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15 August 2014

Northern Australia TaskforceDepartment of Prime Minister and CabinetPO Box 6500CANBERRA ACT 2600, Australia

Subject: Submission in response to the Australian Government’s Green Paper on Developing Northern Australia.

Dear Sir or Madam,

North Queensland Airports (NQA) welcomes this opportunity to provide further input to the Australian Government’s considerations on developing northern Australia.

This submission supplements, and should be read in conjunction with, our two previous submissions to the Joint Select Committee on Northern Australia:

A. Submission from North Queensland Airports to the Joint Select Committee on Northern Australia. Submission No. 185; and

B. ASEAN Open Skies – Relevance to Northern Australia’s Economic Development.

NQA is a corporation that was established in 2008 to acquire and operate Cairns and Mackay Airports upon their privatisation under the Airport Assets (Restructuring and Disposal) Act 2008.

Since acquisition of these airports, NQA has played an important role within the communities served by them by actively promoting tourism and trade. Our airports serve as cornerstones of the Cairns and Mackay regional economies, contributing a total of almost $4B each year and generating over 40,000 jobs. The group contributes over $2M annually towards regional economic development, tourism marketing and support for business and community organisations, events and initiatives. We look forward to our continuing involvement with our region’s residents, businesses, and government at all levels to actively promote the growth and prosperity of northern Australia.

Should any clarification or additional information be required in regard to any of our submissions, we would be happy to meet with representatives of the Northern Australia Taskforce and/or the Joint Select Committee on Northern Australia for further discussions. Please do not hesitate to contact Stephen Prasser on xxxx xxx xxx, or by email to: xxxxxxxxxxxxxxxxx

Yours Sincerely,

Kevin BrownChief Executive OfficerNorth Queensland Airports

mailto:[email protected]

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Submission in response to the Green Paper on Developing Northern Australia P a g e | 2

NQA Response to Green Paper on Developing Northern Australia

August 15, 2014.

Contents

1. Executive Summary..................................................................................................................5

2. Introduction..............................................................................................................................7

a. Australia’s aviation environment..........................................................................................7

i. Domestic...........................................................................................................................7

ii. International.....................................................................................................................8

b. Asia-Pacific aviation environment.......................................................................................10

c. Northern Australia’s air connectivity..................................................................................12

3. The economy and productivity of northern Queensland......................................................14

4. The relationship between aviation connectivity and economic growth...............................15

5. Impediments to growing northern Australia’s air connectivity.............................................17

a. Lack of population base and economic diversity.................................................................17

b. Carrier duopoly...................................................................................................................18

c. Air Service Agreements.......................................................................................................19

d. Airline Incentives.................................................................................................................21

e. Passenger Movement Charge.............................................................................................22

6. The relationship between passenger services and cargo......................................................23

7. Opportunities for growing Northern Australia’s international tourism and trade...............26

a. Special Economic Zones – viable model for Northern Australia..........................................26

b. Export-enabling projects.....................................................................................................26

c. Investment in tourism and trade........................................................................................27

d. Multimodal transport integration.......................................................................................27

e. Connecting the Pacific with ASEAN.....................................................................................28

f. Beyond rights for Asian carriers to North America..............................................................30

g. Grow trade with Papua New Guinea...................................................................................30

h. Relaxation of ownership and control requirements............................................................31

8. Recommendations..................................................................................................................32

Annexe A: Abbreviations...............................................................................................................34

Annexe B: Reference List................................................................................................................35

Annexe C: Freedoms of the Air......................................................................................................37


1. Executive SummaryAir transport plays a key role in economic development and in supporting long-term economic growth. Direct connectivity to the global air transport network facilitates a region’s integration into the global economy by taking business travellers to meet existing and new customers, building inbound tourism, expanding trade markets, generating economies of scale and scope, and proving greater access to international investors and capital markets.

The 21st century has become an aviation-based economy. 65-75 per cent of global economic value in trade (including consulting) is carried by air; the standard and often quoted 35% ratio is just for ‘products’Professor John Kasarda, 2014.

The international airports of southern Australia are enjoying a period of rapid expansion in international connectivity, both in the number of destinations served by direct flights, and in the number of seats available on international services. Over the 10 years from 2003 to 2013, the major southern airports have experienced cumulative growth in international passengers of: Brisbane (83%); Sydney (63%); Melbourne (128%); Adelaide (286%); Perth (147%); and the Gold Coast (522%).

By contrast, despite northern Australia’s proximity to Asia, fewer than 1.5% of international passengers arriving in or departing from Australia do so through an airport in northern Australia. Cairns’ reliance upon inbound tourism demand to attract new international air services has failed to build passenger numbers over the past decade, with a 45% decline in the number of international passengers through the international terminal between FY 2004-05 and 2013-14.

This decline in international connectivity has led to long-term stagnation of Cairns’ tourism industry and the regional economy as a whole, attended by the concomitant effects of high youth unemployment, limited population growth, and under-investment in the infrastructure necessary for economic recovery. Over the four years to 2010-11, the Far North region of Queensland showed no net growth in Real GRP, and only recorded average annual GRP growth of 2.3 per cent in the ten years to 2010-11. Far north Queensland also has the second highest rate of youth unemployment in Australia, currently at around 21 per cent.

The increasingly competitive international aviation environment in the Asia-Pacific region presents both challenges and opportunities to northern Australia’s secondary airports. As airlines in the region seek to cut costs and increase revenue while at the same time providing record low fares, it is clear that tourism travel demand alone will not give us a competitive advantage over other airports in the region which are also aggressively pursuing the growing Asian carriers for new services. Airlines are attracted to airports that can provide ancillary revenue streams on top of passenger fares.

In many respects, air freight is a close companion of the international passenger travel market, as around 90 per cent of air freight movements into and out of Australia travel in the belly hold of passenger services. As passenger airlines increasingly look to improve their margins by utilising their belly-hold cargo space, the ability of airports in northern Australia to attract new international services may largely depend on them working with the region’s primary producers and manufacturing industries to increase exports by air. The farms and sustainably-managed fisheries of Queensland’s northern regions are an abundant source of fresh produce, beef, dairy products and seafood that have the


potential to not only meet domestic demand, but also to grow in prosperity through exports to our regional neighbours, particularly to Asia.

Population and income growth in the Asian region are driving increased demand for food—in quantity, quality and product integrity. The real value of global food demand is expected to rise by around 35% by 2025 from 2007 levels, with most demand coming from Asia. China and India alone could account for almost 60% of the global increase. The size and scale of global food markets will shift as an increasingly affluent region demands higher value food and greater food choice. Consumer food preferences and diets in our region will also change, becoming increasingly homogeneous.

Northern Australia’s proximity to Asia is often cited as providing our region with a distinct competitive advantage over our southern counterparts in growing trade, tourism and foreign investment. The reality, however, is that proximity itself provides no material benefit without direct connectivity. Travellers, whether on business or pleasure, are more concerned with the total journey time and cost than with straight-line distance, and where an international journey to or from an airport in northern Queensland requires transiting through a major airport further south (generally Brisbane, Sydney or Melbourne), the proximity advantage actually belongs to the southern capitals.

Cairns Airport is extraordinarily well placed to emerge as a major export and trans-shipment point for air cargo (and passengers) travelling between northern Australia and Asia. With limited direct connectivity, however, this potential is not being realised. Over the 10 years to the end of 2013, total international cargo through Australian airports increased by almost 44% (in tonnes), while over the same period airports in northern Australia saw contraction in international cargo throughput, with Cairns Airport’s international cargo declining by 53% and Darwin Airport’s by 48%.

Opportunities for growing northern Australia’s tourism industry, international trade in goods and services, primary industries, the establishment of foreign and domestic corporate entities in the region and inflows of Foreign Direct Investment, will rely heavily upon the ability of the region’s international airports to improve direct connectivity with the growing markets in Asia.

The Australian Government, along with the State, Territory and Local Governments of northern Australia, all have a role to play in growing the economies of northern Australia through international tourism and trade, by putting in place the policies—and supporting the development of infrastructure—that will enable northern Australia to truly exploit its proximity to Asia by becoming an intrinsic and dynamic member of the broader regional economy.NQA’s recommendations for initiatives to stimulate economic growth in northern Australia can be found on pages 33 & 34 of this submission.


