Wednesday, January 24, 2007

Tuesday Column: Qantas - the protected kangaroo

At last! The price of petrol is on track to fall below one dollar. But what about the price of flying?

The cost of jet fuel peaked in July when Israel launched air strikes against Lebanon.It has been falling for most of the time since.

But Qantas has been sparing in its cuts to the fuel surcharge. It has cut the surcharge on flights to Europe from $185 to $170, on flights to the US from $145 to $133 and on domestic flights from $31 to $26.

It says it will do more when it is able. The Australian Competition and Consumer Commission hasn’t taken much of an interest. A spokesman told me that what Qantas did was a matter for the market. Competition should sort things out.

But the problem is that there isn’t much of market. Even less than there is for the selling of petrol.

On most routes within Australia there are only airlines: Virgin Blue, which also has a fuel surcharge and Qantas, which sometimes uses the name Jetstar.

On other routes there is no competition whatsoever... The ANZ’s Chief Economist Saul Eslake is a reluctant Qantas/Jetstar customer. He tells me that when he flies to Tamworth to give a presentation he has no choice to use Qantas. It charges him far more for the Sydney-Tamworth leg on which it has a monopoly than it does for the much –longer but somewhat competitive Melbourne-Sydney leg.

Saul is a bit upset with Qantas/Jetstar at the moment. After a presentation in North Queensland on Friday he found himself waiting in the Hamilton Island airport for most of the afternoon instead of back at his desk at work. He says the excuses varied. It was either a mechanical problem, or bad weather back in Melbourne. He changed the greeting on his mobile and office phones to one that explained that he had planned to be back in the office at 3.30pm, “but thanks to Jetstar's monumental incompetence and ineptitude, I am spending about three and half hours twiddling my thumbs at the Hamilton Island airport. If you have an alternative to flying on Bogan Air, as I call Jetstar, please take my advice and use it.”

His point is that on most routes people don’t have alternatives. It is a generally established principle in economics that two is a particularly poor number of competitors when it comes encouraging genuine competition. (One is, of course, even worse.) Think of Optus and Telecom in the early days of phone deregulation, think of Woolworths and Coles, think of Hoyts and Greater Union before the arrival of Dendy in Canberra.

Where there are two big firms in an industry usually one sets its price just a bit below the other and there the competition stops. But when there are three or more competitors, as there are today when it comes to providing mobile telephone services, real price competition is quite likely.

There is scarcely any price competition on the most lucrative of Qantas’s routes – Sydney to Los Angeles. Only Qantas and United Airlines fly the route and they make quite a lot of money doing so.

According to the Canberra consultancy Econtech Qantas charges 38 per cent more per kilometre for Sydney-Los Angeles flights than it does on the Sydney-London route on which it faces more real competition.

Econtech was commissioned to conduct the study by Singapore Airlines, which has been trying to fly between Sydney and Los Angeles and provide real competition for more than a decade. At every turn the Australian government has blocked Singapore Airlines saying that such competition from it would not be in the national interest. It wants Virgin Blue to enter the market instead.

But if the government was serious about serving the interests of travelers, rather than those of Australia’s two big airlines (neither of which the government owns, and one of which may soon be taken over and so loaded up with debt that it will pay little tax) it would encourage as many competitors as possible to fly to and from Australia.

The effect could be dramatic. Econtech says the extra capacity and the lower prices on the route that would result from opening it up would be likely to increase the number of travelers moving between Australia and the US by as much as 8 per cent, and could boost spending by US visitors in Australia by more than A$100 million.

But these aren’t the economic figures that the government finds persuasive when it considers whether or not to allow an extra foreign airline to fly to Australia. When it asks “What’s in it for Australia?” it means “What’s in it for Qantas and Virgin Blue?” Its attitude seems to be that it will only allow air travelers to and from Australia to benefit if other countries allow Qantas or perhaps Virgin Blue to land so that they can benefit.

It is attitude long ago abandoned when to comes to imports. Australia used to once say that it would only allow in cheap imports and assist Australian consumers so long as other countries allowed in imports from Australian firms benefiting those firms. Australian consumers were held hostage to the interests of Australian manufactures.

But two decades ago the Hawke government decided that it would bring Australia’s tariff walls no matter what. It decided that its most important responsibility was to assist Australian consumers rather than the firms that employed them.

In aviation it remains different and we pay for it flight after flight. As Saul Eslake puts it: “The interest of Australia when it comes to manufacturing and agriculture is seen as the same as that of the purchasers of goods, but the interest of Australia when it comes to aviation is not seen as that of Australian flyers, but rather that of Qantas.

It would be nice to think that the proposed private takeover of Qantas will change that. It’ll no longer be owned by Australian citizens - the government might cut it lose. But I am more pessimistic about that than I used to be. A few weeks back it reported that government was close to deal under which it would allow the takeover on the condition that Qantas kept jobs in Australia.

Almost every other firm in Australia has lost the right to play the jobs card. The government should tell Qantas that all bets are off and that its time for the rest of us to travel cheaply.