2002

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

SENATE

AVIATION LEGISLATION AMENDMENT BILL 2002

REVISED EXPLANATORY MEMORANDUM

THIS EXPLANATORY MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED

(Circulated by authority of the Minister for Transport and Regional Services,
the Honourable John Anderson, MP)

TABLE OF CONTENTS
TABLE OF CONTENTS	i
AVIATION LEGISLATION AMENDMENT BILL  2002	2
FINANCIAL IMPACT STATEMENT	2
Regulation impact statement International Air Services Commission amendments	3
NOTES ON CLAUSES	4
SCHEDULE 1 – AMENDMENT OF THE INTERNATIONAL AIR SERVICES COMMISSION ACT 1992	6
SCHEDULE 2 – AMENDMENT OF THE AIR NAVIGATION ACT 1920	8
SCHEDULE 3 – REPEAL OF THE FEDERAL AIRPORTS CORPORATION ACT 1986	15
ATTACHMENT A	16

AVIATION LEGISLATION AMENDMENT BILL 2002
OUTLINE
The purpose of the Aviation Legislation Amendment Bill 2002 (the Bill) includes:

•	Under Schedule 1 - amendments to the International Air Services Commission Act 1992 which provide the main part of the legislative framework required to implement Government decisions to reform the role and responsibilities of the International Air Services Commission (IASC) which were released in June 1999 following its consideration of the recommendations of the Productivity Commission in its Report into International Air Services.

Full implementation of Government decisions relating to the IASC will require new regulations and a new Policy Statement to be issued by the Minister under section 11 of the International Air Services Commission Act 1992.

•	Under Schedule 2 – amendments to the Air Navigation Act 1920, in order to initiate reform in aviation security.  Aviation security standards are implemented by Australia’s civil aviation industry to protect against aircraft hijack or aircraft sabotage.

Schedule 2 introduces an over‑arching legislative framework for the handling of aviation security information.  In particular, this framework will contain a number of statutory protections relating to the use of the information;

Schedule 2 reforms those provisions in the Act that regulate the carriage of munitions and implements of war on board civil aircraft; 

Schedule 2 removes references related to the Federal Airports Corporation, consequential to the repeal of Federal Airports Corporation Act in Schedule 3; and

•	Under Schedule 3 - repeal of the Federal Airports Corporation Act 1986 and the transfer of any remaining contracts, assets and liabilities of the Corporation (that were not previously dealt with in the Airports (Transitional) Act 1996) to the Commonwealth.

FINANCIAL IMPACT STATEMENT

The amendments to the International Air Services Commission Act 1992 and Air Navigation Act 1920 will have no financial impact on the budget.

The financial impact of the transfer of any remaining contracts, assets or liabilities of the Federal Airports Corporation to the Commonwealth is not known but is not expected to be significant.

Regulation impact statement
International Air Services Commission amendments

The need to amend the International Air Services Commission Act 1992 to reform the role and responsibilities of the IASC was accepted by the Government as an integrated element of a larger package of reforms to international aviation policy, which was announced on 3 June 1999.  

These reforms were issued at the end of a substantial review of international aviation policy, which included an Inquiry by the Productivity Commission into international air services that concluded in September 1998.

A Regulatory Impact Statement (RIS) covering all aspects of the proposed changes to Government policy was prepared at the time the Government made its decision on changes to IASC processes that would require changes to the International Air Services Commission Act 1992. That RIS was considered adequate by the Office of Regulation Review.  The statement places the amendments to the International Air Services Commission Act 1992 in the context of the overall package of international aviation policy reform and is at Attachment A.  The following paragraphs of the RIS are relevant to the amendments to the International Air Services Commission Act 1992:

paras 12 - 13 – describe the role of the IASC and how it has changed as air service agreements have been liberalised;

para 14 – notes that the Productivity Commission was asked to examine the current performance and functions of the IASC as part of its inquiry into International Air Services;

para 18 – outlines the objectives of Government action in the international aviation sector, one of which is to reduce the administration costs for Australian carriers associated with obtaining and using Australian capacity;

paras 41 – 42 - note Government agreement with the Productivity Commission that there is scope for streamlining the functions of the IASC given on-going liberalisation of Australia’s Air Services Agreements since 1992;

para 43 – notes that elements of the International Air Services Commission Act 1992 can be modified to provide a simplified focus on benefits from competition and significantly reduce requirements for industry in its dealings with the Commission;

paras 59 – 61 – notes that the Government has decided that the IASC should retain its function of testing the bona fides of applicants for available capacity under its air services agreements;

paras 62 – 65 – notes that the Government will continue to encourage competition between Australian airlines through retaining the current start – up provisions, which provide an initial new entrant an allocation of capacity appropriate to the development of efficient, economically sustainable services;

paras 66 – 67 – notes that the Government will maintain five year determinations for available capacity;

para 82 – outlines the benefits for Australian carriers from streamlining of capacity access provisions at the IASC;

para 110 – notes that the streamlining of the IASC’s capacity allocation process as a result of the proposed amendment to the International Air Services Commission Act 1992, will lead to reduced allocation, monitoring and enforcement costs;

para 117 – notes that IASC comments were incorporated in two submissions to the Productivity Commission Inquiry made by the Department of Transport and Regional Services; and

para 125 – notes that amendments will be required to the International Air Services Commission Act 1992 to streamline the assessment process for capacity allocation and other affected administrative processes.

NOTES ON CLAUSES

Clause 1 – Short Title
The Bill, once enacted, may be cited as the Aviation Legislation Amendment Act 2002.

Clause 2 – Commencement
The bulk of the Act will commence on Royal Assent.  The exceptions to this are: 

•	Schedule 1, which commences on proclamation but not later than 6 months after Royal Assent; and 

Clause 3 – Schedule(s)
This clause provides that the following legislation is amended or repealed as set out in the specified schedule:

International Air Services Commission Act 1992 is amended as set out in Schedule 1 to the Bill;

Air Navigation Act 1920 is amended as set out in Schedule 2 to the Bill; and

Federal Airports Corporation Act 1986 is repealed as set out in Schedule 3 to the Bill.

SCHEDULE 1 – AMENDMENT OF THE INTERNATIONAL AIR SERVICES COMMISSION ACT 1992
Item 1 – Section 3
This item repeals the existing Part 1 Section 3 to amend the objectives of the International Air Services Commission Act (the IASC Act) in accordance with the Government’s decision that the object should be to enhance the welfare of Australians by promoting economic efficiency through competition in the provision of international air services. 

Items 2 and 3 – Section 4
These items insert definitions of APS Employee and Secretary to assist in interpretation of the IASC Act in relation to items 4, 5 and 6, which allow the International Air Services Commission (IASC) to delegate selected powers and functions.

‘APS employee’ has the same meaning as in the Public Service Act 1999.  ‘Secretary’ means the Secretary of the Department.

Item 4 – Paragraph 12(1)(b) 
This item provides for regulations to be developed that set out the circumstances in which submissions about the allocation of capacity, or the renewal of a determination, will be invited before the Commission makes a determination allocating available capacity. 

The aim of regulations developed as a result of this amendment is to streamline IASC procedures, for example, by allowing the IASC or its delegates to call for submissions by any party on applications by Australian airlines for a determination granting either capacity available under Australia’s air services agreements, or a renewal of an existing determination, only when two or more applications have been received for the same capacity. 

