Domestic Air Cargo Industry in Australia - Bureau of Infrastructure ...

BTE Publication SummaryDomestic Air Cargo Industry in AustraliaOccasional PaperThe discussion of domestic aviation issues in Australia has historically focusedon the passenger market. This reflects the dominance of passenger transportin the operations of the domestic airlines and the relatively small proportion ofdomestic cargo that is carried by air. Despite this emphasis on passengeroperations, the Commonwealth Government has implemented regulationsspecifically directed at air cargo and the major airlines have evolved separatestrategies for cargo traffic in recent years. Cargo is now an important elementof Australia's domestic aviation industry and is a significant source of incomefor several carriers. This Paper presents the findings of a BTE study of thedomestic air cargo industry in Australia.SubjectSeriesDateA to ZSearchResultsPrintExitGO BACK

FOREWORDThis Paper presents the findings of a BTE study of the domestic aircargo industry in Australia. It was prepared in the FinancialAssessment Branch by Mr R. K. Starr. A preliminary version of thePaper was passed to the Independent Review of Economic Regulation ofDomestic Aviation which, amongst other things, was required toconsider the implications of the regulatory framework for the airfreight sector.A number of organisations contacted during the course of the studyprovided extensive information on the development and operation of theindustry. I would particularly like to thank the officials from theai rl i nes , freight forwarders and Comnonweal th departments for theirassistance.D. J. McLENNANAssistant DirectorFinancial Assessment BranchBureau of Transport EconomicsCanberraSeptember 1987iii

CHAPTER 7CHAPTER 8CHAPTER 9APPENDIX IREFERENCESRATING PRACTICESStructure of freight ratesTrends in ratesFUTURE PROSPECTSMarket sizeIndustry structure and operationCONCLUDING REMARKSFREIGHTER NETWORKS OF DOMESTIC AIRLINES ANDFORWARDERSPage555558656568757989ABBREVIATIONS 95vi

2.12.22.32.43.14.14.25.15.26.17.1Characteristics of domestic air cargoAustralian domestic airline cargo traffic by majorroutes, 1980-81 to 1984-85Directional imbalances in Australian domestic airlinecargo traffic on major routes, 1984-85Australian domestic airline cargo traffic by majorai rport, 1984-85Major events in development of Comnonwealth Governmentregulation affecting the domestic air cargo industry,1952 to 1978Major events in development of Comnonwealth Governmentregulation affecting the domestic air cargo industry,1979 to 1987Changes in trunk airline traffic and Gross DomesticProduct, 1976-77 to 1985-86Australian domestic air cargo traffic by majorairlines and airline groups, 1981-82 to 1985-86Australian domestic air cargo task by majorairlines and airline groups, 1981-82 to 1985-86Domestic airline cargo traffic by aircraft configurationand ai rl i ne, 1984-85Scheduled air freight rates for selected routes byoperator, October 1986Page49111317263540415056vi i

7.2Annual change in average yield in real terms forAustralian Airlines cargo and passenger traffics,1976-77 to 1985-86 61Page7.38.11.1I .2I .3I .41.5Air freight rates on the Sydney-Melbourne route inreal terms, 1979 and 1986 63Forecast average annual growth rates for domesticairline1986 traffic, to 2000 66Australian Airlines' freighter network, November 1986 80AAF's freighter network, 1986 November 82TNT Air's overnight freighter network, interstate andQueensland routes, November1986 84TNT Air's daytime freighter network, NSW and SA routes,November 1986 86Wards Express and Security Express - Country Couriersfreighter network, April1987 87v i i i

FIGURESPage2.1 Australian domestic airline cargo traffic, 1946 to 1986 72.2 Australian domestic airline passenger traffic, 1946to 1986 107.1 Published domestic airline freight rates in reai terms,1977 to 1986 60ix

CHAPTER 1INTRODUCTIONThe discussion of domestic aviation issues in Australia hashistorically focused on the passenger market. This reflects thedominance of passenger transport in the operations of the domesticairlines and the relatively small proportion of domestic cargo that iscarried by air. Despite this emphasis on passenger operations, theCommonwealth Government has implemented regulations specificallydirected at air cargo and the major airlines have evolved separatestrategies for cargo traffic in recent years.Cargo is now an important element of Australia's domestic aviationindustry and is a significant source of income for several carriers.For example, it accounted for $66 million or 8 per cent of the revenueearned by Australian Air1 ines in 1985-86 (Australian Airlines 1986,8) .lAir transport is a major component of the express freight and couriermarkets and is an important element of domestic distributionactivities. There are also links with airline passenger services androad transport operations.Domestic air cargo was subject to detailed regulation by theCommonwealth Government until the early 1980s when most directcontrols were removed. Subsequent developments in this sector maytherefore provide some information on responses to regulatory changein the Australian environment. They may also assist in theidentification of the impact on air cargo operations of future changesin the regulation of airline passenger services.1. The Australian National Airlines Comnission operated as TransAustralia Airlines (TAA) until August 1986 when it was renamedAustralian Airlines. The present trading name is used in thisPaper where the current situation or events after the name changeare involved. In all other references the earlier name is used.1

Occasional Paper 87OUTLINE OF THE PAPERThis Paper describes the development of Australia's domestic air cargoindustry, its current structure and operations and potential futuredevelopments.The two basic components of the air cargo market are freight and mail.The Paper concentrates on freight as it accounts for almost 90 percent of domestic air cargo traffic but there is also some discussionof mail. Although attention is focused on scheduled airlineoperations due to the availability of data, related activities such asfreight forwarding and charter operations are also discussed.The characteristics of air cargo, the comnodities involved and thesize of the domestic air cargo market are described in Chapter 2.There is also a discussion of traffic patterns and competing modes.The evolution of the regulatory framework and the development of theindustry up to 1978 are considered in Chapter 3 while later events arediscussed in Chapter 4. Legislative provisions are outlined and thereis a discussion of the impact of the two ai rl ine pol icy on the aircargo industry. Changes in air line operating strategies and equipmentare also described.Chapter 5 covers the current structure of the domestic air cargoindustry. The impact of fre ight forwarders and their links withcarriers are highlighted. Current operational practices areconsidered in Chapter 6 in terms of aircraft configuration, operatingcosts, freighter aircraft, service networks and capacity utilisation.Rating practices are covered in Chapter 7. The structure of freightrates, including the availability of discounts, is described and thereis a discussion of trends in rates in recent years.Chapter 8 outlines potential future developments in terms of marketsize and industry structure. A sumnary of the main points in thePaper is presented in Chapter 9.2

