The competition authority has urged the government to reform how Sydney Airport Holdings Pty Ltd (ASX: SYD)’s take-off and landing slots are assigned to make it easier for challenger airlines to enter the market.
Domestic aviation has long been an effective duopoly between Qantas Airways Limited (ASX: QAN) and the now-privately owned Virgin Australia.
A third player, Regional Express Holdings Ltd (ASX: REX), has traditionally served rural routes but will start servicing the lucrative Sydney-Melbourne-Brisbane triangle from March.
The Australian Competition and Consumer Commission (ACCC), in a submission to a senate inquiry, called for changes to make the sector more competitive.
One way is to reform how airport slots are allocated to make it easier for new players to compete.
Currently, slots are given to airlines indefinitely.
“There have been growing concerns within industry that airlines have been able to exploit the slot-management scheme to hoard slots and/or use slots inefficiently to maintain their market power and prevent entry or expansion by competitors,” said the ACCC submission.
The ACCC has proposed financial deterrents to stop airlines from hogging slots while not using them.
Other ways the big airlines stifle competition
The competition watchdog also reported it has received complaints from within the aviation industry about ‘capacity dumping’ and ‘predatory pricing’.
Both practices lessen competition by making it harder for newcomers to challenge the duopoly.
Capacity dumping involves putting on more flights and seats than is necessary for a particular route. Regional Express has accused Qantas of this practice by starting on rural routes that don’t have sufficient demand for 2 airlines.
Predatory pricing is when airlines sell seats at below the cost of providing them.
“Cheap airfares may be beneficial to consumers in the short term,” the ACCC stated.
“However, if an airline offering airfares at below cost results in competitors exiting the market, consumers could be left with substantially more expensive airfares and less choice in the long term.”
According to ACCC chair Rod Sims, sometimes his organisation may identify “concerning behaviour” but it falls short of the level required for it to take “enforcement action”.
“The ACCC will be ready to recommend potential policy options, including potential regulatory protection for airline users, should there be signs that the competition is not effective,” he said.
“Rivalry between airlines can encourage cheaper airfares, more favourable terms and conditions, better quality in-flight services, more frequent services and a broader network reach.”
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Returns as of 6th October 2020
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Motley Fool contributor Tony Yoo owns shares of Qantas Airways Limited and Sydney Airport Holdings Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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