Item 5 – Subsections 17 (2) and (3)
This item repeals subsections 17(2) and 17(3) of the IASC Act and replaces them with a new paragraph 17(2), which, for the purposes of the IASC Act, will make the procedure for applications and submissions for renewals of determinations consistent with applications and submissions for available capacity (see Item 4).

Item 6 – After Part 3
This item inserts a new part of the IASC Act, which provides for delegation of the Commission’s powers and functions to an APS employee in the Department.
Delegations must be in writing and may only be made with the written agreement of the Secretary.

This item also provides that IASC regulations may limit the delegation of the Commission’s powers and functions in specified circumstances.

The aim of regulations developed as a result of this amendment will be to allow delegates to make decisions under the IASC Act about applications by airlines for either a determination, or a variation to an existing determination, or a renewal of a determination when the specific expertise of the IASC is not required – for example, where the applicant is clearly reasonably capable of implementing its proposal; and where the air service capacity under an Air Services Agreement is unconstrained or where there is only one applicant for the available capacity.

This new part of the IASC Act and the regulations will also provide for delegates to resubmit applications for determinations, variations to existing determinations or applications for renewal of determinations to the Commission when the circumstances of that application would make the Commission the more competent body to judge whether the applicant is reasonably capable of implementing its proposal – for example, where a new airline applies for capacity on a route, or where an application may have implications for the Trade Practices Act 1974.

Item 7 – Application – paragraph 12(1)(b) of the International Air Services Commission Act 1992
This item clarifies that the amendment at Item 4 to paragraph 12 (1)(b) will not apply to applications for a determination invited before the commencement of the item. 

Item 8 – Application – section 17 of the International Air Services Commission Act 1992
This item clarifies that the amendment at section 17 will not apply to submissions made about a renewal of a determination invited before the commencement of the item.

SCHEDULE 2 – AMENDMENT OF THE AIR NAVIGATION ACT 1920
Item 1 – Subsection 3(1)
This item repeals the definition for airport operator or operator from section 3 of the Air Navigation Act 1920, consequential to the repeal of the Federal Airports Corporation Act 1986 in Schedule 3.

Item 3 – Subsection 3(1)
Item 3 inserts a new definition for aviation industry participant into section 3 of the Air Navigation Act 1920.  This term is used in new sections 22ZVA – 22ZVE.  Under the definition, aviation industry participant means:

•	an aircraft operator prescribed by regulation;

•	a person, prescribed by regulation, who carries on the business of handling international cargo; or

•	a person, prescribed by regulation, who provides aviation security services.  In practice, this will comprise people who implement aviation security on behalf of a person mentioned above.

Item 4 – Subsection 3(1)
Item 4 inserts a new definition for aviation security information into section 3 of the Air Navigation Act 1920.  This term is used in new sections 22ZVA - 22ZVE.  Under the definition, aviation security information means information that relates to compliance, or to a failure to comply, with the Air Navigation Act 1920 or regulations under the Air Navigation Act 1920 that relate to aviation security.

Items 8 and 11 – Subsection 3(1)
These items repeal the following definitions from section 3 of the Air Navigation Act 1920:

		Corporation			Federal airport

The repeal of these definitions is consequential to the repeal of the Federal Airports Corporation Act 1986 in Schedule 3.

Item 27 – Section 19
Item 27 repeals the existing section 19 and replaces it with a new provision.

The new section 19 provides that a person must not do an act that results in munitions of war or implements of war being carried by or in:

•	an aircraft in Australian territory; or

•	an Australian aircraft outside Australian territory;

in circumstances other than those prescribed by regulation or where permitted in writing by the Minister. The new offence has a maximum penalty of imprisonment for 7 years.

By way of background, section 19 regulates the carriage of munitions and implements of war on board Australian civil aircraft.  In particular, section 19 implements Article 35 of the Convention on International Civil Aviation.  Under Article 35, no munition of war or implement of war may be carried on board civil aircraft “except by permission” of the contracting state. Section 19 allows the Minister to issue written permissions.  The new section 19 will also allow these permissions to be codified in the regulations which will contain a series of “allowable carriages”.  That is, the Regulations will describe those classes of carriage that will become lawful carriage and that will not constitute a breach of the offence under new section 19.  This will modernise the provision overall, enhancing transparency and certainty and eliminating duplication and bureaucratic approval processes.

Items 27A-27D – Subsections 22E(d), 22ZV(1)(b), (c), (f)
These items repeal references to Corporation from section 3 of the Air Navigation Act 1920, consequential to the repeal of the Federal Airports Corporation Act 1986 in Schedule 3.

Item 28 – Part 3A
Item 28 inserts a new Part 3A. Part 3A provides a legislative framework for the handling of aviation security information. Part 3A is divided into 2 Divisions.

Division 1 of Part 3A – Secretary may require aviation security information
Division 1 (sections 22ZVA – 22ZVB) authorises the making of regulations concerning aviation security information.

Section 22ZVA – Secretary may require aviation security information
Subsection (1) provides that once prescribed, aviation security information may be required to be provided by an aviation industry participant to the Secretary.  In particular, section 22ZVA applies if the Secretary believes on reasonable grounds that an aviation industry participant has aviation security information of a kind prescribed.

Under subsection (2), the Secretary may, by written notice given to the aviation industry participant, require the participant to give any such information to the Secretary, within the period and in the manner as specified in the notice.  However, the period specified by the Secretary must not be less than 14 days.

Under subsection (3), the written notice of the Secretary may also specify the form in which the information is to be given to the Secretary, including orally, in writing or by electronic transmission.

Under subsection (4), if a person engages in conduct in contravention of subsection (2), the person is guilty of an offence punishable, on conviction, by a fine not exceeding 45 penalty units.

Subsection (5) defines a term that is used in subsection (4).  Engage in conduct has the same meaning as in the Criminal Code.  Under the Code, to engage in conduct means to do an act or to omit to perform an act.

Section 22ZVB – Self‑incrimination
Section 22ZVB provides that an individual is not excused from giving the aviation security information (under section 22ZVA) on the ground that the information might tend to incriminate the individual or expose the individual to a penalty.

In summary, the purpose of the aviation security information is to allow the Department of Transport and Regional Services (the Australian regulator of aviation security) to deal with, and to resolve, security incidents in a timely and effective manner, rather than to use this information to prosecute members of industry after the event.  As a result, the regime contains a rebuttal of the presumption against self‑incrimination.  Otherwise, the presumption could potentially be used by individuals to decline to provide the information.  

In return for rebutting this presumption, strict controls are placed on the use of the information so collected.  These controls are contained within Division 2.  For example, protecting this information will not reduce Government compliance options, because this information is currently not available to Government.  Rather, significant compliance benefits are anticipated to result from the receipt of this additional, targeted security data.

Division 2 of Part 3A – Protection and use of aviation security information
Division 2 (sections 22ZVC – 22ZVG) outlines the protections that are to be afforded to aviation security information.  These protections cover both the information that is compulsorily acquired under Division 1 and also information that is volunteered.  For example, this includes “tip‑off” information received from a third party.  This also includes information that a member of Australia’s civil aviation industry may volunteer (to the Department of Transport and Regional Services) on its own compliance problems – in order to work with the Department to rectify any compliance concerns.

Section 22ZVC – Interpretation
Section 21 defines when the protections (under Division 2, for aviation security information) apply.

Under subsection (1), the protections apply if a person (the protected person) gives a Departmental official aviation security information (the protected information).  The protections apply whether the information is volunteered or is compulsorily acquired under Division 1.

