The Australian Competition and Consumer Commission (ACCC) will maintain close oversight of domestic airfares between major cities following Rex Airlines’ market exit.
The ACCC has released its latest domestic airline competition report. While some indicators point to improved conditions for airline consumers, the report also highlights significant challenges and potential risks to competition in the market.
Improved Consumer Conditions Amid Industry Shifts
The first half of 2024 saw a general improvement in conditions for air travelers. Airfares declined, with average revenues per passenger dropping 1.6% in nominal terms and 5.2% in real terms compared to June 2023.
This trend was particularly noticeable on major city routes, which typically enjoy more competition than regional and remote connections. East-west routes and those serving the Gold Coast experienced especially notable fare reductions.
Operational performance also saw positive developments. The cancellation rate for domestic flights reached its lowest point in almost four years, dipping below the long-term industry average of 2.2% to 2.1% in May 2024.
This marks a significant improvement from the peak of 5.0% recorded in December 2023. On-time performance, while stabilizing at 76.8% in June 2024, still lags behind the long-term industry average of 80.9%.
Competition after Bonza and Rex Exit
Despite these improvements, the ACCC expresses concern about the competitive landscape of Australia’s domestic aviation market.
The collapse of Bonza and Rex’s withdrawal from routes between metropolitan cities has resulted in a situation where, as of July 2024, no domestic route has more than two competing airline groups.
This represents a significant reduction in competition, considering that between November 2023 and April 2024, Australia briefly saw its first four-airline route between Melbourne and the Gold Coast.
ACCC Commissioner Anna Brakey emphasized the importance of competition in keeping airfares low, stating, “Consumers generally enjoy lower airfares where there is more competition on a route.”
The commission’s data supports this assertion, showing that since February 2023, routes with increased competition have consistently offered lower fares. This is notable, compared to 2019 levels than the broader domestic network.
Challenges for New and Expanding Airlines
The report delves into the significant hurdles faced by new and expanding airlines in the Australian market. The short-lived operations of Bonza, which ceased after just over a year, and the current struggles of Rex highlight these challenges.
Fleet management emerges as a critical factor, with the ACCC noting that airlines with larger fleets benefit from economies of scale in aircraft acquisition, staff training, and maintenance support.
Global supply chain issues further complicate matters, creating barriers to expanding capacity, updating aging fleets, and securing necessary parts for maintenance. These challenges are particularly acute for smaller airlines, which may lack the resources to weather such difficulties or the flexibility to adjust their operations in response to seasonal demands or unexpected disruptions.
Monitoring and Future Outlook
The ACCC has committed to closely monitoring airfares, especially on routes formerly served by Rex, to ensure that the reduced competition does not lead to unjustified price increases.
Commissioner Brakey stated, “The concentrated nature of Australia’s domestic aviation industry reinforces the importance of the ongoing transparency and scrutiny we bring through our monitoring role.”
While passenger levels and seat capacity in June 2024 approached pre-pandemic levels (at 97.8% and 96.8% respectively), the industry’s structure has changed significantly.
The government’s guarantee of regional flight bookings for Rex customers throughout its voluntary administration process shows the importance of maintaining connectivity to regional and remote communities.
Conclusion
While consumers have benefited from lower fares and improved operational performance in the short term, the reduction in competition raises concerns about the long-term health of the market.
The challenges faced by newer and smaller airlines in establishing and maintaining operations highlight the high barriers to entry in the aviation sector. The coming months will be critical in determining whether the current improvements in consumer conditions can be maintained in a less competitive environment.
Questions still remain as to whether Australia’s domestic aviation market can support a diverse range of operators to serve the nation’s travel needs.
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