SUBMISSION BY VIRGIN AUSTRALIA FEBRUARY 2018
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The operation, regulation and funding of air route service delivery to rural, regional and remote communities
Submission 109
SENATE RURAL AND REGIONAL AFFAIRS AND TRANSPORT REFERENCES
COMMITTEE
INQUIRY INTO THE OPERATION, REGULATION AND FUNDING OF AIR ROUTE
SERVICE DELIVERY TO RURAL, REGIONAL AND REMOTE COMMUNITIES
SUBMISSION BY VIRGIN AUSTRALIA
FEBRUARY 2018The operation, regulation and funding of air route service delivery to rural, regional and remote communities
Submission 109
Introduction
The Virgin Australia Group of Airlines (Virgin Australia) welcomes the opportunity to lodge a
submission to the Senate Rural and Regional Affairs and Transport References Committee’s
Inquiry into the operation, regulation and funding of air route service delivery to rural,
regional and remote communities.
As an integrated airline group, Virgin Australia offers services in all major segments of the
Australian aviation market. This includes regular public transport (RPT) flights offered by
Virgin Australia Airlines (VAA) as a premium service carrier operating on 71 domestic and 30
international routes, and low-cost carrier Tigerair Australia’s (Tigerair) services on 23
domestic routes catering to the budget/leisure segment of the market. Virgin Australia
Regional Airlines (VARA) principally serves the charter flight requirements of a number of our
corporate clients, in addition to operating RPT flights on routes to the Indian Ocean
Territories under a contractual arrangement with the Commonwealth Department of
Infrastructure and Regional Development. Virgin Australia Cargo offers air freight transport,
utilising the cargo hold space on VAA’s RPT flights and through the operation of a network of
dedicated freighter aircraft.
In addition to our own operations, Virgin Australia offers travellers access to flights operated
by our international airline alliance partners to over 450 destinations across the world. Our
key alliance partners Air New Zealand, Delta Air Lines, Etihad Airways, HNA Aviation Group
and Singapore Airlines also offer code share services on VAA’s domestic flights, including on
regional routes. This provides an important additional source of passenger feed on to these
routes, enhancing their commercial performance.
Virgin Australia’s contribution to the Australian economy is significant. Our operations as an
Australian business with more than 10,000 employees involve the transport of overseas and
domestic travellers to tourism destinations across the country, including to regional locations,
and also facilitate domestic and international trade through the movement of goods. Deloitte
Access Economics estimates that Virgin Australia’s total economic contribution through
these activities was $3.4 billion in FY16, which directly and indirectly supports more than
75,000 Australian full-time equivalent jobs, representing 0.75% of total employment in
Australia.1
Virgin Australia’s presence in the regional aviation market
Our regional RPT services comprise a large component of our domestic network, with flights
operated to 33 regional (non-capital city) ports2 across Australia. Of the 75 domestic RPT
routes served by Virgin Australia, 53 include at least one regional (non-capital city)
destination.3
In regional markets, VAA’s services are operated with Boeing 737-700/800, Airbus 320,
Fokker 70/100 jets and ATR72-600 turboprop aircraft, while Tigerair operates both Airbus
320 and Boeing 737-800 aircraft.
1
Deloitte Access Economics, The economic contribution of the Virgin Australia Group to Australia, January 2017,
commissioned by Virgin Australia.
2
Albury, Alice Springs, Ayers Rock, Ballina, Broome, Cairns, Christmas Island, Cloncurry, Cocos (Keeling)
Islands, Coffs Harbour, Emerald, Geraldton, Gold Coast, Hamilton Island, Hervey Bay, Mt Isa, Kalgoorlie,
Karratha, Kununurra, Launceston, Mackay, Mildura, Newcastle, Onslow, Paraburdoo, Port Hedland, Port
Macquarie, Proserpine, Rockhampton, Sunshine Coast, Tamworth, Townsville and Newman.
3
Includes the Onslow-Perth route, which is principally served by VARA for charter operations but also has a
limited number of seats available for sale by VAA to the public on a RPT basis.
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Submission 109
Virgin Australia has made large investments to expand our presence in regional Australia
over the past seven years. This includes the deployment of ATR72 aircraft on regional
routes, the acquisition of regional operator Skywest Airlines, the commencement of services
in a number of regional markets and the establishment of Lounges at four regional airports
(Alice Springs, Cairns, Gold Coast and Mackay). Our growth in these markets has boosted
competition, supporting regional tourism and economic development, as well as providing
increased options for local residents to access air services.
Virgin Australia has been unable to sustain services in some regional markets due to poor
commercial performance over an extended period. This includes the withdrawal of services
from four intrastate routes in Queensland between August and September 2017. To provide
passengers with access to the affected regional destinations, we entered into a commercial
arrangement with Alliance Airlines, which elected to operate these routes in its own right
after our withdrawal, with the use of the VA designator code to support the distribution of its
airfares. Alliance Airlines bears all the commercial risk associated with these services.
Regional route economics
From an economic perspective, the operation of services on regional routes is more
challenging than on routes between capital cities, principally due to difficulties in achieving
economies of scale in regional markets. As with all routes we serve, the sustainability of our
regional services relies heavily on our ability to match the capacity we deploy with the
demand for our flights, as well as the effective management of costs.
In general terms, it is not commercially viable for an airline to indefinitely maintain a service
on a route for which revenues earned are insufficient to offset the corresponding costs. While
airfares are influenced by a complex range of interrelated factors, airlines operating on a
rational commercial basis will price their services in order to cover their costs and, if possible,
earn a reasonable return on invested capital.
