2. Case Study The impact of microeconomic reforms on the airline industry in Australia.

3. Lesson Outcomes What we should be able to do after today’s lesson …. Define microeconomic reform Describe how the Australian airline industry has been reformed during the past decade Evaluate how microeconomic reform has affected the Australian airline industry

4. Content Preview The “olden days” of Australian aviation The Microeconomic Reforms implemented during the 1990s The Results of Microeconomic Reform

5. The “Olden Days” (Before MER) Until 1990 Australia operated with a “two airline” policy. This policy dictated that only Qantas (publicly owned) and Ansett (privately owned) could carry domestic passengers.

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

7. The US Experience of MER Between 1978 and 1990 fares declined 30% in real terms Overall, travelers saved around $US10 billion per year Seat numbers on planes have increased, but carrying rates have gone from 52% to 61% Internationally, things had started to change. In 1978 the US air market was deregulated. The impact was immediate:

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

9. Reform No. 1 - Deregulation In 1990 the “two airline policy” was abolished. This allowed for the introduction of competitors into the market. However, the resulting competition has lead to the failure of Compass (Mk 1 and 2), Impulse and Ansett.

10. Reform No. 2 - Privatisation In 1992 Qantas purchased Australian Airlines (formally TAA). A year later the federal government sold 25% of Qantas to British Airways. In 1995 the remaining share of Qantas was sold. The total sales price was $2.1 billion.

11. Reform No. 3 – New Supervision With relaxed regulatory requirements, increased supervision became necessary. In 1991 Dick Smith was appointed to head the Civil Aviation Authority (CAA). He suggested the concept of “affordable safety”. This idea was taken up by the Civil Aviation Safety Authority.

12. Problems with “Affordable Safety” The results of this policy were disastrous. Three days before Christmas in 2000 six of Ansett’s planes were grounded due to large cracks in the motors. The same problem re-occurred at Easter in 2001. These problems contributed to the downfall of the airline.

13. MER – The Results So Far… Some positive results have been gained from changes in the airline industry. Prices have fallen in real terms – it is cheaper to fly now than in 1989 Passenger numbers have increased by around 75%. Employment in the industry is 19% higher than in August 1990.

14. What the graph reveals about MER and airline costs…..

15. What the graph reveals about MER and employment…

16. Think – Pair - Share Let’s review what we have discovered…. Spend the next 30 seconds and think about the benefits and problems MER has brought to the Australian airline industry Now make a list of the benefits/problems Now find a partner and compare your lists