2. Introductiona. Australia’s aviation environment

i. DomesticConditions in the Australian domestic airline industry have been somewhat volatile over the past five years. At the beginning of the five-year period, the global economic downturn caused a decrease in the number of visitors entering Australia, and many Australians shelved unnecessary travel plans in favour of stabilising their finances. Although air passenger kilometres continued to grow year on year, the rate of growth was lower than the long-term trend, reflecting tough operating conditions. Airlines were caught out with excess capacity, and in response have reduced capacity, cut underperforming routes and discounted prices to better align supply with demand and attract more passengers.

Annual revenue growth in Australia’s domestic airline market is expected to be around 3.3 per cent from 2014-20191.

Figure 1: Domestic RPT passenger traffic – All Australian airports (source: BITRE)

Australia’s domestic aviation market is dominated by a duopoly of dual-branded carrier groups: the Qantas Group comprising Qantas (QF), Jetstar (JQ) and Qantaslink; and the Virgin Group comprising Virgin Australia (VA) and Tigerair Australia (TT). In the year ending April 2014, the passenger share of each of the four major domestic airlines was as follows:

1 IBISWorld 2014, Domestic Airlines in Australia, Industry Report I4902, p.3.


Figure 2: Domestic airline passenger share (12 months to April 2014)2

Around 8.5% of passengers travelling within Australia on RPT flights in the 12 months to April 2014 started or ended their journey at an airport in northern Australia.

ii. InternationalThe five years through 2013-14 began with some turbulence for Australia’s international air services. The revenue and volume growth achieved by the industry in 2006-07 was largely wiped away by the economic downturn of 2008-09, but since then revenue has been on the ascent due to solid growth in passenger numbers and record low prices from the emerging international low-cost carriers.

Figure 3: Passengers travelling to or from Australia (2003-2013)3

Generally speaking, Australia has very good connectivity to international air transport networks. Most of the world’s largest international airlines operate services into at least one Australian international airport, with Sydney Airport attracting the greatest diversity of international carriers. Airline partnership and codeshare agreements also provide international carriers with connectivity to airports that they do not serve directly through their codeshare partners.

2 Based on data extracted from AirportIS ™

3 BITRE Airport Traffic Data <http://www.bitre.gov.au/publications/ongoing/airport_traffic_data.aspx>


Figure 4: Australia's direct international air services (source: AirportIS)

The Qantas Group’s international airlines (Qantas and Jetstar) carried 25 per cent of international passengers to/from Australia in the 12 months to April 2014, the largest share of any carrier or group.

Figure 5: International airlines in Australia by market share

With nearly 1,500,000 passengers a year, the market between Australia and the United Kingdom, also known as the Kangaroo route, is the largest non trans-Atlantic international market from Europe4. Australia’s strong links with UK both economically and demographically, drives significant demand levels both on the business and Visiting Friends and Relatives (VFR) segments. The market share of UK

4 Airbus 2014, Global Market Forecast for 2013-2032 “Future Journeys”. P66.


and Australian carriers on the Kangaroo route has dropped 10 percentage points since 2003, primarily to the benefit of Middle Eastern airlines which now carry about one third of the demand.

Industry revenue is forecast to increase at a compound annual rate of 1.5 per cent over the next five years, to reach $17.8 billion in 2018-195. Increasingly favourable conditions, such as solid income growth in Australia and Asia, will result in increased demand for travel. However, continual downward pressure on airfares, a weaker Australian dollar and strong competition on a global scale will partly offset these favourable conditions.

Barriers to entry into Australia’s international market (as an Australian-designated carrier) are high, as Australian international airlines are required to be ‘substantially owned and effectively controlled’ by Australian nationals before being granted rights negotiated under Australia’s Air Services Agreements. Foreign ownership and control limits on Australian airlines are set out in the Qantas Sale Act 1992 and the Air Navigation Act 1920.

b. Asia-Pacific aviation environmentAfter a decade of tremendous growth, the Asia-Pacific region is recognised as being at the centre of the future global economy. Taking in the five biggest economies in Asia, it is actually the world’s largest in terms of GDP, ahead of North America and the EU.

The Asia-Pacific region represents more than a quarter of the world economy today, and will represent more than a third by 2032. Economic growth, a growing middle class and increasing urbanisation are all key to air traffic growth, and the combined influence of all three of these drivers will see the Asia Pacific region lead world air traffic by 2032, with more than 50% of new long-haul routes and 34% of all passengers.6

The weight of Chinese tourism and leisure travel alone is becoming increasingly influential upon travel patterns throughout the region. China’s expenditure on travel abroad reached US$102 billion in 2012, an increase of 40% from 2011. 7

5 IBISWorld 2014, International Airlines in Australia, Industry Report I4901, p.3.

6 Airbus, supra, p. 25.

7 Supra, p. 61.


Figure 6: Asia-Pacific to lead in world air traffic by 20328

With rapidly-growing intra-regional traffic and a strong LCC presence, Asia-Pacific is expected to account for 34% of global deliveries of narrow-bodied (single-aisle) passenger aircraft, and 48% of wide-bodied (twin-aisle) passenger aircraft deliveries to 2032.

Figure 7: 20-year demand for new single-aisle passenger aircraft by region (2013-2032)9

8 Supra, p. 46.

9 Supra, p. 29.


Figure 8: 20-year demand for new twin-aisle passenger aircraft by region10

Figure 9: Asia-Pacific passenger aircraft demand to 203211

Airbus expects passenger traffic between Asia and Australia/New Zealand to grow by 4.7 per cent CAGR over the period 2013-2032.12

10 Supra, p. 31.

11 Supra, p. 37.

12 Supra, p. 102.


c. Northern Australia’s air connectivity International airports in southern Australia are enjoying a period of rapid expansion in international connectivity, both in the number of destinations served by direct flights, and in the number of seats available on international services.

Table 1: Growth in international passengers: 2003-201313

Average Cumulative

Sydney Airport 4.52% 63.10%

Melbourne Airport 7.65% 128.54%

Brisbane Airport 6.10% 83.14%

Perth Airport 8.40% 147.06%

Adelaide Airport 12.81% 286.55%

Gold Coast Airport 23.40% 522.51%

Cairns Airport -2.93% -34.09%

Darwin Airport 12.78% 328.91%

13 BITRE, Supra.


Figure 10: Direct international flights from airports in southern Australia (source: AirportIS)

By contrast, only three airports in northern Australia currently support scheduled international services: Port Hedland, Darwin and Cairns. Despite northern Australia’s proximity to Asia, fewer than 1.5% of international passengers arriving in or departing from Australia do so through an airport in northern Australia. Over the past three years, international passenger numbers through Darwin Airport have grown by less than 2 per cent, and through Cairns Airport have actually declined by 2.5 per cent.14

Figure 11: Direct international flights from airports in northern Australia (source: AirportIS)

The airports in northern Australia, and particularly those in northern Queensland, face significant challenges in attracting new international services.

Whereas Darwin’s close proximity to South East Asia has enabled the establishment of new international services operated by narrow-bodied jets, the airports in northern Queensland are generally not within practical range of most large airports in Asia for the current generation of these aircraft.

Northern Australia’s proximity to Asia is often cited as providing our region with a distinct competitive advantage over our southern counterparts in growing trade, tourism and foreign investment. The reality, however, is that proximity itself provides

14 BITRE, Supra.


no material benefit without direct connectivity. Travellers, whether on business or pleasure, are more concerned with the total journey time and cost than with straight-line distance, and where an international journey to or from an airport in northern Queensland requires transiting through a major airport further south (generally Brisbane, Sydney or Melbourne), the proximity advantage actually belongs to the southern capitals.

Figure 12: Direct service (non-existent) vs indirect service (present actual journey).