If costs are outweighed by revenue on a particular route for an extended period, an airline
will inevitably look to withdraw its services and redeploy aircraft to higher-yielding routes. For
the impacted route, the result will be fewer air services, and depending on the prevailing
circumstances, potentially reduced competition, higher airfares and the loss of RPT services
altogether. In this regard, we would highlight that many of the regional markets we serve do
not deliver acceptable commercial returns to Virgin Australia at current pricing levels. Virgin
Australia and all other airlines manage the sale and pricing of their seats in the same manner
as perishable inventory sold in other industries, such as hotel rooms, hire cars, seats at
special events and advertising space.
Regulatory restrictions which are preventing the expansion of services on regional routes
with latent unmet demand, such as those in effect at Sydney Airport, also warrant
consideration. Additional services on regional routes will increase competition, placing
downward pressure on airfares.
For Virgin Australia, the operation of a sustainable network of air services provides us with
the greatest opportunity to facilitate the economic development and social cohesion that
aviation brings – in metropolitan and regional communities alike – as well as deliver returns
to our shareholders as a private commercial enterprise. Government policy and initiatives
which have a positive impact on the competitiveness and sustainability of air services will
support the long-term viability of the sector and position the industry to play a more effective
role as a critical enabler of Australia’s growth, economic transformation and engagement
with our geographic region.
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Submission 109
(a) Social and economic impacts of air route supply and airfare pricing
Virgin Australia appreciates that safe, reliable, regular and affordable air services are vital to
regional communities, providing local residents with access to essential medical, financial,
educational and other services, while also supporting regional economic development and
social connectedness. In many regional centres, the existence of air services plays a key
role in reducing isolation from capital cities and metropolitan areas and enhancing the quality
of life in such communities. Air services connect regional centres not only to the rest of
Australia, but to the rest of the world. This is important for passenger transport and the
carriage of freight, whether it be medical supplies or time-sensitive exports.
The supply of air services to regional areas, and the economic and social benefits they
deliver, is ultimately dependent on the commercial viability of such flights. In broad terms, the
commercial viability of air services on any route will depend on the existence of sufficient
demand, an airline’s ability to recoup its costs and competitor dynamics. These are the key
factors which underpin airfare pricing. From a cost perspective, one of the most challenging
issues we face as an airline is the disproportionately high charges imposed by a number of
regional airports, as outlined in further detail under section (d).
Virgin Australia is aware that some regional communities hold a perception that airlines are
seeking to earn unreasonable returns in setting airfares on regional routes and/or that
airfares on such routes are cross-subsidising pricing on trunk routes. As many of the regional
routes we serve do not deliver acceptable commercial returns at current levels of pricing, this
perception is inaccurate. If Virgin Australia, as a private commercial enterprise, cannot
operate services in such markets on a profitable basis over an extended period of time, this
is likely to see the supply of flights reduced, with corresponding implications for the relevant
regional communities. This highlights that the continued supply of air services is inextricably
linked with airfare pricing, and airfare pricing should not be examined in isolation.
It is important to note that domestic airfares have been trending downwards for more than 20
years, as reflected in the Commonwealth Bureau of Infrastructure, Transport and Regional
Economics’ Domestic Air Fare Indexes.4 These indexes are constructed based on the
monthly collection of airfares for the top 70 routes in the Australian domestic network, which
includes regional markets. They reveal that in real terms, the best discounted fares on these
routes in January 2018 are around half the price of those available in January 1998.
Airlines, in common with other businesses selling perishable inventory, will manage the
pricing and sale of seats on a flight in accordance with the economic principles of supply and
demand. We offer a range of airfares on each of our flights and all regional markets are
included in our regular network-wide sale campaigns. We encourage travellers to make
bookings at the earliest opportunity, which provides the greatest scope to access the
cheaper seats available on a particular flight.
(b) different legal, regulatory, policy and pricing frameworks and practices across the
Commonwealth, states and territories
In Virgin Australia’s view, there is a critical role to be played by all levels of government in
supporting regional air services.
The Commonwealth’s overarching policy objective for Australian aviation is to assist the
industry to grow in an environment that is safe, reliable, efficient and competitive.5 The
4
Available at https://bitre.gov.au/statistics/aviation/air_fares.aspx#anc_table_sum.
5
The Coalition’s Policy for Aviation, August 2013.
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Submission 109
Commonwealth has policy and regulatory oversight of the 21 leased federal airports and
administers the aviation security framework at airports across the country. While the
Commonwealth does not have responsibility for economic regulation of any regional air
services (this was transferred to the states and territories by the end of 1979), it has
established a number of schemes which directly support the commercial viability of some
regional RPT air routes and regional airports.
The Commonwealth regulatory framework governing the operation of aircraft movements
(slots) at Sydney Airport encompasses special arrangements for RPT services between
Sydney Airport and NSW regional communities. While the arrangements were introduced to
safeguard the operation of regional services, in reality they are inhibiting the growth of such
services in the State.
Under the Sydney Airport Slot Management Scheme 2013, slots assigned to regional
services may be converted to slots assigned to non-regional services, but conversions in the
reverse direction are not permitted. In 2017, during Sydney Airport’s morning peak period
(7.00am-9.00am) and afternoon peak period (5.00pm-7.00pm) there were 42 fewer slot pairs
available for regional services compared with 2001 (a decline of 10%). This has created a
situation where the availability of slots at Sydney Airport for NSW regional services in the
morning and afternoon peak periods is extremely limited. Timings in these periods are
necessary for the operation of viable services by airlines, as they enable day trips to be
undertaken by travellers originating both in Sydney and regional communities. Accordingly,
the current legislative arrangements equate to less competition, fewer choices and
potentially higher airfares on routes between Sydney and destinations in regional NSW until
Western Sydney Airport becomes operational.
