March 23rd 2002

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Articles from this issue:

COVER STORY: The US steel decision

Ansett's collapse highlights failure of deregulation

Government's currency gamble goes bad

Straws in the Wind: All you need is love / What's in a name?

NSW Anglican Bishops support stem cell research ... but not at the cost of human life

Media: Courageously un-PC / Sudden 'enthusiasm' for Crean

Captive market (letter)

Misdirected (letter)

US steel (letter)

Show trials (letter)

Adult stem cells: the better option

Comment: Enron's collapse - the net widens

ASIA: How should the West respond to the terrorist threat?

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Ansett's collapse highlights failure of deregulation

by Colin Teese

News Weekly, March 23, 2002

Ansett is now gone, and with it some 13000 jobs and unmeasured suffering for hundreds - perhaps thousands - of families.

Destroyed has been an airline business which rose from modest beginnings as a regional operator, to become one of the best known and respected domestic carriers in the world.

To one commentator - a dedicated deregulationist - the demise of Ansett was 'good riddance': because it meant that the last vestiges of the two-airline policy were now behind us. He went on to remark that with the demise of the two airline policy, also gone was the capacity for huge fortunes to be made in controlled airline operation - effectively by swindling consumers.

Goodness knows which world he is living in.

Nobody has ever made much money out of airline operation-with or without regulation.

The two airline policy never was constructed, it just happened. Ultimately it evolved out of experience and common sense, because it seemed to best satisfy the needs of Australian air travellers.

Here's how. At the end of World War II, there was one major domestic airline (Australian National Airways); Ansett was emerging from its beginnings as a regional operator. Qantas - in various manifestations - was the only international operator and wholly government owned.

ANA, begun by Sir Charles Kingsford-Smith in the 1930s, soon became Ansett ANA and, ultimately, Ansett.

Meanwhile, the Labor Government in 1946 decided for reasons which had nothing to do with airline policy, to create a fully government-owned airline, Trans Australia Airlines. (This decision was ideologically driven in part fulfilment of its then commitment to socialism.)

TAA operated in competition with ANA/Ansett, principally, though not exclusively, on Australia's capital city routes. It later became Australian, and ultimately, was swallowed by Qantas, which, by then, had been privatised.

To the surprise of many, TAA prospered, and quickly became a serious problem for its privately-owned competitor.

For this, there were good reasons. First TAA enjoyed a government-backed borrowing facility, which meant cheaper borrowing. Second the Labor Government gave it exclusive access to government-funded air travel, which at that time, while not large, was an important advantage.

Third, and most important of all, it acquired a dedicated and highly qualified technical staff demobilised from the Royal Australian Air Force.

The latter advantage, and the government-backed borrowing facility, proved to be invaluable, when it came to the selection of equipment. Ansett, by contrast, was almost compelled to purchase US aeroplanes, in order to enjoy the benefit of concessional US Ex/Im bank finance - only available on US-built equipment. How else could it compete with TAA, whose government-guaranteed funding allowed it to buy anywhere?

In the early days, it did not matter much because US equipment was the best available. Thus both airlines, operating similar aeroplanes, competed mainly in the quality of service provided.

The early sixties brought change. The British developed commercial propjets ahead of the Americans, and then finally, the French were first with a pure jet commercial airliner.

When TAA, after much study, bought British propjets and Ansett bought US piston-engined aircraft, TAA was able to develop a telling commercial advantage by virtue of its fleet having much cheaper operating costs.

As a result, the Menzies Government was compelled to arrange for TAA to swap some of its better equipment with Ansett in order to keep the private airline alive.

This action could truly be said to be the beginning of the two-airline policy. When later TAA attempted to purchase French jets, the government, which managed airline policy by means of its control over the import of heavy transport aircraft, defined its two-airline policy.

Competition on the main trunk routes would be maintained by allowing only the government airline and one commercial operator. To maintain stability and avoid wasteful competition, it also decreed that the two operators use identical equipment.

Thus was defined, though never stated, a policy which aimed at ensuring that the airlines competed only in the quality of service they provided.