The table below demonstrates the difference in the potential travel distance and time from Cairns Airport to three major destinations in Asia, compared with the current actual travel distance and total journey time in the absence of direct flights to these destinations:

From To Direct Dist Actual Dist Direct Time Actual Time Via

Cairns Singapore 5009km 7529km 6 hours 12.5 hours Brisbane

Cairns Shanghai 5900km 9803km 7 hours 17.5 hours Sydney

Cairns Guangzhou 5685km 8450km 6.75 hours 13.5 hours Brisbane


3. The economy and productivity of northern QueenslandQueensland recorded relatively weak output growth of 1.7 per cent average annual growth over the four years to 2010-11 compared with average annual growth of 2.7 per cent over the same period in the rest of Australia.15

Figure 13: Growth in Real GRP, 2006-07 to 2010-11, Queensland16

Over the four years to 2010-11, the Far North region of Queensland showed no net growth in Real GRP, and only recorded average annual GRP growth of 2.3 per cent in the ten years to 2010-11.

Far north Queensland also has the second highest rate of youth unemployment in Australia, currently at around 21 per cent.17

15 Queensland Treasury and Trade 2013, Experimental Estimates of Gross Regional Product 2000-01, 2006-07 and 2010-11, p. 9.

16 Supra.

17 ABC Far North Queensland, Youth unemployment predicted to skyrocket in FNQ, April 2014

< http://www.abc.net.au/local/stories/2014/04/08/3980651.htm>, accessed 12/8/2014.


4. The relationship between aviation connectivity and economic growth.Air transport plays a key role in economic development and in supporting long-term economic growth. Direct connectivity to the global air transport network facilitates a region’s integration into the global economy by taking business travellers to meet existing and new customers, building inbound tourism, expanding trade markets, generating economies of scale and scope, and proving greater access to international investors and capital markets.

The 21st century has become an aviation-based economy. 65-75 per cent of global economic value in trade (including consulting) is carried by air; the standard and often quoted 35% ratio is just for ‘products’18

Appraisals of the regional economic benefits of increased access to the global air transport network generally focus on the direct contribution to Gross Regional Product (GRP) through local employment and expenditure, as well as indirect benefits to industries such as tourism. The traditional approach to appraisal does not quantify the significant additional economic benefits created by aviation, those that cannot be replicated by other industries in the absence of air transport.19

The International Air Transport Association (IATA) has explored the relationship between air connectivity and regional productivity – that is, the advantages that connections to the global air transport network provide for businesses. IATA’s research highlighted the significant wider economic benefits that are created through improved links to the global air transport network. Its survey of firms in five different countries showed the importance of good air transport links for a region’s efficiency, productivity and investment attraction. In particular, greater connections to the air transport network provided potential benefits through20:

A. Facilitating international trade and tourism. Air transport connects businesses to a wide range of global markets, providing a significantly larger customer base for their products than would be accessible otherwise. It is particularly important for high-tech and knowledge-based sectors, suppliers of perishable or time-sensitive goods and the tourism and hospitality industries.

B. Boosting productivity across the economy. By expanding the customer base, air transport allows companies to exploit economies of scale and to reduce unit costs. By exposing domestic companies to increased foreign competition, it also helps to drive efficiency improvements among domestic firms in order to remain competitive.

C. Improving the efficiency of the supply chain. Access to extensive air transport links allows domestic firms to identify and manage investments in foreign-based assets and encourages foreign firms to invest in the regional economy.

18 Prof John Kasarda in CAPA Centre for Aviation, The Aerotropolis – a strategy, not a project. ‘Aerotropolis EMEA’ Conference report: Part 1.

19 IATA 2007, Aviation Economic Benefits, IATA Economics Briefing No. 8, p. 21.

20 Supra, p. 22.


D. Acting as a spur to innovation. Extensive air transport links facilitate effective networking and collaboration between companies located in different parts of the globe. Access to a greater number of markets also encourages greater spending on research and development by companies, given the increased size of the potential market for future sales.

E. Indirect impacts.Includes the economic activity fostered by the supply chain of industries servicing airport operations, and the consumer spending of wage earners associated with an airport, its supply chain industries and regional tourism.

Summarily, IATA’s research found that:

There is a statistically significant and positive link betweenconnectivity, productivity and long-term economic growth.21

21 Supra, p. 25.


5. Impediments to growing northern Australia’s air connectivity.a. Lack of population base and economic diversity.

Even the larger urban centres in northern Australia (Cairns, Townsville, Mackay and Darwin) lack the permanent population that would normally be required to attract and maintain international air services using wide-bodied aircraft.

Population and economic growth of the communities within which NQA’s airports (Cairns and Mackay) operate is constrained by an over-reliance on the fortunes of one industry. For Mackay this industry is mining; for Cairns it is tourism. While other industries certainly exist within these communities, as with any other of a similar size, the effect of a downturn in mining employment on Mackay has brought into stark relief the dominance of mining within the regional economy, just as for Cairns the tourism downturn for almost the decade to 2012 saw regional unemployment rise to among the highest in Australia.

Darwin’s proximity to South East Asia brings it within narrow-body jet range of a number of major Asian hubs, including Singapore, Kuala Lumpur and Manila, and as a result Darwin Airport has been successful in attracting new international services operated by smaller aircraft. Although this has provided benefits to the tourism economy of the Northern Territory, the inability of narrow-bodied aircraft to carry commercially-viable volumes of cargo has meant that these services have provided no growth in the region’s exports of goods by air.

Cairns’ reliance upon inbound tourism demand to attract new international services has failed to attract new services over the past decade, with a 45% decline in the number of passengers through the international terminal between FY 2004-05 and 2013-14.22

Figure 14: Cairns Airport international passenger movements

This decline in international connectivity has led to long-term stagnation of Cairns’ tourism industry and the regional economy as a whole, attended by the concomitant effects of high youth unemployment, limited population growth, and under-investment in the infrastructure necessary for economic recovery.

22 Australian Government, BITRE airport traffic data <http://www.bitre.gov.au/publications/ongoing/airport_traffic_data.aspx>


Part of the challenge of attracting new international services to Cairns is that the revenue model of most international airlines relies upon the sale of business class fares to offset the low-yielding economy class seats. As a predominantly tourism-driven destination which is not home to any significant government agencies or corporate headquarters, Cairns provides little demand for business class travel.

Diversification of the Cairns economy through growth in export of goods and services, attracting regional offices of multi-national corporations, locating large government offices in the north, and increasing international student enrolment in regional education and training institutions would greatly enhance the viability of direct international air services to the region.

b. Carrier duopolyDespite the ostensible liberalisation of the Australian airline industry since the abolition of the Two Airline Policy in 1990, Australia’s domestic airline industry is still dominated by two airline groups—the Qantas Group comprising Qantas, Jetstar and Qantaslink; and the Virgin Group comprising Virgin Australia, Tigerair Australia and Skywest Airlines.

Within each airline group the decision for any airline within the group to establish a new international or domestic service is made at the group level, taking into consideration the broader strategy and objectives of the entire group. A case in point is Canberra Airport. Despite having a catchment population of almost one million people, a demographic with the highest average income in Australia, and investing around $480 million on its terminal precinct from 2009-201323, neither Australia airline group has commenced services to/from Canberra Airport with its Low Cost Carrier brand (Jetstar or Tigerair). It is widely held that this is a strategic decision by each airline group to protect their high-yielding business and government traffic through Canberra Airport.

It is unlikely that any Australian-based international airline is going to provide northern Australia with significant improvements in international air connectivity in the near future. The CEO of the Qantas Group has foreshadowed a period of limited growth for the group by stating:

“We must defer growth and cut back where we can, so that we can invest where we need to.” (Qantas Group CEO Alan Joyce - Feb 27, 2014)24

In reality, the Qantas group is reducing its international operations from airports in northern Australia by closing its Jetstar base in Darwin in early 2014. As a consequence of this, Jetstar’s services from Darwin to Manila and Tokyo were terminated, weekly services from Darwin to Bali were reduced from eight to seven, Darwin to Brisbane services reduced from nine to seven, and operation of flights from Darwin to Singapore was transferred to Jetstar Asia. Jetstar’s three Airbus A320 aircraft that were previously based in Darwin have been relocated to Adelaide.25

23 Canberra Airport website < http://www.canberraairport.com.au/>

24 Alan Joyce, Feb 27 2014: http://www.qantasnewsroom.com.au/media-releases/qantas-group-strategy-update-2, accessed on 11/8/2014.