To address this problem and support the expansion of regional services in NSW, the
legislative framework should be amended to allow any slot held by an airline to be used to
operate a regional or non-regional air service, as is the case in other states and territories, or
alternatively, to allow non-regional slots to be converted to regional slots.
A number of state and territory governments have established policy frameworks governing
aviation. In some cases, these policies include arrangements for the regulation and/or
subsidisation of RPT air services on intrastate routes, which would otherwise not be
commercially viable in a competitive market due to low passenger volumes. Virgin Australia
considers that regulation of regional RPT services is appropriate and sensible in
circumstances where such intervention by government is necessary to ensure the continuity
of access to vital services by regional communities. State and territory laws and policies
regarding land use are also relevant to the operation of airports and the use of airspace by
airlines.
Virgin Australia does not currently operate services on any intrastate regulated routes.
We understand that the Queensland Government is currently in the process of reviewing its
regulated RPT intrastate route network and is due to undertake consultation with
stakeholders in the first half of 2018. The last review was undertaken in 2013, which resulted
in the deregulation of three intrastate routes.
The Western Australian (WA) Government has recently concluded a Parliamentary Inquiry
into regional airfares in the State, to which Virgin Australia provided evidence. The Inquiry
report made a number of recommendations, including that the State Government undertake
a review of its Aviation Strategy, assess whether additional RPT air routes should be subject
to regulation and consider whether any current RPT air routes require subsidisation to
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Submission 109
secure their viability. The Government’s response to the report is due in the first quarter of
2018.
In a 2014 Parliamentary Inquiry into regional aviation services, the NSW Government
examined the impact on regional communities, from both a social and economic perspective,
of the reduction over the previous decade in the number of regional centres in the State that
have an RPT service. In adopting one of the recommendations of the Inquiry, the
Government consulted with local councils served through regulated air routes to seek further
views on whether deregulation would be preferable to regulation. This has led to the
deregulation of a number of intrastate routes since 2015. The Government is currently
looking at the potential to deregulate other routes across the State, with this approach driven
by a desire to increase competition, reduce costs for passengers and eliminate red tape
associated with licensing requirements.
VARA is currently appointed as the exclusive operator of RPT air services between Perth
and the external territories of Christmas Island and the Cocos (Keeling) Islands under a
contractual arrangement with the Commonwealth Department of Infrastructure and Regional
Development. Under this arrangement, we operate one frequency per week on each of the
following routes with Airbus 320 aircraft:
Perth-Cocos Islands-Christmas Island-Perth
Perth-Christmas Island-Cocos Islands-Perth
Under the arrangement, VARA also manages the operation of a fortnightly dedicated
freighter service by Toll Aviation.
Many regional airports are owned and operated by local councils. The policies and practices
of local governments regarding the management of such airports, including infrastructure
investment and maintenance, service delivery and fees charged to airlines, have an impact
on the sustainability of regional air services.
(c) how airlines determine fare pricing
As noted above, pricing on any route is driven by a complex range of interrelated factors.
Broadly, the key factors comprise:
supply of, and demand for, air services;
costs of operation of flights; and
competitor pricing.
The amount of capacity Virgin Australia deploys on any particular route is a function of
demand. Demand for travel is influenced by the mix of corporate and leisure passengers, the
seasonality of the route and prevailing economic circumstances. On most of the regional
routes we serve in WA and some routes in Queensland, the corporate segment is the
predominant source of demand for our services, driven in large part by the ‘fly-in fly-out’
workforce requirements of the mining and resources sector. It is important to note that the
revenue earned on these routes under corporate travel agreements is crucial to the viability
of our services. Without the demand from these corporate clients, it is highly probable that
capacity and frequency on many regional routes would be lower, and it is also possible that
airfares would be higher. In fact, it is likely that RPT services on some regional routes would
be unviable if it were not for the demand from the corporate segment.
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Submission 109
In Virgin Australia’s experience, price discounting offers limited scope to unilaterally boost
demand for our flights on routes dominated by corporate passengers, unlike routes with a
greater proportion of price-elastic passengers travelling for leisure or non-business purposes.
This challenge is exacerbated on routes with low passenger volumes servicing regional
destinations with small local populations. Offering deeper discounts is ineffective in
increasing our passenger loads and simply reduces the total revenue we would otherwise
earn on these services, diminishing our ability to cover our costs of operation and therefore
jeopardising the viability of such flights over time.
For any route, airfares and passenger loads will vary depending on the day of the week, time
of day and whether the relevant flight is scheduled during a period of peak demand, such as
school holidays or a special event. Flights at popular travel times will naturally attract more
passengers than those at less popular travel times, and airfares will be priced in accordance
with the economic principles of supply and demand, consistent with the revenue
management practices employed by all commercial enterprises engaged in the sale of
perishable inventory.
In highly seasonal markets, leisure traffic alone is typically incapable of supporting
sustainable air services. For airlines to achieve load factors and yields which underpin a
commercially viable operation, a combination of leisure and corporate/government traffic is
required. Governments can play a role in supporting competition on such routes by ensuring
that all travel undertaken by employees adheres to applicable travel procurement policies.
Government strategies which seek to promote regional economic diversification will be
essential to ensure sufficient demand for air transport on regional routes continues to exist.
For example, implementation of initiatives in the White Paper on Developing Northern
Australia will boost overall economic development in the region and provide scope to create
the demand conditions necessary to support a sustainable network of air services over the
longer term.
