THE FAILURE OF VIRGIN AUSTRALIA COULD COST TRAVELLERS $50 BILLION OVER 10 YEARS

The failure of Virgin Australia could cost travellers $50 billion over 10 years if the Qantas Group was left with no competition. That is the stark number, of a 20 per cent increase in airfares, typical of when a monopoly situation develops on an air route in Australia.

Australia faces the real prospect of an airline monopoly that will cost the economy tens of billions and devastate the tourism industry with airfares soaring unless the government steps in to support Virgin Australia and Qantas.

In the next 12 months, there is no question both Australias major airlines will need government support to survive the unprecedented COVID-19 crisis as no airline can survive this pandemic if travel restrictions go to the end of the year.While the focus is on Virgin Australia, Qantas will barely survive 2020 without support.

And while the government ponders the dilemma, Qantass competitors are being propped up by their governments. Every airline in the G20 is being helped by their governments. US airlines are getting $90 billion, so when the pandemic is over, they will be flying high.

The Australian government touts its $1 billion rescue package that has already been announced but it is almost meaningless as most of it relates to waiving taxes and charges if the airlines are flying, which they are not.

S&P estimates that half of Virgin Australias operating costs and those of Qantas are fixed and that a reduction in variable costs will not offset the collapse in revenue. In the fragile tourism industry that robust competition and thus low fares will be there when domestic travel restrictions are lifted.

And the International Air Transport Association (IATA) backs up Virgins call for support pleading with governments to support their airlines. IATA forecasts for Australia that passenger numbers will be down by 35 million, revenue for our airlines will sink by $18 billion and the impact on the countrys GDP will be $44 billion.

Job losses related to the impact on Australias airlines and related industries such as tourism is put at 278,000. And if the government thinks it can snap its fingers and there will be mad scramble to fill the void they ought to think again.

Qantas has a stranglehold on the corporate market which underpins the industry and no new entrant will be interested in serving the regional market. And the ACCC recognizes the importance of Virgin Australia.

Competition has a critical role to play in getting the economy running again post the COVID-19 crisis. It is important that the necessary short-term measures do not give rise to long term structural damage to competition or market concentration, he said at a recent event.

The survival of Virgin Australia is critical for Australia, its economy and tourism industry.

Answer all questions below:

1. Analyse the economic problem for the government if it wants to financially support the airline industry by applying the concepts of scarcity, choice and opportunity cost.

2. (a) Given the disruption arising from the Covid-19 pandemic, discuss one (1) other possible

factor that might change demand for air travel and one (1) possible factor that might change the supply of air travel.

(b) It is likely that we will experience a rise in the price of airfare in the future. Explain your answer using demand and supply analysis. Will the price elasticities matter?

3. If Qantas becomes the only firm in the airline industry, discuss the three (3) barriers of entry it would create to remain as the single firm in the airline industry.

4. Discuss the two (2) advantages of the creation of Qantas as a single firm in the airline industry. Consider also whether it is good for the allocation of resources in the economy.