25 Sydney Morning Herald 9/12/13 < http://www.smh.com.au/business/aviation/jetstar-to-close-darwin-base-and-cut-nt-flights-20131209-2z0xl.html> accessed on 30/7/14.


The Virgin Group faces similar constraints in growing international capacity. Whereas the Virgin CEO has flagged the airline’s intention to increase penetration into Asian markets, this strategy appears to focus more on developing broader codeshare agreements with the region’s own airlines rather than greatly increasing the number of international services operated by Virgin itself. This is evidenced by Virgin’s forward orders for aircraft, that are weighted heavily towards narrow-bodied jets (Boeing 737-800 and 737MAX) targeted at replacing and growing current fleet serving the Australian domestic and trans-Tasman markets. Virgin has yet to announce its choice of next-generation wide-bodied aircraft, with only two Airbus A330s to join the fleet by 2016.26

In stark contrast to the Australian carriers’ conservative plans for international capacity growth over the coming years, carriers throughout Asia—and the low-cost carriers in particular—are poised for a period of unprecedented expansion. Two airlines based in South-East Asia—Indonesia’s Lion Air and Malaysia’s AirAsia Group—each have more new jet aircraft on order than are currently operated by all four major Australian airlines combined. These airlines, along with many others in Asia, are actively seeking opportunities for growth in the Asia-Pacific region, including through the establishment of foreign subsidiaries.

c. Air Service AgreementsInternational aviation traffic rights are governed by thousands of bilateral air services agreements (AsAs) that were first developed according to the principles of the 1944 Chicago Convention on International Civil Aviation. Whereas the airline industry has changed significantly over the past 70 years, the rules governing international operations and ownership have not.

Australia’s current system of bilateral agreements constrains the ability of airlines to operate on a fully commercial basis, due to: 1. Operational (or product market) restrictions:

An AsA can include restrictions on the number of airlines permitted to operate on a certain route, restrictions on the frequency of flights and restrictions relating to the fares charged on such routes.

2. Ownership (or capital market) restrictions:An AsA can give country A the right to reject country B’s airline carrier if the carrier is not “substantially owned and effectively controlled” by nationals of country B. These restrictions are often supplemented by statutory provisions in a country.

Effective liberalisation must therefore address both forms of restriction; through product market liberalisation to provide greater freedom on operations, and capital market liberalisation to provide greater freedom of ownership and control.

26 Australian Aviation <http://australianaviation.com.au/2013/08/no-rush-for-virgin-australia-fleet-plans/>, accessed on 11/8/2014.


Australia should have an open and competitive international aviation market that benefits tourism, trade and consumers, allows Australian and overseas airlines to expand, and maintains a vibrant Australian-based aviation industry.Australian Government, National Aviation Policy White Paper 2009.


The most important trend for international civil aviation over the next two decades will be the shift from bilateral to multilateral air transport agreements, a process that began in 1997 with creation of the single aviation market in the European Union. Thousands of bilateral air transport agreements are evolving into a system of less than a hundred bloc-based multilateral air transport agreements, but the bilateralism and protectionism (between blocs rather than states) will be maintained.

One such bloc-based agreement is the ASEAN Open Skies Agreement. The vision of ASEAN Leaders is to form an ASEAN Community by 2015 that will build a more competitive and resilient region by bringing peoples, goods, services and capital closer together. As a key step towards realising this vision, the ASEAN Open Skies Agreement27 is ultimately intended to create an aviation environment wherein there are no limitations on capacity, frequency or aircraft type on services between member states. The move towards a true ASEAN Single Aviation Market has many hurdles to overcome yet, with entrenched protectionism of national carriers providing significant resistance, but it is almost inevitable that this region will eventually support an aviation market that has few or no restrictions on airline operations or ownership between member states.

In 1998, Australia’s Productivity Commission found that:

[i]f Australia does not move rapidly, the rest of the world could liberalise around it. Australia would be disadvantaged if air transport services between other countries became relatively more efficient. And Australian carriers would be disadvantaged in their pursuit of new and larger international markets if other markets liberalised ahead of ours.28

Australia currently has bilateral air services agreements/arrangements with 89 countries/economies, but is not currently a member of any bloc-based multilateral agreement, or of any bloc that is currently negotiating such an agreement. Australia is also party to a number of international trade agreements covering trade in services including the General Agreement on Trade in Services (GATS), the Asia–Pacific Economic Cooperation (APEC) Agreement and the Australia–New Zealand Closer Economic Relations Trade Agreement (ANZCERTA). However, only the ANZCERTA explicitly covers international air services. The other agreements either exempt or do not specify commitments related to air transport.29

New Zealand led negotiations that culminated in the 2001 Multilateral Agreement on the Liberalization of International Air Transportation (MALIAT)30 with the United States, Singapore, Brunei, and Chile, later joined by Samoa, Tonga, Cook Islands, Mongolia and Peru (which has since withdrawn from the Agreement). Australia is not a party to this agreement.

27 In practice, ‘Open Skies’ within the ASEAN region is not one agreement but three separate agreements: The Multilateral Agreement on Air Services (MAAS); Multilateral Agreement on the Full Liberalisation of Air Freight Services (MAFLAFS); and The Multilateral Agreement for the Full Liberalization of Passenger Air Services (MAFLPAS).

28 Productivity Commission, International Air Services, Inquiry Report (Report No.2), p.XXIX.

29 Supra, p. 269.

30 MALIAT <http://www.maliat.govt.nz/>, accessed on 11/8/2014.


Not all liberalisation is beneficial to secondary airports. In an effort to incentivise the establishment of international services to secondary airports in Australia, some of Australia’s bilateral Air Service Agreements—typically those where foreign carriers desire an increase in capacity to/from Australia—offer unlimited capacity on services that operate to or through designated secondary airports in Australia (such as Cairns). With the Australian Government working towards securing open capacity agreements with key markets31 (such as Hong Kong), secondary airports may, unless some other effective mechanism for attracting services is devised, find it even more difficult to grow their international connectivity.

Ownership and control restrictions in national designation of international airlines may be restricting growth in international services from northern Australia’s airports under Australia’s bilateral system. According to the Productivity Commission:

Of all of the bilateral system’s constraints on efficiency and competition, probably the most fundamental is the requirement that national flag carriers be locally owned and controlled.32

The justification used for ownership and control restrictions imposed on Australia’s international airlines is that Australia should exercise its entitlements under the bilateral system through its own flag carrier(s). Australia’s Productivity Commission found, however, that “local ownership and control is not a necessary condition for the bilateral system to function. It is national designation, rather than ownership and control, that is necessary.33”

The Productivity Commission further found that “When there are clear lines of accountability between airlines and the countries designating them, it should not matter where they are owned, any more than in other industries.”34

Opportunities for growing Northern Australia’s tourism industry, international trade in goods and services, primary industries, the establishment of foreign and domestic corporate entities in the region, and inflows of Foreign Direct Investment, will rely heavily upon our connectivity to the growing markets in Asia.

d. Airline IncentivesAirlines, both international and domestic, are increasingly seeking to de-risk new and unproven routes—particularly to secondary airports—by requiring significant financial incentives from commencement of the service and throughout the first two or three years of operation. Incentives are commonly in the form of revenue guarantees,

31 Mike Mrdak, Secretary of the Department of Infrastructure and Regional Development, speech to CAPA conference in Sydney August 8, 2014.

32 Productivity Commission, International Air Services, Inquiry Report (Report No.2) (Ausinfo, Canberra, 1998).p. XXX.

33 Supra, p. 213.

34 Supra, p. 214.


marketing support, discounted airport fees or any combination thereof, and routinely run into the millions of dollars.

