ECW3830

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ECW3830
Competition and Regulation
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Week 7 Hilmer report and industry restructuring
Week 5-6 Regulating monopolies and access to
essential facilities
Week 8 Liberalisation in aviation
Week 4 Theories and practice of privatisation
Competition and Regulation
Week 9 Structural reform and regulation in
electricity
Week 3 Deregulation rationales and experiences
Week 10 Competition and regulation in
telecommunications
Week 2 Theories of regulation
Week 11 Mergers, Cartels and restrictive
practices
Week 1 Rationale for competition policy and
regulation
Week 12 - Research topic. Regulation,
deregulation and privatisation in small open
economies
Week 13 Revision
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Examination

• Three hours
• 4 concise essay style questions based on the
  topics of the unit.
• and
• 1 research question
• All questions are worth equal marks

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Research question

• Consider any industry (in any country) where the
  price is regulated.
• What kind of market structure is in the industry?
  
• What is the reason for and aim of price
  regulation?
• Which of the known approaches to/methods of price
  regulation is applied? (Use an appropriate
  theory/model for your explanation)
• Is the aim of price regulation achieved?
• In the case you are considering, are there
  negative consequences/side effects of price
  regulation?

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Sample question 1

• Use an appropriate theory to explain, why natural
  monopolies are regulated. What in particular is
  supposed to be regulated? Does regulation always
  serves its purpose? If not what might be a
  reason? Give examples.
• Topics
• Regulating monopolies and access to essential
  facilities
• Hilmer report
• Deregulation
• Theories of regulation

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Sample question 2

• Give examples of an industry where the third
  party access regulation is essential. Explain why
  it is required. Does the third party access
  regulation help in promoting competition?
• Topics
• Regulating monopolies and access to essential
  facilities
• Hilmer report
• Deregulation
• One of the following industries
• Telecommunication
• Energy (high voltage transmission)
• Airports

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Sample question 3

• Outline the moves that Australia has taken to
  reform the telecommunication sector and to
  develop a market of telecommunication services.
  How strong do you expect competition in the
  market to be, and is there a continuing role for
  regulation?
• Topics
• INDUSTRY SPECIFID QUESTION. One of the following
  industries
• Telecommunication
• Energy (high voltage transmission)
• Airports
• Regulating monopolies and access to essential
  facilities
• Hilmer report
• Regulation
• Deregulation
• Privatisation

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Sample question 4

• ACCC has recently rejected the proposal of merger
  between QANTAS an Air New Zealand. Using an
  appropriate theory, explain what could be a
  reason for this decision. Do you agree it was
  justified?
• Topics
• Mergers, Cartels and Restrictive Practices
• Theories of regulation

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Week 8 Liberalisation in Aviation
Why airlines are regulated?
Why airlines are deregulated?
USA historic routes of airline industry
deregulation
Australia Domestic airlines
Australia International airlines
Towards open skies
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Aims On completion of this topic students
should be able to
Liberalisation in Aviation

• Understand the basis rationale for regulation and
  deregulation in the aviation industry
• Be aware about the historic routes of the
  deregulation of the aviation industry in USA
  and
• Judge the merit and outcome of deregulatory
  polices of the domestic and international
  segments of the airline industry in Australia and
  overseas.

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Essential Reading
Liberalisation in Aviation

• Quiggin, John, Evaluating Airline Deregulation
  in Australia Australian Economic Review,
  Mar1997, Vol. 30 Issue 1, p45-56, (Reeding 19)
• Peter Forsyth, (2003) Low Cost Carriers in
  Australia Experiences and Impacts, Journal of
  Air Transport Management, 9 pp 277-284 (Library
  reference - http//www.lib.monash.edu.au/resourcel
  ists/e/ecw3830.html )
• Alan Johnston Andrew Trembath, Economic
  regulation of intrastate aviation and the
  National Competition Policy Discussion paper,
  National Competition Council, 2005 (Free on the
  internet - http//www.ncc.gov.au/pdf/PIReAv-001.p
  df ).
• Aviation policy and regulation - on the official
  site of the Department of Transport and Regional
  Services (http//www.dotars.gov.au/aviation/legisl
  ation/policy/index.aspx )

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Liberalisation in Aviation
Why airlines are regulated?

• Airline services were historically heavily
  regulated in all countries
• Concerns about monopoly and oligopoly
• in most cases, only a small number of airlines
  serve a given "city pair" market by providing
  direct flights between the cities concerned.
• Allowing for competition, was considered the same
  uneconomical as in other network industries
  (railway, energy telecommunications)
• Concerns about security
• Concerns about safety

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Liberalisation in Aviation
Why airlines are regulated?

• Traditionally, apart from safety and security,
  the following matters have been regulated
• Domestic aviation
• Limited licensing of airlines
• Licensing each airlines access to every route it
  pursues
• Airfares
• International aviation
• Limited licensing of airlines
• Negotiating access of international competitors
  to local destinations
• Airfares
• Ownership of and access to airports

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Liberalisation in Aviation
Why airlines are deregulated?
Airline deregulation is the process of removing
restrictions on airlines affecting, in
particular, which carriers are permitted to serve
particular routes.
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Liberalisation in Aviation
USA historic origin of airline industry
deregulation
Regulation

• Since 1938, the Federal Civil Aeronautics Board
  (CAB) had regulated all domestic air transport as
  a public utility setting
• fares
• routes
• schedules
• Advantages
• the CAB promoted air travel
• held fares down
• obliged to ensure that the airlines had a
  reasonable rate of return.
• Disadvantages
• bureaucratic complacency
• lengthy delays of the approval process
• Inefficiency of airlines due to lack of
  competition

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Liberalisation in Aviation
USA historic origin of airline industry
deregulation
Deregulation

• The United States Airline Deregulation Act of
  1978
• It also was part of a broader movement that, with
  varying degrees of thoroughness, transformed
• trucking,
• railroads,
• buses, cable television,
• stock exchange brokerage,
• oil and gas,
• telecommunications,
• financial markets, and
• local electric and gas utilities.

