The Australian domestic air freight market: consequences of partial deregulation

Abstract

This paper discusses regulation and the economics of the air freight industry before turning to an examination of the consequences of the Commonwealth in 1981 largely removing its economic controls on the industry. Regulation provides the framework in which the air freight industry operates. The various governmental regulatory systems are outlined and a historical perspective is provided of the growth and structure of the industry since 1946. The discussion of the economics of the industry seeks to highlight its unique characteristics and draw together the demand and supply relationships. The events and reasons that led up to the Commonwealth largely withdrawing from economic regulation are considered as well as public and industry views of air freight regulation. The Commonwealth began to relax economic controls of the industry in 1977 when it allowed two specialist freight operators to import aircraft and operate air freight services between the mainland and Tasmania. The removal of air freight tariffs from the Airline Agreement in 1981, together with further relaxation of entry, coincided with a period of declining and even negative growth rates in Australia. As a result the few new entrants, as well as several smaller existing companies, were severely affected to the extent that some companies ceased operations. Despite the adverse economic conditions, however, there is evidence both of faster growth of the volume of air freight and of lower prices as a result of deregulation. Increasing price and service competition with the road sector is very noticeable. Both statistical considerations and industry experience strongly support the view that the growth in the air freight sector was suppressed because of being regulated through the two airline agreement