CHAPTER 2 THE AIR CARGO MARKETThe domestic air cargo market can be considered in terms of thecharacteristics of air cargo, market size, traffic patternsandcompeting services.CHARACTERISTICS OF AIR CARGOCargo moved by air generally has a number of characteristics whichdistinguish it from the broader domestic cargo market. It tends torequire fast transit times and high quality of service although thereis wide variation in the requirements of individual shipments.Commodities moved by air often have high unit values. However, thereare also cases such as spare parts where a relatively inexpensive itemhas a high value in use, such as the minimisation of idle time forexpensive equipment.Table 2.1 provides information on the major types of comnoditiesshipped by air on domestic routes in Australia and the reasons forusing air transport. The major traffics include newspapers, businessdocuments, cinema films, perishables and spare parts. Detailedinformation on the comnodity composition of Australia's domestic airfreight is not available.Some of the comnodities which are moved by air initially appear to bebetter suited to other modes such as road transport. However, freightrate discounts resulting from factors such as the need for backloadingmay make air transport an attractive option.FreightDelivery schedules offered by major carriers indicate that thedomestic air freight market can be divided into four major categories.The areas are same-day express, overnight express, next-day and offpeak.Same-daySome ofexpress services provide delivery on the day of lodgment.this traffic is carried on aircraft which are primarily3

Occasional Paper 87TABLE 2.1CHARACTERISTICS OF DOMESTIC AIR M?GOSensitivitySh ipmen t Types of favouringtype Price T irne goods a ir transportUrgent Low High Urgent smal 1 Fastest deliveryshipments goodspackagesandLower damageBusinessratesdocuments'Computer tapesMed i ca 1equipmentNewspapersVi tal sparepartsAir mailIntermediate Moderate Moderate Cinema films Speed ofand perishable Cut f 1 owers deliveryshipments LivestockFoodstuffsRe1 1 i ty iabiLower damagePersonal effects ratesPharmaceuticals Control ledenvironmentRegularshipmen tsHighLow Records ReducedWhite goodspackaging costsAutomotive parts More flexibilityClothingin planning andComputersdistributionTool SReduced stocklevels andopportunity costof capital tiedup duringtransportLower damage andpi lferage ratesSource Derived from BTE (1980, 24).4

Chapter 2involved in the movement of passengers. However, a large part of themarket is served by freight forwarders using small freighter aircraft.The freight carried is mainly business documentation, with themovement of bank papers between country centres and capital citiesbeing one of the major traffics.Overnight express cargo is probably the largest category in terms ofrevenue. This traffic mainly involves door-to-door overnighttransport with lodgment by 5 pm on a working day and guaranteeddelivery by 9 am on the following morning. It is generally carried onservices where the aircraft do not uplift passengers.The third category of air cargo also requires fast delivery but thetransit time is longer. Cargo is lodged by 5 pm on a working day withdelivery during the late morning or afternoon of the following day.This traffic may be carried on overnight freighter services wherecapacity is available but in many cases it is moved on passengerservi ces.Off-peak cargo is the fourth broad category of air cargo. Thistraffic is carried when space is available on aircraft and deliverymay be up to several days after lodgment.Mai 1Mail carried on domestic air services can be divided into twocategories. Air mail accounts for the majority of traffic and coversarticles which require a high quality of service and rapid delivery.Surface mail by air is mail that would normally be carried by surfacetransport. It travels by air when capacity is available on aircraftin order to speed up delivery. In this Paper, the term air mailcovers all mail carried by air.Mail has a number of characteristics which affect the transport task.Transport arrangements are constrained by the processing system whichrequires the mail to arrive in the destination city by 3 am if it isto be delivered on that day. The volume of traffic on individualroutes is highly volatile and hence it is often difficult for theairlines to provide adequate capacity while maintaining satisfactoryloadings of cargo.MARKET SIZEAir transport has traditionally accounted for a small proportion oftotal cargo movements in Australia on a weight basis. The availabledata indicate that scheduled air transport services carry around 0.01per cent of Australian domestic freight in terms of tonnes consigned5

Occasional Paper 87and 0.06 per cent on a tonne-kilometre basis (BTE 1984, 9-10).l Airfreight represents approximately 0.3 per cent of interstate freightmovements in terms of tonnes consigned (Australian Bureau ofStatistics 1986, 3). However, the share would be significantly higheron a value basis due to the high average unit value associated withair freight (BTE 1980, 22-23).2 Air transport is also very importantin certain comodity markets.The air cargo market has expa,nded significantly in the post-warperiod. The growth has been driven by a variety of factors includingincreased population, higher income levels, growth of time-sensitiveindustries such -as finance and advertising, moves to centralwarehousing, computerisation and adoption of the just-in-timeprinciple in manufacturing. Work undertaken by the BTE suggests thatunder, current conditions a 10 per cent rise in real income (asmeasured by Gross Domestic Product) would result ina 14 per centincrease in air freight traffic (BTE 1986, 41).Figure 2.1 illustrates the trends in the amount of freight and mailtraffic carried on domestic airline services between 1946 and 1986.Air freight increased from 6.7 million tonne-kilometres to 137.3million tonne-kilometres over this period while mail traffic rose from1.3 million tonne-kilometres to 18.6 million tonne-kilometres. Theoverall airline cargo market has generally followed the trend in airfreight traffic as a result of the dominance of the latter sector incargo movements.Several broad stages in the development of the air freight market areapparent in Figure 2.1. From 1946 to 1956 air freight tonnekilometresincreased at an average compound rate of 24 per cent perannum due to strong growth in the Australian economy (Department ofTransport 1979b, 279). Between 1956 and 1961 the market declined by 7per cent per annum as a result of factors such as the rapid1.2.Department of Transport and Cohunications data on tonnes of cargocarried on domestic scheduled air services overestimate the tonnesof traffic consigned because a particular item is counted eachtime it passes through a major airport or is transferred to anaircraft with a different flight number. The level of doublecountingis not known with any accuracy but one carrierinterviewed during the study estimated that it was around 25 percent.Australia's international air freight market provides anindication of the potential variation in market shares based onweight and value. In 1984-85 air freight accounted for less than0.1 per cent of Australia's overseas trade on the basis of grossweight but around 14 per cent in value terms.6

Chapter 2176 -150 -150 -140 -130 --120-SC.r110-7.FEv) 100-mLg 90-C7la,cC.I,80-S 70-g 60-LluV50 -40 -30 -20 1Sources Department of Transport (1979b).Department of Aviation (1984c, 1987a).Figure 2.1Australian domestic airline cargo traffic,1946 to 19867

