Part 1 The Year in Review by the Chairperson, Dr Ian Douglas

This annual report marks the twenty-fifth year of operations of the International Air Services Commission (the Commission). It is my pleasure to provide an overview of the activities of the Commission for the last 12 months.

In the financial year 2016–2017, there was again a steady growth of international passenger movements into and out of Australia, with an increase of 7.2% in passenger traffic compared with last year. Airlines increased their capacity in response to this growth by 7.8% and load factors decreased by 0.5 percentage points.

A review of aviation data published by the Bureau of Infrastructure, Transport and Regional Economics (BITRE), from 1985 to 2016, indicates that passenger traffic in Australia consistently increased year after year except in 2001 to 2003 when it dipped to its lowest following terrorist attacks in the USA and the spread of severe acute respiratory syndrome (SARS) overseas. In 2008, even with the global financial crisis, we continued to witness an increase in international travel in Australia although slightly moderating, from 6.0% growth in 2007 to 3.1% in 2008. In the last five calendar years, growth in international passenger traffic has steadily increased on an average of nearly 6%, with 2016 posting close to an 8% growth1.

The China route has seen a significant capacity growth over the past few years, with China being both a source of tourism and a travel destination for Australians. With the growth of passenger movements between Australia and mainland China, Qantas has increased its capacity allocation on the route to enable it to operate unlimited capacity and frequency while Virgin Australia sought and was issued in June 2016, 1,925 seats per week of passenger capacity in each direction. Virgin Australia plans to operate services between Australia and mainland China during the Northern Winter 2017 (October 2017– March 2018) scheduling period, subject to a range of commercial considerations including obtaining suitable slots. Additionally, Pacific Air Express sought and was issued unlimited freight capacity to operate all-cargo services between Australia and mainland China. Subject to certain commercial considerations including obtaining suitable slots, Pacific Air Express plans to commence freight services between Australia and mainland China in November 2017.

Qantas also applied for and was issued seven weekly frequencies in each direction on the Vietnam route. The capacity is being utilised by Jetstar Airways, a wholly-owned subsidiary of Qantas, to operate direct services on Sydney-Ho Chi Minh and Melbourne-Ho Chi Minh city pairs. Qantas code shares on the Jetstar flights.

In 2016–17, Australian airlines operating international services appear to have rationalised their operations on certain routes either ceasing or reducing their operations -- for example, both Qantas and Virgin Australia returned part of their capacity entitlements on the Indonesia route. Last year, Virgin Australia returned its capacity allocation on the Thailand route when it ceased operating to Phuket in February 2016 and this year, the airline returned capacity on the United Arab Emirates route. Qantas withdrew its own-operated services on the Cairns-Port Moresby sector in November 2016 and instead decided to commence services between Brisbane and Port Moresby.

When Air New Zealand decided to cease operating its direct services between Auckland and Norfolk Island with effect from May 2017, Norfolk Island Airlines saw a niche market. It applied for and was issued unlimited passenger capacity on the New Zealand route to operate two weekly services on a Boeing 737–300 between Norfolk Island and Auckland. The services will be operated under a wet lease arrangement between Norfolk Island Airlines and Nauru Airlines, a foreign-registered carrier operating under an Australian air operator's certificate. Norfolk Island Airlines and Nauru Airlines operated their first bi-weekly service between Norfolk Island and Auckland on 17 June 2017.

A majority of the work of the Commission during the reporting period involved renewal of capacity allocations. Qantas renewed its capacity allocations on Fiji, France, Korea, Papua New Guinea, South Africa, Thailand, United States of America, United Arab Emirates and on the Singapore route to be used to exercise own stop-over rights between Singapore and Colombo. Virgin Australia, on the other hand, renewed its capacity allocations on Fiji, Italy, Solomon Islands and on the Singapore route for the exercise of own stop-over rights between Singapore and Colombo. Pacific Air Express renewed and increased its capacity allocation to unlimited on the Nauru route.

Another area of significant work for the Commission in the last financial year was assessing applications by the airlines to use their allocated capacity for code sharing either with another Australian carrier or with a foreign airline. Code sharing allows an airline to expand its international network by enabling it to offer services, as marketing carrier, on routes where it does not have its own operations. For the operating carrier, code share arrangements enable it to obtain traffic feed and distribution outside the operating carrier's home market. It therefore enhances the airline's presence in a market where otherwise that airline has no profile, usually at the end of a route away from the operating carrier's home country.

Where the bilateral air services arrangements allow for code sharing, the Commission usually grants an airline's request to use the capacity for code share services unless the Commission has serious concerns that the proposed code share arrangements would negatively impact on competition on the route. For example, in a route where there is only one operator and the proposed code share is with another carrier that has a strong profile in that market, the Commission would have serious concerns that approving this would result in a higher barrier to entry and close the market from a third airline which might consider operating a competitive service. The case study in part 3 of this report discusses this further.

During the reporting period, the Commission approved Qantas' applications to vary multiple determinations to permit code sharing with Air Niugini on the Brisbane/Sydney and Port Moresby sectors; Fiji Airways on the Singapore route; Jet Airways on the Thailand route; and on the Singapore and Thailand routes, for code sharing between Jetstar and Finnair. Virgin Australia sought and was granted variations of multiple determinations to permit the use of the capacity for code sharing with Hong Kong Airlines on the Hong  Kong route; and with Air Berlin, Air Canada, Alitalia and Hong Kong Airlines on the trans-Tasman route.

Appointment matters

On 31 December 2016, Mr King's term of appointment ended. While many straightforward matters come through to the Commission, a couple of complex and contested cases had to be dealt with sensitivity and deliberated upon thoroughly. Mr King's depth of industry knowledge and experience proved invaluable during the assessment of these complex cases. I thank him for his measured and thoughtful contribution to those deliberations which, no doubt, strengthened the Commission's ultimate decisions.

As we bid Mr King farewell, we welcomed Ms Jan Harris as a Member of the Commission upon her appointment by the Governor-General on 24 November 2016. Ms Harris brings to the Commission a wealth of experience, both from her long-standing career in the Treasury Department and the private sector. I thank Ms Harris for her contribution in the past months, in particular, her expertise on governance matters which helped steer the Commission in discharging its functions properly in accordance with the Act and administrative law requirements.

As we review our performance during the year, I would like to thank the Executive Director, Ms Marlene Tucker, and her small team in the Secretariat for their invaluable advice and assistance in ensuring that the Commission functions smoothly and efficiently.

Dr Ian Douglas
Chairperson

1 bitre.gov.au/statistics/aviation/index.aspx

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Last Updated: 16 October, 2017