Rather than being aimed at equitably sharing the risk of new route establishment with the destination airport, airlines are using their market power over secondary airports to transfer as much risk to the airport as it is prepared to bear in order to secure the service. It is not uncommon for secondary airports to lose money on a new international service for some years without any commitment from the airline that the service will continue once the financial incentives have been exhausted. At that point the airline is free to redeploy their aircraft on a more profitable route.

Although securing a new service through payment of large incentives may bring short-term benefits to the regional economy of the destination airport, loss of that service after a couple of years once the incentive period expires may bring far greater and longer-lasting ramifications. Businesses that invest in reliance upon a sustained increase in visitor numbers can find themselves in financial difficulty with the withdrawal of the service, international students who enrolled in regional education and training institutions due to the convenience of direct services from their home country may withdraw from their courses, export contracts established to take advantage of the cargo capacity provided by the service may fail, and the airport itself can find it even more difficult to attract other international airlines when the industry is aware of the failure of the service.

Without offering incentives, however, secondary airports—including those in northern Australia—have little chance of securing new international services in competition with the many other airports (and their state-run tourism agencies) in the Asia-Pacific region that are prepared to heavily subsidise new routes. The critical consideration in assessing the extent to which a new service should be subsidised is whether or not the service has the potential—before the incentive period expires—to be viable even in the absence of financial support.

e. Passenger Movement ChargeAustralia currently applies a Passenger Movement Charge of AUD $55 to all departing international passengers to offset the cost of government-provided services. Australia is one of only a few countries in the world to apply such a levy, and even within the group of OECD countries that do apply departure tax, Australia’s is the highest for short-haul international flights and the second-highest for long-haul flights. In the World Economic Forum’s Travel and Tourism Competitiveness Index for 2013, Australia was ranked number 130 out of 140 countries for competitiveness of Ticket Taxes and Airport Charges.35

The rate of the Passenger Service Charge is a very significant barrier to attracting new international passenger services to Cairns. Cairns’ proximity to South-East Asia makes it a viable destination for short-to-medium-haul leisure traffic from that region if fares are competitive, but with many low cost carriers in South East Asia charging less than AUD $200 each way on short-to-medium haul flights within the region, Australia’s PMC

35 World Economic Forum, Travel and Tourism Competitiveness Report 2013.


forces airlines to charge fares that are less attractive than those to competing leisure destinations.


6. The relationship between passenger services and cargoThe supply of air freight services is strongly linked to and influenced by the market for air passenger services. Around 90 per cent of air freight movements into and out of Australia are transported in the available belly hold capacity of commercial passenger aircraft and therefore the terms and conditions of access—as well as the demand—for these passenger services to airports in northern Australia have important implications for the region’s exporters. In that sense, the opportunities for north Queensland’s primary producers and service providers to grow their business through international trade are highly dependent upon the region’s international tourism industry.

A number of recent studies have highlighted the importance of the movement of people for trade36, finding that international buyers travel to the region they import from in order to establish trade relationships, for example, because they need to find an appropriate supplier. Export regions with good direct international connectivity with large consumer markets are far more likely to attract international buyers and trade delegations, leading to greater and more rapid growth in trade.

Population and income growth in the Asian region is driving increased demand for food—in quantity, quality and product integrity. The real value of global food demand is expected to rise by around 35% by 2025 from 2007 levels37, with most demand coming from Asia. China and India alone could account for almost 60% of the global increase. The size and scale of global food markets will shift as an increasingly affluent region demands higher value food and greater food choice. Consumer food preferences and diets in our region will also change, becoming increasingly homogeneous.

Figure 15: Global food demand to 205038

36 e.g. Rauch and Trindade, 2002; Herander and Saavedra, 2005; and Jansen and Piermartini, 2008.

37 Australian Government (2012) Australia in the Asian Century White Paper p. 214

38 Linehan V, Thorpe S, Andrews N, Kim Y & Beaini F 2012, Food demand to 2050: opportunities

for Australian agriculture, Australian Bureau of Agricultural and Resource Economics and

Sciences (ABARES) Outlook conference paper no. 12.4, Canberra, www.adl.brs.gov.au.


Cairns Airport is extraordinarily well placed to emerge as a major export and trans-shipment point for air cargo (and passengers) travelling between northern Australia and Asia. The farms and sustainably-managed fisheries of Queensland’s northern regions are an abundant source of fresh produce, beef, dairy products and seafood that have the potential to not only meet domestic demand, but also to grow in prosperity through exports to our regional neighbours, particularly to Asia.

Without direct connectivity, however, this potential is not being realised. Over the 10 years to the end of 2013, total international cargo through Australian airports increased by almost 44% (in tonnes). Over this period all major southern airports saw significant growth in their cargo business, with Brisbane Airport growing by 58.5%, Sydney Airport by 44%, Melbourne Airport by 36.5%, Perth Airport by almost 60%, and Adelaide Airport by more than 68%. By contrast, airports in northern Australia saw contraction in international cargo throughput over the same period, with Cairns Airport’s international cargo declining by 53% and Darwin Airport’s by 48%.39

Figure 16: International cargo movements through selected Australian airports (tonnes)40

The contraction in Cairns Airport’s cargo throughput is a direct consequence of the reduction in direct international flights. Whereas the majority of live fish, eels and crustaceans sourced locally are exported through Cairns Airport on the remaining Cathay Pacific services to Hong Kong, most of the agrifood exports from the region bound for other destinations are transported by road to Brisbane Airport to be loaded there as belly hold freight on passenger services. The additional transport cost of moving produce to Brisbane reduces the profitability of primary producers in northern Queensland and consequently also their competitiveness in Asian markets.

For international airlines, the potential for cargo revenue to supplement passenger fares can make the difference between whether or not a new service is viable.

Globally, air cargo and mail account for roughly 12% of airline industry revenues. While this may seem small, consider that airline operating margins globally

39 Australian Government, BITRE Airport Traffic Data.

40 Supra.


average under 3%. Take away air cargo revenues and many passenger airlines would not be economically viable.41

As passenger airlines increasingly look to improve their margins by utilising their belly-hold cargo space, the ability of airports in northern Australia to attract new international services may largely depend on them working with the region’s primary producers and manufacturing industries to increase exports by air. This in turn builds regional economic diversification and employment growth, as well as tourism. Rather than ‘stealing’ this cargo from airports further south, improved international connectivity through Cairns Airport will grow the total volume of exports from the region.

The potential benefits to primary industries in northern Australia cannot be overstated. For example, dairy has been a significant industry on the Atherton Tablelands for many years, but due to domestic market conditions milk production has declined since deregulation of the industry in 2001 from more than 150 million litres to around 53 million litres in 2013, with the number of dairy farms decreasing from 185 to fewer than 60 over the same period. The Atherton Tablelands is the only major dairy region in Australia that is not exporting, and the development of exports is seen by the remaining dairy farmers as critical to the survival of their industry. As it is not viable to truck milk from the Atherton Tablelands south to Brisbane airport for export, the availability of international air services from Cairns Airport to Asian Markets (and China in particular) may determine the future viability of the region’s dairy industry.

41 Tretheway, Mike 2003, ‘Fighting cargo’s corner’, Airline Cargo Management, December, pp. 32-6


WORKED EXAMPLERoutepro™ software was used to model the expected financial performance of a 4/weekly service operated by a major Chinese airline between Shanghai and Cairns using an Airbus A330-300. Routepro™ predicts that for the airline to break even on this service at average passenger loads of 75% would require a fare (each way) of AUD $525. If any net passenger revenue (after fees and charges) additional to this is assumed, for the purposes of this example, to be profit, then increasing the passenger load from 75% to 80% at the same average fare would provide the airline with a total annual profit on this service of around AUD $2.8 million.

The Airbus A330-300 is a wide-bodied aircraft that is capable of carrying around 19 tonnes of cargo on the Cairns to Shanghai route, even with a full load of passengers and their bags. If the airline were to carry even 80% of its maximum cargo load on each flight from Cairns to Shanghai, at a conservative average revenue to the airline of AUD $1.50/kg, the additional annual revenue would be around AUD $4.74 million. According to Airbus technical data on A330 fuel burn, the additional cargo weight would require approximately AUD $1.74 million worth of extra fuel each year on this service. The net result to the airline would therefore be an additional annual profit of around AUD $3 million, or more than double the profit that would be expected through operating this service with passengers alone.

