The ACCC's Airline Competition in Australia report released today explores the significant impact of COVID-19 on the sector and outlines the approach the ACCC will take to protecting competition. The report is the first under the Federal Treasurer's direction to monitor domestic air passenger services.

In April 2020, travel restrictions led to a 95 per cent reduction in Australian airline passengers compared to the same time last year. The Sydney-Melbourne route, which was previously the second busiest flight corridor in the world, saw passenger numbers fall from 742,000 in April 2019 to 17,000 in April 2020, a fall of around 98 per cent.

"COVID-19 has created some of the most difficult market conditions in Australian aviation history and it's critical that when the industry starts scaling up domestic flying, any potential damage to competition is identified quickly and acted on," ACCC Chair Rod Sims said.

"A lot has changed since the Treasurer directed us to take on this new role in June. Domestic airline travel was expected to be on its way to returning to more regular operations by now but infection spikes in some states and tighter border restrictions have delayed the recovery."

"Australia's domestic airline industry over the next few years may look quite different to the one that went into 2020," Mr Sims said.

"Air travel is vital for the economy in a country as large and geographically dispersed as Australia. Competition must be safeguarded through this period so our domestic airline industry can meet the needs of consumers, and the economy more broadly."

The ACCC's approach to protecting competition in the sector will include monitoring, reporting, advocacy, investigation and, where necessary, enforcement action.

The report outlines the types of activities that could damage competition and for which the ACCC will be watching as the industry moves towards more regular operations. These activities include airlines entering into agreements with suppliers to prevent competitors from offering services, or altering schedules to prevent a competitor entering the market.

Central to protecting competition will be the ACCC's analysis of monthly flight capacity, passenger numbers, and revenue data from Qantas, Virgin and Rex, who together supply the vast majority of Australia's passenger airline services.

The ACCC can obtain information from airlines using its formal data gathering powers under the Competition and Consumer Act.

"We will act if we identify behaviour that damages competition, either arising from the conduct by airlines directly or through their arrangements with others," Mr Sims said.

"The ACCC will be reporting to government regularly and this will assist with informed policy development, particularly if we observe signs that competition in the sector is not effective."

The report reveals that airline downsizing and expansion is happening concurrently as a result of the COVID-19 pandemic.

Market changes have created opportunities for some airlines to expand into the domestic network as the availability of infrastructure, aircraft, pilots and fuel has improved. At the same time, major airlines Qantas and Virgin are downsizing and restructuring their fleets and workforces to reduce operating costs.

"This new airline monitoring role for the ACCC is focused on competition, but it sits alongside all of our other work on disrupted travel and consumer guarantees," Mr Sims said.

Question 15(15 marks)

(a)What market structure is depicted in the Australian domestic airline industry? Use evidence from the article to support your answer. (1 mark)

(b)State at least 3 main characteristics of the market structure you have identified in (a) above.

(3 marks)

(c)According to the article, why is it essential for airline travel to be competitive in Australia? Identity at least 2 issues raised by the ACCC that could adversely impact on competition in the domestic airline industry(2 marks)

(d)Assume the airlines were able to collude, how would this alter the structure of the current market? With the aid of a fully labelled diagram, provide a description of how the resultant pricing, output and profits would be determined in both the short and long run, and discuss the welfare effects(5 marks)

(e)Using your diagram in part (d) of your answer above, label the competitive market equilibrium profit maximizing price and output combination point. By comparing the welfare effects of the competitive market to the outcome in (d), explain fully why the ACCC should be justified in its efforts to curtail airline behavior that could potentially damage competition in the industry. (4 marks)