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Australia. Review Committee on Australia's International Civil Aviation Policy
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Australia's international civil aviation policy.
Aeronautics, Commercial - Australia.; International civil aviation. Policies of Commonwealth government. Australia.; Aeronautics, Commercial--Australia.
AUSTRALIA’S INTERNATIONAL CIVIL AVIATION POLICY The Parliament of the Commonwealth of Australia Volume 2 Annexes to Report of Review Committee 1978 Presented by Command 11 October 1978 Ordered to be printed 26 October 1978 Parliamentary Paper No. 319/1978 Review of Australia's International Civil Aviation Policy Volume 2 Annexes to Report of Review Committee 1978 REVIEW OF AUSTRALIA'S INTERNATIONAL CIVIL AVIATION POLICY Annexes to Report of Review Committee Published by Australian Government Publishing Service, Canberra 1978 Printed by Authority by the Commonwealth Government Printer TABLE OF CONTENTS INTERNATIONAL CIVIL AVIATION POLICY REVIEW ANNEXES TO REPORT Page ANNEX A. PASSENGER AND FREIGHT OPTIONS A1 Passenger Option 1 - Continuation of Existing ^ Position A2 Passenger Option 2 - Limited Market Entry by ^q Supplemental Carrier(sj A3 Passenger Option 3 - Designated National Carriers Alone Operate in a Third and 21 Fourth Freedom Market A4 Passenger Option 4 - Third and Fourth Freedom Market plus One or More Low Fare -?q Operators: Fare Controls Maintained A5 Passenger Option 5 - As for Option 4 without Fare ^ Controls A6 Passenger Option 6 - Open Competition 55 A7 Freight Option A - Free Market 60 A8 Freight Option B - Limited Entry on Capacity Basis 68 A9 Freight Option C - Modification to Split Charter Rules A10 Freight Option D - Composite Capacity and Split oq Charter Controls ANNEX B. DEMAND B1 Historical Demand 66 B2 Passenger Ticket Survey 102 B3 Forecasts of Passenger Demand 154 B4 BTE Work on Demand 161 B5 Directional Passenger Demand Imbalance on ^55 Selected Routes B6 Application of Directional Flow Ratios 1?6 B7 Fares History - Kangaroo Route 1'79 B8 Review of Statistics Relating to International Air 188 Traffic B9 International Air Freight and Mail 198 ANNEX C. AIRLINE PRICING, COSTS AND EFFICIENCY C1 Existing Fare Structure 228 Page C2 Administration of International Fares and Rates - Department of Transport Statement C3 Airline Efficiency Measurement Techniques - Summary C4 Cost and Revenue Implications of the Options C5 Utilisation of Capacity for Selected Routes C6 Cost Analysis 257 281 285 288 294 ANNEX D, INTERNATIONAL CIVIL AIR AGREEMENTS D1 States Parties to Air Transit Agreement D2 Agreements/Arrangements Relating to Air Services Between Australia and Other Countries D3 Australian Standard Draft Air Service Agreement D4 Pooling and Cooperative Agreements Between Qantas and Other Carriers 300 301 302 321 ANNEX E. ANALYSIS OF PASSENGER DEMAND AND IMPACT OF NEW FARES ON SCHEDULED SERVICES 324 ANNEX F. WELFARE ANALYSIS ANNEX G. FOREIGN POLICY ASPECTS 378 411 ANNEX H. ICAO SPECIAL AIR TRANSPORT CONFERENCE H1 Regulation of Capacity in International Air Transport Services - Extract H2 Recommendations of ICAO Conference, April 1977 424 ANNEX I. SUBMISSIONS TO THE REVIEW 435 ANNEX A1 Passenger Option 1 Continuation of Existing Position Principal Features of Option 1.1 Scheduled air services into/out of Australia would continue essentially unchanged, with the Australian and foreign designated carriers operating services in accordance with presently agreed rights. Passengers travelling to different destinations would be accommodated jointly, as appropriate, on scheduled services making multiple stops en route. Carriers would cater for the needs of various types of traveller (business, VFR, tourist) and offer a range of fares (e.g. first and economy class, tour basing, promotional). 1.2 Airlines of intermediate countries which now participate in the carriage of traffic on long-haul routes (e.g. between Australia and U.K./Europe) would be able to continue doing so, even though the extent of their participation, through the carriage of traffic between the countries at the ends of the route, would prevent a reconciliation of total capacity available for end to end carriage with the level of demand. 1.3 Charter operations would continue to be limited largely to flights which satisfy existing rules covering "affinity" and "single entity" charters. Exceptions may continue to be allowed, however, on the merits of individual cases; for example, inwards inclusive tour programs which do not significantly divert traffic from scheduled carriers. Arguments Advanced in Support of This Option 1.4 Some foreign scheduled carriers sought the continuation of present arrangements, because they believed changes could adversely affect their shares of the market. They favoured the "fine tuning" of some fares arrangements, while still retaining present overall arrangements. Analysis Efficiency and Impact : Operators Efficiency 1.5 Substantial unused capacity would remain on some routes (e.g. Australia-Europe) should present arrangements continue. In some instances, the situation could worsen; for example, if a second U.S. carrier were to begin operations on the Australia-USA route. 