However, under subsection (2), the protections do not apply if the person volunteers the information to the Departmental official in the course of an official Departmental investigation that relates to aviation security compliance.

Subsection (3) defines two further terms that are used in Division 2.

APS employee has the same meaning as in the Public Service Act 1999.

Departmental official means a person acting in the course of his or her duties as:

•	the Secretary of the Department of Transport and Regional Services;

•	an APS employee in the Department; or

•	a delegate under the Air Navigation Act 1920 or regulations made under the Act.

Section 22ZVD – Use or disclosure by Departmental officials other than for aviation security purposes
Section 22ZVD outlines the first of the protections for aviation security information.  Under this protection, the information must be held in a secure manner, and not be generally disclosed.

Under subsection (1), a Departmental official must not use or disclose the protected information other than for the purposes of aviation security.  In particular, the Departmental official must not be reckless as to whether the information is protected.  An offence committed under subsection (1) is punishable by a maximum fine of 45 penalty units.

Under subsection (2), the protection under subsection (1) does not apply if the protected information is used or disclosed for the purposes of a prosecution, or defending a prosecution, of:

•	an offence under subsection (1) – that is, in relation to the enforcement of the protection itself; or

•	an offence under section 137.1 or 137.2 of the Criminal Code – that is, in relation to the giving of false information.

Section 22ZVE – Disclosure other than in excepted circumstances

Under subsection (1), a person must not disclose the protected information (to another person), except where the disclosure is in an “excepted circumstance”.  In particular, the person (disclosing the information) must not be reckless as to whether the information is protected.  An offence committed under subsection (1) is punishable by a maximum fine of 45 penalty units.

Subsection (2) sets out the “excepted circumstances”, in which protected information may be disclosed under subsection (1).

Protected information may be disclosed to:

•	a Departmental official;

•	a Minister;

•	a Minister’s member of staff, nominated by the Minister to receive protected information on the Minister’s behalf; and

•	a Member of the Parliament (acting in the course of his or her duties).

In addition, protected information may be disclosed to:

•	an aviation industry participant; or

•	a person acting in the course of his or her duties in an Agency (within the meaning of the Public Service Act 1999);

if the information is disclosed in a form that does not identify, and is not reasonably capable of being used to identify, the protected person.

Subsection (3) provides that disclosure of protected information may occur with the consent of the protected person.

Also under subsection (3), the protection under subsection (1) does not apply if the protected information is used or disclosed for the purposes of a prosecution, or defending a prosecution, of:

•	an offence under subsection (1) – that is, in relation to the enforcement of the protection itself; or

•	an offence under section 137.1 or 137.2 of the Criminal Code – that is, in relation to the giving of false information.

Section 22ZVF – Disclosure to court or tribunal

Under section 22ZVF, a person is not to be required to divulge or communicate the protected information to a court or tribunal – except in a prosecution of an offence mentioned under subsection 22ZVD(2) or paragraph 22ZVE(3)(b).

Section 22ZVG – Protection for person who gives information
Section 22ZVG outlines the second of the protections for aviation security information.  Under section 22ZVG, neither:

•	giving protected information; nor

•	any information, document or thing obtained as a direct or indirect consequence of giving protected information;

is admissible in evidence against the protected person in:

•	a criminal proceeding; or

•	any other proceeding for the recovery of a penalty.

However, the information can be used in a proceeding under section 137.1 or 137.2 of the Criminal Code (in relation to the giving of false information).  For example, where the giver of the information intentionally provides misleading information.

In summary, protected information is designed to describe compliance – by Australia’s civil aviation industry – with the aviation security regulatory standards.  If such information is volunteered (outside of an official Departmental investigation) – and, in particular, if an industry organisation volunteers information on its own compliance – then that information cannot be used to prosecute the giver of the information.

Rather, the purpose of the protection is to encourage Australia’s civil aviation industry to engage with the Department of Transport and Regional Services (the Australian regulator of aviation security) in the regular and routine disclosure of compliance information.  For example, protecting this information will not reduce Government compliance options, because this information is currently not available to Government.  Rather, significant compliance benefits are anticipated to result from the receipt of this additional, targeted security data.

In particular, the candid, honest and comprehensive disclosure of information from industry will enable the Department to collate an accurate, up‑to‑date view as to the aviation security performance of Australia’s aviation industry.  This will empower the Department to deal with, and to resolve, compliance problems in a timely and effective manner.

SCHEDULE 3 – REPEAL OF THE FEDERAL AIRPORTS CORPORATION ACT 1986
Item 1 – The whole of the Act
This item repeals the Federal Airports Corporation Act 1986.

Item 2 - Definitions
This item includes definitions for Corporation, repeal day, residual assets, residual instruments and residual liabilities used in this Schedule.

Item 3 – Residual assets and liabilities to become Commonwealth assets and liabilities
This item transfers all the residual assets and liabilities of the Federal Airports Corporation to the Commonwealth with effect from the repeal day.  In addition the Commonwealth becomes the Corporation’s successor in law.

The item also provides that a residual instrument continues to have effect after the repeal day as if it were an instrument of the Commonwealth.

Item 4 – Pending proceedings
This item provides that where court proceedings have commenced prior to the repeal day involving the Corporation, the Commonwealth will assume those rights and obligations.

ATTACHMENT A
REGULATION IMPACT STATEMENT 
In September 1998, the Productivity Commission (PC) provided the Final Report on its inquiry into International Air Services and the International Air Services Commission (IASC) to the Government for its consideration. 
2.	For over 60 years, the international bilateral system has governed international aviation activities.  The bilateral air services arrangements (ASAs) create a legal framework that controls airline ownership and control, capacity, frequency and destination of flights. Australian Government policy encourages the liberalisation of ASAs.  While this position is also shared by a number of our trading partners, it is by no means a universally accepted view.  Within the bilateral system there is scope for further liberalisation.  The PC shared this view. 
3.	The PC proposed a policy of liberalising on a reciprocal basis with other countries, bilaterally, plurilaterally and eventually, multilaterally.  It also recommended a package of measures to increase the scope for international air services for regional Australia. In the longer term, it recommended that air services should become a part of the General Agreement on Trade in Services (GATS).