Occasional Paper 87development of interstate trucking, the increasing influence offreight forwarders and improved rail and shipping services. From 1961to 1974 there was a return to steady growth with an average increaseof 8 per cent per annum. In the following six years the level oftraffic was erratic, with the result that there was little growth inthe market between 1974 and 1980. The upward trend resumed after 1980with an average compound growth rate of 4 per cent per annum, althoughthere was a slight decline in traffic in 1986.The level of air mail traffic has generally been less variable thanair freight. There was moderate growth in air mail between 1946 and1959, a large increase in 1960 and generally steady growth averagingalmost 7 per cent per annum between 1960 and 1973. This was followedby a 17 per cent decline in traffic between 1973 and 1976 due tofactors such as industrial action affecting the domestic airlines andincreases in postage rates (Department of Transport 1979b, 254) .3 Themarket subsequently resumed its upward trend with averageannualgrowth of around 7 per cent between 1976 and 1986.There have been significant differences in the patterns of growth ofair cargo and passenger traffic in the post-war period. The levels ofairline passenger traffic between 1946 and 1986 are illustrated inFigure 2.2. Passenger traffic grew more rapidly than air cargobetween 1956 and 1980 and there were also significant differences inthe patterns of growth after 1980. The level of passenger-kilometresreached a historical peak in 1981, decl ined by 6 per cent over thefollowing two years and then recovered strongly. In contrast, airlinecargo traffic grew steadily between 1980 and 1985 before decliningslightly in 1986.The air cargo market is also seasonal as a result of variations infactors such as the level of retail sales. Traffic normally falls inthe March quarter (Department of Aviation 1987c, 17).TRAFFIC PATTERNSThe domestic air cargo market is characterised by large imbalances intraffic. Several routes account for a substantial proportion of theair cargo moved in Australia and backloading is limited in many cases.Table 2.2 contains data on movements of freight and mail on domesticscheduled airline services by major routes over the five years to3. The exclusion of air mail to Papua New Guinea from the domesticfigures also contributed to the decline.8

Chapter 21984-85. The importance of east coast movements and services betweenTasmania and the mainland is apparent. Recorded movements along theBrisbane-Sydney-Melbourne corridor accounted for 38 per cent ofoverall traffic in 1984-85. Traffic between Tasmania and the twomajor east coast airports accounted for a further 20 per cent of cargocarried by the airlines in that year.TABLE 2.2 AUSTRALIAN DOMESTIC AIRLINE CARGO TRAFFIC BY MAJOR ROUTES,1980-81 TO 1984-85a(tonnes)Routes 1980-81 1981-82 1982-83 1983-84 1984YearMe1 bourne-SydneyMelbourne-LauncestonSydney-BrisbaneMelbourne-AdelaideMe1 bourne-PerthSydney-AdelaideMelbourne-HobartMelbourne-BrisbaneBri sbane-Townsvi 11 eAdelaide-PerthSydney-CanberraSydney-PerthCai rns-Townsvi 11 eBri sbane-Cai rnsMelbourne-CanberraOther29 334 33 06119 399 18 46518 372 19 7789 892 9 0005 495 5 9975 987 5 5978 016 9 6922 832 3 6333 556 4 0794 537 3 3632 623 2 436765 1 8211 162 1 2211 832 2 2821 473 1 411269843125533 70526 90519 5607 5148 5305 1706 0313 9054 2662 5532 2082 3491 1451 8531 33931 58734 784 37 57528 807 29 12720 885 22 0868 972 10 43711 797 10 3915 205 6 0278 223 4 9064 182 4 3754 647 4 2992 530 2 9042 225 2 1772 103 2 0361 831 1 9182 035 1 4041 474 1 66727 751 28 308Total 142 259 153 091 158 620 167 451 169 637a. Includes movements of freight and mail in both directions. Basedon uplifts and discharges on domestic scheduled airline serviceswithin a particular flight number. Includes movements betweenairports which are not directly connected. Regardless of whetheran actual change of flight number is involved, all flights areconsidered to change flight number when passing through Adelaide,Brisbane, Cairns, Canberra, Darwin, Gove, Hobart, Melbourne, Perthor Sydney. Data therefore do not indicate ultimate originsanddestinations. Figures exclude comnuter and charter operators.b. Top 98 city pairs.Sources Department of Aviation (1983a, 1984a, 1985c, 1987b).Department of Transport (1982).9

Occasional Paper 871200011400108001020096009000c.," 84007800-7E7200v)2 6600c,g 60002 .- 5400l4800L8 4200SQJ v) 3600a 300012006001945 1950 1955 1960 1965 1970 1975 1980 1985YearSources Department of Transport (1979b).Department of Aviation (1984~~ 1987a).Figure 2.2 Australian domestic airline passenger traffic, 1946 to 1986Table 2.2 also indicates significant variationsin traffic growthrates on various corridors. The most rapid increases were recorded onroutes between the east coast and Perth, with traffic on theSydney-Perth and Melbourne-Perth corridors growing by 166 per cent and89 per cent respectively. This probably reflected the expansion ofdirect services on the Perth-east coast routes which replacedmovements through Adelaide. There were traffic declineson fourroutes as' a result of local influences.Table 2.3 shows the imbalances in traffic on the major corridors in1984-85. The figures record cargo weight and may underestimatetraffic imbalances as volume rather than weight is the determinant ofcapacity on many routes. In addition, the overall figures do notreveal movements at particular times of the day or year. Industry10

Chapter 2sources indicate that the major traffic imbalancesto Perth, Tasmania, Darwin and northern Queensland.are on the routesThese imbalances are reflected in capacity shortages on some forwardlegs. For example, 10 per cent of the mail consigned from the easternStates to Western Australia during 1984-85 either was not uplifted onthe intended flight or was offloaded en route due to aircraft capacityrestrictions (Australian Postal Comnission 1985, 3). Theopportunities for the development of pure air cargo servicesinAustralia have been significantly affected by the imbalances indomestic air cargo flows.TABLE 2.3 DIRECTIONAL IMBALANCES IN AUSTRALIAN DOMESTIC AIRLINE CARGOTRAFFIC ON MAJOR ROUTES, 1984-85aCargo (tonnes)Ratio ofFrm first To first outbound toRoute point PO int inbound trafficMelbourne-Sydney 21 729 15 846 1.4Melbourne-Launceston 16 142 12 985 1.2Sydney-Bri sbane 14 612 7 474 2.0Melbourne-Perth 5 754 4 637 1.2Me1 bourne-Adelaide 7 116 3 321 2.1Melbourne-Hobart 3 003 1 903 1.6Sydney-Adelaide 4 051 1 976 2.1Bri sbane-Townsvi 11 e 2 564 1 735 1.5Melbourne-Brisbane 3 253 1 122 2.9Adelaide-Perth 1 878 1 026 1.8Sydney-Canberra 1 357 820 1.7Sydney-Perth 1 150 886 1.3Bri sbane-Cai rns 799 605 1.3Townsvi 1 1 e-Cai rns 1 157 761 1.5Me1 bourne-Canberra 1 117 550 2.0a. Movement of freight and mail traffic on domestic scheduledairline services between two airports not necessarily directlyconnected but within the same flight number series. Data do notindicate ultimate origins and destinations. Figures excludecomnuter and charter operators.Source Department of Aviation (1987b, 6-10).

