Case Study

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Case Study

• The impact of microeconomic reforms on the
  airline industry in Australia.

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Lesson Outcomes

• What we should be able to do after todays lesson
  .
• Define microeconomic reform
• Describe how the Australian airline industry has
  been reformed during the past decade
• Evaluate how microeconomic reform has affected
  the Australian airline industry

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Content Preview

• The olden days of Australian aviation
• The Microeconomic Reforms implemented during the
  1990s
• The Results of Microeconomic Reform

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The Olden Days (Before MER)

• Until 1990 Australia operated with a two
  airline policy.
• This policy dictated that only Qantas (publicly
  owned) and Ansett (privately owned) could carry
  domestic passengers.

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The Perceived Benefits of MER

• In theory, economists suggested that MER should
  provide two overall benefits to any Australian
  industry.
• 1. Increased competition should lead to lower
  prices.
• 2. Lower prices should help in achieving higher
  productivity.

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The US Experience of MER
Internationally, things had started to change. In
1978 the US air market was deregulated. The
impact was immediate

• Between 1978 and 1990 fares declined 30 in real
  terms
• Overall, travelers saved around US10 billion per
  year
• Seat numbers on planes have increased, but
  carrying rates have gone from 52 to 61

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Australian Microeconomic Reforms

• As a result of the benefits seen in other
  countries, many changes were made in Australia.
• Beginning in 1989, the Australian government
  undertook three types of MER
• Deregulation of the aviation industry
• Privatisation of govt owned airlines
• Introduction of a new supervisory body

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Reform No. 1 - Deregulation

• In 1990 the two airline policy was abolished.
• This allowed for the introduction of competitors
  into the market.
• However, the resulting competition has lead to
  the failure of Compass (Mk 1 and 2), Impulse and
  Ansett.

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Reform No. 2 - Privatisation

• In 1992 Qantas purchased Australian Airlines
  (formally TAA).
• A year later the federal government sold 25 of
  Qantas to British Airways.
• In 1995 the remaining share of Qantas was sold.
• The total sales price was 2.1 billion.

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Reform No. 3 New Supervision

• With relaxed regulatory requirements, increased
  supervision became necessary.
• In 1991 Dick Smith was appointed to head the
  Civil Aviation Authority (CAA).
• He suggested the concept of affordable safety.
• This idea was taken up by the Civil Aviation
  Safety Authority.

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Problems with Affordable Safety

• The results of this policy were disastrous.
• Three days before Christmas in 2000 six of
  Ansetts planes were grounded due to large cracks
  in the motors.
• The same problem re-occurred at Easter in 2001.
• These problems contributed to the downfall of the
  airline.

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MER The Results So Far

• Some positive results have been gained from
  changes in the airline industry.
• Prices have fallen in real terms it is cheaper
  to fly now than in 1989
• Passenger numbers have increased by around 75.
• Employment in the industry is 19 higher than in
  August 1990.

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What the graph reveals about MER and airline
costs..
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What the graph reveals about MER and employment
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Think Pair - Share

• Lets review what we have discovered.
• Spend the next 30 seconds and think about the
  benefits and problems MER has brought to the
  Australian airline industry
• Now make a list of the benefits/problems
• Now find a partner and compare your lists