented employment. Open Skies catalytically opens thousands of jobs.
  • Intra-Australia increase in accessibility and movement. Also greater access for Northern Australia to Tiger economy regions and beyond.
  • Increase in belly-cargo a trade-bolster of goods, with much of Northern Australia’s infrastructure focus around growing international trade links. Increase in high-value belly cargo capacity could catalyse growth in high-volume shipping capacity, hence catalysing exports and imports.
  • Business growth through stronger cash flows. Hence strong increases in spending. 0.95 billion dollars annually forecasted through Open Skies.
  • Diversification thanks to new economy streams. This can allow sustainable growth and less mono-industry risks and turbulences, as witnessed after the mining industry reccedings.
  • Australia acquiring foreign currency, hence moderating currency sold and bought.
  • Infrastructure support and focus from local, state and federal governments. Projects now have stronger business cases, inducing even more jobs and spending.
  • Greater access to foreign investments and growth thanks to direct links.
  • Social advantages such as geocultural exposure and dialogue relationships to neighbouring economies, and implicative socioconditional improvements, such as lower unemployment, higher average wages and increased population
  • and finally Environmental advantages thanks to growing protection of natural tourism and heritage attractions of increased value.

 

In order for an open skies policy to really be effective, there must be a clear opportunity for carriers to entice them into the area. Overcoming barriers of entry must be displayed to facilitate growth in RPT transport. First issue is that much of Australia including the north simply doesn’t have the population size or growth to support high-capacity RPT operations in a regulated setting. With an open skies policy, the possibility of a tourism boom suggests that the population and economies of Northern Australia could grow facilitating management of the issue, and hence a robust business case for international airlines.

Secondly, the current duopoly of the Qantas and Virgin groups has led to poor passenger satisfaction, higher prices and low degree of freedom in passenger movement. Whilst these two groups compete with each other, the pricing and product cartel has meant these 2 airline groups could utilize domestic regulations to stay put in context of game theory. Commencing operations of a foreign airline in 8th freedom open skies operations, the new competition will force the duopoly groups to become much more competitive, a major positive for consumers thanks to increased capacity and reduced prices.
Barriers of entries also include:

  • Strict regulated and outdated Air services Agreements with airline, capacity and city pair enlisted, minimizing an international airline’s flexibility in route structures and operations into Australia. Removal through Open Skies and reformed bilateral agreements would eliminate this
  • With the mining boom well and truly gone, impacts of poor industry diversification was felt in North Australia’s air connectivity thanks to route cutbacks and ceases of operations. The region is in need of tourism for economic diversity to manage this. This catalyses risk mitigation for a foreign airlines business case.
  • Regional airlines are subsidized by the government. Open skies will increase revenues for purely regional airline ops, reducing need for payouts.
  • $55 passenger movement charge will be a more prominent impact on tourism with Open Skies reducing fares. Government visa fees also impact Open Skies and its effectiveness, which needs to be altered.
  • A Strong tax system in Australia leading expensive operations within Australia. This can have strong implications on post-tax profit of domestic and international carriers and businesses.
  • And finally Air Services Australia charges and airport charges extremely high in Australia.

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Finally, on behalf of the All Pacific Travel Concept Tour Operators & Destination Management consultancy, the tourism operators and beneficiaries of Northern Australia, the residents and the visitors, the APTC would like to recommend to the government in accordance to the lessons learnt above as follows:

  • Alter the Passenger movement charge to index by distance flown. This will facilitate a competitive edge for Northern Australian international passengers
  • Reduce tourism visa, airport and airspace charges. An open skies on paper requires open accessibility beyond freedom of traffic. Reduction of costs and easier visa acquisition and access always fosters strong elasticity-driven growth
  • Potential special economic zoning for increased trade.
  • Improve security, border protection and immigration facilities to accommodate growth of passenger traffic.
  • Improve airport quality and volume management through expansion projects to facilitate demand where required. This includes freight and RPT ops.
  • Retain and foster bilateral capacity, frequencies and volumes growth to facilitate Southern Australian Airports.
  • Enable international business operations with landside partnership immunity with tourism operators. Mutual advertising, marketing, agreements and bundling could revitalize the tourism operator market.
  • Stronger commission rights for travel agencies for origin destination itineraries.
  • Administer approachability and potential remedies for domestic carriers to respective levels of governments in transition phase post-Open Skies liberalization. Some airlines will be harmed, and it’s crucial that routes be served and consultative agreements to be made.
  • Catalyse codeshares, partnerships and secondary hubbing with connections for major international airlines.
  • And finally foster 5th freedom capability for airlines to connect to South Pacific Islands.

 

To facilitate new entrants of airlines and minimize barriers of entry into Australia, the APTC developed a plan for sustainable cabotage. This can be done through use of bilateral agreements and the Open Skies Program to allow narrowbodies to operate to airports in Southern Australia via a Northern Australian Airport under Open Skies. This is a tentative proposition to allow narrowbodies aircraft with capacity up to 230 passengers, being your high density A321 or 737-900, to fly from ASEAN and other Asian destinations to Southern Australian Ports domestically via north-Australian airport with freedom of passenger rights all the way, with requirement of a domestic airline sponsor and minimum hard-block codeshare requirements. This means small airlines can take on big Aussie cities, or big airlines can take on small cities.

In conclusion with consistency with the Northern Australian White paper and other sources, that barriers to airlines is barriers to consumers. Maximized accessibility provides a social and economic multiplier to bustle Australia’s output, productivity and constancy to their vision to promote development, and create a strong, diverse, secure, and a competitive Northern Australia.