Capturing a share of Australia’s current and projected tourism growth presents a significant
economic opportunity for regional areas. Developing tourism in the regions, through strategic
and focused destination marketing, tailored to consumer preferences and behaviours of
domestic and international target markets, will also contribute to the creation of the demand
required to support sustainable air services. It is essential that the Commonwealth and each
of the states and territories continues to support tourism growth through destination
marketing activities, given that most individual tourism businesses do not have sufficient
incentive to undertake such promotion, as it would also benefit other commercial enterprises
in the same location, ie the ‘free-rider problem’. Governments also have a role to play in
supporting the expansion of tourism infrastructure in regional towns, whether through grants
or incentive schemes. Growth in tourism will lead to increased demand for air services to
regional areas, which will provide opportunities for airlines to realise cost efficiencies that
have the potential to deliver lower airfares.
Costs of operation of flights include fuel, airport fees, labour, air navigation charges, aircraft
leasing fees, catering costs and general administrative overhead expenditure. Such costs will
vary for each route depending on fees charged by the relevant airports, aircraft type used,
sector length and frequency of service. The cost of fuel at regional airports is often higher
than capital city airports, and while Virgin Australia seeks to minimise the need to uplift fuel
at regional airports, there is a need to do so for some flights. The carriage of extra fuel adds
weight to an aircraft, increasing fuel burned on such flights.
Due to a lack of scale, costs of operation on a per passenger basis are always higher on
regional routes than on trunk routes between capital cities. With fewer passengers and
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Submission 109
frequencies across which such costs can be allocated, it is more difficult to achieve cost
efficiencies on regional routes. As a result, the costs that must be recovered in each airfare
on a regional sector are often greater than those applicable to capital city sectors. It is also
the case that some regional routes exhibit significant variations in passenger loads
depending on the direction of travel. For example, the average load during 2017 on the
Perth-Kalgoorlie sector on a Monday was 75%, while the return Kalgoorlie-Perth sector on
the same day only recorded an average load of 39%. The overall sustainability of services on
these types of routes depends on our ability to maximise revenue generation on flights with
high demand during peak periods, in order to offset a likely shortfall in revenue on non-peak
services.
While the overall cost of operation for any flight is largely fixed, airfares may change in the
lead-up to departure. On any route, Virgin Australia generally seeks to set airfares at levels
that allow us, at a minimum, to earn sufficient revenue to cover our costs of operation, and if
possible, earn a return on invested capital. On regional routes with marginal levels of
profitability, this can be difficult to achieve.
In a competitive market, prices offered by other airlines are also a key influence on the
airfares we offer on regional routes. Our competitors will likely face costs of operation similar
to Virgin Australia, and will seek to recoup these in setting their own pricing on these sectors.
From a more technical perspective, the airfares available for purchase on any flight are a
combination of pricing (individual price points) and inventory management (availability of
seats on the aircraft at individual price points). Our airfares are distributed to the public at an
all-inclusive level and are based on one-way pricing. This method allows for the greatest
transparency and flexibility to build itineraries. The individual components of an airfare
comprise a base level, to which airport and security fees are added, with the Goods and
Services Tax then applied to the sum of these elements.
VAA markets the ‘Getaway’, ‘Elevate’ and ‘Freedom’ fare families in the economy cabin and
the ‘Business Saver’ and ‘Business’ fare families in the business cabin. There are a number
of individual fare classes in each fare family. In the economy cabin, our least expensive fares
are offered in the ‘Getaway’ family, while the most expensive fares are in our ‘Freedom’
family, providing the greatest flexibility in terms and conditions.
Tigerair offers a single fare type subject to the same terms and conditions, with prices
determined in accordance with the inventory available under a range of fare classes.
Passengers also have the option of purchasing ancillary items and services (bags, seat
selection and meals) throughout the booking process, either separately or bundled with an
airfare.
Airfare pricing and inventory management is a dynamic and complex process, which involves
strategic, competitive and risk management considerations. The airfare pricing and inventory
availability for each route and flight is managed separately. If a flight is building a strong
forward load and yield profile in the lead-up to departure, there will be fewer seats available
in the lowest-priced fare classes. Conversely, if the forward load and yield on a flight is weak,
it is likely that there will be seats available in all booking classes across all families.
Accordingly, our pricing and inventory practices will see airfares and their availability typically
change during the period leading up to departure. While it is the case that the costs of
operation for a flight do not change in the lead-up to departure, the risk of not earning
sufficient revenue to cover those costs does. We seek to mitigate this risk through our
revenue management strategies.
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Submission 109
Both VAA and Tigerair encourage passengers seeking the lowest fares on any route to book
their travel at an early opportunity. Passengers also have the ability to access discounted
fares released as part of regular tactical sale campaigns. The table below provides a
snapshot of the sales activity by VAA on a selection of regional routes during 2017.
Total number of days which sale
Route campaigns were in market during
2017
Alice Springs-Adelaide 278
Ayers Rock-Sydney 263
Ballina-Sydney 356
Geraldton-Perth 254
Karratha-Perth 263
Mildura-Melbourne 286
Mt Isa-Brisbane 175
Tamworth-Sydney 226
(d) the determination of airport charges for landing and security fees, aircraft type
and customer demand
Airport charges
Airport charges, which broadly consist of terminal, landing and security screening fees,
represent a significant proportion of airfares on many regional routes and have an
indisputable impact on airfare pricing and the competitiveness of air services. For terminal
and security screening fees, charges are typically levied on a per passenger basis, while
landing fees are levied on a per passenger basis or per tonne of maximum take-off weight of
the aircraft. Some airports offer airlines incentives to grow passenger numbers or increase
services, by providing discounts, rebates or caps on fees.
