The Pulse by Seena Sarram

Policies to Prevent Airline Failure

On 30 April 2024 Australian start up airline ‘Bonza’ entered voluntary administration, that is, its directors triggered insolvency procedures. Three months later another Australian airline, Regional Express, entered voluntary administration. The two airlines operated completely different business models in different market segments. But why did two significant airlines fail in such a short period and what policy changes could reduce the risk of such failures in the future? Some observers suggest a lack of access to slots at Sydney Airport was to blame. Others questioned why the failures came to light so late and whether these airlines were in fact trading while insolvent. The Australian Government proposed a series of reforms in the Aviation White Paper including to Sydney Airport slots, airline performance reporting and government air travel policies. Government policy alone cannot save an airline from a poor strategy, but will these reforms help?

Sydney Airport slot reforms (see initiative 11 & 13)

The Government reaffirmed an earlier announcement that it would update the rules governing access to Sydney Airport slots. Two important and related changes are to:

1. expand the definition of ‘new entrant’ to include existing airlines operating up to 3 return services per day rather than just 2, and
2. shorten the duration of ‘peak timings’ to release slots that were reserved for regional airlines that are not currently using them.

Theoretically, these two changes will give new entrants better access to some of Australia’s most lucrative air travel markets. But it’s not clear whether these new slots would be available to larger aircraft, or only smaller aircraft for which the slots were originally reserved.

It’s also important to note that these changes will bring the legislation behind Sydney Airport’s slots scheme in line with current IATA Worldwide Airport Slots Guidelines. So, why not simply repeal the legislation? The Government may argue that legislation gives them additional enforcement mechanisms such as penalties. But it’s not clear whether or to what extent these penalties would be used. Regulation through legislation is inherently slow, so these rules will become outdated when industry standards evolve. If the legislation won’t be repealed, the legislative definition of ‘new entrant’ should at least refer to the IATA WASG definition so that it does not become outdated.

The Government also flagged future reform to make the ‘use-it-or-lose-it’ rule stricter, for example by shifting to a 90-10 rule. This would mean airlines have to operate at least 90% of the slots they hold to retain them the following year, rather than the current 80%. A stricter ‘use-it-or-lose-it’ rule will not benefit new entrants. It will benefit airports and other suppliers because airlines holding these slots will be forced to operate more flights. It may even benefit consumers in the short term because there will be an irrationally high level of supply, requiring greater discounting to stimulate demand. But this will not create new slots for new entrants and in the long term, existing airlines will become even more dominant.

Airline performance reporting (see initiative 16)

One of the less publicised proposals in the Aviation White Paper is the Government’s intention to collect and publish more airline data to “support increased transparency and scrutiny of airline performance”. Today, the Australian equivalent of the U.S. Department of Transport already collects and publishes commercial and operational airline data including on-time-performance and passenger numbers. More recently the Australian competition regulator has also been directed to collect data and publish reports. But the current data does not provide adequate detail, especially on individual airline performance as compared to data published in the United States. For example, U.S. aviation statistics show origin-destination passenger data by airline, as well as operating expenses of individual airlines by fleet type.

Publication of more detailed statistics is likely to stimulate healthier competition among airlines and alert the public, including creditors, employees and ticketholders of impending financial problems. Some airlines may already publish financial information regularly, but publication of uniform statistics by the Government will make it more accessible and make comparisons far easier. More data will help future start-ups better understand their performance, particularly their costs, and whether they need to make adjustments to avoid failure. The financial situation at Rex was so dire that administrators ended Jet operations almost immediately. Bonza’s administrators publicly stated that the company likely traded while insolvent months before entering administration. When Virgin Australia entered voluntary administration in April 2020, a local council in Western Australia reported that it only recovered 5% of the debt it was owed.

The financial position of airlines is a factor that the Civil Aviation Safety Authority (CASA) may take into account when issuing, suspending or cancelling an air operator’s certificate. One might question whether this should be a mandatory consideration for CASA, but that may also require amendments to CASA’s inspection powers which generally relate to the inspection of property or technical documents. Even if CASA’s current inspection powers allow them to inspect financial documents on demand, better public reporting would make it easier for CASA to know when it is appropriate to make such demands.

Nonetheless, the Government has not committed to actually collecting and publishing more data, rather they proposed to ‘consult’ and did not say who they will consult. This reform will create some minor additional regulatory burden for airlines, but that would pale in comparison to the public benefit, especially if it is confined to larger operators.

Government air travel policy (see initiative 17)

One of the more interesting proposals was for the Government to ‘review government travel purchasing policies to consider whether changed policies could better support competition’. This seemingly acknowledges the Government does not always support competition in making decisions about air travel purchases. The last year the Government publicly reported its actual expenditure on air travel was financial year 2018/19 when it spent about $299 million. In that year Rex’s passenger revenue was about $278 million. So, while the Government’s air travel budget may not fundamentally alter industry dynamics, greater support of smaller or new operators is likely to help prevent their failure.

The Government’s current domestic air travel policy is to purchase the ‘lowest practical fare’, which generally means a restricted economy class fare. Expenditure is monitored to ensure the lowest practical fare within 1 hour of intended travel is purchased. Naturally, smaller airlines will have less frequencies and at less desirable times. So, one way to support them would be to expand the possible window of travel. Of course, the Government should generally purchase the cheapest fare where possible, but new entrants are likely to be among the cheapest in most cases. And consideration should be given to the fact that the largest low-cost carrier in Australia is a wholly-owned subsidiary of Qantas. Indeed, the Government should provide a breakdown of taxpayer funded air travel by airline.

However, at this stage the Government has not committed to any change, only to review their air travel purchasing policy ‘in 2024’.

Implementation

The Sydney Airport slots reforms and government travel budget review are likely to help new entrants by giving them priority access to lucrative revenue streams. Enhanced public reporting of airline data is likely to help new entrants by giving them a better idea of how they are performing relative to established airlines. These reforms would be most effective if enacted collectively to send a clear signal to the market. And while a poor strategy cannot be saved by Government policy alone, Government policy does have a role in ensuring healthy competition. But many of the proposals seem more aspirational than tangible. Some proposals are merely to consult, while others shift work to government agencies for further review. Even where concrete proposals were made, no timetable for implementation was provided. It’s also worth noting that there will be an election by mid-2025. Perhaps all of this is why Qantas’ shares finished 1% higher the day the Aviation White Paper was released.