17-Mar-2015 9:00 AM

Qantas seeks political support for international growth: ‘We operate below our full potential’

Analysis

After Qantas' international division posted a profit for the six months to 31-Dec-2014, the division's first positive result since the Global Financial Crisis, the division needs to move from profit to sustainability and delivering returns. But Qantas is now considering international expansion after many years of reductions. A flight to Tokyo has been added, seasonal services to Vancouver have returned, there are supplementary long-haul services and Perth-Singapore may even be re-opened. Reports suggest a return to Sydney-San Francisco is even possible.

"We continue to operate below our full potential," Qantas reported in a recent government submission. But as Qantas considers international growth, it confronts a markedly different international environment. Qantas argues that Australia viewed it as "expendable" and gave away international traffic rights without receiving enough in return. Qantas seeks to slow liberalisation under the justification of enforcing Australia's legal duty to support a local aviation industry. This is effectively a mask for protectionism, begging the question: what is the value of a local aviation industry?

Summary

Qantas is considering international expansion after many years of reductions, with plans to add flights to Tokyo, Vancouver, and potentially Sydney-San Francisco.
Qantas argues that Australia viewed it as "expendable" and gave away international traffic rights without receiving enough in return, and seeks to slow liberalisation to support the local aviation industry.
Qantas claims that Australia's international market has shifted from inbound to outbound, with outbound travel growing four times the rate of inbound visitor arrivals.
The Productivity Commission has dismissed Qantas' claims and stated that an imbalance between outbound and inbound tourism does not represent a net cost to the Australian community.
Qantas wants to put the brakes on Australia's international capacity growth and re-examine bilateral negotiation policy to gain more expansive air service agreements.
Qantas and Australia's airports disagree over a capacity shortage, with Sydney Airport calling for airports to be included in Australia's air service negotiations.

Qantas argues that Australia may not benefit from its aviation policy

The challenge with Qantas' argument is that the policy framework is inherently limited due, like many such statements, to its inherent conflicts. It is Australian policy that the government must support an Australian-based aviation industry. Thus, policies that may benefit a wide swathe of the Australian public may be detrimental to Qantas and the comparatively small locally-based Australian aviation industry. This creates the room for Qantas to contest developments that have benefitted Australia but hurt Qantas - and which it argues should now potentially be slowed or unwound.

The most recent government position on the topic, expressed in 2013 in the goverrning Coalition's Policy for Aviation, had the following statements. They illustrate the conflict between liberalisation and the vague "national interest":

"The Coalition will work to increase global aviation liberalisation while recognising the need to protect our national interest."

"We will strongly support the entry of Australian airlines into foreign markets and negotiate to remove barriers that prevent access."

"The Coalition will prioritise bilateral air services agreements to ensure we have the aviation capacity necessary to meet future demand."

There is cause in this debate to consider the arguments in the context of Australia having a locally-based aviation industry. But there is also the academic exercise of considering the benefits of a free market. Qantas employs approximately 28,000 people in Australia (most of whom are employed in its domestic operations). Policies that benefit that group, plus other Australians employed in aviation, are relatively small compared to the country's 24 million population, or for example to Woolworths' 200,000.

In support of its claims of its local contribution, Qantas notes it spends AUD6 billion annually buying products and services from Australian food, wine and beverage suppliers. Much of this is presumably for its domestic services while expanding foreign airlines will also need to access Australian catering, so the claim needs to be diluted accordingly. It would be a false premise to assume that no airline would replace Qantas domestically in Australia's massively valuable domestic market place, in which case it/they would need to be locally based - so arguably it makes more sense to allocate only those resources directly relevant to international operations in this discussion.

It should be noted Qantas' domestic network carries many passengers from international partners. So a growing presence of foreign carriers boosts Qantas' domestic traffic.

Australia's Productivity Commission has effectively dismissed Qantas' claims

This debate arises from Australia's Productivity Commission soliciting submissions to inform its research paper into Australia's international tourism industry. There is no immediate legislative change proposed, but Qantas' lobbying can influence the future direction as well as the short term, such as through air service negotiations.