Regional airports are neither regulated nor monitored by the Australian Competition and
Consumer Commission (ACCC), which provides scope for these airports to use their market
power to unilaterally impose unreasonably high airport charges, which are above efficient
levels. As part of this, some airports have demonstrated a lack of transparency regarding
operating costs and capital investment. This limits the ability of airlines to assess and
determine whether airport charges are commensurate with the level of service provided.
Charges imposed on airlines vary from airport to airport. For an aircraft turnaround at
regional airports in WA, such charges are on average around double those levied by the
regional ports we serve in NSW and Victoria, on a cost per-passenger basis.6 Charges
imposed by some regional airports in Queensland are also significantly higher on average
than those in NSW and Victoria (although there is greater variation in charges across
regional airports in Queensland compared to WA).
Regional airports should be encouraged to seek funding from the Commonwealth and/or
state/territory governments to support investment in infrastructure. This will better enable
airports to maintain charges to airlines at sustainable levels, which will ultimately be reflected
in airfares and/or the service offering on regional routes.
6
There is some variation in the charging methodologies applied by different regional airports. Turnaround costs
have been assessed using average passenger loads during 2017.
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In Virgin Australia’s experience, in negotiating commercial agreements with airlines the
priority of most council-owned airports is generally the provision of services to the community
and the broader economic benefits that such airports deliver. There is, however, an
emerging trend for local councils to grant the management rights of an airport to a third-party
private operator under long-term lease arrangements. The financial benefits derived under
such arrangements provide funds which can be used for investment in other community
infrastructure, while also relieving councils of the economic burden of investing in airport
infrastructure during the relevant term of the lease. For airlines, this results in private
operators seeking to earn a commercial return on their investment in the airport lease (rather
than the value of the airport’s physical assets), without regard to the broader economic
benefits airlines and their passengers deliver to the community. Higher airport charges will
either be reflected in higher airfares or absorbed into an airline’s cost base. In either case,
this has the potential to threaten the viability of air services to such ports over the longer
term. Assertions that small increases in airport fees are not material for airlines are incorrect,
as illustrated by the application of the carbon tax to domestic airfares from July 2012 to June
2014, which Virgin Australia and other airlines could not absorb and sought to pass on to
passengers.
While it is the prerogative of these local councils to grant airport management rights to
private operators and set charges at any level (given there is no regulation governing
regional airport pricing), Virgin Australia is of the view that communities may not be aware
that this practice is occurring and may therefore simply draw the conclusion that airfares are
unreasonably high as a consequence of airline pricing practices alone. Councils should be
managing airports in accordance with the expectations of local residents, most of whom are
likely to regard safe, affordable and reliable air transport as an essential service in their
community, for both social and economic reasons. If residents are voicing concerns
regarding airfare pricing, yet continue to regard air transport as an essential service, councils
may wish to consider opportunities to reduce airport charges in order to provide scope for
airlines to offer lower airfares. While this may entail the need for other council non-airport
revenue streams to be used to subsidise the costs of operation of the airport, this is likely to
be justified on the basis of the overall benefit to the community that air services provide.
There is also a risk, particularly with private third-party operators, that some airports may
seek to invest in infrastructure that does not deliver the operational or service delivery
benefits desired by airlines. In some cases, councils may include provisions in the lease
agreement that oblige the airport operator to undertake certain levels of investment. This
could lead to significantly higher aeronautical charges for airlines, particularly at low-volume
regional facilities. To ensure these charges are not higher than necessary, investment in
airport infrastructure should be aligned with the operational requirements of airlines, the
passenger experience airlines seek to provide their guests and demand for air services,
rather than future aspirations of the airport operator. Airlines currently serving a regional
airport should not be expected to fund infrastructure upgrades which deliver no commercial
or operational benefit. There is a need for regional airport operators to engage in genuine
consultation with their airline customers in relation to the delivery of new infrastructure and
the consequential implications for pricing.
As a related point, it is also important to highlight that receiving designation as an
international airport will not, of itself, result in the introduction of international flights at a
regional airport. Airlines will only introduce international services at such airports if they are
commercially viable, underpinned by adequate demand. The population size of surrounding
communities, and tourism and freight transport potential, are relevant demand-side factors.
International designation may, however, see airports move to prematurely undertake costly
and long-term investments to upgrade or modify terminals, runways and aprons, with a view
to attracting larger aircraft operated by international airlines, motivated by a “build it and they
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will come” approach. Given the relatively low passenger volumes at regional airports, the
costs associated with such investment would significantly increase overall charges levied by
the relevant airport operator, which are principally borne by domestic airlines and their
passengers. This would directly impact airfares and jeopardise the sustainability of services
to these airports operated by domestic carriers, which are vital to the local tourism industry,
regardless of whether the airport ultimately secures an international service or not. The costs
of such investment should be recovered from international airlines if and when those
international services eventuate, and the risk of those services not eventuating should be
borne by the airport.
The Commonwealth should carefully assess any application by a regional airport for
international designation, in order to properly weigh the balance of benefits to ensure that
aviation and tourism will not be adversely affected. Such assessment should also include an
evaluation of whether government expenditure to support customs, immigration and
quarantine facilities at these airports will deliver value to the taxpayer.
Virgin Australia has settled commercial agreements reflecting a reasonable sharing of risks
and returns with a number of regional airports. In this regard we would highlight the pricing
practices and service outcomes of Ballina Airport, which is owned and operated by the
Ballina Shire Council. Charges levied by Ballina Airport are among the lowest of all the
regional airports we serve. Between 2013 and 2017, Ballina Shire Council sought $10.2m
from the Commonwealth and NSW Governments to partially fund $15.8m of capital
investment necessary to support anticipated growth of 50% in passenger volumes at Ballina
Airport between FY12 and FY17. Commenced in FY13 and due for completion FY18, this
capital investment included runway strengthening and expansion of the apron, taxiway and
terminal. Ballina Shire Council only sought to recover the balance of this capital investment
($5.6m) from airlines. Virgin Australia considers that this approach recognises that the
benefits that air services deliver to the regional economy and the community are greater than
those which would be delivered through earning a higher return on airport infrastructure. For
Ballina Airport, this has resulted in passenger volumes and aircraft movements increasing by
around 30% and 20% respectively between FY13 and FY17.