Occasional Paper 87Information on the major airports used for the movement of domesticair cargo in 1984-85 is presented in Table 2.4. This furtherillustrates the importance of east coast and Tasmanian operations andthe significant directional imbalances in traffic. Melbourne, Sydneyand Brisbane together handled 62 per cent of domestic airline cargo in1984-85 and the two Tasmanian airports accounted for an additional 13per cent.COMPETING SERVICESThe major competitor in the markets serviced by air transport isexpress road services. In recent years road transport operators haveattracted a substantial proportion of overnight freight from airtransport services on routes between adjacent cities. This hasparticularly affected the Melbourne-Sydney and Melbourne-Adelaideroutes. Factors in the growth of competition from road transportoperators include improvements to the national highway system andlimited increases in road freight rates. It appears that the traffictransferred to road transport has generally comprised lower ratedi tems.The competition from road transport has been less effective onservices between non-adjacent cities and on longer routes such asAdelaide-Perth where the transit time advantages of air transport arestill significant. In addition, the speed of air transport hasenabled it to retain late lodgment express traffic on routes betweenadjacent cities.There has also been significant, growth of combined road and airservices. In these operations, the freight is moved by road on onesector of the journey and by aircraft on the other sector.The development of competing road services has been encouraged by theactivities of freight forwarders. These organisations consolidatecargo from various shippers and use the mode that most efficientlymeets the delivery schedules required by their customers. It isreportedly common on some routes for freight accepted by forwardersfor air movement to be sent by road (Australian Flying 1986, 47;Transport and Distribution Letter 1986a, 5). One observer has claimedthat each night up to 40 tonnes of freight lodged for air expressdelivery on the Sydney-Melbourne and Melbourne-Adelaide routes isinfact moved by fast road vehicles (Age 1986, 3). Several organisationscontacted during the study also stated that the use of road vehiclesto transport cargo lodged as air freight is a comnon practice. Suchactivities would reflect the ability of road transport operators to12

Chapter 2TABLE 2.4 AUSTRALIAN DOMESTIC AIRLINE CARGO TRAFFIC BY MAJOR AIRPORT,1984-85~(tonnes)CargoA irport Inbound Outbound TotMe1 bourneSydneyLauncestonBrisbaneAdel aidePerthTownsvi 1 1 eHobartCairnsCanberraDarwinA1 ice Spri ngsOther40 54034 08820 95421 36712 8469 7593 6593 6912 0902 5021 8421 57814 72158 44740 28017 36615 0508 9489 3183 1812 3692 0811 4031 1539789 06398 98774 36838 32036 41721 79419 0776 8406 0604 1713 9052 9952 55623 784Total 169 637 169 637a. Covers freight and mail revenue traffic uplifted and discharged atmain Australian airports by domestic airlines on scheduledservices within Australia and between Australia and NorfolkIsland. Figures exclude comnuter and charter operators.Source Department of Aviation (1987b, 1-5).meet the delivery requirements of the overnight express market onselected routes under normal conditions.Sea transport is the only alternative to air movement on servicesacross Bass Strait. The substantial transit time advantages of airtransport on this route have resulted in the development of a largeair cargo operation which includes i terns that are normally moved byroad on mainland routes. As noted earlier, services across BassStrait account for a significant proportion of domestic air freightmovements.

CHAPTER 3 REGULATION AND INDUSTRY DEVELOPMENT TO 1978The domestic air cargo industry has been significantly affected bydirect Commonwealth Government regulation of air freight and air mailas we1 1 as by controls over airline passenger services. The latteractivities have impacted on the cargo market as a large proportion ofdomestic air cargo .is carried in the lower deck areas of passengeraircraft.The movement of air cargo has a1 so been 'affected by State governmentlicensing of air services on intrastate routes. Economic regulationis undertaken by all States except South Australia and Victoria. Themajor criteria applied to proposals for new freight services in theStates with economic regulation are the effects on the viability ofexisting airline passenger and freight services andthe impact onalternative forms of transport (Gawan-Taylor 1984a, 5; Review of NewSouth Wales Air Services 1986).This chapter out1 ines the evolution of Comnonweal th Governmentregulation and the development of the domestic air cargo industry upto 1978. The major events over this period are sumnarised in Table3.1.l Developments between 1979 and 1987 are discussed in Chapter 4.THE TWO AIRLINE POLICYCommonwealth Government regulation of the domestic air cargo industryhas historically distinguished between freight and mail. This partlyreflects the different shipper arrangements in the two sectors, withfreight being shipped by a variety of individuals and organisationswhereas a Comnonwealth authority is the sole shipper of mail.FreightDetailed economic regulation of Australia's domestic aviation industry1. For a detailed discussion of the evolution of the regulatorysystem see Poul ton (1981), Department of Aviation (1985a) and BTE(1985).15

Occasional Paper 87commenced with the Civil Aviation Agreement Act 1952 which came intoforce on 18 November of that year. This legislation provided thefoundation for the two airline policy under which access to majorroutes was restricted to TAA and Ansett.2 It was primarily directedat the passenger market but there were also provisions affectingcargo. Amongst other things, the Act required TAA and AustralianNational Airways (ANA) to keep under review air routes, timetables,freight rates and other related matters with a view to avoidingunnecessary overlapping of services and wasteful competition(Department of Transport 1979a, 37).3 The Comonwealth Government wasalso required to take all steps necessary to ensure that its freighttraffic was freely available to both airlines and that the holder of aGovernment warrant had a free option as to the service he would use.The Air1 ines Agreement was subsequently changed with the passage ofthe Civil Aviation Agreement Act 1957. This legislation clearlystated the objective of maintaining a two airline competitive systemon the trunk routes and strengthened the original rationalisationprocedures (Department of Transport 1979a, 37).Further legislation affecting the air cargo sector was enacted overthe following 15 years. The Airlines Equipment Act 1958 facilitatedthe purchase of 'new equipment by the two trunk airlines and introduceddetailed provisions for the rationalisation of aircraft fleets. Thelatter provisions were designed to ensure that neither airlinehadexcess capacity or a qualitative advantage in aircraft (Department ofAviation 1985a, 10).The Airlines Agreements Act 1961 consolidated all of the arrangementsand principles developed in the earlier legislation (Department ofAviation 1985a, 14-15). The Act also extended the rationalisationmachinery until 1977 and set out with greater precision the matterswhich the airlines agreed to keep under review. These mattersincluded timetables, aircraft types and capacity, freighterloadfactors and proposed variations in the levels of freight rates.2. In the discussion of trunk airline services in this Paper, theterm Ansett refers to Ansett Airlines of Australia (and itspredecessors) which is an operational division of Ansett TransportIndustries (Operations) Pty Ltd. Several other operationaldivisi'ons of the latter company undertake regional airlineservices and are identified in the Paper by their trading names.Ansett Transport Industries (Operations) Pty Ltd is a subsidiaryof Ansett Transport Industries Ltd which is one of the parties tothe 1981 Airlines Agreement.3. ANA was subsequently taken over by Ansett Transport Industries in1957.16

