Lower airfares and inflation, higher tourism spending and living standards: The economic gains from relaxing Australia's aviation constraints
27 August 2024
If the proposed recommendation in the Aviation White Paper to ‘increase capacity ahead of demand in bilateral air service agreements and negotiate for ‘open skies’ style agreements' were applied to 9 currently constrained international aviation markets, Australians could see international airfares drop by 3.7%-9.3%, household consumption increase by $3.6-$7.6 billion, output in the tourism industry expand by $4.9-$9.9 billion and an additional 2,300-4,600 jobs in the tourism sector.
Yesterday saw the release of the Aviation White Paper by the Australian Government. It is an important step towards meaningful reforms in Australia's aviation market. The paper outlines 56 initiatives, including major recommendations like reforming Sydney Airport’s slot management arrangements to "improve efficiency in the allocation and use of take-off and landing slots at Sydney Airport and reduce incentives for anti-competitive slot misuse."
Another notable recommendation is also particularly important: initiative 53 is to “pursue additional capacity ahead of demand in bilateral air service agreements and negotiate for ‘open skies’ style agreements where it is in Australia’s interests.”
Why is this recommendation #53 important and what economic gains might we see from removing these restrictions? As part of the aviation green papers submissions, David Williams-Chen worked with a team on the economic analysis for the Airports Council International’s (ACI) submission, which advocated for removing bilateral air service agreement restrictions and creating new open skies agreements. The work completed for the ACI provides valuable insights into these questions.
Why pursuing additional capacity ahead of demand is important
Many of Australia’s international aviation markets are currently at or near capacity. Unlike the USA, which has over 100 open skies agreements, Australia has only seven, relying instead on less liberal bilateral air service agreements, which among other things cap the seats on a route. According to the analysis undertaken for the ACI, markets currently at or near capacity with flights to and from Australia include the United Arab Emirates, Indonesia, Hong Kong, Qatar, Fiji, the Philippines, Vietnam, Papua New Guinea, and Chile. These constraints stifle Australia's potential as an international tourism destination while simultaneously hurting Australian consumers.
What economic gains might we see from removing these restrictions?
The economic benefits of liberalising our aviation markets are clear. The econometric analysis we completed of five of Australia’s seven current open skies agreements showed that passenger volumes grew by about 49% while average international airfares declined by 12% (even after controlling for other factors).
While this shows open skies agreements have had significant economic gains, they take many years to negotiate and introduce into law. So as a more immediate action, the government could raise the existing limits within bilateral air service agreements while negotiating longer term open skies agreements. Indeed, this appears to be the combination of policies that is being suggested in initiative #53.
In particular, if the Government were to raise the seat capacity limits in the abovementioned 9 markets by 40-50%, our econometric analysis suggested this could reduce international airfares to these markets by approximately 5.8%. This equates to a weighted average decline for Australian's international airfares of 3.7%.
This translates into real benefits for Australians.
Using an economy-wide model, we showed that these capacity improvements would increase total household consumption by $3.6 billion from 2025 to 2030. This means that with lower airfares, the 7.7 million Australians who travel abroad each year can spend more on their travels, enhancing their consumer welfare and improving living standards. More broadly, for all households, even those that don’t travel, these reforms would also lower import costs and help slow transport cost inflation — bringing much-needed support to the current fight to bring inflation down.
Moreover, the tourism industry stands to gain immensely from this liberalisation. Lifting capacity ahead of demand in the bilateral air service agreements between Australia and these 9 markets could increase passenger volumes by 13%, leading to a $4.9 billion boost in foreign tourism industry output from 2025 to 2030. Employment in the tourism sector would also rise, with an average of 2,300 tourism jobs supported annually. Importantly, this shows that even while more Australians would be able to afford more overseas travel and therefore may holiday less domestically, the increased volume of international travellers and the associated spending means the net effect actually is positive for Australia’s tourism sector.
Under an open skies scenario in the same 9 markets, these impacts are even greater: international airfares for Australians could reduce by 9.3%, household consumption could increase by $7.6 billion, passenger volumes could increase by about 49%, foreign tourism industry output could be boosted by $9.9 billion and an average of 4,600 tourism jobs could be supported.
Overall, there is a clear case behind this recommendation in the Aviation White Paper to increase capacity in bilateral air service agreements and negotiate for ‘open skies’ style agreements. Doing so has the potential to boost Australia’s economy by lowering costs for consumers, enhancing the tourism sector, and improving living standards for all Australians.