1.6 On the Australia-U.K. route, at least 15 scheduled carriers now participate in promotional fares arrangements initially developed by the Australian and U.K. carriers. 1.7 Capacity provided is generally above that required to meet traffic demands between Australia and other countries. Evidence concerning the utilisation of capacity on selected routes is shown in Annex C5. 1.8 There would be continued inefficiency in the use of resources, e.g. aircraft, labour, energy and government provided infrastructure. 1.9 While the retention of competitive forces would, in theory, act as a spur to the airlines, the tendency is for competition to take uneconomic or otherwise undesirable forms; for example, through the provision of excessive capacity in the bid to gain advantage by increasing frequency of services, or through illegal discounting of fares. 1.10 On balance, the present situation, while benefitting some consumers in the short term (e.g. through discounting of fares to fill empty seats), involves a waste of expensive resources, the cost of which must be met in the long run by consumers and/or taxpayers generally. 1.11 With regard to the setting of tariffs, there would be continued reliance on IATA as a forum for the development of tariff recommendations; subject, of course, to IATA continuing in that role following the outcome of the present in-house review of that body’s functions. Governments consistently have supported the need for the airline industry to be involved in developing tariff recommendations. However, this arrangement has efficiency implications. 1.12 Rates recommended by airlines may be pitched at a level designed to allow survival of the least efficient airlines thus providing high profits to the more efficient operators. 1.13 Inflexible fares can be disadvantageous by removing from airlines the means of improving efficiency through appropriate cost-based fare structures to achieve higher load factors. 1.14 Suppression of competition among airlines with respect to the pricing of travel can foster undue competition on other aspects such as the quality of service they provide to passengers. Where, in their bids to gain a competitive advantage, airlines provide excessive capacity in a market, the pressure to engage in illegal discounting of fares is high. 1.15 On the Australia-U.K. route, however, tariffs are "open rated" because of the failure of IATA airlines to agree upon passenger fares. Hence government influence has been relatively greater in the establishment of fares on this route. 1.16 Similar success has not been achieved on Australia-continental Europe routes because of resistance from European airlines. 1.17 The present system has also failed to promote lower, more efficient fares on AustraliaS.E. S.E. Asia routes, and it has proved difficult to control sixth freedoming of traffic and illegal discounting of fares. Impact 1.18 "End-to-end" carriers (e.g. British and Australian designated airlines on AustraliaU.K. U.K. route) would continue to be concerned at the loss of traffic to which they consider they have the primary entitlement. Reluctance on the part of other airlines to agree to initiatives on fares by the Mend-to-end" carriers would be a further cause of concern to the latter, who could be expected to continue to press for the establishment of end-to-end fares. Because of these factors the present situation is inherently unstable. 1.19 Competitors of the "end-to-end" carriers would continue, where possible, to attract passengers through various marketing techniques; particularly on Australia-Europe routes which are, under the present regime, the most susceptible to "leakage" of traffic from the "end-to-end" carriers because of the relatively large number of airlines of intermediate countries which seek to participate in the carriage of "end-to-end" traffic. Both fifth and sixth freedom operations would continue. 1.20 Nothing would be introduced to affect the viability of existing carriers, and in theory the scale, structure and efficiency of their operations should remain essentially unchanged. However, on the Australia-USA route the proposed entry of a second U.S. airline could severely erode the load factors and market share of the Australian carrier. There is also the possibility that discounting of fares could further reduce the market shares of the third and fourth freedom carriers on other routes. The penetration of fifth and sixth freedom carriers into the Australia-U.K. "end-to-end" market is already substantial; such carriers presently attract nearly 30 percent of the traffic on that route. 1.21 Opportunities for further reduction in costs and fares would largely depend upon factors largely outside the control of scheduled airlines; e.g. technological advances. Airline revenues would continue to be diluted through interlining and pro-rating of fares. 