The Covid-19 Pandemic and resulting collapse in demand for passenger air services has had a profound impact on airline markets in Australia and globally.  As the Pandemic continues, border control continues to be a key health management tool and recovery of demand for air travel is further delayed. Will this result in fundamental changes in the structure of airline markets? Will this prompt regulatory change and in what form? How will competition regulators respond as competitors look to cooperate or consolidate? Will it be possible to maintain pre-Covid levels of competition and have airline markets recover?  

Aviation Industry’s Key Developments in 2020

Impact of the Covid-19 Pandemic

Government imposed travel bans in response to the Covid-19 pandemic saw air passenger volumes collapse from March 2020 in Australia and globally.  According to BITRE, passengers carried on Australian domestic commercial flights (including charter operations) in April 2020 were down 93.6 per cent compared to April 2019.  By December 2020, domestic passenger volumes were still down 54.9 per cent compared to December 2019.   

International volumes have been almost completely wiped out, with Australian citizens and permanent residents only able to leave the country with an exemption, while strict caps on the number of arrivals are in place.  By December 2020, international scheduled passenger traffic to/from Australia was still down 98% compared to December 2019.

While Australia has managed to keep its case load low relative to other countries, state border closures in response to outbreaks have limited the pace and extent of the recovery for the aviation industry.

Virgin Australia Voluntary Administration and expansion of REX

The sudden loss of volumes led Virgin Australia to enter into voluntary administration in April 2020.  In November 2020, Bain Capital became the owner of the airline and new CEO Jayne Hrdlicka has indicated plans to position Virgin Australia as a mid-market carrier that will serve ‘all segments of the market’.  The extent of Virgin Australia’s future offering and ability to rebuild its network will have significant implications for competition in the domestic airline industry.   

Meanwhile, after receiving a large injection of funds from the Federal Government under three support packages - more cash than was granted to Qantas and Virgin Australia combined - regional airline REX has added 6 Boeing 737s to its fleet and commenced selling tickets in competition with Qantas and Virgin Australia on routes between Melbourne, Adelaide, the Gold Coast, Brisbane and Sydney.  The ACCC has noted that Rex’s promotional fares on its first new route, Melbourne-Sydney, prompted competitive responses from Virgin and Jetstar.  The history of three-way competition in Australian domestic airline markets suggests we should watch this space.

Australian regulatory responses

At the onset of the pandemic, the ACCC considered several urgent authorisation applications in record timeframes.  Since then, the ACCC has continued to address matters pragmatically, in recognition of the continued impact of the pandemic on the industry. 

On 19 June 2020, the Treasurer issued a direction to the ACCC to monitor prices, costs and profits relating to the supply of domestic air passenger transport services for a period of 3 years.  The direction requires the ACCC to give the Treasurer a report on the monitoring at least once every quarter.  The ACCC noted in its latest quarterly report that in carrying out its functions, it may be that the ACCC identifies that the level of competition within the industry is diminishing and/or identifies anti-competitive behaviour, but short of thresholds for enforcement action.  The ACCC intends to recommend potential policy options to government should there be signs that competition is not effective.  The monitoring direction provides the ACCC with the ability to compel information from relevant companies within the industry.  As part of its monitoring this year, the ACCC will closely consider the impact of Rex’s entry on new routes between major cities. 

What to expect from the aviation industry in 2021

Continued uncertainty

Most industry analysts are forecasting a very gradual and non-linear recovery over a protracted period, and IATA is forecasting that it will be 2024 at the earliest before international passenger demand returns to pre-pandemic levels. Health Department boss Brendan Murphy and Chief Medical Officer Paul Kelly have signalled that international travel is unlikely to resume for Australians before 2022.  Even with a vaccine rollout, it is not yet clear whether those who are vaccinated may still infect those who are not. In addition, it appears that some vaccines are not as effective against new strains of the virus. These factors may impact the industry’s recovery.

There are also serious doubts that business travel will return to pre-pandemic levels any time soon, with the effectiveness of technology in facilitating meetings now more proven.  As for leisure travellers, there were signs of pent-up demand towards the end of 2020.  However, with snap state border closures being imposed in recent months following outbreaks, it is also possible that many leisure travellers may not have the confidence to make interstate travel plans in the short-term.  In its March 2021 monitoring report, the ACCC considered that the ongoing possibility of future border restrictions has dampened consumer enthusiasm to book flights.

Possible consolidation

With the challenging operating environment likely to continue for some time, several airlines are forecast to exit the industry globally.  The industry has seen the collapse and/or consolidation of airlines when there have been shocks in the past (e.g. following September 11).  Airlines with a network focused on international flights or with fleets of larger aircraft are likely to be more challenged as demand for international and long-haul flights continues to be more affected.  For example, LATAM, which was the largest airline in Latin America prior to the pandemic, filed for US bankruptcy protection in 2020, while Korean Air has recently announced its proposed acquisition of Asiana Airlines.

With many airline markets largely dormant for a year or so, it is unclear how mergers and acquisitions will be analysed by competition regulators.  For example, will recent market shares be of use when volumes are negligible?  Can historic market shares indicate what market shares may be expected in the future when so much is unknown?  What counterfactual will regulators use to assess transactions when the counterfactual may be unknown or speculative given the uncertainties about future reopening and demand?

Greater co-ordination

With uncertainty comes risk and airlines are likely to seek to share this risk by making authorisation applications for joint conduct.  Qantas has recently made applications to renew authorisations for coordination with China Eastern Airlines and American Airlines.  Qantas also recently sought authorisation and urgent interim authorisation for joint conduct with Japan Airlines.  If Virgin Australia were to return to international flying, it is likely that it would seek to do so jointly with other airlines, particularly on longer routes.

Continued focus on slot allocation

2021 is likely to see the ACCC continue to call for slot allocation reform.  In recent submissions to senate and Australian Government inquiries examining the future of Australia’s aviation sector and Sydney Airport Demand Management, the ACCC argued that access to slots at Sydney Airport is a “key barrier to entry and expansion” in Australian air passenger service markets.  2020 saw the waiver of requirements that airlines operate a certain number of flights to keep slots allocated to them.  The issue can be expected to remain in focus this year as the inquiries continue.

Government Support

In March 2021, the Federal Government announced the Tourism Aviation Network Support (TANS) Program, as well as an extension of previous support programs until the end of September 2021.  The TANS Program involves government support allowing airlines to offer airfares at a 50% discount on select routes in order to stimulate demand for travel to these destinations.  Airlines have already responded by adding additional capacity, while questions have been raised about the way in which destinations were selected and their relationship to areas most impacted by a reduction in visitors and tourism spend.  Industry participants and travellers alike will be closely watching how the TANS program works in practice.