BACKGROUND:	THE CURRENT POLICY AND REGULATORY ENVIRONMENT
International Air Services Arrangements
4.	The Minister for Transport and Regional Services is responsible for the management of the Government’s aviation policies, including negotiating ASAs.  The ASAs typically determine capacity, frequency of flights, designated airlines, routes (including third country markets) and airports to be accessed. Australia currently has 54 ASAs.
5.	The current policy is based on a broad approach to negotiating ASAs and approving charter services, which takes into account the requirements of the aviation industry, tourism industry, business users, State Governments and other interested parties.  It encourages new services by both Australian and foreign airlines to a wider range of ports, as well as building flexibility into Australian ASAs to allow carriers to respond more quickly to changes in market demand. 
6.	Under the current policy, capacity is negotiated ahead of demand.  In addition, expanded route rights, liberal code share and own stopover provisions, broad access to Australian regional ports and highly liberalised dedicated freight access rights form the standard Australian package of rights available for negotiation.
7.	The current policy stops short of permitting the negotiation of ‘open skies’ ASAs. 
Ownership and Control of International Airlines
8.	The Department of Transport and Regional Services (DTRS) is responsible for administering the ownership and control provisions of the Qantas Sale Act 1992 and those elements of the Air Navigation Act 1920 which deal with ownership and control provisions for Australian carriers other than Qantas. 
9.	The limits on foreign ownership and control in this legislation are derived from provisions in ASAs which allow either party to refuse entry of the airlines of the other party into their market on the grounds that they are not substantially owned and effectively controlled by nationals of that party.
10.	Currently, under the Air Navigation Act a limit of 35% of equity in Australian international carriers other than Qantas can be held by foreign airlines in aggregate; and with a limit of 25% of equity to be held by an individual foreign airline. The Qantas Sale Act, which applies specifically to Qantas, contains the same provisions, except that no individual foreign person can own more than 25% of Qantas equity and no more than 49% in aggregate of Qantas equity can be held by foreign persons.
11.	Amendments to the ownership and control criteria also have implications for the Sectoral Guidelines for Australia’s foreign investment policy, which is administered by the Foreign Investment Review Board. 
International Air Services Commission (IASC)
12.	As part of the Australian Government’s adoption of multiple designation in 1992, it established the IASC as an independent body within government to allocate capacity, negotiated in Australia’s ASAs, between competing Australian interests to the benefit of the public. 
13.	As available capacity has increased through liberalisation of ASAs, the role of the IASC has changed from that of allocating contested capacity to one more focussed on detailed public benefits tests for the application of more flexible capacity regimes.
14.	The PC, as part of its inquiry into International Air Services, was asked to examine the current performance and functions of the IASC. 
THE PROBLEM TO BE ADDRESSED
15.	The PC concluded that, while the current Government policy and regulatory settings have delivered substantial liberalisation of international air services, that policy is now restricting the further liberalisation of arrangements. The restrictions include the inability to negotiate ‘open skies’ agreements, as well as limiting Australian airline access to equity markets and delaying access to, and increasing the cost of obtaining, available capacity.
16.	The Government’s control over market access is contained in, or derived from, treaties and subsidiary arrangements negotiated and administered by the Australian Government and its bilateral partners. Government action is therefore the only method of addressing this problem.
THE OBJECTIVES OF GOVERNMENT ACTION
17.	The policy challenge is to maintain the momentum, established over the past decade, in liberalising Australia’s approach to an internationally applied framework of bilateral treaties that control market access for international airlines, in order to deliver benefits to the Australian public and Australian exporters, including tourism interests, air freight users and Australian international airlines.
18.	The Government’s objectives are to: 
•	increase the options available under Government policy and, in particular, benefits for regional Australia, from international air services;
•	improve access by Australian carriers to international aviation and equity markets and reduce their administration costs associated with obtaining and using Australian capacity;
•	increase the breadth, transparency and accountability in the consultative and policy process to improve the definition of how the maximum economic benefit derived from international aviation might best be delivered; and
•	as a longer-term goal, pursue the multilateral liberalisation of international air services through the World Trade Organisation and the General Agreement on Trade in Services.
19.	These objectives can be met, in part, within the current policy settings however, substantial further liberalisation will require the Government to amend current policy settings.

OPTIONS FOR LIBERALISING AUSTRALIA’S INTERNATIONAL AVIATION ENVIRONMENT
20.	The PC recognised that international air services will continue to be managed, at least for the foreseeable future, within a recognised and universal framework of bilateral ASAs.  Although the bilateral system is under intense pressure, major changes are proving difficult to achieve through existing institutions such as the International Civil Aviation Organisation (ICAO) and the World Trade Organisation (WTO).  Because of the entrenched position of the bilateral system, and the difficulties of negotiating a truly liberal multilateral agreement, further liberalisation within the bilateral system offers the best prospects for achieving gains in the short and medium term.  However, in the longer term, the Government agrees with the PC that the international aviation policy and regulatory framework could also be effectively dealt with in the GATS. 
20.	Within the constraints of the international bilateral negotiating system, there are three broad options on how to proceed. 

Full and unilateral deregulation
22.	Full and unilateral deregulation involves the removal of all restrictions on the ability of national and foreign carriers to operate services to and within Australia.  This option was considered by the PC in its final report but rejected on the grounds that Australia could be worse off than it is now. 
23.	Under the entrenched bilateral system, Australia cannot produce, let alone trade, international air services without the approval of other countries.  Unilateral liberalisation of scheduled international passenger services would not ensure that competition and the quantity and quality of air services would increase, or that airfares would fall. The PC also noted that opportunities for future gain might be foregone under unilateral deregulation.
24.	The PC observed that, for as long as the bilateral system is recognised and entrenched in the rest of the world, Australian airlines are likely to be severely disadvantaged by a policy of unilateral ‘open skies’. Market growth with increased capacity and frequency (except in a limited number of cases) and network expansion (including to new destinations) would be constrained. 
Status Quo
25.	The PC acknowledged the substantial progress made by successive Australian Governments in liberalising the international aviation policy and regulatory environment. The PC observed that the system is less constrained now than when liberalisation began and that there is a general consensus that significant gains are being achieved.
26.	Australia will continue to benefit from these significant gains, which include:
•	multiple designation and the development of a transparent method of allocating available capacity to Australian airlines (the IASC);
•	the liberalised charter regime;
•	the privatisation of Qantas and an overall increase in the competitiveness of Australian carriers;
•	increased competition from foreign airlines on services to Australia with the resulting consumer benefits; 
•	the leasing of airports; and
•	the broad approach to negotiating international air services arrangements leading to capacity ahead of demand and a more flexible operating environment for international airlines.
27.	The PC concluded however, that while the current Government policy and regulatory settings have delivered liberalisation of international air services, they are now restricting options for further liberalisation. The restrictions include the inability to negotiate ‘open skies’ agreements when they can maximise the national benefit, as well as unnecessarily limiting Australian airline access to equity markets and delaying access to available capacity.

Staged deregulation to the limits imposed by the bilateral system
28.	The PC’s recommendations overall represent a staged approach to liberalising Australia’s policy and regulatory framework for international aviation, which includes the ‘open skies’ option of open capacity and routes and no restrictions on designation, code sharing and airline ownership as a basis for airline designation. The PC’s recommendations also recognised the inherent limitations of the bilateral system as a vehicle for liberalisation to the point of ‘open skies’.
29.	The PC recommended that, in ASAs where ‘open skies’ is not available, the Australian Government continue to liberalise ASAs, incorporating the negotiation of packages of rights aimed at benefiting regional Australia, including:
•	unlimited capacity to fly to all airports other than Sydney, provided that Australian carriers are offered the same routes on a reciprocal basis by their bilateral partners;
•	unilateral removal of restrictions on the number of points to be served and designation of all cities in Australia other than Sydney, Melbourne, Brisbane and Perth within overall capacity constraints; and 
•	unrestricted rights for foreign carriers to code share to all points in Australia on Australian domestic airlines; and unrestricted rights for foreign carriers to carry own stopover traffic.
30.	The PC also recommended the negotiation of cabotage rights into ASAs on a case-by-case basis and the development of options for seventh freedom services, as well as a substantial streamlining of the administration of capacity allocation by the IASC.
31.	The PC recommended that international air services should ultimately be included in the GATS, but concluded that this is a long term objective.  For the short to medium term, the PC recommended that Australia negotiate regional agreements containing liberal access, particularly liberalised ownership and control provisions.
32.	On other liberalisation issues directly related to the regulation of international air services, the PC recommended that the current ownership and control provisions be liberalised.