The Commission's Feb-2015 report effectively dismissed Qantas' claims, remarking: "The Commission does not share Qantas' view." The Commission's views on topics are incorporated below with the arguments from Qantas and other parties, notably Australia's airports.

Although the report is issue, the topic is far from moot. Qantas' submission encapsulates a view it will likely continue to lobby for.

Australia's international market has shifted from inbound to outbound

Qantas' key argument is that international growth has occurred too quickly and without enough benefit to the enshrined Australian-based aviation industry. Qantas cites the statistics that in the 60 years prior to 2004, airline capacity operated into Australia grew to 15 million seats but over the following 10 years grew by an additional 6.8 million seats.

Despite this explosive growth, Qantas argues, inbound visitors to Australia grew by only 1.2 million. As a result, Australia's international market has changed. In 2007, outbound Australian resident departures exceeded inbound international visitor arrivals. Since then, outbound travel has grown four times the rate of inbound visitor arrivals, according to Qantas' calculation.

This means that the outbound travel from Australia's 20 million-odd population exceeds the inbound tourism sourced from the entire global market. Despite estimates, as cited by Qantas, that by 2025 the global "consuming class" will increase from 2.4 billion people to 4.2 billion, there will be more outbound travel than inbound travel.

International inbound visitors and outbound residents: 2003-2014

It was perhaps inevitable Australia grew outbound demand

This is perhaps a startling comparison, but it is not necessarily bad. China, for example, will have more outbound visitors than inbound visitors. Its population is of course much larger, but Qantas' same basic metric will apply: there will be more people outside China than within. This of course is true for every single country.

There is also the argument, as made by Melbourne Airport, that outbound demand supports inbound demand: flights carry passengers in both directions and airlines try to balance directional traffic flows (although this does not always result, such as in the Bali and China markets). The point is that Australia could not simply cut outbound numbers without impacting inbound numbers too.

Australia also has unique characteristics that support outbound demand and limit inbound interest. Foreign travel is part of the Australian psyche. Australians have generous remuneration and annual leave. The corporate structure permits residents to change jobs often and take long trips in between, unlike the job-for-life mentality in other nations. High wages go far in low-cost countries nearby, mainly Asia.

For foreign visitors, Australia is a long distance. With the exception of New Zealand, most major countries have a number of nearby and large markets that are easier to visit. For many, a trip to Australia is still once-in-a-lifetime. Costs are high and distances within are long. Qantas partially acknowledges this, quoting the World Economic Forum's ranking of Australia as 11^th for competitiveness but 137^th for price.

Foreign exchange can also be a factor. In the period Qantas highlights outbound travel as rapidly growing, the Australian dollar was extremely strong, even surpassing the US dollar. This also occurred at a time when Australia's traditional markets - notably Europe and the US - were in economic doldrums. Qantas cites a specially-commissioned Deloitte report that found on the subject of currency: "On average, a 10 percent appreciation of the Australian dollar leads only to a 3 percent fall in arrivals and a 2 percent fall in expenditure."

The same Deloitte study claims only 18% of the outbound growth is due to exchange rate fluctuations. Presumably the implication is that much more is due to lower air fares and greater competition.

(Curiously, Australia's airport association also commissioned Deloitte but for a report on potential economic impact of liberalised air service agreements - which Deloitte's Qantas report effectively argues against. Regardless of whether the Productivity Commission ultimately favours airlines or airports, the consultants have already won.)

Should Australians be forced to take domestic holidays instead?

Qantas appears to discount the impact of outbound travel as not contributing to Australia's economy. Admittedly, it would be difficult if not impossible to calculate the exact benefit to Australia of its residents undertaking overseas travel unless one seeks a metric along the lines of Bhutan's Gross National Happiness.

The point is there is no need to tell Australians, or any population, where to go. Qantas' argument could be read as favouring a cutback in international growth in order to support more domestic tourism - which has a higher chance of occurring on Qantas metal.

Qantas Group in 2014 accounted for only 24% of the international market but nearly two-thirds in the domestic market. Qantas' international presence has decreased but is offset by a greater international presence from Jetstar.

