Open skies

In the cover page of the AFR today (subscription required) there are renewed calls by foreign carriers for a liberalisation of Australia's 'air service agreements' (ASAs) particularly on the lucrative trans-Pacific routes. Over the years I have followed the same issue on the Australia-Japan link.

The call by Singapore Airlines (and other Qantas competitors) is for 'open skies', the air-travel market equivalent of free competition. Currently ASAs in Australia are split 50:50 with the foreign carrier in a destination country with the remaining 50% going to the local carrier, Qantas.

These ASAs are often restrictive in terms of total capacity enabling Qantas (and the foreign carrier) to extract rents from air travellers. On a route such as the Australian-Japan route, where most of the traffic is bound for Australia, the high prices charged could be considered equivalent to a strategic export tax that enables Australia to derive extra benefits from inbound travellers. Indeed this has been the historical argument used by Qantas to justify such restricted capacities - Qantas is restricting capacity to generate increased Australian net national advantage. This is equivalent to often abused 'optimal tariff' or 'optimal export taxes' beloved by interventionist leftists and, to be fair, by a long history of conservative Federal Governments. Sometimes the argument is sneakily dressed up into a claim we are pursuing a value-based rather than 'bums-on-seats' tourism policy - we get fewer tourist arrivals but they are wealthier and spend more. On occasion, to my undying embarrassment, I admit to having endorsed these questionable claims myself. But now, though more wrinkled, I am wiser.

The reason I question them is that while rents are generated by restrictive ASAs they are necessarily split 50:50 with foreign carriers. In addition, our local travellers who do travel overseas face higher fares and lose consumer surplus as a consequence - these are losses that need to be deducted from gains claimed to accrue to Australia via the increased rents to Qantas. The cost of an Australian journey to the US these days is very expensive - I am paying over $3200 for a flight to Chicago in early January. In addition like all monopolists, part of the rents to Qantas leak into or create x-inefficiencies in terms of poor servicing and over-staffing. The service is fairly ordinary on Qantas - you have just about got to beg the hostesses to interrupt their chats for a gin-and-tonic late into a flight. Finally, while rents are gained from restrictive air service agreements in aviation there are downstream losses to other sections of the tourism industry suchy as hotels and restaurants. In simple terms they get less business since fewer travellers come here.

My guess is that the net gains to Australia from restrictive air service agreements are small or even negative. For this reason I am happy to endorse the call of the foreign air carriers in their support for open skies. Australia would gain from more competition or else would lose so little it isn't worthwhile pursuing.