ACCC Suggests Cabotage to Increase Domestic Airline Competition

In its most recent report on the state of Australia’s domestic aviation industry, the Australian Competition & Consumer Commission (ACCC) expressed grave concerns about the lack of competition.

In April 2023, for example, 94% of Australian domestic passengers flew with either a Qantas Group airline or Virgin Australia. The remaining airlines – Rex, Bonza and smaller regional players like Link Airways – accounted for just the 6% of remaining domestic passengers.

41% of passengers flew on a route with three or more airline groups operating in April. But the ACCC believes Rex and Bonza would need to grow to provide effective competition to Qantas (which owns Jetstar) and Virgin.

“Rex’s expansion onto major intercity routes and Bonza’s launch have been positive developments for competition, but their share of the market is small and there are barriers to growth,” ACCC Chair Gina Cass-Gottlieb said.

The ACCC believes that a lack of effective domestic airline competition is leading to higher airfares and poorer customer service.

“Without a real threat of losing passengers to other airlines, the Qantas and Virgin Australia airline groups have had less incentive to offer attractive airfares, develop more direct routes, operate more reliable services, and invest in systems to provide high levels of customer service,” Ms Cass-Gottlieb said.

The ACCC has noticed that airfares drop when there is competition on a route from Rex. But the lower airfares only seem to be offered at similar times to Rex’s flights. Therefore, Rex would need to grow in order to apply more competitive pressure to the major carriers.

“Both Rex and Bonza would need to expand significantly if they are to become more meaningful competitors to the incumbents Qantas Group and Virgin Australia. The ACCC has observed that the incumbent airlines will often reduce their prices for flights that are scheduled at similar times to Rex, but less so for flights at other times,” the ACCC said in its June 2023 report into airline competition in Australia.

So, what can be done about this?

Greater access to peak slots at Sydney Airport

As Sydney Airport is close to operating at full capacity, it’s slot-controlled. Airlines can only add flights if they acquire the necessary take-off and landing “slot pairs” for the times they want to fly.

Under the current slot management system, incumbent airlines who already hold slots can keep them indefinitely as long as they continue to use them. This means new entrants often can’t get new slots for flights at the times they want.

The ACCC has recognised that this creates a significant barrier to entry for new airlines. It also limits growth opportunities for airlines like Rex and Bonza. Therefore, the ACCC has suggested that legislative reform in this area could help.

“Access to peak time slots at Sydney Airport is critical for new and expanding airlines seeking to build an intercity network. Without legislative reform to the airport’s demand management scheme there will not be any material improvement in domestic airline competition in Australia in the foreseeable future,” Ms Cass-Gottlieb said.

The new Western Sydney International Airport will take some pressure off Sydney’s main Kingsford Smith International Airport. The new airport is due to open in 2026.

Cabotage to increase domestic competition?

Noting that the Australia’s minor domestic challengers aren’t yet big enough to provide true competition to Qantas and Virgin, the ACCC has suggested a range of other legislative changes that could result in better outcomes for consumers and the economy.

One of the measures the ACCC suggests may help promote domestic airline competition is cabotage.

“Australia prevents foreign airlines from picking up domestic passengers on a domestic leg of an international flight, which is known as air cabotage. Removing these restrictions could potentially promote competition on some domestic routes.”

Foreign-owned airlines are allowed to operate domestic sectors within Australia as part of an international flight. However, they are not currently allowed to sell seats to domestic passengers on those services. All passengers need to be continuing onto or from the international portion of the flight.

Qatar Airways currently flies a near-empty Boeing 777 every day between Melbourne and Adelaide. It does this because it’s the only way it can operate a second-daily Melbourne-Doha flight under the current terms of the air services agreement between Australia and Qatar.

Prior to the pandemic, several other overseas airlines also operated domestic tag flights within Australia. For example, Cathay Pacific flew between Brisbane and Cairns, Singapore Airlines flew Sydney-Canberra and Philippine Airlines served the Darwin-Brisbane route. None of those flights were available for domestic passengers to book, even though they would have had some empty seats.

If foreign airlines were allowed to sell seats on domestic tag services, they may offer more of them.

Why do cabotage laws exist?

Most countries have “cabotage” laws preventing foreign airlines from selling tickets on domestic services within another country. These laws are designed to protect local airlines from foreign airlines with lower costs “dumping” cheap tickets into the market. But if current domestic airfares are too high due to a lack of competition, a small amount of cabotage could actually be a good thing. Unless you’re an Australian airline seeking to maximise your own profit, that is.

At this stage, the ACCC has merely suggested that a removal of cabotage restrictions could have the potential to increase competition. The government is not seriously considering changing cabotage laws at this point. But if they ever did, you could bet major Australian airlines including Qantas would lobby hard against the idea.

Ultimately, although many Australian travellers would welcome this proposal, it’s hard to imagine it ever coming to life.

You can discuss the ACCC’s recent report on the Australian Frequent Flyer forum:

Matt Graham

The editor of Australian Frequent Flyer, Matt's passion for travel has taken him to over 70 countries… with the help of frequent flyer points, of course!
Matt's favourite destinations (so far) are Germany, Brazil & Kazakhstan. His interests include economics, aviation & foreign languages, and he has a soft spot for good food and red wine.

You can connect with Matt by posting on the Australian Frequent Flyer community forum and tagging @AFF Editor.