~~ ~~~ ~Chapter 3TABLE 3.1 MAJOR EVENTS IN DEVELOPMENT OF COMMONWEALTH GOVERNMENTREGULATION AFFECTING THE DOMESTIC AIR CARGO INDUSTRY, 1952TO 1978Year Developnent1952 Civil Aviation Agrement Act19521957 Civil Aviation Agrement Act19571958 Airlines Equiment Act 19581961 AirIines Agreements Act 19611972 Air1 ines Agreements Act 19721977 Approval for importation offreighters by two companies1978 Domestic Air TransportPol icy ReviewEffect on cargo sectorRequired trunk airlines to keepunder review matters such asroutes, timetables and freightrates in order to avoidwasteful competitionStated the objective of a twoairline competitive system andstrengthened the rational isationproceduresIntroduced detailedrationalisation procedures andfacilitated purchase of newaircraftDefined more precisely thematters the trunk airl ines agreedto keep under review includingfreight rates and freighter loadfactorsRequired trunk airl ines tostimulate air freightProvided for operation ofspecialist freight services byother carriers on trunk routesEnabled IPEC to operate largefreighters to TasmaniaRecomnended removal of freightfrom two airline policy andending of equal sharingprovisions for mailSourcePrepared by BTE.The Airlines Agreements Act 1972 was a response to growing criticismof certain aspects of the two airline policy. It more explicitlyrecognised the public interest obligations which the trunk airlinesundertook to fulfil in return for the retention of the policy(Department of Aviation 1985a, 35). Amongst other things, the Act17

Occasional Paper 87required the two trunk airl ines to stimulate air freight and promoteits development on a sound and economic basis. It also provided forthe introduction of other operators on non-trunk routes as well as theoperation of specialist freight and passenger services which, in theMinister's opinion, were not adequately provided by either TAA orAnsett (Department of Aviation 1985a, 22). Several new services weresubsequently introduced under the specialist services provision.Inaddition, the Airlines Agreements Act 1972 provided specificlegislative backing for curfews on the operation of turbo-jet aircraftat Sydney, Brisbane and Adelaide airports.Under the terms of the two airline policy, controls over freight rateswere exercised by the Minister for Transport (Poulton 1981, 108). AirNavigation Regulation 106 empowered the Minister to approve freightrates subject to any variation as he directed. He could also reject atariff and direct the adoption of a tariff that he considered fair andreasonable for the service provided.By early 1979 the trunk airl ines offered a variety of discounts offscheduled rates to shippers (Australian Transport 1979b, 6). Therewere discounts of up to 15 per cent for large shipments while airportto-airportconsignments attracted an additional discount of5 percent. Rates for off-peak carriage, based on lodgment of cargo at theairport prior to midday, were up to 50 per cent below the basicfreight rate. Backloading rates were available to regular shippersfrom all ports except Melbourne and Sydney.Mai 1Under the terms of the Civil Aviation Agreement Act 1952 andsubsequent legislation, air mail carried on the trunk routes wasreserved for the two major airlines. They were entitled toequalshares of the traffic at the same rate, with thelevel of chargesbeing negotiated between TAA and the postal authority (Department ofTransport 1979a, 96).On the remaining routes there was generally no direct competitionbetween operators and rates were determined on an offer and acceptan'cebasis in negotiations between the carriers and the postal authority.These routes were serviced by charter operators, comuter airlines,regional carriers and the trunk airlines.Payments for the carriage of mail initially included an element ofsubsidy by the Commonwealth Government (Poulton 1981, 162-165).However, in 1957 the Government decided to set the rates on a strictlycommercial basis and provide a specific subsidy for developmental and18

Chapter 3essential rural services. After negotiations with the airlines, therate for the carriage of air mail was reduced by 20 per cent from 1November 1959. The rate was adjusted again in 1968, 1970, 1973 and1976. A system of quarterly reviews based on movements in generalfreight rates was then adopted.DEVELOPMENT OF TRUNK AIRLINE OPERATIONSThe two airline policy provided the framework for the development ofthe domestic air cargo industry in the post-war period. The growth ofscheduled services was initially based on the operations of Ansett andTAA which served both the passenger and cargo markets.The trunk airlines relied heavily on mixed-configuration aircraft forthe movement of cargo but both carriers acquired freighter aircraftearly in the post-war peri~d.~ ANA introduced three BristolFreighters in the early 1950s and brought a substantial freightoperation to Ansett when it was taken over by that company. TAA alsoacquired Bristol Freighters but air cargo was a smal ler part of itsoverall operations.By 1960 Ansett carried 64 per cent of the cargo moved by the trunkairl ines (Aircraft 1982, 16). Three Ansett DC4 aircraft wereconverted to the Carvair freighter version between 1965 and 1968 whilea fourth DC4 was retained for use as a pure cargo aircraft in itsoriginal form (Department of Transport 1979a, 33; Department of CivilAviation 1968, 9). In marked contrast, TAA withdrew its last Bristolfreighter from service in 1969 and then operated without specialistfreighter aircraft for an extended period (Department of CivilAviation 1969, 3).There was some upgrading of the trunk airlines' cargo operationsduring 1966-67 when TAA and Ansett introduced 'Quick Change' versionsof the Fokker F27 (Department of Civil Aviation 1967, 3). Theinternal configuration of these aircraft permitted rapid conversionbetween the carriage of passengers and cargo on the main deck, andthey could therefore be used as pure freighters on night services.The introduction of pal lets at this time also substantial ly reducedaircraft turnaround times.By 1971 the two airl ines had a total of 12 F27QC aircraft inoperation. In line with its greater involvement in the air cargo4. Mixed-configuration aircraft primarily carry passengers but alsohave significant cargo capacity.19