Agriculture, forestry and fishing experienced a decline in its contribution to Queensland’s economic activity from 4.7 per cent in 2000-01 to 2.7 per cent in 2010-11.42

Beyond the direct benefits to our primary industries and tourism, building exports by air through improved international connectivity will relieve some of the pressure from the already-congested Bruce Highway and arterial roads leading to Brisbane Airport. For each 10,000 tons of air cargo exported through Cairns Airport instead of travelling by road to Brisbane Airport, roughly 500 fewer semi-trailers will make the trip south along the Bruce Highway from Far North Queensland to Brisbane and back.

42 Queensland Treasury and Trade, Supra, p. 14.


As a consequence of the SEZ in Guangzhou, cargo volume grew by 80% at Guangzhou airport last year compared to 4% on average throughout China.

Professor John Kasarda, 2014

7. Opportunities for growing Northern Australia’s international tourism and tradea. Special Economic Zones – viable model for Northern Australia.

Notwithstanding any constitutional barrier that may preclude the establishment of a Special Economic Zone or Zones in northern Australia, such a concept should not be readily discounted as it has the potential to provide enormous benefits to the region and act as a catalyst for a period of rapid economic and population growth. Whereas there is an argument—aside from the constitutional one—that no area in Australia should receive what may be perceived to be preferential treatment, it can also be argued that the major population centres in Australia (with more than 1 million residents) enjoy economies of scope and scale that provide benefits to businesses in these areas that are not available to their counterparts in regional areas.

The choice of location and model for any Special Economic Zone will be critical to its success. Whereas the original Special Economic Zones (Free Trade Zones and Export Processing Zones) were developed primarily to support the transition of their target economies from a reliance on agriculture and unskilled industries to skilled manufacturing and technology industries, a Special Economic Zone model appropriate for northern Australia must be designed to facilitate the competitiveness of those industries which have been identified as being pivotal to our region’s future economy, including agriculture, tourism, international education, tropical medicine, resources and energy, and indigenous economic development. The development of these industries does not lend itself well to a traditional Export Processing Zone or Freeport alone (which create clusters of export-oriented businesses within a secure area that is extra-territorial to its host state for customs purposes), but would benefit greatly from the combination of a small number of Freeports at key international transport hubs fed by a region-wide Enterprise Zone that fosters growth in targeted industries through such mechanisms as export development grants, public private partnerships for key infrastructure, tax and duty concessions, relocation allowances for jobseekers, traineeship schemes, establishment of Cooperative Research Centres, and policies that encourage foreign investment.

b. Export-enabling projects.Food irradiation is a processing technology whereby certain types of food can be exposed to a source of ionising energy in order to kill or sterilise insects, bacteria, micro-organisms and other pathogens, and is increasingly becoming the preferred alternative to use of Dimethoate and Fenthion in horticulture.

As the only phytosanitary irradiation facility in Queensland is in Brisbane, any fruits or vegetables produced in northern Queensland that are bound for markets where pre-export irradiation is mandated must be sent by road to Brisbane for treatment, whereupon they are uplifted from Brisbane Airport.

The construction of a phtyosanitary treatment facility (including irradiation treatment) requires a significant capital investment, with high ongoing operational costs. The revenue of such a facility is generated only partly through


the treatment of produce, with other services—such as the irradiation of surgical utensils and packaging—actually constituting a larger share of income. In the absence of demand for these other services, and only a seasonal demand for treatment of tropical fruit in the short-term, the investment in a facility in Cairns cannot be justified based on a purely commercial basis. The long-term benefits of this facility to the economy of the Cairns region would, however, be very significant. Availability of irradiation treatment in Cairns would allow direct export of mangoes and other tropical fruits through Cairns Airport to destinations including Malaysia, China, New Zealand and the United States, in turn supporting the viability of new international passenger services between these markets and Cairns.

In time, this facility could further enhance the viability of international passenger services by enabling importation, through Cairns Airport, of surgical utensils and packaging manufactured in Asia that require irradiation upon arrival in Australia. For an Asian airline, the ability to make significant cargo revenue on each flight both to and from Cairns could make an otherwise marginal service very attractive.

c. Investment in tourism and tradeThe Passenger Movement Charge currently applied to departures from Australia is an over-recovery of the costs of providing border services. Rather than reduce or abolish this charge, the PMC revenue generated through airports in northern Australia that is above that genuinely required for cost-recovery could be invested in growing tourism and international trade in the region. Such investment could include building the capacity of local destination marketing organisations, providing financial support for the establishment of new international services, sponsoring major events, and bringing trade delegations to the region to build exports.

d. Multimodal transport integration.Whereas exports of bulk mineral resources and agricultural commodities from Australia’s northern regions enjoy scale economies that have allowed for significant capital investment to develop efficient supply chain infrastructure (rail and ports in particular), the more fragmented tropical produce, dairy and beef industries of the region lack the capacity to invest in the transport and related infrastructure that would allow them to grow their exports.

Primary producers often find that even where air cargo services exist at a nearby airport that are capable of transporting their exports to international markets, the land transport component—from the farm to the airport—is not efficient or cost-effective. Farmers on the Atherton Tablelands, for example, are constrained by the inability of the both the Kuranda Range road and Gillies Highway to take B-double trucks. Although the Kuranda Rail line extends from Cairns up through Kuranda to Mareeba, Dimbulah and beyond (with a spur to Atherton), this line is not used for freight. Even the main rail line from Brisbane to Cairns carries almost no perishables freight, and refrigerated rail services are not available north of Townsville.

The availability of northbound road freight is a further constraint. Many farmers report that as there is far more available capacity on trucks heading south to Brisbane and southbound rates are generally lower (southbound is viewed as a


backload), it is generally easier to send their perishables much further by road to Brisbane than to the international airport in Cairns.

If the Atherton Tablelands is—consistent with the Australian Government’s objective of growing agricultural exports to Asia—to greatly increase exports of its tropical produce, dairy products and beef over the coming decade, an efficient system for transporting these products to nearby airports and sea ports must be developed. The Kuranda rail line currently runs past Cairns Airport on the opposite side of the Captain Cook Highway. It may be viable to use the Kuranda rail line to efficiently move bulk produce from the Atherton Tablelands down to Cairns, with a multimodal transport hub developed along the stretch of the line adjacent to Cairns Airport to serve as an interface to either international air cargo services from the airport, continuing rail services to sea ports in Cairns and Townsville, or road transport to other destinations.

e. Connecting the Pacific with ASEAN.Most of the Pacific Island nations have little or no direct air connectivity with Asia, and no nation in Polynesia or southern Melanesia is directly connected by air to the ASEAN region. This lack of connectivity imposes similar constraints on economic growth in these countries as are faced by parts of northern Australia, such as limiting inbound tourism and exports of perishables.

Figure 17: Air connectivity of Pacific Islands nations with Asia and Australasia

This lack of direct aviation capacity is due, to a large degree, to the dual factors of distance and demand; the nations of the Pacific are too distant from Asia to operate services using narrow-body jets, but lack the demand (for now) to reliably (and profitably) fill wide-bodied aircraft on direct services from Asia.

The ability of international airports in northern Australia to attract and retain direct services from Asia could be enhanced by collaborating with airports of the Pacific Island nations. Cairns Airport is ideally positioned between the major


ASEAN hub airports and the Pacific Island nations of Vanuatu, Fiji, New Caledonia, Samoa and the Solomon Islands, allowing services to be operated connecting these two regions with each other as well as with northern Australia. The combined demand of Cairns and a destination such as Fiji or Vanuatu (for example), along with the additional cargo revenue, may also be sufficient to attract a service using a wide-bodied jet to/from a large market such as Kuala Lumpur, Shanghai or Guangzhou.