—–

Although the hypothetical jump to conclusions above, we must note that the conversation about impacts should be observed once the ASEAN Single-Aviation market matures and forms (as suggested by ASPIRE). The Asean Open Skies, or more formally known as the Asean Single Aviation Market (Asean-SAM), continues to be an elusive dream for the 10-nation bloc as members renewed their commitment at this year’s Asean meeting of their leaders in Kuala Lumpur. Asean, which stands for Association of Southeast Asian Nations, is made up of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

A new declaration to form an Asean Community all but reiterated the association’s original manifesto, the progression reinforced as building “economies that are vibrant, competitive and highly integrated, and an inclusive community that is embedded with a strong sense of togetherness and common identity.” The Community will be formally instituted on December 31st, aiming to eliminate trade barriers to form a single market and production base.

Since the Open Skies policy has been part and parcel of that umbrella ambition, it marks another milestone as a positive thrust in the desired direction, although the target was to have it fully implemented this year. But where does the Open Skies stand in the development?

Much was said in the past about hurdles posed by the region’s disparate geography, economic disparity, different political make-up and diverse cultural practices. Not in the least, the different levels of economic progress and welfare across the region continue to pose difficulties for member nations to move at the same pace towards the ideal commonality. A single market modelled on that of the European Union (EU) is still a long way off.

No one denies that liberalisation will benefit Asean and fuel aviation growth in the region. It may open up channels for collaboration among operators but lest it be misconstrued, it does not necessarily run on complementary operations as a single entity against the rest of the world. Open skies means freeing up the competition across the borders and breaking down barriers of entry which allows neighbouring carriers to compete with home carriers on a level playing field. Therefore, the fear of competition among Asean carriers – each at a different level of growth – is real. The major carriers operate very much the same routes, and there is competition to channel traffic away from home bases through hub and other airports. Asean has a myriad of carriers, many of them thriving on niche and closed markets. The question is: Are they ready?

The EU has seen increased competition in the single market, benefitting customers and driving carriers to be more cost-efficient. Low-cost carriers (LCCs) such as Ryanair and easyJet have grown to be more than just low-end niche players but serious threats to legacy carriers which are already struggling to stave off competition from foreign carriers which are more efficient and service-friendly. The single market has also led to mergers for strength, such as the International Airlines Group (IAG) which conglomerates British Airways, Iberia, budget carrier Vueling and Aer Lingus, and is 10% owned by Qatar Airways. It is hard to envisage at this stage such a development within Asean, no less for the reasons already mentioned.

To be fair, the region has seen some progress in the liberalising process, even as the goalpost keeps moving away. Some major airlines are already preparing for the eventuality as the market shows signs of growing, particularly in the demand for budget travel. However, if the failure of Tigerair’s forays into the Philippines and Indonesia as a joint-venture (JV) partner is any indication of the climate for cross-border investment, it again points to the region’s readiness and propensity to sustain the efforts. The pace is not moving fast enough, and so long as the goalpost keeps shifting forward, it is easy to lose that drive.

Priorities can change quickly. Asean nations are caught in the current of the global scramble for economic pacts across a wider region in a world that is increasingly being threatened by geopolitical rivalry down economic lines. They, not as a bloc but individually, risk isolation and being disadvantaged by non-participation. This could be a distraction away from the Asean agenda.

Four Asean members – Brunei, Malaysia, Singapore and Vietnam – signed the Trans-Pacific Partnership (TPP) agreement which took effect on October 5 along with Australia, Canada, Chile, Japan, Mexico, New Zealand, Peru and the United States. Indonesian president Joko Widodo at a subsequent meeting with US president Barack Obama expressed his country’s interest in joining the bloc. Asean itself has proposed a Regional Comprehensive Regional Partnership to engage non-members Australia, China, India, Japan, New Zealand and South Korea. However, this does not prevent member nations from independently pursuing bilateral trade agreements which may see implementation of some measures such as faster immigration channels between these parties ahead of similar facilitation within a common Asean union.

Within the aviation industry too there are alliances and there are alliances, so to say. Global alliances represented by Star, Oneworld, SkyTeam do not preclude member airlines from forging other partnerships outside their ambit, some of which are cross-border agreements. It seems to complicate the relationships, but apparently it also opens up opportunities that may otherwise be thwarted by restrictions of exclusivity.

This year’s Asean Summit – its 27th – is focused on forging an Asean identity, the absence of which is viewed as a major hurdle in the progress towards a no-barrier common marketplace. Singapore prime minister Lee Hsien Loong said: “One of the constraints on government – and one of the reasons Asean finds it difficult to make progress together – is (that) there is not a very strong sense of Asean identity”. He added: “I think there is some distance yet.”

There was mention of the Asean community engaging in projects, so-called low-hanging fruits, such special lanes for citizens of member nations at airports and facilitation via an Asean Business Travel Card.

But new issues that surfaced recently are not going to make the forward thrust any easier. Indonesia, the largest community in the bloc, has expressed its intention to rein in administration of part of its airspace presently under the purview of the Singapore authorities, but its aviation safety record is raising reservations. Following findings by the United Nations’s International Civil Aviation Organisation (ICAO), the US Federal Aviation Administration (FAA) has downgraded its safety rating of Thailand’s aviation authority over concerns about safety standards.

Such issues are likely to shift the priorities of not only the affected nations but also the bloc as a common entity, particularly considering its small composition of member states. So it appears that Open Skies will be taking a backseat in the meantime.

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