Qantas Airways annual international available seat kilometres: 2008-2013

Jetstar Airways annual international available seat kilometres: 2008-2013

What Qantas wants is a fair go (as it sees it) in international markets. Reading between the lines, Qantas seems to acknowledge limits on domestic tourism. Virgin Australia's submission to the commission is more direct about the future of domestic tourism: "While the domestic tourism market presently generates almost three-quarters of the industry's total expenditure, it is relatively mature compared to the growing international market."

The Commission gave little air time to this argument, writing in its report:

An imbalance between outbound and inbound tourism does not represent a net cost to the Australian community. There are welfare benefits associated with Australian residents travelling abroad, particularly if they are able to travel at a lower cost and access more frequent air services to a wider range of destinations. Further, it is not necessarily the case that Australians would instead travel domestically if they were not taking international trips.

Qantas wants to put the brakes on Australia's international capacity growth

The commission's task is mostly about how to support tourism. However, the bulk of Qantas' submission is about what not to do: "Australia must stop rewarding airlines which put at risk the integrity of the market." Qantas accuses some airlines of having "the objective of controlling the market" and later consolidating.

These statements are clearly controversial, but the condensed argument is that over-capacity causes airlines to rationalise or exit the market, meanwhile causing disruption. Qantas has some company from the government, which wants to see airlines have sustainable growth and be profitable. At CAPA's Australian Aviation Outlook Summit in Aug-2014, Australian Department of Infrastructure and Regional Development Secretary Mike Mrdak said history does not show the pursuit of market share leading to profits.

Australian Department of Infrastructure and Regional Development Secretary Mike Mrdak speech on Australia's international aviation policy at CAPA summit: Aug-2014

'Getting the Policy Settings Right for International Airline Expansion' Panel discussion on Australia's international aviation policy at CAPA summit: Aug-2014

Qantas also suggested: "A forensic assessment of the commercial and financial fitness of many of the international carriers serving Australia would be instructive."

Qantas called for general international load factor improvements, which the department has in principle agreed with. Mr Mrdak cited figures that Australia was experiencing 40% growth in airline seats from Asia but only 16% growth in passengers from Asia. The figure of two million China-Australia seats operating at a 75% load factor means that half a million seats fly empty over the course of a year. Still, Australia has expanded rights for Chinese airlines. (Qantas acknowledges this market as being the exception where capacity growth has actually led to inbound visitor growth.)

Qantas was short on recommendations of what to do. It has a weak negotiating position. Virgin Australia has replaced Qantas as the main sponsor of Tourism Australia ever since former Qantas CEO Geoff Dixon, while being Tourism Australia chairman, was part of a group looking to make a hostile bid for Qantas. Qantas would point out it has replaced national tourism support with state-level support, but arguably Australia needs a national brand overseas.

Slowing international capacity growth obviously benefits Qantas. Qantas wants to re-examine bilateral negotiation policy

The context for Qantas arguing for slowing international growth is that this is in Australia's best interest. Unsaid is the obvious fact this would help Qantas by curtailing competition. For example, if one Qantas flight is added at the expense of two foreign flights, it is difficult if not impossible to argue an overall benefit to Australia (and not just Australian aviation). Australia has permitted industries like car manufacturing to move overseas, but aviation typically attracts special protection.

The other benefit to Qantas of re-examining international growth is that Qantas could gain from more expansive air service agreements. Qantas contends Australia has offered air service rights as an end in their own right rather than asking for benefits in return. These benefits are not just reciprocal traffic rights (those are customary) but allowing Australian carriers to have a "comparative opportunity".

The argument is: sixth freedom carriers like Emirates and Cathay Pacific are able to generate large traffic flows into Australia by pulling traffic from beyond their hubs. As Australia is an end-of-line point, it does not have hubbing opportunities so needs to gain that access in foreign markets.

As such, Qantas now flies from Dubai to London, replacing previous European services through Bangkok, Hong Kong and Singapore. Those are Asian hubs whose airlines have more flights to Australia than Australia has to them. Australia does not need more rights to go to those hubs but does need the right to fly beyond. If Emirates can use Dubai to pull traffic into Australia, Qantas argues it too should be able to use Dubai to feed traffic.