THE OPTION PREFERRED FOR FURTHER LIBERALISATION

33.	The Government agrees with the PC recommendation that a staged approach to liberalisation (as opposed to unilateral deregulation) is the appropriate policy. It allows the current momentum of liberalisation to be maintained, combined with the best chance of maximising the national benefit to be obtained from international aviation. The Government agrees with the benefits of this approach identified by the PC, which include increased flexibility for airlines to respond quickly to market opportunities and pressures. The PC also observed that, while airlines could be expected to face greater competitive pressure, more efficient airlines would also better be able to reduce their costs and develop their markets.  
34.	The Government also agrees with the PC’s conclusion that consumers and other users would benefit from the opportunities presented by more liberal outcomes, including the potential for increased competition, leading to greater capacity and frequency, expanded networks, more innovative travel products and more competitive fares. 
35.	However, the PC cautioned that obtaining the best results from liberalisation would require careful attention to the strategic sequencing of negotiations with various countries.   This caution is supported by the Government, which agrees with the PC’s assessment that the delivery of access to third country markets, in any one ASA, cannot be divorced from the effect that negotiating that ASA will have on other bilateral partners, and their willingness to move toward more liberal arrangements, in the face of the potential for increased competition in their home markets from third country carriers. 
36.	The PC also observed that a number of countries may not be prepared to liberalise their ASAs with Australia to the extent of negotiating bilateral reciprocal ‘open skies’ ASAs. This observation is supported by the experience of ASA negotiators in DTRS.

37.	The Government proposes that Australia should adopt a policy of implementing “open skies” arrangements with like - minded bilateral partners, which remove all restrictions on:

•	capacity and frequency to from and between Australia and the bilateral partner;

•	code sharing on each other’s airlines;

•	routes, including points of access to the Australian and the bilateral partner’s markets, intermediate and beyond points;

•	multiple designation of airlines by Australia and the bilateral partner; and

•	prices. 

38	The Government also proposes that the Minister for Transport and Regional Services manage the sequencing of ‘open skies’ negotiations strategically to maximise the national interest, and that the national interest will be determined by the Minister for Transport and Regional Services, taking into account the views of all stakeholders, including the tourism industry, the aviation industry, State Governments, exporters and importers, airport operators and foreign policy interests. 

39.	Where an ‘open skies’ air services arrangement cannot be negotiated, or is not in the national interest, the Minister for Transport and Regional Services will determine a negotiating position aimed at achieving the most liberal arrangements possible. 

