Australia a far cry from most competitive aviation market in the world
The method regulators use to measure competition in Australia’s aviation market reveals that it is highly uncompetitive – and a far cry from Albanese government claims that it is the most competitive in the world, new analysis shows.
Former Qantas chief economist Dr Tony Webber said the route-by-route assessment that underpins the industry’s measure of market competitiveness showed that only China and the US meet the competition standard, among countries whose airlines operate flights to Australia.
Prime Minister Anthony Albanese told parliament on Monday “we have the most competitive aviation market in the world, bar none.” He went on to cite a number of airlines that fly into Australia.
Dr Webber, who is now an independent consultant and chief executive of Airline Intelligence & Research, said competition in the aviation industry was looked at route by route.
“There’s a pile of evidence to suggest that [Mr Albanese’s] statement needs a little bit more work – I am being kind,” Dr Webber said. “I wonder what’s possessed him, when the words come out of his mouth he must have known this is a big statement. He said it with great passion.”
Dr Webber used on-time performance flight data from the Bureau of Infrastructure and Transport Research Economics to create what is known as the Herfindahl-Hirschman Index, which measures concentration in the domestic market and the main country destinations with which Australia has air service agreements.
That index calculates the market size and the share of each player, and the higher the index, the less competitive a route.
US aviation and antitrust regulators use the HHI to oversee markets and assess merger applications.
“The HHI benchmark used by the US department of Justice to define highly concentrated markets is 2500,” Dr Webber said
“On that basis we could find just two Australian-international markets that are competitive, a far cry from the most competitive in the world,” Dr Webber said.
Dr Webber, using data from before the pandemic, found Australia’s domestic market had a concentration score 4395, well above the 2500 “highly concentrated” threshold.
“Our domestic market is highly concentrated, and I think everyone could agree with that,” he said.
“We know that the Australian domestic aviation market is highly concentrated. It’s an effective duopoly (Qantas Group vs Virgin Group) with a competitive fringe (Rex and Bonza).
“So if we had international routes that were more concentrated than our domestic market, then that’s clearly evidence that we’re not the most competitive in the world.”
According to his analysis, there are only eight international Australian routes in 2019 with a HHI that is less than the Australian domestic market, but with six being more concentrated or monopolistic than antitrust and utility regulators approve of.
“Our thickest international routes, quite rightly, are some of the most competitive. These include China, the USA, Indonesia and New Zealand.
“The remaining 20 international routes are less competitive than our domestic market. They include big routes such as Japan, Hong Kong, and Thailand.”
Qatar, which the government has refused to increase the number of flights for, had a score of more than 10000. That is four times the “highly concentrated” threshold.
South Korea (5256), Singapore (6528), Thailand (5071) and South Africa (5023) all were double the 2500 measure for poor competition.
His analysis echoes a 2017 academic study which found the Australasia market to be the most uncompetitive of all the major global air markets.
The study undertaken by academics from the aeronautical faculty of Anadolu University in Turkey, used the HHI methodology to compare how competitive seven regional aviation markets were over the period 2006 to 2017.
The Australasia market is the least competitive in the world according to an academic study.
The Australasia market had a HHI concentration score of 1613 in 2017, meaning it was significantly less competitive than any other market. The next least competitive market was North America with a score of 1069. The Asia-Pacific market was the most competitive with a score of 236.
“For there to be any market competition in the Herfindahl-Hirschman Index (HHI), the market concentration rates should be lower than 1000,” the study said.
Using a different measure of concentration called the CR8 index, the academics found similar results.
The HHI data suggested while the Australasia market is the least competitive, it had improved since 2006.
“In the Australasia market, there is a downward trend from 2006 towards the year 2015. In other words, it can be said that the Australasia market has become increasingly competitive.”
A March 2023 study by the same author, Dr Mehmet Yasar, found the Australian aviation market had a HHI score of 3528, among the highest levels of concentration of any developed economy.
Dr Webber said there was a clear corelation between profit margins and the HHI index, with routes to countries having high HHI scores also having high prices, compared with the cost of the service.
“The margin tends to be higher with a higher HHI,” he said.
The lack of competition in Australia’s highly concentrated market is supported by other partial indicators of competition.
Australia ranks 25th for “International Openness” in the 2021 World Economic Forum’s travel and tourism development index.
Within that index, Australia ranked 28th for the number of international airlines, 47th for the number of bilateral air service agreements, and ninth for available seats kilometres per million of population. The latter measure is distorted by the large number of long-haul flights from Australia.
Dr Webber said it was important to understand the nature of competition in the aviation market.
“If you did it for all of Australia you’re factoring in hundreds of airlines, which doesn’t make any sense.”
“Competition occurs on a route basis. So if you’re looking at a flight from Australia to New Zealand, and you’re looking at competition and what drives the air fares on that route, you’re not paying any attention to competition on the Australia to Singapore route, or Australia to Vietnam route.
“The focus point should be on the demand-supply conditions on that route and competition on that route,” Dr Webber said.
The prime minister’s office did not respond to a request for comment.
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