Occas ioml Paper 87market, Ansett also operated two B727 aircraft in the 'Quick Change'configuration as well as the three Carvairs and one DC4 (Department ofCivil Aviation 1971, 3). In 1972 Ansett's Carvair and DC4 freighterswere replaced by Lockheed Electra aircraft which were transferred fromAnsett's passenger fleet and converted to a pure cargo configuration.Throughout the 1970s the two airlines continued to hold differentviews on the appropriate role of air cargoin their operations.Ansett placed greater emphasis on cargo and carried 54 per cent of thecargo moved by the trunk airlines in 1977. It earned 11.4 per cent ofits revenue from air freight and mai 1 in that year while thecomparable figure for TAA was only'8.5 per cent.5 These proportionswere much lower than the corresponding figures of 19.3 per cent and15.1 per cent in 1965 due to the faster growth of passenger revenue(Department of Transport 1979a, 104-106).The two trunk airlines also held different views on the appropriateaircraft for cargo operations in Australia. In 1977 TAA carried 12.5per cent of its cargoin freighter aircraft while the comparablefigure for Ansett was 37.9 per cent. At this stage, TAA relied onDC9s with freight loaded in bags on the seats and F27QC aircraft forspecialised freight operations whereas Ansett operated the fourLockheed Electra freighters as well as the 'Quick Change' F27s andB727s (Department of Transport 1979a, 103-105).ENTRY OF OTHER OPERATORSThe Commonwealth Government was generally opposed to the establishmentof competing specialist air freight carriers for much of the post-warperiod. This apparently reflected a belief that such operators wouldbe uneconomic or dilute the air freight revenue received by the twotrunk carriers. However, specialist operators later achievedasignificant position in the industry as the restrictions on competingcarriers were relaxed.Activities of freight forwardersThe organisations interested in the operation of air cargo servicesincluded the freight forwarders. The expansion of forwardingactivities was a major feature of Australian transport in the post-war5. The Ansett figure underestimates the relative importance offreight in the company's airline operations as the total revenuefigure covers Ansett Transport Industries Ltd as a whole. Freightreportedly accounted for 17 per cent of Ansett's total airlinerevenue in 1975-76.20

Chapter 3period. Forwarders introduced the concept of a single invoice underwhich they assumed responsibility for door-to-door movement as part ofa total package of transport services. They also consolidated smallconsignments into larger loads which attracted lower carriage rates.Part of the reduction was passed onto shippers in the form of lowerfreight rates.Forwarders initially developed in the road transport sector but theyquickly achieved major positions in rail and sea transport. By the1960s companies such as Thomas Nationwide Transport Ltd (TNT),Alltrans Pty Ltd, Mayne Nickless Ltd, Ansett Freight Express andInterstate Parcel Express CO Ltd (IPEC) handled a substantialproportion of the traffic carried by these modes.Development of forwarder activities in the air cargo sector was muchslower as the trunk air1 ines initially preferred to rely on their owndirect selling efforts to obtain freight business. Forwarders claimedthat the airlines treated freight as a second class cornnodity, withfreight not being loaded if passenger traffic limited the spaceavailable and not being unloaded if turnaround times for passengeroperations would be adversely affected. Attempts by forwarders tooperate their own aircraft were initially blocked by the CornnonwealthGovernment but the restrictions were gradually eased.IPEC AirA major development occurred in February 1963 when IPEC Air Pty Ltdcommenced regular air freight operations using a chartered DC3aircraft operated by Brain and Brown. This followed the provision offreight forwarding services through sub-contractors by Ansett and TAA.The airlines had then become IPEC's direct competitors in the freightforwarding sector as well as the only carriers of its air freight(IPEC 1985, 1).In March 1964 IPEC applied for licences to import five DC4 freighteraircraft and operate all-freight services between Sydney, Melbourne,Brisbane, Adelaide, Perth and Launceston. The applications wererefused by the Director-General of Civil Aviation in December 1964 onthe grounds that further facilities for theoperation of freightservices on trunk routes were not justified on economic grounds(Poulton 1981, 45). IPEC challenged this refusal in 1965. The HighCourt subsequently ruled in favour of IPEC on the question of theissue of a charter licence to operate freighter aircraft but againstit on the permit to import aircraft.There was some relaxation of Commonwealth Government controlson21

Occasional Paper 87specialist freight carriers in 1977 although it is not clear whetherthis was a deliberate change in aviation policy (Poulton 1981, 194).In February 1977 the Minister for Transport agreed to the importationof two Carvair aircraft by Air Express Ltd and two Argosy freightersby IPEC under the specialist services provision of theAirlinesAgreements Act 1972 (Department of Transport 1977, 32). However, theright of the Secretary of the Department of Transport to issue thenecessary import permits for these aircraft was challenged in the Highcourt by Ansett Transport Industries (Operations) Pty Ltd. The Courtupheld' the Secretary's right to issue the permits in December 1977 andIPEC and 'Air Express were subsequently issued with import permits.The companies initially acquired aircraft from other Australianoperators. Air Express bought two DC4 aircraft from Qantas with thesupport of the Tasmanian Government which provided a $500 000 loanguarantee. The aircraft were converted to freighters and enteredservice in October 1977 when they joined the company's two BristolFreighters on the Melbourne-Launceston route (Poulton 1981, 194).However, Air Express subsequently encountered financial difficultiesand went into receivership in September 1979.IPEC was more successful. It had purchased an out-of-hoursAustralian-registered Argosy 101 from Brain and Brown in 1976 and,after refurbishment to make it airworthy, this aircraft enteredservice with IPEC on the Bass Strait routein February 1978 (IPEC1985, 1). Two Argosy 222 aircraft were subsequently imported andintroduced into the Bass Strait trade in October 1978 and March 1979(Department of Transport 1979c, 39). The original Argosy 101 was thenplaced in reserve and later sold in line with undertakings given tothe Government when the company imported the Argosy 222 aircraft.Other developmentsBy 1978 TAA and Ansett were sti 11 the only operators generallypermitted to carry air cargo on scheduled services on trunk routes.The only' exception was the route between Tasmania and the mainlandwhere a number of smal ler charter carriers such as Brain and Brown,Air Express, Forrestair, Fleet Air and IPEC operated specialistfreighters (Department of Transport 1979a, 103, 115-116). However,these companies operated older aircraft such as OC3s, DC4s and BristolFreighters which were often unsuitable and uneconomic. All operatorsexcept IPEC were subsequently taken over or ceased operations due tofinancial difficulties. IPEC's operations were confined to servicesacross Bass Strait under a written agreement with the Minister forTransport and attempts to extend Argosy services north to Sydneyin1979 were unsuccessful (IPEC 1985, 1).22