40.	In addition, the Government agrees with the PC that Australia’s standing policy should offer all countries a regional airports access package that includes unrestricted direct route access, and unlimited capacity, code share and own-stopover rights for all designated international airports other than Sydney, Melbourne, Brisbane and Perth.  Within negotiated capacity, Australia should offer all countries unrestricted rights for foreign airlines to code share on Australian domestic airlines and carry their own stopover traffic to all points in Australia.
41.	As part of liberalising the framework of regulations that govern access to international markets for Australian international airlines, the Government agrees with the PC that there is scope for streamlining the functions of the IASC. 
42.	The role of the IASC is to allocate international capacity negotiated in ASAs between Australian airlines to the public benefit.  This function is performed under the provisions of the International Air Services Commission Act 1992.  The on-going liberalisation of Australia’s ASAs has substantially simplified the role of the IASC since its inception in 1992. 
43.	Elements of the IASC Act can now be modified to provide a simplified focus on benefits from competition and significantly reduced requirements for industry in its dealings with the Commission. The IASC Act requires submissions whenever new capacity is advertised or a carrier applies for new capacity, even if there is no contest for the allocation of that capacity.  Reform of these requirements will streamline the current allocation process.
The Government’s View
44.	While the Government is in agreement with the majority of the PC’s recommendations, there are some reservations about the following recommendations.
Recommendation 9.3 – Cabotage
45.	The PC recommended that cabotage access for foreign carriers be negotiated into ASAs on a case by case basis on the grounds that restricting cabotage rights for carrying passengers and freight to domestic airlines reduces the opportunity for competition on domestic routes.
46.	The PC however stated that this recommendation would only produce a marginal economic benefit. It observed that the Australian airline industry is relatively efficient and internationally competitive, and that it was unlikely that foreign airlines would be able to attract the higher yielding business and full fare economy passengers from domestic airlines. The PC also observed that it was unable to comment on whether foreign airlines would be attracted to the remaining, lower yielding, passengers at little more than marginal cost.
47.	Access to domestic markets by foreign airlines is not part of the normal trade in international air services and none of Australia’s major trading partners, with the exception of New Zealand, would currently permit Australian airlines access to their domestic markets. 
48.	Given that the PC stated that implementing this recommendation would provide only marginal benefits, and that it is largely uncharted territory in international air services negotiation world wide, the recommendation should not be taken up at this time.
49.	Currently, international airlines can obtain dispensation from the Australian Government to carry passengers and cargo over domestic sectors where it is of direct benefit to Australia’s interest. This approach to cabotage will remain in place if the PC’s recommendation is not enacted.
Recommendation 9.2 – Ownership and control
50.	The PC recommended that Australia should invite neighbouring countries to develop a regional arrangement that would enable the relaxation of bilateral ownership and control criteria.  The PC observed that this was very much a second best option to liberal multilateral reform of the type that the Government is intending to pursue in the GATS. However, the PC concluded that, if liberalisation could be achieved quickly with either New Zealand or in the South Pacific region (or both), there would be potential benefits for members and their airlines, including better use of aircraft, greater access to markets and better networking opportunities and access to larger capital markets.
51.	Ownership and control provisions are a universal feature of an internationally applied framework of bilateral treaties and are not amenable to piecemeal solutions.  For Australian carriers, the binding constraint (apart from the Commonwealth’s own foreign ownership prescription) would be the least liberal arrangement with a significant country.
52.	The Government agrees that there is a need to reform access by international investors to the sector, and agrees with the PC that this is best done in a forum with universal application, like the WTO, where there is at least some chance of carrying reluctant players such as the US. 
53.	In the interim, it is however important to examine Australian legislation in this area and to send a clear message to GATS members that Australia is prepared to consider a new framework for ownership and control of international airlines in the GATS context.  Some liberalisation of legislated foreign ownership restrictions of Australian carriers is possible.  The Air Navigation Act imposes limits of 25 per cent for a single foreign airline, and 35 per cent for total foreign airline ownership.  These ownership provisions should be amended to apply a simple 49 per cent foreign ownership rule for all Australian international carriers (with the exception of Qantas).  This should assist in airlines’ alliance plans; allow better access to capital markets; and ensure Australia retains a healthy presence in the international market.  This position will also send a clear signal of Australia’s intent in negotiating away ownership and control restrictions through the GATS.  The Government does not consider it possible, at this stage, to consider removing this limit altogether, because of the ownership and control constraints placed on Australia by other less liberal‑minded countries which insist upon such minimum restrictions.
54.	At present under the Government’s foreign investment sectoral guidelines, foreign airlines can expect approval to acquire up to 25 per cent individually, or 40 per cent in aggregate, of a domestic airline.  However, in ‘special circumstances’, the Government is prepared to consider foreign airline equity proposals in excess of these guidelines (up to 100 per cent) provided the proposal is not contrary to the national interest.
55.	The Government considers that foreign carriers should be allowed the same access as other foreign investors to domestic air services in Australia.  Such a policy change would require an amendment to the Sectoral Guidelines, to remove the necessity for ‘special circumstances’.  The threat of new entry, utilising foreign airline equity, is made easier under this proposal, and may impose a discipline on participants in the domestic market.
56.	Foreign ownership restrictions would not be removed from the Qantas Sale Act.  Those restrictions limit the foreign ownership of Qantas to 49 per cent, including ownership by foreign airlines in aggregate of up to 35 per cent and individuals, including a foreign carrier, of up to 25 per cent.  The Government considers that Qantas was privatised on the understanding that it would remain substantially owned by Australian interests, and will not change the foreign ownership provisions of the Qantas Sale Act without a separate public debate.
57.	There is also some, albeit limited, scope to negotiate more flexible ownership provisions in ASAs.  This would include recognising ownership structures such as place of incorporation, principal place of business, or other evidence of commitment to providing air services from the territory of the other country, to substitute for the current standard substantive ownership and effective control provisions.
58.	Australia’s negotiating strategy will, in all cases, investigate and aim to achieve a more liberal means of designating international airlines which does not rely on ownership restrictions.
Recommendation 7.3 – Viability testing for airlines
59.	The PC recommended that the IASC should not be involved in the viability testing of airlines that have applied for an allocation of Australian capacity. The PC argued that the existing provisions on viability testing are confusing and can impose costs on airlines, particularly small start‑up airlines. 
60.	However, the PC accepted that the Commonwealth has some obligation to satisfy itself as to the bona fides of a new airline applying for capacity available under an ASA, and concluded that these tests would be better conducted by DTRS as part of their licensing procedure. 
61.	The Government agrees with the PC that testing of the bona fides of carriers is an important element of the allocation process.   The Government considers that the overriding concern is that it must be convinced that an entity it licenses is capable of performing the services it is licensed to provide, and that there is both a moral hazard and consumer deception if this process is absent from licensing. The IASC Act currently requires Commissioners to be selected for their specific expertise in law, commerce, business, economics or public administration in order that they might make this judgement when allocating capacity. The judgement on the business bona fides, as opposed to the regulatory bona fides, of applicants for capacity should remain where the expertise has been appointed.  Arrangements can however be streamlined.
Recommendation 7.7 – Removal of start‑up provisions
62.	The PC recommended that ‘start up’ provisions, included in the Minister’s guidelines for the conduct of the IASC (the Policy Statement), which provide an initial new entrant an allocation of capacity appropriate to the development of efficient, economically sustainable services, should be removed from the allocation process. 
63.	The PC argued that, while the start‑up provisions do encourage competition, it is in an arbitrary way and may come at some cost, in that the incumbent carrier may not obtain the capacity it may have received if start up had not been applied. The PC concluded that the introduction of competition should be the central concern of the Policy Statement, and that this could be better achieved through other amendments to it. 
64.	Where capacity is constrained under an ASA, start up provisions do at least provide a ‘one off’ chance to introduce Australian competition on the route. Ansett, for example, made extensive use of the start up provision in obtaining commercially sustainable levels of capacity during the period in which it established itself as an international carrier. This benefit remains available for new entrants on a number of routes and offers the chance for more opportunities to develop competition to Australia’s major international carriers. 
65.	For this reason, the Government considers that the provision should be retained. 
Recommendation 7.8 – Perpetual capacity allocations 
66.	The PC recommended that the current five-year determinations should be replaced by perpetual determinations, and that the IASC should be rigorous in pursuing the current “use–it-or –lose-it” provisions. The PC observed that the review process imposes a cost on both the IASC and Australian international airlines, which it claims duplicates the operation of the use-it-or-lose-it provisions. 
67.	The Government agrees that the review process imposes additional compliance costs.  However, present review process of determinations is based on the proper assumption that these scarce rights are not ‘owned’ by the carriers.  It provides the necessary transparency for all parties concerned as well as the opportunity for capacity to be reallocated should market and policy conditions change. The Government also considers that the cost of the rigorous policing of use-it-or-lose-it provisions may outweigh the cost on both carriers and the IASC of the five-year review.
Recommendation 9.4 – Capacity restrictions on points other than Sydney
68.	The PC recommended that Australia should offer, on a reciprocal basis, unlimited capacity for foreign airlines to operate to all airports other than Sydney. This recommendation picked up on a public offer by the UK Minister for Transport of unlimited capacity to all secondary gateways in the UK, provided that bilateral partners offer similar rights in return, and would be applied when reciprocal ‘open skies’ is not agreed to by the bilateral partner.
69.	The PC asserted that this recommendation would provide extra capacity to reduce the opportunity costs of operating to regional areas and could stimulate growth in tourism and trade, as well as provide new markets for Australian airlines.  
70.	The PC observed elsewhere in its Report the crucial nature of access to third country markets for both Australian and foreign carriers. This access allows carriers to develop new travel products, build efficient networks and enhance competition from third country carriers. The PC also observed that these rights remain restricted in many ASAs in terms of both destination and capacity, particularly with countries that would not be amenable to an ‘open skies’ outcome for their ASAs with Australia, and that they are traded for rights of interest to foreign Governments and their designated airlines. 
71.	Although capacity is negotiated ahead of demand, it remains an important element of the overall packages negotiated by Australia and, while we remain in the bilateral framework, we need the ability to trade access to ports other than Sydney, particularly as leverage for access to third country markets – an essential element to the progressive deregulation of international aviation.   While Sydney is the primary bargaining chip used in negotiations, the gateways of Melbourne, Brisbane and Perth also provide significant negotiating leverage (although the relative importance of these gateways may vary between different ASAs). 
72.	Therefore, the proposed reforms do not include the removal of capacity restrictions for Sydney, Brisbane, Melbourne and Perth.  Importantly, however, the Government’s regional reform proposal will create a standing package of completely liberalised international aviation access to regional Australia.  The regional package could stimulate new markets for Australian airlines and boost regional areas.   Further, it will eliminate a significant area of opportunity cost for foreign airlines operating services to regional Australia (i.e. the cost of using capacity that could have been used to access primary gateways instead of regional gateways).