1.22 "Charters" would be an alternative means of lowering fares for point-to-point travel, but revision of Australia's affinity charter policy would be necessary. Efficiency and Impact : Marketers 1.23 Airline sales outlets would continue to have incentive to maintain their particular airline's public image, and to assist in maintaining or improving the airline's market share and load factors. 1.24 Agents on the other hand have an incentive to maximize their own revenue by selling the most commercially advantageous mix of tickets and tour packages. Some low priced tickets generate only small commissions for travel agents; the level of commission not necessarily being commensurate with the actual sales effort (cost) involved, because of the more complex conditions which often apply to cheaper priced tickets. Hence the structure of commissions payable to agents is not fully conducive to the full promotion of lower cost travel. 1.25 "Under counter" deals might be offered through marketing outlets in respect of fifth and sixth freedom operations, as deliberate policy on the part of airlines which are operating excess capacity or in a bid to increase their market shares. Under the present system, any "under counter" deals could well be benefitting intermediaries, mediaries, or to a lesser extent the airlines, rather than consumers. Impact ; Economic Regulator 1.26 There would be no lessening of the present level of involvement, including the need to maintain strict control through Air Navigation Regulation 106A. Enforcement activity might have to be increased. 1.27 It could be argued that under the present regimer economic regulatory activities operate more to the advantage of the airline industry than the broader community, and do not promote the lowering of airline costs and hence of fares. Because of a lack of detailed cost information the regulator has incomplete knowledge of the costs and profits of airlines operating into and out of Australia. 1.28 Should this regime be maintained, those consumers to whom price of travel is of major significance would be disadvantaged. Failure by the Government to realise public expectation of cheaper travel could be expected to result in widespread criticism. 1.29 Administration of current regulatory practices is costly both in terms of direct costs and because of the need to collect and process information from airlines on their activities. Present practices do little to foster greater efficiency on the part of airlines or the travel industry generally. Impact : Consumer 1.30 Consumers requiring cheaper travel would continue to have only limited access to reduced fares; for example through a limited range of promotional fares, through "under counter" deals, where airlines could be found willing to offer these, or through participation in affinity charter travel. 1.31 Criticism from many consumers could be expected if lower cost fares did not become more readily available. Many would be aware, for example, that certain illegal discounted fares are available. 1.32 Travellers seeking flexibility in travel arrangements schedule convenience and high standards of service, such as business men, may be satisfied to continue with present arrangements, since the level of fares is generally of secondary importance to this class of passenger (within limits). Other Issues Civil Aviation Bilateral Implications 1.33 Current problems for Australia with fifth and sixth freedom carriers would be unresolved, and would probably worsen. Insistence by the US on its right to designate more than one carrier on the US-Australia route would continue to create difficulties, as would continued adherence by Australia to an affinity charter policy, which does not permit automatic access for US supplemental operators. Australian Domestic Airlines 1.34 There would be no effect on the domestic airlines, which would retain their existing markets. However, they could be expected to continue to make representations about alleged Incursions of foreign carriers into the Australian domestic market. ANNEX A2 Passenger Option 2 Limited market entry by "supplementaln carrier(s) to provide point-to-point flights at low fares on a regular basis 2.1 This option envisages addition of a limited number of regular end-to-end low fare flights to the existing market. For ease of identification such operations are referred to as 11 supplemental”. Supplemental operations would be third/fourth freedom in nature and would offer a restricted type of service. Travel on such flights would be subject to specified conditions, for example, advance purchase of tickets, no stopovers and no child discounts. 