Chapter 3Other forwarders continued to expand their activities in the airfreight market. By the end of the 1970s 16 operators were providingabout 30 per cent of TAA's air freight (Newman 1980, 22). Linksbetween TAA and the Mayne Nickless group were a1 so established duringthis period, with the two organisations jointly developing Jetspressas a consolidator of domestic air freight (Rimer 1977, 199). Ansettwas reportedly less enthusiastic about dealing with forwarders but itnevertheless strengthened its relations with them.TNT also moved to increase its involvement in the domestic air freightindustry. In May 1978 its subsidiary Comet Overnight Transport PtyLtd established a joint operation with East-West Airlines Ltd underwhich an overnight, door-to-door service covering over 1000 Cometcollection depots in New South Wales was established (Freight andContainer Transportation 1978, 22). Ten months later an air freightsystem in Queensland was set up in association with Bush PilotsAirways Ltd. This operation used Emerald as a hub with spokesradiating to Brisbane, Cairns, Rockhampton, Mackay and Cloncurry(Austra l ian Transport 1979a , 27).DOMESTIC AIR TRANSPORT POLICY REVIEWAlthough the two airline policy was designed to promote competitionand protect consumers, there was some public criticism of the standardof passenger and freight services. Difficulties with freightoperations identified by critics included delays, high charges forexpress freight, a perceived lack of interest by the trunk airlines inproviding adequate freight services and an inability to meet demandsfor air freight services due to passenger-oriented timetables andequipment (Department of Transport 1979a, 109; Department of Aviation1985a, 20).On 3 July 1977 the Minister for Transport announced a review of theprinciples and administration of Australia's domestic air transportpolicy. The review was to be undertaken by a special study group ofDepartmental officers assisted by academics and consultants.The Cornnittee's report, which was released in July 1978, concentratedon the passenger market. It concluded that the two airline policy hadprovided various benefits but that the trunk airlines had reached astage where they could withstand greater competition from otheroperators on some parts of their operations (Department of Aviation1985a, 51). There were also a number of findings and recomendationswith respect to air cargo.The Cornnittee recognised that the air freight industry was23

Occasional Paper 87characterised by a heavy dependence on passenger aircraft, withpassenger demand rather than freight being the primary consideration(Department of Transport 1979a, 116-118). It concluded that thedevelopment of a complete air freight service in Australia had beenrestricted by the two airline policy and that regulation had slowedthe growth of the air freight market.It also considered that thepossible benefits of specialised freight operators supplyingaby the trunkdifferent but complementary service to that providedairlines far outweighed the smal 1 risk of over-capaci ty andinstability in the airline industry. The Committee thereforerecommended the removal of air freight from the terms of the twoairline policy. However,the Government to continue to approve freight rates in order toprevent predatory pricing practices.it considered that it would be desirable forThe Committee concluded that there were good reasons for discontinuingthe equal sharing arrangements and the provision for payment at thesame rate for air mai 1 (Department of Transport 1979a, 99-102). Ittherefore advised that quantities and rates should be determined bynegotiations between each airline and the Australian PostalCommission. The Comnittee also recomnended consideration ofamendments to the Postal Services Act to include a provision for theCommission to enforce the carriage of mail on Australian aircraft.There was a further recomnendation that the Comnission be allowed toaward contracts for the carriage of domestic 'opportunity mail by air'to other Australian airlines and operators, including Qantas, onroutes where TAA and Ansett could not offer sufficient capacity atreasonable rates,.66. 'Opportunity mail by air' is now called surface mail by air.24

CHAPTER 4 REGULATORY CHANGE AND DEVELOPMENTS AFTER 1978Policy changes after the Domestic Air Transport P01 icy Review resultedin a significant relaxation of direct controls over the domestic aircargo industry. The major events between 1979 and 1987 are sumnarisedin Table 4.1.INITIAL DEVELOPMENTSPrior to the enactment of new legislation to give effectto therenegotiated Airlines Agreement, several developments affected thestructure and operation of the domestic air cargo industry.Charter operatorsIn early 1979 the Department of Transport authorised a number ofgeneral aviation operators to carry time-sensitive freight on behalfof individual freight forwarders on a regular basis over airlineroutes under closed charter arrangements (Department of Transport1980, 37). These operations were approved after it was recognisedthat existing services were not adequately catering for somesmallitems, such as business documentation, which required urgent deliveryand could support premium rates. Following the withdrawal of Ansett'snightly Electra service on the Brisbane-Mackay-Townsville-Cairns routein May 1979, the Department of Transport issued approvals to a numberof charter operators to fly nightly services for time-sensitivefreight over this route (Department of Transport 1979c, 39).The relaxation of restrictions was quickly followed by the expansionof freight forwarders' involvement in the carriage of overnightexpress air freight. The major operators were Wards Air Cargo,TNTCourier System and IPEC.Wards Air Cargo started a service between Melbourne and SydneyinJanuary 1979 using a chartered Learjet supported by the company'snational ground transport network. Traffic included businessdocumentation, films and computer tapes. The air operation expandedrapidly and by April 1979 Wards had four chartered Learjets providing25

Occasional Paper 87TABLE 4.1MAJOR EVENTS IN DEVELOPMENT OF COMMONWEALTH GOVERNMENTREGULATION AFFECTING THE DOMESTIC AIR CARGO INDUSTRY, 1979TO 1987Year Development Effect on cargo sector1979 General aviation charteroperators given access toai rl ine routesA1 lowed smal 1 aircraft to carrytime-sensitive freight on behalfof individual freight forwarderson a regular basis under closedcharter arrangements1981 Air ines Agrement Act 1981 Removed cargo from ambit of twoA ir ines Equ ipnen mendmen t tairline policy but requiredprospective operators toestabl ish that there was a demandfor their proposed servicesAllowed pure air freightAct 1981operators to have access to largeturbo-jet aircraft subject tocertain undertakings as to theiruse and disposal1983 New air service 1 icencescreatedDesigned to accomnodate purefreight operations1987 Independent Review of Economic Identified possible futureRegulation of Domesticarrangements for domesticAviationaviation including implicationsfor air freight.Announcement by Minister for Indicated ComnonwealthAvi'ationGovernment's intention togive notice to terminate AirlinesAgreementSource Prepared by BTE.two-way services on the Sydney-Melbourne, Sydney-Brisbane andMelbourne-Adelaide-Perth routes (Freight and Container Transportation1979b, 5). Light aircraft provided additional overnight services onthe Brisbane-Townsville-Cairns, Brisbane-Mackay-Mount Isa and Sydney-Charleville-Mount Isa-Darwin routes. The company also made extensiveuse of scheduled services provided by the trunk and regional airlineswhich ,carried 70 per cent of its cargo. In mid-l979 Wards acquiredtwo purpose-designed Learjet freighters which had a maximum payload of1.8 tonnes compared with a capacity of 1.1 tonnes on the charteredpassenger Learjets.26