IMPACT ON STAKEHOLDERS
73.	The effects on stakeholders of the various policy options, discussed in this section, has been completed for the status quo and preferred policy options only, as it was considered that the other policy options were not feasible.
74.	The PC recognised that it is difficult to trace the net effects on economic welfare of the complex restrictions on trade and competition in the ASAs. More particularly, the PC observed that it would have liked to measure the assistance provided to Australian airlines by Australia’s ASAs, but the lack of available data and the complexities of the system meant that this was not practical. 
75.	However, overall, the PC concluded that increased competition led to net welfare gains and overall, liberalisation of trade in international air services is likely to bring substantial benefits to consumers, tourism and other industries that rely on international aviation. 
76.	One clearly identifiable impact of the Government’s preferred option will be to reduce the burden of regulation on both departments/agencies and business.
77.	The following groups will be affected by the proposed reforms:
The airlines:	Effects of the current system
78.	Airline costs are influenced by the regulatory and policy framework.  That framework may facilitate the operation of efficient air services, but it may also increase the cost of operations by restricting airlines’ ability to operate efficient networks. This in turn has implications for airlines’ revenue and profitability.
79.	The current regulatory framework is considered to provide benefits for Australia’s international carriers by limiting the extent of competition from foreign carriers.  As noted above, the PC indicated that it would have preferred to model the size of these benefits, however the data was not available.
The airlines:	Effects of the proposed solution
Benefits
80.	The proposed liberalisation of the international aviation environment will increase flexibility for individual carrier operations under liberalised ASAs and also provide more opportunities for airlines to join alliances to achieve economies of scope and scale.  It is difficult to predict the impact on industry segments of the proposed reforms.  While some industry participants may find the additional competition difficult, the liberalisation of ASAs will also open up niche opportunities for other operators.  Smaller operators may be particularly advantaged in respect of open access to regional areas.
81.	For Australian carriers, the relaxation of ownership and control provisions under the Air Navigation Act will offer increased opportunities for airlines to seek equity investors outside Australia’s capital markets. The PC observed in its analysis that both Qantas and Ansett International currently operate at the limit of the foreign equity provisions in Australian legislation, suggesting that there may be some unsatisfied foreign demand for investment in these companies.
82.	Australian airlines will also benefit from the streamlining of capacity access provisions at the IASC, which, through removing the possibility of a detailed public benefits test in the absence of a contest for available capacity, will provide carriers with faster approvals for a majority of their applications for available capacity.  This will allow Australian airlines to more quickly put capacity into the market, in response to changes in market conditions, and allow them to compete more effectively with foreign carriers, many of whom are not subject to an allocation process for capacity negotiated under an ASA.  Airlines applying to the IASC for capacity will also benefit from a significant reduction in their administrative costs from the proposed amendments to the IASC Act. 
Costs
83.	The proposed liberalisation will increase the opportunity for more competition on any given route.  This is likely to result in reductions in prices, improvements in service, or both.  The resulting effect on profits will depend upon how the Australian carriers manage the transition to the more competitive environment.  If it is managed well, the Australian carriers could leverage their relatively efficient provision of air services to increase their market share, and hence contribute to higher profit levels.  However, there is also a risk of lower profits if market share is not gained.
84.	The boards of Australian international carriers will need to closely monitor the flow of foreign investment, as the streamlined ownership and control provisions proposed by the Government may increase the risk of one or more of Australia’s bilateral partners refusing a designation under an ASA on the grounds that, in their view, the airline is no longer Australian owned and controlled.
85.	Australian carriers, in their submissions to the PC inquiry, claimed that any move away from the status quo option, described above, will have substantial implications for the national interest. The carriers accepted that the outcome of some ASA negotiations may ultimately lead to ‘open skies’ arrangements, but expressed concern that increasing the pace of liberalisation may provide foreign carriers with an immediate advantage, at the expense of Australian carriers, with little or no benefit to Australia’s interests overall.  Further, they argued that a key objective of Government policy should be the maintenance of a strong and viable aviation industry, capable of providing a broad network of domestic services and competing effectively in aviation markets to and from Australia. 
86.	The airlines’ concern is that, if policy outpaces the capacity of Australian carriers to adjust, then it would likely result in long term damage to the industry.  Investment and employment by Australian carriers may not realise its potential, and there is a likelihood of important areas of airline business activity, including information technology and development, engineering and maintenance, going off shore. 
The passengers: Effects of the current system
87.	Passengers’ total costs of travel vary with the level of airfares and the range and quality of services offered. These follow the effect of the regulatory system on the cost structure of the airlines.  Previous episodes of deregulation of air services have produced significant benefits for consumers so there are strong grounds for considering that the restrictions on competition, in existing bilateral ASAs, may limit the potential benefits that consumers of international air services could achieve in a less regulated environment. 
The passengers: Effects of the proposed solution
Benefits
88.	The PC observed that competition between airlines has been shown to result in lower prices, and an increased range and quality of services.  Any additional freedom that can be provided for more efficient carriers to develop networks and economies of scope and scale, within the limits of the bilateral framework, will also provide opportunities to deliver more efficient and cheaper services to passengers and other users of airline capacity. 
89.	The PC noted that the effect of increased competition is likely to be different from one group of passengers to another. Competition for price sensitive passengers, such as leisure travellers, is likely to lead to lower prices. Competition for price insensitive passengers, such as business travellers, could focus on frequency of flights, in-flight services and use of airport lounges. 
90.	As commercial cooperation between international carriers increases, passengers will also benefit from seamless travel options to a greater number of destinations over combined airline networks. 
Costs
91.	It is possible that for passengers from regional Australian points, the number of direct international air services will remain static or reduce as a result of further liberalisation.  This would be as a consequence of international carriers taking advantage of the benefits of hubbing regional Australian traffic over major Australian international gateways, through closer relationships with Australian domestic carriers, rather than increasing direct services to Australian regional gateways. 
The tourism industry and airport operators: Effects of the current system
92.	The output of the Australian tourism industry and airport operators varies substantially with the number of overseas visitors travelling to Australia and the extent to which Australians substitute international for domestic tourism.  To the extent that restrictions on competition in air services may affect the potential benefits to consumers, the number of passengers may be lower than would occur in a less restricted market.  Hence, the current ASAs may also have flow‑on effects for the tourism industry and airport operators.
93. In the case of the tourism industry, there may be two flow‑on effects of the restrictions, which could have quite different outcomes.  First, lower volumes of foreign passengers coming to Australia may be expected to have negative consequences for the Australian tourism industry (i.e. there could be less patronage of domestic businesses by foreign tourists).  Second, lower volumes of Australian passengers going overseas may be expected to have positive consequences for the Australian tourism industry (i.e. Australian tourists may holiday more at home than overseas).   The counteracting forces of these two effects makes it difficult to conclude whether the net effect of the restrictions is positive or negative in the case of the Australian tourism industry.  However, if the volume of potential foreign tourists is reduced, it is likely to lead to a net negative impact (although of indeterminable size).
94.	In the case of the airport operators, it seems likely that lower volumes of international passengers would result in a lower than potential throughput of passenger numbers, and hence lower than potential revenues and profits.
The tourism industry and airport operators: Effects of the proposed solution
Benefits
95.	An increase in the flexibility of the regulatory and policy environment will provide the tourism industry and airport owners and operators with greater opportunities to market the benefits of their individual destinations through the increased opportunity of carriers to service them. This was a benefit claimed by both airports and tourism representatives in their submissions to the PC inquiry. 
Costs
96.	Liberalisation will also open up the industry to greater competition from overseas destinations as the approach of international airlines toward Australia as a destination becomes increasingly market oriented. 
97.	Experience to date suggests that the benefit to tourism and airport interests in regional Australia, in particular, of each major change of policy in this sector is increasingly marginal, and that stimulation of demand, rather than supply, is the major on-going challenge for Governments and the private sector.