2.2 This option would call for Government determination of conditions of entry and levels of fares. Effects on, and reactions by, existing scheduled carriers would need to be taken into account. Principal Features of Option 2.3 In order to ensure that the public utility character of scheduled services was adequately maintained, ”supplemental” flights would be limited to the more heavily trafficked routes, where the volume of traffic could also support some degree of innovation by carriers. Governments at each end of a route would need bilaterally to agree on adding direct end-to-end operations before '’supplemental'1 flights would be feasible. The flights could be mounted by the existing third and fourth freedom carriers, possibly through "charter" subsidiaries; or alternatively, controls on entry could be eased to permit specialist operators the right to operate on a route. It is also assumed the two governments would agree on equal capacity and operating rights and conditions for their respective "supplemental" or "charter" carriers. Issues relating to the provision of Australian dedicated charter capacity are discussed in Chapter 7 (Section 13). 2.4 Operators would be required to file their proposals on fares for approval by the two governments. 2.5 On routes where "supplemental" flights were not available, affinity and single entity charters would continue to be approved in accordance with existing Australian Government policies. Arguments Advanced in Support of this Option 2.6 Provision of a low fare, made possible by the introduction of "no-frills" type service with restricted reservation conditions, should expand the size of the passenger market, opening up new opportunities for both consumers and airlines. 2.7 Competition among airlines would exert downward pressure on costs and encourage efficiency. Airlines, by striving to maximize profits, would seek to reduce their costs, increase overall efficiency and achieve high load factors, and foster the introduction of lower fares. There would be a strong incentive for existing carriers to match the low fares offered by the "supplemental" carriers. 2.8 The presence of "supplemental" carriers in the market, particularly if not tied organisationally ionally to competing scheduled carriers, should encourage competition among airlines generally. 2.9 Licences for "supplemental" carriers could be reviewed after a specified period thereby providing them with the incentive to offer effective competition. At the same time a continuing threat of new entry would guard against scheduled carriers attempting to use predatory pricing to eliminate supplementals. 2.10 Specialisation and market segmentation would be promoted. Resources would be re-allocated so as to maximize technical and allocative efficiency in the use of resources. There would be pressure on airline managements to fine-tune fares so as to ease seasonal fluctuations in demand for travel, and hence optimize investment in the provision of capacity, as determined by peak period demands. Analysis Efficiency and Impact ; Operators 2.11 Feasibility of allowing limited entry by "supplemental” carriers was examined for the Australia-U.K. routes. These were selected because more data are available for them, but in any event the more heavily trafficked routes are more suitable than others to accommodate "supplemental" flights. 2.12 Short term effects of permitting entry to the market, along the lines suggested by one U.K. operator, are analysed in Attachment 1 to this Annex. There is likely to be substantial traffic generation and diversion from scheduled services, and a dynamic and unstable situation could be expected to result. The demand for supplemental seats at the fares suggested is estimated to far outstrip the level of supply that has been proposed. The market would not be "cleared" and the unsatisfied demand would cause other operators to react in ways that could lead to a very different structure of services than that which existed prior to the limited entry of "supplemental" carriers being allowed. Moreover, the equilibrium structure of services is difficult to predict. Efficiency and Impact : Marketers 2.13 With the introduction of additional carriers and increased competition among airlines, marketing activity should intensify. Depending on the marketing strategy adopted by "supplemental" carriers, there could be increased entrepreneurial activity by travel wholesalers, with benefits to consumers. 2.14 Marketing tactics employed could include intensive advertising aimed at specific market segments, new tour packages, alternative fare structures and marketing through single franchise outlets. Impact ; Economic Regulator 2.15 Re-negotiation of Australia's bilateral air services agreements with relevant countries would be necessary before "supplemental" flights could be introduced. There would be a need to exercise supervision over fares, and associated conditions, offered by both "supplemental" and scheduled carriers, and to keep under review the impact of "supplemental" flights on the overall market situation, including implications for other countries. 