Qantas seeks hubbing right in other markets

Some markets sharply disagree with the idea of a comparative opportunity. Instead, the concept is: your geography is your problem, not our solution to provide. Qantas' Hong Kong-London rights were gained with difficulty, and many other requests have failed.

Some consider a liberal agreement with Hong Kong the biggest lost opportunity for Australia. "The Government of Hong Kong has deliberately traded on the basis that it can grow its capacity to Australia without making any concession to the legitimate interests of Australian airlines in establishing reciprocal hub opportunities in Hong Kong," Qantas says. In view of Hong Kong's protective access regime, this clearly has logic in an airline context, but this is another market where consumer and broader interests prevailed.

Qantas argues Australia has not considered the requirement to have a locally-based aviation industry since Australia has offered Hong Kong traffic rights on the simple basis the Australian economy would benefit. This, Qantas says, "has effectively removed the leverage needed to ensure Australian carriers have reciprocal access to the benefits of Hong Kong's extensive hub capability.

Hong Kong is the only hub Qantas singles out. It looks positively on Dubai despite having complained of the damage wrought by local carrier Emirates for so many years. Qantas sidesteps the capacity growth (and outbound carriage) Emirates was able to secure from Australia.

Much of the growth Qantas derides has in fact been from the Gulf. In 2004, Emirates was the only Gulf carrier in Australia but in 2014 rose to become the second-largest international airline in Australia (behind Qantas).

Emirates' aeropolitical division that was so successful in gaining seats from Australia has now moved to Qantas, stopping short of arguing against their past accomplishments. If Emirates had not been so successful in gaining Australian capacity, Qantas may not have needed to partner with it. But having done so, there is inevitably a different dynamic now.

Qantas flies beyond Dubai to London with access to other markets. Qantas and Australia have also secured beyond rights from mainland China to Europe although these are unused. Qantas does use beyond rights for cargo services from China to the US.

Qantas' submission extols the virtues of its "hubs", not just in Dubai but also in Dallas with American Airlines, Santiago with LAN and Shanghai with China Eastern. But the exact value of these hubs is unclear. They are small. With the exception of Dubai, these cities are merely transfer points to another carrier, not a hub to connect to another Qantas flight. Onward virtual connections are important and require various third country codeshare rights, but these are different from flying beyond with its own metal.

The possibility of a foreign airline investor in Qantas has been a talking point, and Qantas briefly notes that "access to complex traffic rights is an essential element in making Australian carriers attractive to external investors."

Virgin Australia is supportive of the bilateral achievements made

Virgin Australia takes a different view from Qantas. It does address recent international over-capacity, saying: "It is important to note in this regard that requests for capacity by airlines are not confused with actual economic demand for air services."

Unlike Qantas, Virgin does not have sharp words for Australia's bilateral negotiations, saying the Australian department tasked with this "effectively balances the interests of all stakeholders and extracts the maximum value from the negotiating leverage it holds…This is a challenging task, which in our opinion has been managed well by the Department to date."

That said, Virgin does say: "there is increasing scope for Australia's diplomatic footprint to be leveraged in engaging with foreign countries to pursue the establishment of air services arrangements to support the expansion of Australian carriers' networks."

The Commission calls for more accountability in bilateral negotiations, which should 'serve the community'

The Commission has disagreed with the airlines and government bodies negotiating bilaterals about what the policy priorities should be. Those parties negotiate to support an Australian-based aviation sector, which as noted earlier may not reflect the interests of wider Australia. The Commission wrote: "Air services arrangements should serve the community, not airlines or the tourism industry."

Depending how much influence the Commission's report gains, foreign airlines could potentially use this recommendation to lobby for more traffic rights, even if the flights will carry large numbers of outbound visitors (for example, AirAsia X) or will be from a hub (such as Hong Kong) vested interests have had difficulty negotiating with.

Where bilateral decisions are made in favour of the Australian-based aviation sector, and perhaps against the interest of the general population, the Commission recommends transparency of how and why the decision was made. This type of accountability, hardly seen in bilateral outcomes, could foster local populist sentiment. That could create pressure for more consumer-oriented, not airline-oriented, outcomes.