Difficulties experienced by airlines in negotiating with regional airports were noted in the
Productivity Commission’s Economic Regulation of Airport Services Inquiry Report in 2011,
including inappropriate pricing of services and the use of ‘take-it-or-leave-it’ conditions of
use.7 While the Productivity Commission formed the view that it was not necessary to
formally extend the Aeronautical Pricing Principles to regional airports, this appeared to be
justified on the basis of countervailing power held by an airline in circumstances where it is
the sole operator to a regional airport. This view is not valid for regional airports served by
multiple airlines, and with Virgin Australia’s expansion in the regional market, is increasingly
not the case in practice.
To address the challenges experienced by airlines in negotiating airport charges with some
regional airports as monopoly service providers, Virgin Australia would like to see the
Government update and re-issue its Aeronautical Pricing Principles in order to confirm their
application, at a minimum, to all airports served by more than one airline. In addition, we see
merit in the development of a set of guidelines or code of conduct governing regional airport
pricing and service delivery, which would cover each of the following:
defining the rates of return that would be accepted as reasonable for an airport to
earn on investment in aeronautical assets;
7
Productivity Commission, Economic Regulation of Airport Services Inquiry Report, No. 57, 14 December 2011,
page 329.
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Submission 109
establishing parameters concerning the revaluation of aeronautical assets, mitigating
the risk of airports revaluing assets as a means of justifying increased charges;
broadly defining the types of capital investment airports could reasonably seek to
recover and earn a return on from airlines, while also specifically excluding
speculative investment designed to attract wide-bodied, international or freighter
services and the inclusion of the value of assets funded by government grants; and
establishing principles to ensure pricing equity between airlines receiving the same
standard of service in a common-user environment, to preclude airports from
charging an airline/s higher fees in order to offset lower fees offered to another
carrier/s.
We would also like to see any guidelines or code of conduct specify that regional airports are
only entitled to recoup the provision of government-mandated security screening services on
a strict pass-through basis. This would ensure that both airlines and airport operators face no
financial disadvantage as a result of compliance with mandatory government security
regulations and prevent airport operators from seeking to earn a financial return on such
services. This view is supported by the ACCC in its 2015-16 Airport Monitoring Report, which
provides that revenue earned by airport operators in relation to mandated security screening
“is set to recover the costs associated with security services and does not affect the overall
profitability of the airports”.8 While this report’s scope is limited to the performance of the
major capital city airports, its rationale for the treatment of government-mandated security
costs is applicable to all airports across the country and should be adopted in any formal
guidelines in relation to pricing.
Commercially-balanced, outcomes-focused negotiations which result in charges which
accurately reflect service delivery and demand-driven capital investment incorporating a
reasonable return on investment in relevant airport facilities will assist to create the
conditions necessary to enable airlines to sustain, as well as increase, services on regional
routes. This will allow airlines to realise cost efficiencies and provide scope for lower airfares.
Airport security
As a general comment, rising aviation security costs represent an ongoing challenge to the
sustainability of regional air services. On a per passenger basis, security fees are higher at
regional airports with lower passenger volumes relative to capital city airports. Virgin
Australia will continue to work with the Office of Transport Security (OTS) to ensure
regulatory requirements are met while working with each airport to minimise costs.
In Australia, each airport operator is responsible for the provision of its own security
screening processes, which in the majority of cases are delivered by security screening
service providers. The cost of these services is determined in accordance with the
commercial arrangements between the airport operator and the company providing the
security screening service. As noted above, airport operators should be recovering these
costs from airlines on a strict pass-through basis. The disparate nature of these commercial
arrangements represents a practical impediment to the network-wide allocation of security
costs. In comparison, delivery of airport security services in countries such as New Zealand
and Canada is the responsibility of the central government, which readily enables cost
allocation at a network level. Similarly, air navigation and aviation rescue and firefighting
8
Australian Competition and Consumer Commission, Airport Monitoring Report 2015-16, page 174.
11The operation, regulation and funding of air route service delivery to rural, regional and remote communities
Submission 109
services in Australia are provided by a single supplier, Airservices Australia, allowing for
costs to be allocated on a network-wide basis.
In seeking to find the most economical way to meet the regulations and address the risk of
emerging threats, airports and the OTS should be encouraged to adopt a strategic approach
to investing in and implementing equipment with advanced technology standards, such as
explosive detection systems x-ray with dual or multi-view capability. Adoption of this
technology would provide scope to reduce or eliminate other screening processes, such as
manual explosive trace detection. At the same time, opportunities to increase the efficiency
of security screening processes should be assessed, such as allowing staff at security
screening points to perform multiple tasks. These measures have the potential to
significantly improve the passenger facilitation process and will assist efforts to minimise
costs without increasing security risks. Virgin Australia strongly encourages further
investigation of these proposed initiatives while noting that implementation would require
regulatory amendments.