2.16 (a) The regulatory authority (i.e. the Government) would experience pressure from those would-be travellers wishing to gain access to the cheaper fares being offered by "supplemental" carriers, but unable to do so because of the limited number of such flights made available. In addition, the risk of market instability could increase the need to protect consumers against financial failure by travel wholesalers and agents. (b) T AUSTRALIA’S INTERNATIONAL CIVIL AVIATION POLICY The Parliament of the Commonwealth of Australia Volume 1 Report of Review Committee 1978 Presented by Command 11 October 1978 Ordered to be printed 26 October 1978 Parliamentary Paper No. 318/1978 *. Review of Australia's International Civil Aviation Policy Volume 1 Report of Review Committee 1978 REVIEW OF AUSTRALIA’S INTERNATIONAL CIVIL AVIATION POLICY Report of Review Committee Published by Australian Government Publishing Service, Canberra 1978 Printed by Authority by the Commonwealth Government Printer PREFACE In October 1977 the Minister for Transport directed that a review should be undertaken to determine whether the economic regulation in Australia of international national civil aviation remained appropriate to the present circumstances of the international civil aviation industry, and to the development of lowest cost air travel and air freighting arrangements between Australia and other countries. It was decided that the review be undertaken by officers of the Department of Transport, guided by a Steering Committee comprising senior officers of the Department and Dr C.A. Gannon, Associate Professor of Economics at Monash University. The terms of reference given the Committee appear immediately behind this preface. A small group of officers were seconded from their normal duties to undertake this work as a Study Group. The Steering Committee met regularly and also contributed individually to this report. During the course of the review, the Committee, as required, consulted with the Departments of Foreign Affairs, Trade and Resources and Industry and Commerce, and with Qantas Airways Limited. In addition, as required by Government, the Committee sought submissions from international airlines operating to Australia, major domestic airlines, other carriers who have expressed interest in operations to Australia, State Governments, and with representatives of freight, travel, tourist, ethnic and other interests. One hundred and seventeen such organisations were approached. As would be expected during such a broad review, a large number of matters were raised that are not central to the principal policy considerations addressed. The Committee has taken the liberty, when considering several such issues, to include its own recommendations in the belief that these would be helpful. However, the Committee considered that it was beyond its terms of reference to recommend as more preferred any one of the options for change listed in the report. As all options involve significant issues of national interest, the selection of any one of these options is clearly, and correctly in the Committee's view, the prerogative of Ministers. The Committee gratefully acknowledges the loyal support given it by members of the Study Group, the extensive assistance it received from Government Departments, the help of Qantas Airways Limited with the provision of extensive data, the submissions made by a wide range of industries and interest groups and the personal contribution of those who met the Committee, many travelling long distances either from interstate or overseas, at considerable cost and inconvenience. The Committee perceived areas for additional research, which had time allowed, it would have wished to pursue. It understands and agrees with the time constraint placed upon it to report, but believes continuing work in several areas should be undertaken by the Department and the Bureau of Transport Economics to assist with the preparation of advice to Government and to allow better public understanding of the operation of this important, dynamic industry. TERMS OF REFERENCE 1. To review whether provisions of the Air Navigation Act 1920 relating to the economic regulation of international civil aviation and Government policy decisions taken to support those provisions are appropriate to the present circumstances of the international national civil aviation industry and, in particular, to the development of lowest cost air travel and air freighting arrangements between Australia and other countries. 2. To report to the Minister for Transport by 31 March 1978 on the results of the review and, if considered appropriate, on the options that are available to the Government for the development of alternative policies, consistent with the continued commercially viable operation of an Australian flag carrier or carriers. 