98.	International passenger traffic to and from Australia has doubled to 15 million passengers in the 10 years to December 1998.  In the same period, the proportion of visitor arrivals to Australia increased from 52% to almost 60% in the year to December 1997, before falling back to 57% in the year to December 1998 as the Asian downturn began to affect Australian inbound tourism.  To the extent that these changes are the result of microeconomic reform (as opposed to increasing levels of income), these outcomes underline the importance of maintaining the momentum of reform in the aviation sector.  However, it is increasingly clear that the beneficiaries of these reforms are the major population centres and that direct international air services to regional Australia are under considerable commercial pressure. This trend is likely to continue, as carriers use the more liberal environment to hub at major gateways.
Users of air freight: Effects of the current system
99.	The competitiveness of airfreight varies with the level of freight charges and the range and quality of services offered. The PC observed that airfreight is generally a by–product of passenger services, as it is generally carried in the bellyholds of passenger aircraft.
100.	The regulatory and policy framework for passenger services through ASAs can therefore have implications for the supply and configuration of airfreight services to and from Australia. The PC concluded that competition is quite vigorous, even in regulated markets, particularly when users accept less direct routes in exchange for lower rates.   The main reason for this competitiveness is that air services are principally based on passenger loads rather than bellyhold loads, and there is currently significant surplus capacity in bellyholds.  Hence, carriers are willing to negotiate down to marginal cost in order to generate additional revenue (and profit) from airfreight.
101.	The PC also observed that regulations governing international airfreight services had been eased considerably in many of Australia’s ASAs, but some restrictions remain. 
102.	Since March 1996, additional capacity equivalent to 133 weekly B747s services in each direction into and out of Australia has been negotiated for dedicated airfreight services in all of our major freight markets from a negligible base.  Fully utilised, this represents a potential increase in airfreight capacity to and from Australia in the order of 1.4 million tonnes per annum.  In addition to this capacity, dedicated airfreight services can now operate without restriction between Australia and twelve of our bilateral partners.  Further open freight agreements are currently being negotiated.
103.	In March 1996, the equivalent of 23.5 B747s was approved to operate dedicated airfreight services to Australia.  Currently there is the equivalent of 28.6 B747s.  A great deal of the demand for airfreight has been absorbed by the dramatic increase in the number of international passenger services, with the consequent increase of available bellyhold capacity.  However, there has been a minimal increase in the number of dedicated freight operations, despite the substantial amount of capacity and access rights that became available for these services. 
Users of air freight: Effects of the proposed solution
Benefits
104.	The PC concluded that anything that reduces airline costs and improves networking possibilities would benefit the users of airfreight. The benefits and costs to airlines, passengers and the tourism industry can also be applied to the users of airfreight. 
105.	However, as several inquiries, including the PC inquiry, have observed, the question for air freight is not one of the supply, but rather of increasing the value of outbound freight to the point where it creates a demand for airfreight that is commercially viable for international airlines to satisfy.  Various Government initiatives, including “Supermarket to Asia” are addressing the issue.
Costs
106.	No costs have been identified. 
Regulating authorities: Effects of the current system
107.	The current policy and regulatory framework directly affect DTRS, who currently administer ASAs and the Air Navigation Act, and the IASC, who administer the allocation of Australian capacity. The Foreign Investment Review Board, which administers sectoral guidelines on foreign investment, is also a direct stakeholder in the current framework. 
108.	The ACCC has had a limited but important role to date in assessing the anti‑competitive effects of aspects of international aviation, including airline alliances. The State and Territory tourism and transport authorities and the Office of National Tourism are directly affected by the outcomes of ASA negotiations.
Regulating authorities: Effects of the proposed solution
Benefits
109.	For DTRS, the liberalisation of the current policy and regulatory framework provide a broader range of options to recommend to the Minister for Transport and Regional Services in determining the negotiation position for individual ASAs. This, in turn, will increase the scope for accommodating a wider range of stakeholders in the outcomes of ASA negotiations, including the views of the State and Territory tourism and transport authorities and the Office of National Tourism. 
110.	The IASC’s capacity allocation process will be streamlined as a result of the proposed amendment to the IASC Act, which will lead to reduced allocation, monitoring and enforcement costs.
Costs
111.	It is likely that the ACCC may have to increase its involvement in the regulation of international aviation, as the flexibility of the regulatory and policy framework may facilitate an increase in anti‑competitive behaviour. 
BROADER EFFECTS OF LIBERALISATION
112.	The proposed reform of the Government’s aviation policies and regulations will provide significant additional potential for the promotion and development of international travel, tourism and trade to Australia.  Regional Australia, in particular, could substantially benefit from the reforms.  However, these potential benefits may not be fully realised without a concerted effort to fully exploit the opportunities created by changes to policies and regulations.
113.	As important as it is, the on-going reform of the aviation policy, of itself, will not solve the complex issues associated with revitalising travel, trade and tourism to and from regional Australia.  Stimulation of demand and continuing the essential focus on adding value to our exports is of fundamental importance to increasing the competitiveness of regional Australia.  The agencies, both Commonwealth and State, responsible for the management of these issues will need to ensure that their programs are properly focused to meet these challenges. 
CONSULTATION
114.	The proposed reforms to the policy and regulatory framework are in response to the PC’s Inquiry into International Air Services, which was commissioned by the Treasurer on 12 December 1997.  The Inquiry held initial public hearings in Sydney and Melbourne in March 1998, and hearings on the draft Report in Melbourne in July 1998.  The Inquiry attracted 81 submissions from interested parties, including substantial submissions from parties representing the major stakeholders identified in this RIS. 
115.	In general, the foreign airlines which provided submissions were in favour of further liberalisation, with the exception of British Airways, who agreed with Qantas and Ansett International that the current liberalisation process (the status quo option above) was delivering sufficient reform to the regulatory and policy framework. Qantas, Ansett and Australia World (in particular) were keen to see the IASC processes streamlined. 
116.	Tourism bodies were generally in favour of greater liberalisation than the current regulatory policy framework could provide, with most leaning toward ‘open skies’ in some form but with differences in their approach on how quickly this end might be achieved. 
117.	DTRS made two submissions to the PC Inquiry that incorporated comments from the IASC, but made no direct recommendations as to the direction that Government policy should take. DTRS did however suggest that the GATS was an area worth further exploration, particularly in regard to the regulation of air freight, the ownership and control of international airlines and the regulation of non scheduled international air services. 
IMPLEMENTATION AND REVIEW
118.	As part of their recommendations to change the policy and regulatory framework, the PC suggested that consultation with stakeholders be better coordinated and more direct to DTRS in the lead up to amendments to that framework.  The proposed reforms will provide all stakeholders in the process with opportunities for input at each individual negotiation and the opportunity to meet with each other as stakeholders bi-annually to provide input on the direction of implementation strategies for the new framework. 
119.	The Government agrees with this recommendation, aimed at making the consultative process more transparent and direct. DTRS will implement changes to its administration of the consultation process to ensure that this will be achieved, including bi-annual conferences for all stakeholders and improved access to individual ASAs.
120.	As part of implementing the PC’s recommendation, it is proposed that DTRS hold a bi-annual international aviation conference. This conference will provide stakeholders with the opportunity to contribute to the broader direction of international aviation policy and regulation, as well as to the negotiating position for individual negotiations.
121.	The first conference in each year will establish recommendations for negotiating priorities and provide a forum for the Minister for Transport and Regional Services to meet with stakeholders and to set out the Government’s policy framework. All stakeholders will be invited to give their perspective.   The second conference in each year will be a mid term review that essentially reports on and reviews progress against the policy objectives and refine priorities where necessary. 
122.	The stakeholders will include the Federal Departments representing tourism; foreign affairs, trade and primary produce export interests, Australia’s international airlines, State and Territory governments, the principal private airport operators, tourism interests, such as the Australian Tourism Commission, and other peak industry bodies. 
123.	The Conference will be chaired by DTRS and report directly to the Minister for Transport and Regional Services.  It will provide an opportunity for the Government’s approach to the international aviation policy and regulatory environment to be reviewed directly by participants in the industry at six monthly intervals. 
REGULATORY CHANGES NECESSARY TO IMPLEMENT REFORMS
124.	Amendments will be required to the Air Navigation Act to implement the changes in ownership and control provisions. Amendment of the Foreign Investment Sectoral Guidelines will also be required to reflect these changes. 
125.	 Amendments will be required to the International Air Services Commission Act to streamline the assessment process for capacity allocation and other affected administrative processes.