Figure 18: Cairns Airport could become a passenger and cargo hub between the Pacific Islands and Asia

There are presently a number of impediments to airports in northern Australia pursuing such opportunities, including that Australia’s bilateral Air Service Agreements do not presently allow such an arrangement. Impediments include that:

Australia’s ASA with Fiji grants beyond rights to designated airlines of Australia to Honolulu, Mainland USA, Canada, Mexico, South America and beyond, but does not grant rights beyond Australia to the designated airline of Fiji;

Australia’s ASA with Fiji only lists BNE, SYD and MEL as Australian destinations.

Australia’s ASA with the Cook Islands only grants the designated airline of the Cook Islands ‘any three points in Australia’;

Australia’s ASA with the Cook Islands grants beyond rights to the designated airline of Australia (any three points) but no beyond rights to the designated airline of Cook Islands;

Australia’s ASA with Samoa grants the designated airline of Samoa only access to ‘any three points in Australia’. This ASA also grants beyond rights to the designated airline of Australia (to North & South America plus any three points from: Auckland, Nadi, Noumea, Nukualofa, Vila), but beyond rights to the designated airline of Samoa are limited to points in the area bordered by Australia-PNG-Palau-the Marshall Islands-French Polynesia and NZ.

Australia has not established an Air Service Agreement with Vanuatu, New Caledonia or the Solomon Islands; and


Australia’s separate Air Service Agreements with Singapore and Malaysia each grant the designated airlines of these countries only Auckland as a point beyond Australia.

Australia’s Air Service Agreement with Brunei Darussalam grants the designated airline of Australia points before and beyond Brunei Darussalam, but grants the designated airline of Brunei Darussalam access only to Darwin and Perth, with no intermediate or beyond rights.

Australia’s bilateral agreements therefore preclude the establishment of a service between the ASEAN and the Pacific Islands regions, via an airport in Australia, that is operated by an airline based at either end of such service, as only an Australian-designated airline would have the requisite traffic rights.

f. Beyond rights for Asian carriers to North America.In 2006 the Australian government denied Singapore Airlines its request for access to the Pacific route—the right to use an Australian airport as an intermediate point between Singapore and the United States, including the right to carry passengers to and from Australia on that route. Although the government recognised at that time “the need to provide reasonable opportunities for foreign carriers committed to Australia to grow their operations here … [and] to attract and retain major foreign airlines to Australia to provide competition and improve our access to global trade and tourism markets”, the designated airlines of Singapore still do not have access to the Pacific Route, and under the current Air Service Agreement are only granted Auckland as a point beyond Australia.

Granting the designated airlines of Australia’s Air Services Agreement partners in ASEAN the right to fly to points in North America through an airport in northern Australia would be a powerful incentive for the establishment of international services. A service connecting Singapore and Los Angeles (for example) through Cairns would not only connect the Great Barrier Reef with one of its largest traditional visitor markets (North America) and the rapidly growing visitor markets in the ASEAN region, but would also provide efficient connectivity—through existing domestic flights—to these markets for the regional centres of northern Queensland, central Australia (Alice Springs and Uluru) and Perth (which does not currently have direct flights to North America).

g. Grow trade with Papua New Guinea


As our closest international neighbour at only 90 minutes by air from Cairns, the relationship between Far North Queensland and Papua New Guinea is a close and important one. Many Cairns-based businesses derive a significant portion of their revenue from their activities in PNG, and trade in both directions is an important economic driver for both PNG and Far North Queensland.

With the economy of PNG expected to grow by 6.0 per cent in 2014, and a staggering 21.0 per cent in 201543—led by the commencement of gas exports in late 2014—building an even closer relationship with PNG can only serve to benefit the economy of the Cairns region.

The ability for the Cairns region to grow exports to PNG is impeded by that fact that PNG’s only international airport, Jacksons Airport in Port Moresby, is an extremely inefficient and unreliable entry point for international cargo. Aside from significant issues with congestion and typical backlog on freight clearance, issues with corruption associated with transfer of goods through the airport are widely reported.44

h. Relaxation of ownership and control requirementsWithin the current market conditions in Australia, and as evidenced by Jetstar Australia’s withdrawal of international services from Darwin, it is highly unlikely that an Australian-designated international airline will establish new international services using aircraft based at an airport in northern Australia any time in the foreseeable future. Acknowledging that these airlines are, quite appropriately, free to make this decision based on commercial grounds consistent with their respective strategies and in the interests of their shareholders, it is nonetheless a major impediment to the economic wellbeing of northern Australia. Whereas Australia’s airlines have the option to grow their business by establishing foreign subsidiaries in high-growth markets, airports and the communities they support have no such option available to them.

The international connectivity, and by extension the economy, of northern Australia could benefit greatly by the airports in northern Australia having the freedom to pursue the establishment of a foreign carrier’s operations base for international operations, without the requirement for the carrier to establish an Australian subsidiary in accordance with the current ownership and control provisions. Australia’s bilateral agreements could be renegotiated to provide this carrier with Australian designation to operate international services (effectively unlimited seventh freedom rights) only from specified airports in northern Australia. Further to that, the government could consider granting restricted ninth freedom (cabotage) rights to the carrier, conditional upon the service originating from or terminating at the airport in northern Australia that the airline is using as a base. This would allow the airline to feed traffic into its international services from a large catchment.

Unilateral liberalisation of ownership and control restrictions by the Australian Government would not, ceteris paribus, be enough to compel an Asian airline to

43 ADB. Asian Development Bank Outlook 2014. Manila.

44 Advance Cairns - http://www.advancecairns.com/files/media/original/0a2/f3c/98f/pre-clearance-customs-position-paper-feb-2013.pdf


establish a base in northern Australia. The airline would still make its decision based on commercial feasibility, and any new service would be subject to the destination state approving the designation of a foreign carrier for the purposes of securing Australia’s traffic rights, but this liberalisation of airline ownership and control would at least give the airports of northern Australia far broader scope for securing international services.


8. Recommendationsa. The establishment of Special Economic Zones in northern Australia.

The Australian Government, along with the governments of Queensland, the Northern Territory and Western Australia, should confirm support for the principle of a Special Economic Zone or Zones in northern Australia, and fund an independent analysis of options for implementation of such zones.

b. Further liberalisation of international airline operations. Although the Australian Government has made significant progress in liberalising international air services under the bilateral framework, the benefits of this work have mainly accrued to the major capital city airports rather than secondary airports in northern Australia.

The Australian Government should grant (where these rights are not already granted) 5th Freedom rights to ASEAN-based airlines to access the Pacific Islands nations, North America and New Zealand via international airports in northern Australia.

c. Liberalisation of airline ownership and control.The Australian Government should waive the airline ownership and control restrictions to allow a foreign carrier to establish international operations as a designated carrier for the purposed of Australia’s Air Service Agreements, using aircraft based at an airport or airports in northern Australia.

This is in line with the Productivity Commission’s recommendation that “Australia should negotiate with its bilateral partners to incorporate in its own ASAs more liberal means of designating airlines which do not rely on ownership restrictions.”

d. Reinvest the Passenger Movement Charge. The PMC revenue generated through airports in northern Australia that is above that genuinely required for cost-recovery should be invested in growing tourism and international trade in the region. Such investment could include building the capacity of local destination marketing organisations, providing financial support for the establishment of new international services, sponsoring major events, export-building infrastructure, and bringing trade delegations to the region to build exports.

e. Infrastructure Grants.The Australian Government along with the respective State and Territory Governments should establish a Northern Australia Export-Building Grants Program, to provide supplemental funding to export-building projects that will stimulate regional economic growth but may not provide immediate returns sufficient to attract 100% private investment. Examples of potential projects include the establishment of irradiation facilities in Cairns for produce export, creating a rail freight system and multimodal transport hub on the Kuranda Rail line, and construction of an export-focused milk processing plant on the Atherton Tablelands.


Decentralised Public Sector.The Australian Government and Queensland Government should promote the economic diversification of North Queensland’s significant urban centres through the establishment of large centres of public sector employment in these centres.

f. Pre-clearance of cargo to Papua New Guinea.The Australian Government should negotiate an agreement between Australia and PNG to facilitate the establishment of customs pre-clearance for cargo travelling between Cairns and airports in PNG.

g. Establish a Papua New Guinea Consulate in Cairns.The Australian Government should negotiate a joint funding arrangement with the government of Papua New Guinea for the establishment of a PNG Consulate in Cairns.