3. To address within the review, without limiting other matters considered relevant, the need for and level required of scheduled air services between Australia and other States; and, if changed air service arrangements are proposed, their impact on - the continued operation of and price charged by scheduled services; the feasibility of negotiating with other States changes to air services agreements that may be required; the influence of these on third States and Australia's relations with these States; the ability of Government to ensure the maintenance of high safety standards; the retention of appropriate standards of passenger comfort; adequacy of international air services to smaller Australian international airports; the effect on Australian airports; and any direct cost or revenue gain to Government. SUMMARY The present Australian policy relating to the economic regulation of international civil aviation in Australia, the constraints of the existing institutional arrangements and the way these arrangements have acted to restrict development of lowest cost air fares are discussed in this report. Economic issues involved in the structure of air fares are presented together with data to illustrate the existing and potential air travel demand, and the non homogeneity of this demand. A move to a strictly third/fourth freedom regime could offer significant savings to operators, and hence fares to consumers. However, the report notes particularly that the agreement of other countries is needed for any changed arrangements to be implemented. Six alternative policy options or regulatory regimes are proposed for passenger services: (a) continue the existing position; (b) maintain the existing system but allow limited entry to a supplemental carrier or carriers to provide point to point low fare flights on a regular basis; (c) restrict services to a third and fourth freedom city pair regime with capacity limited and entry restricted to designated national carriers at each end of a route; (d) as for (c) above but with addition of one or more third and fourth freedom low fare airline operations, with capacity and fares controlled; (e) as for (d) above but without fare controls; (f) open competition. Current freight policies, pricing mechanisms and their adequacy are examined and four alternative options proposed: (i) Free market; (ii) Allow limited entry to individual routes by pure freighter and charter operators under a controlled capacity regime; (iii) Maintain the existing system but modify split charter rules to reduce existing restrictions; (iv) Combine options (ii) and (iii) above to provide composite capacity control and relaxed split charter rules. The implications of changed arrangements on service frequency, welfare, foreign policy, safety standards, passenger comfort standards, gateways, airports, the tourist industry and defence are examined. The report concludes with a brief discussion on likely implementation strategy and transitional problems. TABLE OF CONTENTS INTERNATIONAL CIVIL AVIATION POLICY REVIEW REPORT PREFACE TERMS OF REFERENCE SUMMARY CHAPTER 1 PRESENT POLICY Section 1, Section 2, Section 3, Section 4. Section 5. Section 6, Section 7. Section 8. Section 9. Section 10. Section 11. Section 12. Introduction The International Environment Bilateral Arrangements National Interests in International Civil Aviation Definition of Scheduled Flights Tariffs Tariff Enforcement Capacity Regulation Airline Pooling Agreements International Initiatives on Current Problems Qantas Airways Limited Australian Legislation CHAPTER 2 WHAT NEED FOR CHANGE EXISTS? (i) (iv) (vi) 1 1 3 8 13 17 19 26 28 31 32 34 36 38 Section 1. Introduction 38 Section 2. Are Lower Prices Possible? 42 Section 3. Constraints Within Present Policy 54 CHAPTER 3 THE STRUCTURE OF AIR FARES - SOME BASIC 56 ECONOMIC ISSUES Section 1. Introduction 56 Section 2. Quality of Air Services 58 Section 3. The Nexus Between Costs, Demand and Fares 64 Section 4. Fare Structure Design 71 Section 5. Existing Fare Types 87 PAGE CHAPTER 4 ANALYSIS OF PASSENGER DEMAND 91 Section 1. Introduction Section 2. Historical Demand Section 3. Demand Imbalance Section 4. Passenger Ticket Survey Section 5. BTE Work on Demand Section 6. Demand Forecasts 91 94 108 113 119 124 CHAPTER 5 ALTERNATIVE POLICY OPTIONS FOR PASSENGER SERVICES 127 Section 1. Section 2. Section 3. Section 4. Section 5. Section 6, Section 7. 127 135 137 140 Introduction Option 1: Continuation of Existing Position Option 2: Limited Market Entry by Supplemental Carriers Option 3: Designated National Carriers Alone Operate in a Third and Fourth Freedom Market Option 4: Situation as Described in Option 3 plus one or more ^ ^ Third and Fourth Freedom Low Fare Operators Option 5: As for Option 4 with ^ ^ Fare Controls Removed Option 6: Open Competition 148 CHAPTER 6 AIR FREIGHT AND MAIL 150 Section 1. Introduction 150 Section 2. Current Policy 152 Section 3. Existing Air Freight Situation 154 Section 4. Adequacy of the Existing Regime 15/ Section 5. Freight Pricing Mechanisms 139 Section 6. Effect on Freight of Passenger Options Section 7. Air Freight Options 1f ' Section 8. Mail 174 PAGE CHAPTER 7 IMPACT OF CHANGED AIR SERVICES ARRANGEMENTS ON RELATED ACTIVITIES Section Section Section Section Section Section Section Section Section Section 10 Section 11 Section 12 Section 13. Section 14. Section 15. Section 16. Introduction The Relationship Between Passenger Demand, Scheduling and Service Frequency Welfare Analysis Net Fares Children's Fares Foreign Policy Considerations Safety Standards Standards of Passenger Comfort Effect on Australian Airports International Gateways Passenger Charter Policy Impact of Changed Policies Upon the Commercial Viability of an Australian