What can be done to improve commercial viability of regional aviation in NSW/Australia?

31 May 2017
From our ‘Thinking outside the box’ series
With continued volatility in the resources sector and tourism being inherently seasonal, soft demand from regional and business communities has unsurprisingly resulted in lower profit margins for regional airlines. Professor Rico Merkert explains further.

Although Rex has recently reported a slight improvement in outlook, Virgin Australia and Qantas are still seeing tough trading conditions in the regional and domestic Australian aviation markets. With continued volatility in the resources sector and tourism being inherently seasonal, soft demand from regional and business communities has unsurprisingly resulted in lower profit margins for regional airlines. Profitability is an even greater issue for regional airports, with their number having dropped by 46% over the last 20 years.  Additionally the Australian Airports Association (AAA) reported in 2016 that 60% of Australian regional airports are still operating at a loss with many of them struggling to fund infrastructure maintenance and ongoing operation. Being largely council run, they suffer from restricted access to capital markets, and lack management and incentive structures to grow profitability. Consolidation appears to be the name of the game.

It therefore seems to be timely to ask what policy makers can do to improve commercial viability of regional aviation in Australia?

Before answering this question one needs to evaluate whether it is worth having regional air services at all. For the regions themselves this is a no brainer because the economic impact of regional aviation is substantial and also because, quite frankly, many regional and remote communities would often not even exist without regular scheduled air services.  In Europe and the USA they are hence often referred to as essential or lifeline services.  However, what value do such services present to people and businesses residing in urban/metropolitan areas?

Our research, recently published in the Journal of Transportation Research Part A: Policy and Practice,provides evidence for such willingness to pay. Our findings suggest that, compared to other modes of travel to regional areas, Sydney residents are willing to pay a premium for regional air services of on average $126 ($99 leisure; $153 business) for one hour of travel time savings. Regional airlines, for example QantasLink, could charge a premium of $189 as part of the ticket price from say Sydney to Port Macquarie, where the saved travel time is 1.5 hours compared to driving a car.

This has important implications on regulation and public support of such services.  The high premiums on time savings resulting from regional aviation services suggest that some form of industry support may be warranted, at the least through ensuring a business friendly institutional environment. Industry subsidies may not be required if the regional air services’ essential role is otherwise recognised as part of the future development of the regions.  In the context of regulating Sydney Airport (KSA) our findings provide justification for the mandated level of peak hour slots for regional carriers.  Our findings also suggest that there is value in considering a further scheme to provide ‘medium’ and ‘large’ regional airports with guaranteed access to slots at KSA.  This would include a minimum of two slots in both the morning and evening peak-hours (ideally six) which in turn would generate the potential for some true competition between regional carriers.  Allowing multiple operators to compete for the lucrative business travel market, which demands morning departures and an evening return, would make regional air services more competitive and therefore attractive to the travelling public.

This may prove more difficult in the regional context than at metropolitan airports and certainly won’t be the panacea to solve low passenger numbers.  Attracting non-aeronautical revenues such as through car parking, adjacent business parks or freight is another option that some airports are currently exploring, for example Wellcamp, Dubbo and Tamworth. Opportunities around jointly developing routes with all stakeholders (including tourism agencies) which could include federal or local government route development funds is also an option that should be explored.

The potential game change is however something else, namely better integration of regional aviation.

Firstly, the better integration of federal, NSW state and council plans, policies, initiatives and legislation would not only result in a better product but also in improved cost effectiveness.  For example, reconsidering the need for federal ‘red tape’ security regulation at all airports may yield regional benefits, as clearly one size does not fit all in the airport context. Secondly, and perhaps more importantly, there could be greater integration of aviation within the transport sector. Presently, aviation is not recognised as a form of public transport.  However, given that people use scheduled, publicly supported and/or regulated regional air services for a range of purposes, it could be said that regional air services have given the name Airbus a more literal meaning, and that aviation could be a mode of public transport which would benefit from greater integration with road and rail public transport.

Our latest study findings on “Strategic Management of Integrated Public Transport and its Value in the Air Bus Context” suggest that while the business traveler prefers the current air service and taxi model, the leisure market is more open to integrated land shuttle services from the airport to their destination.  Through 11,280 choice experiment observations we determined that metropolitan leisure travelers are willing to pay a premium of $45.88 for a plane and integrated shuttle at the regional destination and an additional premium of $23.97 where the shuttle can be booked at the same time as the airfare. This combined willingness to pay (of $69.85) for just those two integration features (there are many more to explore) represents potentially attractive opportunities to regional airlines and airports that look at mobility as a service that requires management across modes to get people to their destination. The ability to charge this premium may lead to improvements in the profitability of the aviation value chain. If they charge fares below that premium, the competitiveness and attractiveness of regional air services may be enhanced which may ultimately result in higher patronage and boost commercial viability of services, and the economic performance of the regions.

Integrated timetabling, transport service offering, ticketing and marketing are all normal in cities. Who would doubt the benefits of the Opal card in Sydney?  Why don’t we have something similar for regional aviation and regional transport in general? FlyPelican are now applying elements of this concept as they offer their customers an integrated fare of $135 “Pelican Sydney Connex” that includes in addition to the air service (from Newcastle) all transfer and ground transportation to/from Sydney Domestic Airport. With new technologies and apps becoming available on a daily basis, it is only a matter of time until fully integrated regional air service solutions will become the norm and force policy makers to rethink their strategies.

Professor Rico Merkert is Chair in Transport and Supply Chain Management at the Institute of Transport and Logistics Studies.

  • Merkert, R. and Beck M.J. (2017): Value of travel time savings and willingness to pay for regional aviation, Transportation Research Part A: Policy and Practice, 96, 29-42.
  • Merkert, R. and Beck, M. (2017): Strategic Management of Integrated Public Transport and its Value in the Air Bus Context, ITLS Working Paper, 01-2017, The University of Sydney.

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