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Liberalisation in Aviation
USA historic origin of airline industry
deregulation
Deregulation

• The United States Airline Deregulation Act of
  1978
• gradually eliminated the CAB's authority to set
  fares
• required the CAB to expedite processing of
  various requests
• liberalized standards for the establishment of
  new airlines
• allowed airlines to take over service on routes
  underutilized by competitors or on which the
  competitor received a local service subsidy
• authorized international carriers to offer
  domestic service
• prohibited the CAB from introducing new
  regulation of charter trips
• terminated certain subsidies
• terminated existing mutual aid agreements between
  air carriers
• authorized the CAB to grant antitrust immunity to
  carriers
• authorized intrastate carriers to enter into
  through service and joint fare agreements with
  interstate air carriers
• gradually transferred remaining regulatory
  authority to the U.S. Department of
  Transportation (DOT), and dissolved the CAB
  itself.

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Liberalisation in Aviation
USA historic origin of airline industry
deregulation
Deregulation

• Effects
• Reduction in fairs by 30 in inflation ajusted
  terms
• Increase in passenger loads
• Airlines can now transfer larger aircraft to
  busier routes and replace them with smaller ones
  on shorter, low-traffic routes.
• Development of low cost (no frills) carriers
• Issues
• The benefits of deregulation have not been evenly
  distributed through the national air
  transportation network.
• Costs have fallen more dramatically on heavily
  trafficked, longer-distance routes than on
  shorter, lighter ones.
• Exposure to competition led to heavy losses and
  conflicts with labor unions. Between 1978 and
  mid-2001 nine major carriers and over 100 smaller
  ones had gone bankrupt
• Eastern, Midway, Braniff, Pan Am, Continental,
  America West Airlines, TWA

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Liberalisation in Aviation
In Australia

• Prior to 1990, Australia operated a Two Airlines
  policy
• Effectively guaranteed the maintenance of exactly
  two airlines,
• one public (TAA, later Australian Airlines and
  then Qantas) and
• one private (Annett),
• Almost identical fares, fleets and schedules.
• Discounting was only permitted to the extent that
  it did not necessitate an increase in standard
  economy fares.
• Repeal of the two airlines agreement under the
  Airline Agreement Termination Act, which came
  into effect on 30 October 1990,
• This restriction was abandoned, along with limits
  on entry to the industry.
• A number of unsuccessful attempts at entry were
  made, but the first successful new entry was
  Virgin Blue which was launched in 2000.
• Virgin Blue's entry, the subsequent fare war, and
  the decline in air travel following the September
  11 attacks led to the collapse of Ansett and the
  restoration of a duopoly market.

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Liberalisation in Aviation
In Australia
Domestic

• Fares are completely deregulated
• New entries are subject to licenses. Licenses
  are not refused.
• Fare recent fare wars
• However a duopoly has resulted in increase in
  fares
• No frills airlines/services (Jet Star versus
  Virgin Blue)
• Special status of QANTAS
• Small regional airlines monopolistic position of
  flying to regional centres
• extremely high fares

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Liberalisation in Aviation
In Australia
International

• Fares are completely deregulated
• Servicing routes subject to licensing
• Special status of QANTAS
• Protection of QANTASs international routes by
  reciprocal arrangements with international
  partners
• 1 flight by QANTAS to 1 flight by a partner to a
  particular destination if QANTAS services the
  corresponding route.
• Restricting international airlines from using
  Australia for routes to third parties where
  QANTAS operated
• Singapore Airlines was recently not permitted to
  service Australia-US route
• Protection the majority Australian ownership of
  QANTAS
• Recent referral of a takeover bid to the
  Australian Foreign Invest commission

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Liberalisation in Aviation
In Australia
Airports

• Airports have been privatised
• Prices are regulated. Why?
• regional natural monopoly
• there is a well developed demand for air
  transport to and from each major city
• travel is typically point to point
• demand is based on a specific destination
• within a city or adjacent areas, alternative
  airports are not viable departure/arrival
• new entry is unlikely
• other forms of transport (given distances) are
  not close substitutes to air travel
• airport operators also have an incentive to
  price-discriminate among users airlines, for
  extracting more profit
• consumption is not affected and
• airlines may have a significant degree of
  countervailing power (passing the airport fees
  onto consumers)

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Liberalisation in Aviation
In Australia
The most recent development

• AVIATION REGULATION REVIEW TASKFORCE
• Minister for Transport and Regional Services
• Press Release 04 April 2007
• http//www.ministers.dotars.gov.au/mv/releases/200
  7/April/059MV_2007.htm
• The Group will work closely with the aviation
  industry and provide advice to me on matters
  including
• the best practice safety regulatory model for
  Australia
• priorities for the Government's future regulatory
  reform programme, including the development of
  the timetable prioritising regulatory reforms and
  key performance measures
• the consultation arrangements between the
  Government's aviation agencies and the industry
  and
• the change management and education and training
  requirements in implementing regulatory changes.

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Revision questions for the next weektutorial
Liberalisation in Aviation

• Be prepared to discuss
• The reasons for regulation and deregulation of
  the aviation industry
• Elements of airline deregulatory policies in
  Australia and overseas