Flag Carrier or Carriers Issues Related to the Provision of the Australian Share of Dedicated Charter Capacity Single Airline Operations on a Route - Prospects and Difficulties Tourism Aspects Defence Aspects CHAPTER 8 OTHER POLICY ISSUES Section 1. Size of Australia-Overseas Markets Section 2. Legislative Requirements Section 3. Time Limits on Air Service Agreements - The Issues Section 4. Overseas Experience - Charter Arrangements - Charter Competitive Fares Section 5. Operations by International Airlines Over Domestic Sectors (Cabotage) 176 176 177 185 194 195 198 204 207 211 216 218 224 228 230 232 237 238 238 241 243 245 249 PAGE CHAPTER 8 (continued) Section 6. Directives for Free or 250 Concessional Travel Section 7. Liaison with Domestic Aviation 257 Policy Review Committee Section 8. Exchange Rate Fluctuations 258 CHAPTER 9 IMPLEMENTATION AND TRANSITION 260 Section 1. Implementation Strategy 260 Section 2. Transitional Problems 262 Section 3. Concluding Comments 264 GLOSSARY OF TERMS 266 CHAPTER 1 PRESENT POLICY Section 1. Introduction 1.1.1 Australian Government policy towards the economic regulatory arrangements for international civil aviation has been directed towards the development ment and operation of scheduled services at fares and rates that take account of the public interest and are consistent with commercially viable operations by carriers to areas of the world of principal travel, trade and political interest to Australia, and to securing Australian participation in the provision of these services. 1.1.2 This policy has been pursued on a bipartisan basis by successive Australian Governments. The support of scheduled service arrangements is a reflection of the perception by Government of Australia's geographic situation and the political, trade and ethnic associations it enjoys. Several such important relationships are with countries in the northern hemisphere. These involve the maintenance of air services over routes which are amongst the longest in the world. 1.1.3 Policy towards non-scheduled operations, usually called charter operations, has been consistent with the above. Passenger charter flights to and from Australia have either been on the basis of single entity charters or on the basis of passengers satisfying the so-called affinity rule. The latter requirement is that passengers must belong to an association formed for purposes other than travel, and undertake travel together as an incidental to the principal activity of the association. The minimum fare per passenger for such affinity charters is not to be less than 50 percent of the approved economy fare on scheduled services for the sector(s) flown. The national carrier of either the destination State or of Australia has the right of first refusal to operate such flights. Inclusive Tour Charters have been allowed to operate from the USA to Australia since 1972 under very relaxed arrangements. Freight charters are allowed on the basis of single entity, i.e. one consignor to one consignee of a homogenous load. No stipulation as to price or carrier applies to freight charters. Freight charter rules were relaxed somewhat in 1976 to allow split consignments on charters into Australia to carry out meat exports. Section 2. The International Environment 1.2.1 Current policy reflects not only Australian attitudes towards international air service arrangements, but takes account, as it necessarily must, of multilateral lateral agreements on international civil aviation and the attitudes of other States with which Australia has negotiated bilateral air service agreements. 1.2.2 Some discussion of these is a pre-requisite to understanding current policy and the limits they impose on future change. As the Report of a UK Committee of Inquiry said, "the air transport industry of any country is closely influenced by the policies and standards of other countries, and it is not possible to (1 ) start afresh and rewrite a policy unilaterally"v . Convention on International Civil Aviation (Chicago Convention) 1.2.3 In the Allied States met at Chicago to endeavour to negotiate a Convention which would provide for multilateral agreement on the manner of regulating international civil aviation. The future importance international civil aviation would assume was anticipated by the rapid development of aviation during the Second World War. (1) British Air Transport in the Seventies Report of the Committee of Inquiry into Civil Air Transport (London 1969). 1.2.4 The Chicago Convention was the result. It established the International Civil Aviation Organisation (ICAO), now a specialised agency of the United Nations, which has encouraged the development of uniformly acceptable technical standards and procedures that have made possible the operation of international air services at present levels and high safety standards. 