The Commission suggested "a clear statement from the Australian Government about how it assesses the aggregate national interest when negotiating international air services arrangements, including what factors are considered, such as the benefits to the community of outbound travel, and how any trade-offs are made when balancing the interests of different stakeholders."

Qantas and Australia's airports disagree over a capacity shortage

Qantas makes clear its view about capacity into Australia, saying:

"more than enough capacity available under Australia's air services arrangements"

"It is a matter of record that there is no supply crisis in present or projected airline capacity into or out of Australia"

"Airline capacity will be the least of the challenges"

Sydney airport does not agree. It noted in its submission that six markets (China, Malaysia, Hong Kong, Qatar, Philippines and Fiji) were at or almost at their utilisation of available capacity as of Nov-2014. Since then capacity has been made available for China.

Key market constraints and level of total capacity utilisation: Nov-2014

	Australian carriers	Foreign carriers
China	9%	106%
Malaysia	0%	98%
Hong Kong	30%	100%
Qatar	0%	100%
Philippines	31%	89%
Fiji	95%	102%

Although Qantas does not directly respond to this, it takes a shot at airport economics: "The practice of these airports to demand more capacity - despite knowing there is no supply side crisis - has its origins in the benefits they derive from the dual-till policy and passenger throughput to support retail activities."

The Commission found Sydney's argument relevant and expanded the examination of countries at or approaching bilateral limits (for 2014).

International aviation capacity expected to be used as a proportion of capacity entitlements: Oct-2014 to Mar-2015

Sydney airport is calling for airports to be included in Australia's air service negotiations. Sydney hopes airport representation will balance what it sees as the narrow interest of airlines, which are invited to air service negotiations. Sydney says this will "seek an outcome that best fits the national interest", challenging the view the "national interest" must serve local airlines ahead of local airports.

Qantas appears to take aim at AirAsia X and Cebu Pacific

In two of the markets Sydney Airport identifies as needing capacity growth (Malaysia and the Philippines), Qantas has sharp rebukes for the local carriers.

"Given Malaysia's often stated potential as an inbound tourism market, the principal focus of capacity should be directed to maximising Malaysian tourism and not to provide an exit point for Australians travelling to third countries," Qantas says.

AirAsia X rapidly grew the Australia-Malaysia market (Malaysia Airlines responded with growth) and became a low-cost network carrier. AirAsia X transfers passengers over Kuala Lumpur (and soon it hopes over Bangkok and Bali Denpasar) to other destinations served by short-haul AirAsia units or other long-haul AirAsia X destinations (for now, North Asia).

Cebu Pacific has launched in the Australian market. Like AirAsia X and MAS, Cebu's looming entry prompted its full-service counterpart, Philippine Airlines, to rapidly grow. Sixth freedom traffic is an objective, although connecting volumes are lower than at AirAsia X or MAS.

Following from its criticism of Malaysia, Qantas says: "This is equally true of the Philippines and its much touted but highly elusive tourism potential where a similar approach should be adopted. Inevitably the growth in sixth freedom traffic carried by Malaysian and Philippine's carriers will undermine the willingness of airlines from those third countries, many of which are central to Australia's strategic interests, to continue to invest in Australia."

The grounds of this concept, that carriers are blocking other entrants, needs a discussion too thorough for here. Thailand, for example, is a large beyond market for AirAsia X and Thai Airways is facing financial difficulties, has not grown significantly in the past (prior to AirAsia X's expansion) and has had one of the lower international load factors.

See related reports:

Qantas is rebounding but wants to change views that it is 'expendable'

To its credit, Qantas is very good at talking itself down. This is not coincidental but intentional to extract very overdue efficiencies and changes it needs. It is a credit to the current management that Qantas is finally getting its house in order. The downside is that this has made Qantas seem to be facing one crisis after another, a narrative followed by Australia's excitable media and the local population's affinity with "their" Flying Kangaroo, even though Qantas is privately-owned (a fact less well known than it should be - to the public and government).

One view is that the Australian government has seen through the drama and considers Qantas to be in reasonable shape, although it has failed to deliver on reforms to the outdated Qantas Sales Act.