An inevitable - though in some respects undesirable - element of this policy was that it required the competing services to maintain more or less identical scheduling. In the absence of that, one operator risked conceding to the other greater access to the periods of highest load concentrations.

Nevertheless, this issue was constantly in the minds of those managing the policy, though no satisfactory means of resolving it was ever devised. And, of course, this shortcoming in the operation of the two airline policy was eagerly taken up by the deregulationists. Significantly though, one thing deregulation has not changed, is the cluster of departures times in harmony with periods of greatest traffic density.

There is no doubt that the concentration of services around times of major traffic generation makes commercial sense. It is also good business economics. Capacity levels are maximized and fares can be held at the lowest possible level. For those same reasons it also serves wider community interests.

By these means, the main carriers provided nationwide, regular capital city services at fares its customers could afford. Fares between the most densely populated cities are slightly loaded to enable those between the smaller capitals to be struck at a level most likely to sustain a large enough volume of traffic to justify the service.

All of this is, of course, an overall national interest justification for the two-airline policy involving structured and managed competition, with a minimum of intervention. There was another. Over time the major operators came to acquire interests in, and to sometimes own outright, smaller regional carriers. By this means profitable operation on main inter-city routes helped sustain effective regional services which were essential to country areas.

All of these considerations passed over the heads of the deregulators. In the rush to deregulate, the two-airline policy was swept aside. In its place cut-price operators were encouraged to enter the market against Qantas and Ansett. The architects of the policy even had the temerity to suggest that Qantas and Ansett should be compelled (some deregulation!) to allow incoming operators access to their exclusive terminal facilities.

New operators came and went under this policy, but by fare cutting while they survived, they were able to put financial pressure on both major operators - but especially on Ansett. The private operator was offered the carrot - which ultimately became a poisoned chalice - of a licence to operate overseas.

But the strain of continuous price competition and its impact on market share and profitability, finally began to affect the company's ability to maintain the highest standards of maintenance which had previously been its hallmark. That, in turn, undermined customer loyalty.

The arrival of a cut price operator with enough financial strength to run Ansett out of money in a price cutting war with the help of a government subsidy, so ate into Ansett's market share on the main profit yielding routes, that the company was driven to the wall.

Deregulation had done to Ansett what no amount of socialisation could manage.

Competition, the deregulationists, triumphantly announced at the fall of Ansett, had prevailed over the two airline policy. But the rejoicing was shortlived. Once all attempts to resuscitate Ansett have failed, the reality began to dawn.

We now have a single airline policy. Apart from a cut-price operator doing no more than picking the eyes out of the profitable inter-city routes, Qantas is the single carrier providing a comprehensive service.

Perhaps for good reason Qantas has shown no inclination to share its so-called monopoly position with its customers. With a cut-price operator cherry picking for most gains on the profitable routes, Qantas probably wants to build a 'war chest' to deal with future price-cutting eventualities.

The normal practice with damaging price competition is that the stronger party cuts prices until the weaker is driven out of business, then puts up prices to recover its earlier losses. Qantas appears anxious to do the opposite - accumulate a surplus to deal with future price-cutting.

However, the tactic may not succeed against its present cut-price competitor; the latter may turn out to have the deeper pockets.

Either way it is unlikely that consumers will win any real gains in the end. Ironically, neither will the cause of deregulation. Already the competition watchdog under Alan Fels is calling on the Government for new regulation to deal with the windfall gain it claims has accrued to Qantas as a result of the demise of Ansett.

Yet a very different form of re-regulation may be called for if the cut-price operator undermines the ability of Qantas to continue to operate a comprehensive service. Nobody has yet considered that possibility.

Meanwhile the deregulationists have come up with an alternative screwball idea. Put Qantas under competitive pressure by allowing the incoming - and outgoing - international carriers to carry domestic passengers within Australia. (At present - in accordance with international practice - this is not allowed.) Which is probably just as well. Allowing it could mean we would end up with a 'no airline' policy.

Don't imagine that this could not happen. As in so many areas of deregulation, dismantling of the two airline policy, and what has followed, presents yet another example of a well functioning system being discarded in favour of something worse.

  • Colin Teese

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