Want cheaper plane tickets? Here’s how we get them

Giving people more access to flights is good for several reasons. Not only does this mean people like my friend get to see more of the country and enjoy traveling, it’s also good for the economy.

We know Australia has a productivity problem: We’re not getting much better at using the scarce resources we have to provide the goods and services we want and need. Part of this is due to the problem we see in the aviation sector: a lack of competition (think Coles and Woolworths dominating the supermarket space, or the big four banks doing most of our lending) means that many of our big businesses are not pushed to innovate.

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But if Australians could get around more easily, we could also increase our productivity. Businesses won’t have to spend as much to fly their employees (leaving them with more money to spend on technology or research), employees will be able to travel more easily to places where jobs are better suited to their skills, and people will be able to go places faster or more often to close deals, connect with each other, and share ideas.

The country’s tourism industry will also get a boost, with Australian travelers spending more on accommodation, food, shopping and transport (the Treasury report’s authors predict passenger demand growth will be particularly strong on tourist routes, up to 58 per cent). Overseas tourists may also decide to add an additional leg to their trip to another Australian city if prices are lower.

According to the researchers, the impact of lower airfares on passenger numbers is not as strong immediately as it is in the long term. This reflects what’s called “elasticity”: In this case, how sensitive customers’ demand for flights is to a given change in price.

In Australia, an additional airline (and therefore a 5 to 10 percent reduction in airfares) leads to an increase in passenger demand of only 0.5 percent to 1 percent in the following month, meaning that demand is relatively “inelastic” or unresponsive to changes in price. But in the following year, the same change in price could lead to an increase in passenger demand of up to 25 percent; This means that demand is much more “elastic” or responsive to changes in price.

ANU public policy professor Bob Breunig, lead author of the Treasury report, says the difference is largely due to the fact that habits can take some time to change, especially for non-essential travel.

“In the month following the drop in plane tickets, a businessman who would have a video meeting [with someone interstate] “They might decide to do an in-person meeting instead because it suddenly becomes cheaper,” he says, while a recreational flyer might not plan an extra trip right away. But with a year left on the runway, people are more likely to consider those additional domestic trips.

The research also found that the growth in demand for traditional “tourist” routes, such as those flying to Cairns or Coffs Harbour, is greater in the long term than for business travel-dominated routes such as Sydney to Canberra (bad news for me).

Of course, owning an additional airline in Australia is easier said than done. Dozens of airlines, including most recently Rex and Bonza, have tried to enter the industry or rival Qantas and Virgin on the capital city routes they dominate, but have faced too many headwinds.

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Australia’s relatively sparse population certainly doesn’t help, but the regulatory maze airlines have to navigate and the fight for airport slots (which are, of course, dominated by major airlines) have made things particularly difficult for new airlines. Qantas and Virgin have been accused of “slot hoarding”, where they book slots at airports and cancel those slots to prevent rivals from accessing peak travel times, which are often the most profitable.

While other options, such as high-speed trains between our major cities, could lead to greater competition, this would likely take decades and require large amounts of government spending to lay the line and build the necessary infrastructure.

One thing the government should do is lift the ban on foreign airlines operating entirely on domestic routes; This is a policy the Coalition has promised to at least try if elected at the last election. Many international airlines have the large sums of money and existing processes and machinery needed to compete with Australia’s aviation giants.

Lower airfares may not lead to an immediate increase in Australia’s passenger numbers. But the evidence is overwhelming that more competition is needed. This is also our chance to boost the nation’s productivity and enable more Australians (including those who are less well-off) to see more of the country we are lucky to call home.

Ross Gittins explains economics in a subscriber-only newsletter. Sign up to receive it every Tuesday evening.