But in its submission, Qantas went on the defensive, identifying a view "that Qantas is inefficient and Australia's future rests with foreign carriers". The view also holds that "Australian carriers are expendable".

Can domestic flying exist without international?

Virgin Australia was also concerned in its submission that without changes along the lines of what Qantas suggests, "the competitiveness of Australian carriers will be eroded over time - not only in the international context, but also domestically, as the viability of international and domestic networks is inextricably linked."

Virgin's argument initially comes across as ironic: it is mostly a virtual international. Virgin notes its share of the international market has grown from 4.9% in 2008-2009 to 7.7% in 2013-2014.

But much of that international capacity is the outbound leisure demand Qantas derides. 85% of Virgin's international seats in Feb-2015 are to Southeast Asia and Southwest Pacific - leisure destinations like Bali and Fiji as well as the trans-Tasman market. 40% of Virgin's international seats are to New Zealand.

Virgin Australia international seat capacity by region: 16-Feb-2015 to 22-Feb-2015

Virgin Australia international seat capacity by country: 16-Feb-2015 to 22-Feb-2015

Based on available seats in Feb-2015, Virgin's largest foreign ports are Auckland followed by Denpasar (Bali), mostly outbound markets.

Virgin Australia top 10 hubs/bases/stations by international seats: 16-Feb-2015 to 22-Feb-2015

Virgin has basically shown that international and domestic networks are not inextricably linked: it has managed to secure a higher-yielding domestic position without all the international flying (mostly loss-making) Qantas does. Virgin most likely allows for a greater definition, whereby its international network is dependent on liberalisation that allows its code to be placed on various services around the world.

As it does less international flying, Virgin is less concerned than Qantas is. Codeshares are only one small matter on Qantas' agenda.

Qantas has to support its arguments with meaningful, not token, actions

Qantas is partially to blame for views that it may be "expendable". Its share of the international Australian market has decreased from 29.8% in FY2004 to 24.1% in FY2014. (Without Jetstar, the share would be smaller.)

International inbound/outbound market share: 2004-2014

It was probably inevitable Qantas would see a market share decrease given its end-of-line position and high operating costs. But arguably the decrease was larger than if Qantas restructured earlier and made different decisions (only some with the benefit of hindsight).

Perth is an example. Qantas in recent years has ended service to Tokyo, Hong Kong and Singapore so that there are no regularly scheduled international Qantas flights from Perth, provoking much anger at the consumer, industry and political levels. Perth airport agitated for it to be exempt from bilateral constraints so foreign carriers would be able to grow in the absence of a Qantas presence.

"Perth has just 7% of its international seats provided by Australian airlines and the only destinations are short haul leisure markets focussed on outbound Australians (Bali and Thailand). By contrast, the other Major Gateways have 30% or more of their seat capacity provided by Australian airlines," Perth airport wrote. "Recent actions by both major Australian airlines have clearly demonstrated that Perth is dependent on foreign airlines to grow air service capacity into Perth and therefore it is critical that foreign airlines have no restrictions to increasing capacity to Perth...The Australian airlines are simply no longer directly serving major hubs from Perth and the markets beyond those hubs in any material way except through their code share services with their alliance partners."

Now it appears Qantas is preparing to return international services to Perth with a flight to Singapore - a daily 737-800 compared to its previous double daily A330 services. This may placate some voices but Qantas will need to demonstrate its intentions are genuine and not token.

Qantas still flies internationally from Brisbane, but with a smaller presence than previously. Brisbane Airport's submission notes that between 2005 and 2014, Qantas' international destinations from Brisbane decreased from nine to five, with one of those destinations (Queenstown) only operating the winter ski season. Qantas' five international destinations from Brisbane compares with 18 from Sydney. (Since Brisbane's submission, Qantas has added service to Tokyo.)

Brisbane directly labels a lack of liberalisation as a protectionist measure for Qantas - something understood if seldom stated - and questions the value of this. As Brisbane wrote: "Further, to the extent that limits on international air rights under Air Services Agreements are retained by the Commonwealth as a protection for the local carrier, Qantas Airways, the rationale for Brisbane to be captured within the constraints is questionable in the context of Qantas' increasing focus on Sydney as the hub for its international services."

