The “most effective way” to increase airline competition in the Australian domestic market is to reform the way slots are allocated at Sydney Airport (SYD), Australia’s competition regulator says.

In a new report on the state of airline competition in Australia, the Australian Competition and Consumer Commission (ACCC) says startup Bonza, an LCC that entered the market this year, and regional Rex, which is endeavoring to expand its route network, will have little ability to break through what it characterizes as the Qantas Group-Virgin Australia “duopoly” unless regulations are changed, particularly regarding access to SYD.

ACCC points out that 94% of domestic passengers flew on either Qantas Group (including LCC subsidiary Jetstar) or Virgin Australia in April. “Domestic aviation is one of the most concentrated industries in Australia, barring only natural monopolies such as electricity grids and rail networks,” ACCC Chair Gina Cass-Gottlieb says in a statement released along with the report.

“Without a real threat of losing passengers to other airlines, the Qantas and Virgin Australia airline groups have had less incentive to offer attractive airfares, develop more direct routes, operate more reliable services and invest in systems to provide high levels of customer service,” she continues.

According to the report, 4.6 million passengers flew domestically in Australia in April, 92% of pre-pandemic levels. There were 176 domestic routes in operation in Australia in April, up from 154 in January 2023 and 160 in April 2019. “The bulk of the increase was attributable to Bonza, which had commenced operations on 20 of its proposed routes by the end of April 2023,” ACCC says, noting Bonza is now operating 27 routes—and on only two of those routes does it compete with other carriers.

Qantas operated 118 routes domestic routes in April, up from from 116 in January of this year.

ACCC highlights a lack of access to SYD for new entrants as a key barrier to growing the Australian domestic airline market and making it more competitive.

“Access to takeoff and landing slots during peak times at Sydney Airport is critical for airlines seeking to build an intercity network,” ACCC explains. “The most effective way that the Australian government could enhance airline competition for the benefit of consumers would be to implement reforms to the way Sydney Airport slots are allocated to airlines. Without these slot changes, there will not be any material improvement in domestic airline competition in Australia in the foreseeable future.”

ACCC adds that current “rules allowing airlines to retain [SYD] slots in perpetuity exacerbates capacity constraints by limiting the opportunities for new or expanding airlines to acquire slots needed to launch new services and compete.”

The report continues: “Airlines can exploit the scheme by acquiring and hoarding slots for strategic reasons, such as to prevent competitors’ access to slots, resulting in inefficient slot use and further diminishing opportunities for increased competition.” 

The consequences are “more than theoretical,” ACCC says, adding: “Rex’s ability to continue to expand its intercity jet operations and bring choice and competition to more consumers each week will likely be hindered without better access to peak period slots at Sydney Airport. Bonza CEO Tim Jordan also said that access to slots at Sydney Airport had been an impediment for the new airline, with Bonza not including Sydney in its initial network of 27 routes.”

ACCC advises the Australian government to make the SYD slot allocation scheme "more robust with regard to identifying and taking action where airlines are misusing their slots, such as by hoarding slots and then selectively cancelling flights in a way that still meets the ‘use-it-or-lose-it’ rules.”

The regulator says the government should remove “a preference currently given to incumbent airlines seeking to change the time of a slot ahead of new entrant slot allocation requests.”

The government, ACCC adds, “could consider options for strengthening the regime to better protect airlines in negotiations with the major airports,” noting that its review of airport regulations “found that some contracts between airports and airlines contained provisions that prevented the airport from offering lower charges or other incentives to a rival airline.” Reforming this could help open up domestic competition, ACCC says.

According to ACCC, Qantas Group had a 60.8% domestic passenger market share in April, followed by Virgin Australia at 33.2% and Rex at 4.8%.

“Rex’s expansion onto major intercity routes and Bonza’s launch have been positive developments for competition, but their share of the market is small and there are barriers to growth,” Cass-Gottlieb says.