Andrew Leigh

WHY MANY PAY TOO MUCH FOR FLIGHTS, AND HOW TO MAKE THEM MORE AFFORDABLE

A high-performing aviation sector is critical to Australia's way of life, connecting people and communities, while supporting economic activity and employment across regions.

Australia accounts for around 1.7 cent of global economic activity. Given this, we benefit greatly from adopting and modifying innovation from overseas. Swiftly bringing new ideas and products into our economy has been a major driver of economic growth for decades - and will continue to be so into the future. Travel is an important mechanism for sharing ideas, even in a post-pandemic world.

A healthy aviation sector means we can be better connected to the rest of the world, better equipped to adopt innovations and better able to help diffuse new ideas within Australia. In short, the aviation sector has large spillovers to other sectors, not just in obvious areas like tourism but right across the economy.

Using detailed microdata from the private sector and the Bureau of Infrastructure and Transport Research Economics, Omer Majeed from the Competition Taskforce in Treasury has teamed up with Professor Robert Breunig at the Australian National University to examine how competition has changed over time and the impact on aviation activity and prices. In an Australian context, it adds to the relatively limited evidence base demonstrating the relationship between competitive pressures and consumer prices.

The results show a strong relationship between competition and airfares. When one airline services a route, airfares average 39.6c per kilometre. With two competing airlines, the average fare drops to 28.2c. With three competitors, to 19.2c. In other words, the price per kilometre is halved when three competitors fly a route compared with the situation when there is only a single monopoly airline. With four or five competitors, the price drops further still.

Initial results further indicate that the mere threat of competition in the aviation sector has, on average, helped to lower prices. The team is further developing this analysis, which will support the taskforce's contribution to the government's Aviation White Paper, which is expected to be published in mid-2024.

Australia's aviation history shows the value of competition. Prior to the Second World War, more than a dozen airlines operated in Australia, and Australia's aviation volume was among the highest in the world. But from the 1950s to the 1980s, a duopoly prevailed, keeping prices high. Only with the deregulation of aviation in the late-1980s did flying become affordable for many middle-class families and small businesspeople.

Aviation competition has been fundamental to connecting Australian cities to one another, and connecting our country to the world. Still, many Australians suffer from a lack of competition. For example, for a resident of Darwin, it is often cheaper to fly from Darwin to Singapore than it is to fly from Darwin to Sydney - even although the international flight is longer than the domestic one.

Airlines aren't the only industry where competition is a problem. There are signs the intensity of competition has weakened across many parts of the economy. The Competition Taskforce analysis of microdata gives us a sharper picture on what's happening, and where reforms might most help consumers with cost-of-living pressures.

Within Treasury, the Competition Taskforce is moving swiftly to identify reforms that will create a more competitive, dynamic and productive economy. History teaches us the value of competition reforms. In the 1990s, a raft of competition reforms unleashed strong productivity growth. Today, the potential gains from competition reform are just as large. It's competition reform - with wings.

Originally published in the Canberra Times on Friday the 2^nd of February.