(e) pricing determination, subsidisation and equity of airfares
Detailed information as to how Virgin Australia determines its airfare pricing is set out in
section (c). While the pricing and inventory management processes we adopt are common
across all routes in our network, it should be emphasised that each route has different
characteristics which will have a particular influence on airfares, such as level of seasonality,
directionality of travel patterns, proportion of corporate/government versus leisure traffic and
service and product offerings by competitors. On each route, pricing may also vary from flight
to flight, based on demand, the need to cover costs and competitive dynamics. Demand will
also be dependent on the population sizes of the destinations at each end of the route.
Characteristics of trunk routes between capital cities, on which multiple return frequencies
are operated each day by a number of domestic carriers, are very different to those of
regional routes. For example, up to 53 return services are currently operated each day on
the Brisbane-Sydney route by four airlines, compared with up to eight return services on the
Perth-Port Hedland route, which is served by two airlines. The stronger demand for travel on
trunk routes enables airlines to achieve greater aircraft utilisation compared with regional
routes, allowing airlines to spread the fixed costs of an operation over a larger base. These
cost efficiencies are reflected in airfares.
Virgin Australia manages the profitability of each route separately. As a commercial
enterprise accountable to shareholders, we seek to ensure that airfares on each individual
route are set at levels which allow us to earn sufficient revenue to offset the associated costs
of operation. Accordingly, airfares on regional routes do not cross-subsidise those on trunk
routes. In fact, the current returns delivered by a number of individual regional routes are not
acceptable, but have strategic value to Virgin Australia from a broader network perspective.
These routes are therefore essentially cross-subsidised by our non-regional routes at this
time. This cross-subsidisation cannot be continued indefinitely, however, and sustained
losses on routes will inevitably result in reductions in services or market withdrawal.
It should also be noted that comparisons of airfares on regional routes with those offered on
international routes to/from capital city ports are not valid, as the economic characteristics of
such routes are entirely different. A key factor in this regard is the difference in the size of the
population and air travel market in regional areas compared to capital cities and major
international destinations. Comparisons based solely on airfares and distance are misleading
and simplistic, as they fail to take into account the broad range of factors which underpin the
pricing and profitability on any route.
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Submission 109
On international leisure routes, there is significant scope to boost demand and passenger
volumes through promotional activities and price discounting. As noted above, such
opportunities are limited on certain regional routes where demand is low or more inelastic. It
is also misleading to draw comparisons between airfares offered on international routes
to/from capital cities by budget carriers based overseas, which operate at lower cost bases
than Australian airlines.
On any route, the earlier a reservation is made ahead of departure, the greater the
opportunity a passenger will have to access a range of price points on the relevant flight.
Accordingly, Virgin Australia encourages passengers seeking the lowest fares on any route
to book their travel at an early opportunity. Passengers also have the ability to access
discounted fares released as part of regular tactical sale campaigns.
(f) determination of regulated routes and distribution of residents’ fares across
regulated routes
It is the role of state and territory governments to determine whether any intrastate routes
should be subject to regulation. Virgin Australia provided comments to inform reviews
undertaken by the Queensland and WA governments regarding the regulation of air services
in those states in 2013 and 2014 respectively.
Virgin Australia does not currently operate services on any intrastate regulated routes,
although we previously served four intrastate RPT air routes in WA which were subject to
regulation (Perth-Albany, Perth-Derby, Perth-Esperance and Perth-Learmonth (Exmouth)).
These routes had been operated by Skywest Airlines prior to Virgin Australia’s acquisition of
the WA-based regional carrier in 2013.
Between January 2014 and January 2015, resident fares were offered on routes between
Perth and Albany, Esperance and Learmonth (Exmouth), as well as on non-regulated
intrastate routes between Perth and Busselton, Geraldton and Ravensthorpe, and the
Albany-Busselton and Esperance-Ravensthorpe routes. Under this offer, which was
promoted via local chambers of commerce and travel agents, residents were able to access
a 30% discount on full economy airfares. This provided the greatest scope for residents to
access discounted fares for bookings made close to the date of departure. Local residents
were entitled to purchase up to six return or 12 one-way airfares at the discounted price each
year. These fares were discontinued due to extremely low levels of bookings.
(g) airline competition within rural and regional communities
As noted above under section (c), competition is one of the key factors influencing airfare
pricing. On an unregulated route, competition between airlines will create market forces
capable of placing downward pressure on airfares. The majority of regional routes operated
by both VAA and Tigerair are served in competition with at least one other airline.9
The ability of a route to sustain competition will largely depend on the level of demand for air
travel on that particular route. With high passenger volumes, trunk routes between capital
cities are characterised by strong competition from multiple operators. In sharp contrast,
some regional routes with low passenger volumes are unsuitable for competition and require
regulation in order to ensure communities have access to an RPT air service. The WA
Government is of the view that annual passenger demand of at least 100,000 is necessary to
9
VAA is the only operator on the Gold Coast-Canberra, Hervey Bay-Sydney and Kalgoorlie-Melbourne routes,
Tigerair is the only operator on the Coffs Harbour-Melbourne and Gold Coast-Hobart routes and VARA is the only
operator on routes to Christmas Island and the Cocos (Keeling) Islands from Perth.
13The operation, regulation and funding of air route service delivery to rural, regional and remote communities
Submission 109
attract two or more operators on a particular route and that intrastate routes are likely to
require regulation below this level.10 In NSW, the threshold for a route being regulated, or
allocated to one carrier, is that it operates at or below 50,000 passengers per year (although
the NSW Government has been progressively deregulating intrastate routes in recent years,
as noted above under section (b)). A passenger number benchmark is not articulated in the
context of the current Queensland regulatory framework.