Annexe A: Abbreviations

ASAASEANBNECAGRCASA

Air Services AgreementAssociation of South-East Asian NationsIATA code for Brisbane AirportCompound Annual Growth RateCivil Aviation Safety Authority

CNSGDPGRP

IATA code for Cairns AirportGross Domestic ProductGross Regional Product

GSPGross State Product

IATAThe International Air Transport Association

ICAOInternational Civil Aviation Organization

IOSAIATA Operational Safety Audit programme

LCCLow Cost Carrier

MELMKYNQAPMCRPK

IATA code for Melbourne (Tullamarine) AirportIATA code for Mackay AirportNorth Queensland AirportsPassenger Movement ChargeRevenue Passenger Kilometres

RPTRegular Public Transport (scheduled flights-not charters)

SYDUSOAP IATA code for Sydney Airport

Universal Safety Oversight Audit Programme (administered by ICAO)



Annexe B: Reference List

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Airbus 2014, Global Market Forecast for 2013-2032 “Future Journeys”. Available at http://www.airbus.com/company/market/forecast/

ASEAN Secretariat 2011, Master Plan on ASEAN Connectivity, Jakarta. Available at http://www.asean.org/resources/publications/asean-publications/item/master-plan-on-asean-connectivity-2

Australian Government (2012) Australia in the Asian Century White Paper p. 214. Available at http://www.asiaeducation.edu.au/verve/_resources/australia-in-the-asian-century-white-paper.pdf

CAPA Centre for Aviation, The Aerotropolis – a strategy, not a project. ‘Aerotropolis EMEA’ Conference report: Part 1. Available at http://centreforaviation.com/analysis/the-aerotropolis--a-strategy-not-a-project--aerotropolis-emea-conference-report-part-1-178262

Deloitte 2013, Positioning for prosperity? Catching the next wave, Building the Lucky Country #3. Available at http://www.deloitte.com/view/en_AU/au/news-research/luckycountry/prosperity-next-wave/index.htm

Farole, T and Gokhan A, 2011, Special Economic Zones – Progress, Emerging Challenges, and Future Directions, The World Bank.

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IATA 2007, Airline Liberalisation, IATA Economics Briefing No. 7. Available at http://www.iata.org/whatwedo/Documents/economics/IATA_AirlineLiberalisation.pdf

IBISWorld 2014, International Airlines in Australia, Industry Report I4901.

IBISWorld 2014, Domestic Airlines in Australia, Industry Report I4902.

Intervistas, The Economic Impact of Air Service Liberalization. Available at http://www.intervistas.com/downloads/Economic_Impact_of_Air_Service_Liberalization_Final_Report.pdf

Jansen, Marion and Piermartini, Roberta, Temporary Migration and Bilateral Trade Flows. World Economy, Vol. 32, Issue 5, pp. 735-753, May 2009.


Linehan V, Thorpe S, Andrews N, Kim Y & Beaini F 2012, Food demand to 2050: opportunities for Australian agriculture, Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) Outlook conference paper no. 12.4, Canberra, www.adl.brs.gov.au.

North Queensland Airports 2014, Submission from North Queensland Airports to the Joint Select Committee on Northern Australia. Submission No. 185. Available at http://www.aph.gov.au/parliamentary_business/committees/house_of_representatives_committees?url=jscna/subs.htm

North Queensland Airports 2014, ASEAN Open Skies – Relevance to Northern Australia’s Economic Development, Submission to the Joint Select Committee on Northern Australia

PPC Haanappel, ‘Airline Ownership and Control, and Some Related Matters’, (2001) 26 Air & Space Law, No.2, p.90.

Productivity Commission, International Air Services, Inquiry Report (Report No.2) (Ausinfo, Canberra, 1998). Available at http://www.pc.gov.au/projects/inquiry/international-air-services/docs/report

Queensland Government, Department of State Development, Infrastructure and Planning, Economic Directions Statement Queensland Airports 2013-2023. Available at http://www.dsdip.qld.gov.au/economic-development/economic-directions-statement-queensland-airports-2013-2023.html

Queensland Treasury and Trade 2013, Experimental Estimates of Gross Regional Product 2000-01, 2006-07 and 2010-11. Available at http://www.qgso.qld.gov.au/products/publications/experimental-estimates-grp/

Queensland Treasury and Trade 2013,Queensland Productivity Update:2011-12. Available at http://www.qgso.qld.gov.au/products/publications/estimates-qld-productivity-performance/qld-productivity-update-2011-12.pdf

Rauch J & Trindade V, 2002, Ethnic Chinese Networks In International Trade, The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 116-130, February.

Regional Australia Institute 2013, Rethinking the Future of Northern Australia’s Regions. Available at http://www.regionalaustralia.org.au/wp-content/uploads/2013/11/Rethinking-the-future-of-northern-Australias-regions1.pdf

The World Bank, International Finance Corporation 2008, Special Economic Zones – Performance, Lessons Learned and Implications for Zone Development. Available at https://www.wbginvestmentclimate.org/uploads/SEZs%20-%20Performance,%20Lessons%20Learned%20and%20Implications%20for%20Zone%20Development.pdf

Tretheway, Mike 2003, ‘Fighting cargo’s corner’, Airline Cargo Management, December, pp. 32-6.

World Economic Forum, Travel and Tourism Competitiveness Report 2013. Available at http://www.weforum.org/issues/travel-and-tourism-competitiveness

World Trade Organization 2008, Liberalization of Air Transport Services and Passenger Traffic. Available at http://www.wto.org/english/res_e/reser_e/ersd200806_e.pdf


Annexe C: Freedoms of the AirFirst Freedom of the Air - the right or privilege, in respect of scheduled international air services, granted by one State to another State or States to fly across its territory without landing (also known as a First Freedom Right).

Second Freedom of the Air - the right or privilege, in respect of scheduled international air services, granted by one State to another State or States to land in its territory for non-traffic purposes (also known as a Second Freedom Right).

Third Freedom of The Air - the right or privilege, in respect of scheduled international air services, granted by one State to another State to put down, in the territory of the first State, traffic coming from the home State of the carrier (also known as a Third Freedom Right).

Fourth Freedom of The Air - the right or privilege, in respect of scheduled international air services, granted by one State to another State to take on, in the territory of the first State, traffic destined for the home State of the carrier (also known as a Fourth Freedom Right).

Fifth Freedom of The Air - the right or privilege, in respect of scheduled international air services, granted by one State to another State to put down and to take on, in the territory of the first State, traffic coming from or destined to a third State (also known as a Fifth Freedom Right).

ICAO characterizes all "freedoms" beyond the Fifth as "so-called" because only the first five "freedoms" have been officially recognized as such by international treaty.

Sixth Freedom of The Air - the right or privilege, in respect of scheduled international air services, of transporting, via the home State of the carrier, traffic moving between two other States (also known as a Sixth Freedom Right). The so-called Sixth Freedom of the Air, unlike the first five freedoms, is not incorporated as such into any widely recognized air service agreements such as the "Five Freedoms Agreement".

Seventh Freedom of The Air - the right or privilege, in respect of scheduled international air services, granted by one State to another State, of transporting traffic between the territory of the granting State and any third State with no requirement to include on such operation any point in the territory of the recipient State, i.e the service need not connect to or be an extension of any service to/from the home State of the carrier.

Eighth Freedom of The Air - the right or privilege, in respect of scheduled international air services, of transporting cabotage traffic between two points in the territory of the granting State on a service which originates or terminates in the home country of the foreign carrier or (in connection with the so-called


Seventh Freedom of the Air) outside the territory of the granting State (also known as a Eighth Freedom Right or "consecutive cabotage").

Ninth Freedom of The Air - the right or privilege of transporting cabotage traffic of the granting State on a service performed entirely within the territory of the granting State (also known as a Ninth Freedom Right or "stand alone"cabotage).

Source: Manual on the Regulation of International Air Transport (Doc 9626, Part 4)


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