1.2.5 However, the Conference did not achieve agreement on the manner of the economic regulation of the industry, although the Convention does include certain Articles which are of considerable importance to this matter. Article 1 recognises that each State has complete sovereignty over its own air space. Article 6 spells out the corollary of that principle, namely, that no scheduled international air service may operate over or into the territory of a contracting State without its previous consent. Article 5 gives, between contracting States to the Convention, the right of non-scheduled flights of innocent passage and stops for non-traffic purposes. 1.2.6 There had been some expectation prior to the Chicago Conference that agreement would be reached on basic principles within which agreed authority for international national flights would be established. An International Air Transport Agreement was drawn up at the Conference as a multilateral accord to exchange commercial rights but was hever widely accepted. 1.2.7 It did, however, set out the so called five "freedoms" of the air. "Freedoms" is a misnomer, as they are really privileges granted by States to the carriers of other States. These freedoms as granted by one State to the carrier of another are: First - The privilege to fly across its territory without landing; Second - The privilege to land for non-traffic purposes; Third - The privilege to put down passengers, mail and cargo taken on in the territory of the State whose nationality the aircraft possesses; Fourth - The privilege to take on passengers, mail and cargo destined for the territory of the State whose nationality the aircraft possesses; Fifth - The privilege to take on passengers, mail and cargo destined for the territory of any other Contracting State and the privilege to put down passengers, mail and cargo coming from any such territory. To these should be added the so-called "sixth freedom", although there is no general agreement about what this means. Usually it is taken to refer to the situation where the designated airline of one State party to an agreement carries traffic between the grantor State's territory and that of a third State, with a stop in the airline's home territory. The diagram on the following (1) page illustrates these freedoms as well as cabotage traffic. Article 7 of the Convention made clear that contracting States can do as they wish in regard to the granting of cabotage rights, provided they do not claim specifically that the privilege they are granting or receiving is on an exclusive basis. (1) The right for the carrier of one State to carry revenue traffic between two points that are both located within the territory of another State. FREEDOM I Nation A Nation B Right of TRANSIT WITHOUT LANDING FREEDOM II Nation A Nation B Right of NON-TRAFFIC STOP for refuelling, etc., but not setting down or picking up load. FREEDOM III Nation A Nation B Right to SET DOWN TRAFFIC from Nation "A” at Nation “B” FREEDOM IV Nation A <“ Nation B Right to PICK UP TRAFFIC from Nation "B" for Nation "A” FREEDOM V Nation A Freedom III Nation B Freedom V Nation C Freedom V Nation ~> D Right to CARRY TRAFFIC BETWEEN FOREIGN COUNTRIES, e.g. NATION "B & NATION "C" FREEDOM VI. (COMBINATION FREEDOMS III AND IV) Nation B Freedom IV Nation A Freedom III Nation C CABOTAGE Nation A Freedom III Nation B1 Cabotage Nation B2 Right tc CARRY TRAFFIC WITHIN TERRITORY OF A FOREIGN NATION 1.2.8 It is clear that States which are in a position because of their geography or traffic attraction to exercise sixth freedom rights will regard sixth as third and fourth freedom rights. This raises a regulatory problem. Identification of the true origin and destination of traffic is a matter of considerable controversy between States and airlines, lines, some advocating the collection of such data and others opposing it. Because Australia is usually a terminal point for air services, transit traffic is relatively unimportant. Since many major centres of 1 travel interest to Australians lie beyond intermediate States, this has posed particular problems. As will be seen this contributes to some of the present difficulties within the existing system. 1.2.9 One further advance was achieved at Chicago. A separate agreement known as the International Air Services Transit Agreement, which Australia has ratified, established amongst its signatories for aircraft on international scheduled services the first two "freedoms" . of the air. The practical effect for Australia is that where another country has not ratified this Agreement, although it may be a member of ICAO, Australian flag aircraft on international scheduled services do not have rights of overflight or landing for technical stops in the territory of that State. These have to be secured bilaterally. Annex D1 lists the names of other States which have ratified the Agreement. Section 3. Bilateral Arrangements 1.3.1 The results of failure to achieve multinational national accord at Chicago meant that it has been left to bilateral negotiation to find agreed practical working rules for the operation of air services between countries. There is, therefore, as one writer has said, "a vast cobweb of bilateral international agree(1 (1 ) ments
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