Domestic airlines look for growth opportunities amid continuing challenges

17 March 2021

Australia’s domestic airlines are gradually recovering from historically low passenger numbers, but snap border closures continue to create challenges for the industry.

The ACCC’s third Airline Competition in Australia report, released today, shows total passenger numbers for December 2020 were 41 per cent of pre-COVID numbers, up from the 13 per cent of pre-pandemic levels reported in September 2020.

The gradual recovery of the industry over the quarter to December 2020 meant air traffic also started to return to pre-pandemic domestic patterns. While intrastate routes accounted for the vast majority of passengers throughout 2020 because of closed borders, 69 per cent of passengers in December 2020 flew on interstate routes, up from 26 per cent in September 2020.

The return of interstate flying appears to have assisted Virgin most notably as the airline increased its share of total passengers from 20 per cent to 24 per cent over the December quarter. The Qantas Group, consisting of Qantas, Jetstar and QantasLink, remained dominant with 74 per cent of the market in December 2020.

COVID-19 outbreaks over the normally peak December holiday period set back the projected recovery of the domestic travel market. Airlines cancelled almost one in 10 scheduled flights in December 2020, which is notably higher than previous months and pre-pandemic.

“Australia’s domestic airlines are starting to experience a recovery in their passenger numbers, but it remains a very challenging environment,” ACCC Chair Rod Sims said.

The pandemic has presented an opportunity for regional operator Rex to secure the aircraft and pilots needed to expand into major city routes. In March 2021, Rex began running services on the Melbourne–Sydney route, and announced plans to expand into Adelaide, the Gold Coast and Canberra over the coming weeks.

Rex’s expansion provoked immediate responses from its competitors. Rex’s promotional $49 fares on the Melbourne–Sydney route prompted Virgin to price match, while Qantas-owned Jetstar introduced a $29 discounted airfare.

“With three carriers on Australia’s busiest route, competition has been vigorous and consumers are the beneficiaries of this. Each airline will need to work hard to win over consumers,” Mr Sims said.

“Domestic airfares normally peak over holiday periods but we didn’t see that happen in December, partly because the three airline groups offered competitive promotions in a bid to get customers back in the skies.”

All three airline groups continue to revise their broader networks by entering new routes and exiting others, in response to consumer demand in a dynamic and uncertain environment.

“While international borders are shut and business travel remains low, airlines are actively looking for new opportunities to optimise their networks and generate revenues,” Mr Sims said.

“The competitive process can be vigorous and robust as airlines enter new routes. While the process may have commercial consequences for individual airlines, at this stage domestic airline competition appears to be increasing rather than decreasing.”

The Australian Government recently announced that it would extend the Regional Airline Network Support and Domestic Airline Network Support funding programs to the end of September. The ACCC understands that routes have become increasingly ineligible for funding under these programs as activity has recovered, but the extension will likely see the retention of some routes that would otherwise have no longer been operated. The Government also announced the Tourism Aviation Network Support program, which will subsidise tickets sold to at least 13 key tourist destinations between April and the end of July 2021.

The ACCC’s report outlines a number of significant developments in the airline industry in recent months, including how airlines are revising their service offering to target particular groups of customers.

“It appears that Virgin and Rex are both targeting business and leisure customers who value a certain level of service but are also mindful of the price,” Mr Sims said.

“This may leave Qantas facing less competition for premium customers, and through its Jetstar brand, for budget holiday customers as well.”

The report also looks at the role customer loyalty schemes have played in the airline industry. While these schemes can potentially reduce competition by encouraging people to repeatedly fly with only one airline, they do not appear to be a major barrier to competition at present.

“We will continue to monitor for changes in these market dynamics as the industry recovers, and watch out for any signs that competition is diminishing,” Mr Sims said.

Australian domestic air services – December 2019 to December 2020

Graph showing the recovery of Australia's domestic aviation industry between April and December 2020

Source: Bureau of Infrastructure, Transport and Regional Economics; Australian domestic airline activity.

Note: Data is for regular public transport and does not include charter operations.

Background

On 19 June 2020, the ACCC was directed by the Treasurer, The Hon Josh Frydenberg MP to monitor the prices, costs and profits of Australia’s domestic airline industry and provide quarterly reports to inform Government policy. This report is the third under the Treasurer’s direction.

The direction under Part VIIA of the Competition and Consumer Act enables the ACCC to require information from relevant companies. The direction is for three years.

Release number: 
23/21
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