Brisbane joined Perth in asking for a more flexible air services regime.

Qantas laments how international capacity growth into Australia has benefitted "only a small number of monopoly airports". The reality of course is that Australia only has a few major airports, following its population clusters. As in many other cities, the airports are monopolies. This is not new.

Australia top 10 airports ranked on available system seat capacity: 16-Feb-2015 to 22-Feb-2015

Qantas is aware of this reality. Low-cost subsidiary Jetstar has grand plans for Darwin as an international hub but has not yet realised them. Now with some delay, international airlines are backfilling the opportunity.

Jetstar's presence at Melbourne-alternative Avalon has declined (including beyond the data shown in the graph below) and the carrier is reviewing its presence to see if it should remain at the airport or withdraw.

Melbourne Avalon Airport to Australia (seats per week, one way): 19-Sep-2011 to 2-Aug-2015

With Qantas having deferred long-haul aircraft - 787s and A380s - it has not publicly issued a plan for when and how it will grow internationally to compensate for the foreign expansion it seeks to restrain. Qantas' options for the 787 expire in 2015. It is likely Qantas will take a decision in the short/medium term to exercise these; 787 delivery could be as early as 2017.

The Commission supports removing capacity limits at airports - except Sydney (perhaps)

One of the Commission's most radical suggestions was that airports - perhaps except Sydney - should be exempt from foreign carrier restrictions since Australian carriers have only a limited presence, as the airports noted.

Total number of international seats operated to/from Australian airports, and proportion of seats operated by foreign and Australian airline: 2013-2014

Currently most airlines accessing Australia on a restricted bilateral (and not open skies agreement) have capacity limits for major airports and unrestricted capacity for secondary airports. However, the Commission's suggestion is perhaps too radical in its entirety for government.

The Commission suggested:

allowing foreign airlines to access, on an unlimited basis, Australia's major gateways, including any secondary international airports established in the major gateway cities, by extending the regional package. There is very little leverage to be gained in international negotiations from restricting access to any Australian airport, with perhaps the exception of Sydney Kingsford Smith Airport.

...

It is difficult to see how restricting access to secondary airports serving the major gateways, such as Avalon and the proposed airport at Badgerys Creek, creates benefits for the Australian community. If any restrictions are to remain, the case for all restrictions, except those at Sydney Kingsford Smith Airport, is quite weak, and open access could be extended accordingly.

...

The potential costs to Australian airlines from liberalising access to Perth Airport are therefore likely to be limited.

The challenge of balancing national interests with national carriers - and the mythical level playing field

Some portray Qantas' submission as the airline classically blaming everyone but itself. It is true Qantas stagnated and only recently has started reforming to have a sustainable position going forward. Qantas' dilemma is the same as other flag carriers elsewhere in the world: convincing governments of their value when foreign carriers are increasingly proving themselves to be adept at getting the job done more efficiently.

Curiously Qantas cites that 70% of Australian tourism investment comes from aircraft purchases, followed by airport infrastructure projects. Aircraft mostly come from Airbus and Boeing so there is no sizeable amount of investment being made in Australia (Boeing has manufacturing in Australia but this has waned in recent years). It is no coincidence Gulf carriers, frustrated with limited bilaterals, highlight to Germany how many Airbus aircraft they buy. As US carriers call for their country to limit Gulf carrier access, the Gulf carriers have also noted the economic importance of their Boeing aircraft purchases.

What these embattled carriers want is protection but they seldom admit to that description. As Qantas wrote: "Qantas does not want protection. However, we do need a level playing field or the closest that can be achieved within the bilateral framework." Virgin Australia also takes the view the aeropolitical regime is at fault. It certainly is, but it becomes an excuse for Australia to create biased (protectionist) outcomes. Virgin cited the Productivity Commission's 1998 inquiry into international air services, which concluded that "as long as the bilateral system is accepted and entrenched in the rest of the world, Australian airlines are likely to be severely disadvantaged by a policy of unilateral 'open skies'".

The keyword of course is that the disadvantage is to Australian airlines not the Australian economy.

Australia has a long and progressive history of liberalisation. On the basis of the Productivity Commission's deliberations this is likely to continue.