Although a certain level of passenger traffic is a key determinant of whether a route is
capable of attracting and sustaining competition, the costs of operation and access to
commercially-suitable slots at each end of a route are also highly relevant. Higher costs
require larger passenger volumes in order to be offset. In this regard, prohibitively high
airport charges at regional airports can significantly reduce the scope for an air route to
support competition. Consistent with our statements under section (d), an airport operator
should not, however, offer discounts on airport charges to a prospective airline if it seeks to
recover such discounts by imposing higher charges on incumbent operators.
In relation to slots, an inability for airlines to operate services at times desired by passengers
will inhibit the level of the competition on a route. As outlined under section (b), the
Commonwealth legislative framework governing the allocation and use of slots at Sydney
Airport is restricting the growth of NSW intrastate regional services, with corresponding
implications for airfares available on such routes.
The corporate travel agreements that airlines have in place on a particular route can also
affect competition. On low-volume regional routes dominated by passengers travelling for
business purposes, if one airline has secured all the traffic under exclusive arrangements
with the companies from whom the majority of demand for travel derives, there is unlikely to
be sufficient residual demand from those travelling for leisure or non-business purposes to
support commercially viable services by another operator. In this situation, airfare price
discounting will not be capable of boosting demand in a material way, as the proportion of
price-elastic passengers travelling on the route is simply too low. This type of scenario led to
our withdrawal from the Perth-Learmonth (Exmouth) route in 2014, after a period of
sustained losses following the entry to the market by our competitor after the route was
deregulated in 2011. The majority of business traffic that VAA had carried on the route
switched to our competitor due to pre-existing exclusive airfares arrangements it had in place
with the key corporate entities operating in the region. As a result, VAA was unable to attract
sufficient non-business traffic to allow our operations to remain viable.
A number of regional routes are served by low-cost carriers, including 10 served by Tigerair.
In broad terms, the business model of low-cost carriers relies on the ability to maximise
revenue through high aircraft utilisation and achieving high load factors through offering
lower airfares than full-service airlines, while also maintaining a low cost base. The
fundamental economic characteristics of some regional routes are incompatible with this
business model, which depends on the ability to realise cost efficiencies by operating flights
in high-volume and leisure-dominated markets. For example, intrastate routes in WA are
unlikely to be commercially attractive to a low-cost operator given their relatively high costs,
low passenger loads and the limited scope to boost demand through price discounting.
Initiatives to increase demand and passenger volumes will provide the greatest scope to
boost competition on regional routes, in both the low-cost and premium segments of the
market. In this regard, government schemes and programs designed to facilitate economic
development in the regions, especially in the area of tourism, are critical. Virgin Australia
10
Western Australia Department of Transport, Review of Regulated Regular Public Transport Air Routes in
Western Australia Final Public Report 2015.
14The operation, regulation and funding of air route service delivery to rural, regional and remote communities
Submission 109
collaborates closely with state and regional tourism agencies, businesses, industry
organisations, airports and communities to identify opportunities to stimulate demand for
travel in regional markets, and promotes flight and accommodation holiday packages for
many regional destinations through our website. With the challenges inherent in the regional
aviation operating environment, this approach will ensure that the requirements of all key
stakeholders are taken into account as part of developing solutions which will ensure
regional communities have access to safe, regular, reliable and affordable air services.
There have been calls by some regional communities for the Commonwealth to consider
granting cabotage rights to foreign carriers. While at face value, this may appear to have
some short-term benefits, in reality it could be expected to have far-reaching consequences
for the long-term sustainability of the Australian aviation and tourism industries. Operating
alongside Australian airlines, foreign carriers would earn marginal revenue by offering
capacity that could be priced at levels lower than the average cost faced by domestic airlines
on these sectors. Over time, this could be expected to lead to network rationalisation by local
operators, with aircraft redeployed to higher-yielding routes. This would come at a cost to
tourism in regional areas, as domestic airlines play a key role in terms of investment in
marketing and promotional activity. It is important to remember that almost 75% of tourism
activity in Australia is domestic.11 Cabotage, in contrast, represents an opportunistic play for
foreign carriers without a long-term commitment. If a more commercially attractive
opportunity presented itself, these carriers would simply redeploy their aircraft.
(h) consistency of aircraft supply and retrieval of passengers by airlines during
aircraft maintenance and breakdown
All airlines within the Virgin Australia Group strive to maintain schedule integrity to the
greatest extent possible, to meet the expectations of our passengers. It is the case, however,
that our services will be unavoidably interrupted from time to time due to unforeseen aircraft
maintenance requirements. Service disruptions also arise due to weather conditions and
crew resourcing limitations.
The remoteness of a destination and the frequency of operation on a particular route have a
bearing on the efficiency of a recovery operation. For example, VAA’s ability to undertake
recovery on the 750 kilometre Brisbane-Sydney route, on which we have up to 20 return
scheduled frequencies per day operated by multiple aircraft, is much greater than the 1,300
kilometre Perth-Port Hedland route, on which we operate up to two return frequencies per
day, or on routes between Perth and Christmas Island and Cocos (Keeling) Islands, where
we operate two frequencies a week.
As a service delivery business operating in a highly competitive market, it is in our interests
to minimise the inconvenience caused to our passengers as a result of disruptions by
operating recovery services as quickly as we can. We are also incentivised to operate to our
schedule to the greatest extent possible, given the collection and publication of domestic
airline on-time performance data by the Commonwealth Bureau of Infrastructure, Transport
and Regional Economics.
(i) all related costs and charges imposed by the Civil Aviation Safety Authority
Virgin Australia does not incur any charges from the Civil Aviation Safety Authority (CASA)
which are specific to operations on regional routes. The magnitude of the costs we pay
annually to CASA are minor relative to other costs for our business such as labour, fuel and
airport charges.
11
Tourism Research Australia, Tourism Satellite Account 2016-17, page 6.
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