The Productivity Commission estimates that productivity growth has been responsible for almost all the increase in Australia’s GDP per person since Federation. Yet after the worst decade of productivity performance in 60 years to 2020, productivity growth has declined even further in the past three years. It is little surprise, then, that the need for improved productivity growth in coming decades was signalled as a central tenet of Treasury’s recent Intergenerational Report.
Competition encourages innovation, and innovation is the seed of productivity growth. So it is with good reason that the Australian Government recently announced a Competition Policy Review, led by former Chair of the Australian Competition and Consumer Commission (ACCC), Rod Sims.
Australia has several highly concentrated markets, including groceries, banking and air travel. The dominant player in the domestic aviation market is Qantas, whose CEO Alan Joyce recently departed the company shortly after a $2.47 billion underlying profit was declared for the 2022-23 financial year.
Although Qantas Group (including Jetstar) shares 95 per cent of the domestic passenger market with Virgin Australia, a small number of companies in a market does not necessarily lead to anti-competitive behaviour if barriers to new entrants are low.
In the case of aviation, however, there are significant barriers to entry. New international flight routes require government approval, as evidenced by the recent rejection of Qatar’s proposal to add another 21 weekly flights to its Australian routes. Airports also have a limited number of slots, which determine how many flights can take off and land within a given time period.
Established airlines have been accused repeatedly of acquiring excess slots so as to stimy competition, only to cancel half-full flights at short notice to ensure their planes are full. Current arrangements not only fail to prevent this practice of ‘slot hoarding’ but also give preferential treatment to incumbents, making it even more difficult for new competitors to enter the market.
Hence the ACCC has recommended reforming how slots are managed in order to address slot hoarding and thereby boost competition in the aviation industry. The Australian Government has every reason to consider these reforms, and others that improve competitiveness in Australia’s more-concentrated markets, with a degree of urgency.
Craig Emerson
Managing Director
Emerson Economics