Chapter 4TNT Courier System also introduced chartered aircraft on overnightexpress services although it continued to rely heavily on the trunkair1 ines (Freight and Container Transportation 1979f, 4). By late1979 two Learjets provided overnight return services on the Melbourne-Perth and Melbourne-Sydney-Brisbane-Townsville-Cairns routes while twoWestwinds served Sydney-Melbourne andMe1 bourne-Adelaide-A1 iceSprings-Darwin. Four smaller aircraft operated to coastal and centralQueensland and south-west Western Australia.In May 1979 IPEC was issued with a charter1 icence to operateovernight freight services between Brisbane, Sydney, Melbourne(Essendon), Perth and Adelaide using DC3 aircraft (Department ofTransport 1979c, 39). The company comnenced a Melbourne-Sydney-Melbourne overnight service using a DC3 in July 1979. Other aircraftchartered by the company provided connections to Brisbane and Adelaidewhile IPEC's Argosy aircraft operated to Tasmania (Freight andContainer Transportation 1979d, 5). The DC3 freighter was withdrawnfrom service in late 1979 as a result of high fuel costs, limitedpayload and expensive cargo handling procedures. However, IPECcontinued to act as a forwarder for mainland air freight by charteringTAA and Ansett aircraft and by using a number of smaller operators(Department of Transport 1980, 37).The services operated by the freight forwarders were generallycomplementary to those offered by the trunk airlines as they filledtime or service gaps in the airlines' schedules. A TAA official notedthat IPEC had increased the size of the air cargo market to Tasmaniabecause of its ability to cater to segments which were not served bythe trunk airlines (Freight and Container Transportation 1979c, 5).However, there were also areas of competition. For example,inNovember 1979 Ansett and TAA launched door-to-door express air freightservices in direct competition with the services provided by Wards andTNT Courier System (Freight and Container Transportation 1979e, 15).Takeover of Ansett Transport IndustriesIn late 1979 TNT and News Limited acquired joint control of AnsettTransport Industries Ltd (ATI). TNT had initially acquired a 23.3 percent interest in the company in 1972 but a subsequent takeover offerat that time had failed after an amendment to the Victorian CompaniesAct.Although air freight forwarding was not a central consideration in thetakeover, the ownership change was followed by a significantrestructuring of Ansett's air cargo operations including greateremphasis on forwarding activities. In February 1980 the former27

Occasiona 7 Paper 87general manager of TNT Courier System was appointed general manager ofAnsett's air cargo operation with responsibility to TNT's chiefgeneral manager (Freight and Container Transportation 1980, 23). TNT,which had traditionally used both Ansett and TAA for the movement ofits air cargo, concentrated its business with Ansett. Thesedevelopments encouraged a closer relationship between TAA and MayneNi ckl ess.LEGISLATIVE AMENDMENTSA package of legislation to give effect to the renegotiated AirlinesAgreement was passed by Parliament in June 1981 and came into effectin early 1982. It was primarily directed at continuing the regulationof domestic airline passenger services while promoting increasedcompetition and reducing community dissatisfaction with variousaspects of the two airline policy (Department of Aviation 1985a,36-37). However, there were also changes in the provisions affectingfreight and mail.Freight provisionsThe Airlines Agreement Act 1981 removed freight from the ambit of thetwo airline policy and the Airlines Equipnent Anendment Act1981 excluded freight from the capacity determination process. Thesechanges eliminated controls over freight rates and removed many of therestrictions on trunk route freight operations.The amended legislation also made provision for pure air freightoperators to have access to large turbo-jet aircraft suitable fortheir operations. However, certain obligations as to the use anddisposal of the aircraft were also imposed on the operators. Theywere required to undertake not toup1 ift passengers on theirdesignated turbo-jet cargo aircraft and, when the aircraft were to besold, they had to either sell them overseas or obtain an undertakingfrom the Australian buyer to comply with the obligations (Departmentof Aviation 1985a, 42).As a result of these changes, any operator other than an internationalairline (including Qantas) was able to provide pure cargo servicesunder a, cargo airline licence if it satisfied certain operationalrequirements and demonstrated that the aircraft would not be used tocarry passengers (Independent Review of Economic Regulation ofDomestic Aviation 1987, 74). The domestic air cargo industry wastherefore partially deregulated but significant direct and indirectregulation still remained.28

Remaining freight regulationChapter 4The mixed-configuration aircraft which carried the majority of cargowere still subject to regulation in terms of the passenger market. Inaddition, prospective entrants were required to establish that therewas a demand for their proposed services and to provide theundertakings as to the use and disposal of the aircraft (Department ofAviation 1985a, 37). It was also claimed that, despite the regulatorychanges, the procedures for importing aircraft and obtaining licencescontinued to create significant barriers to entry (Dairy ComnercialNews 1986, 3).The impact on freight services of continued Cononwealth regulation ofthe interstate passenger market was subsequently highlighted by TAA inits submission to the Independent Review of Economic Regulation ofDomestic Aviation (TAA 1985b, 56-57). TAA stated that severalregulatory provisions prevented it from operating freighter servicescombined with marginal passenger services on certain trunk routes atnight using the A300 aircraft. Constraints in the areas of capacitydeterminations and the requirement to seek agreement on load factorsmeant that operation of the proposed services would necessitate thewithdrawal of passenger capacity from other parts of the network. Inaddition, TAA was concerned that the Independent Air Fares Committeewould not necessarily approve a special fare to attract passengers atunpopular times. It also considered that the curfews based on enginetypes rather than noise levels would prevent the proposed service frombeing offered.Earlier Airlines Agreements had made no reference to the role ofQantas or other international airlines in the carriage of domestic aircargo on scheduled services over trunk routes. The Government'spolicy had been that Qantas could only carry domestic cargo as a subcontractorto Ansett or TAA (Department of Transport 1979a, 115).Clause 15 of the Schedule to the Airlines Agrement Act 1981 specifiedthe role of Qantas as the provision of international air services andnot domestic regular public air services (Independent Review ofEconomic Regulation of Domestic Aviation 1987, 103, 153, 254).However, there was provision for the carriage of international trafficover domestic sectors as part of Qantas' international services.Comnonwealth authorities interpreted this clause as excluding Qantasfrom participation in the domestic freight market unless it had theconcurrence of the parties to the Airlines Agreement. Thisinterpretation was challenged by Qantas which argued that itsexclusion from the domestic air cargo market was inconsistent with theliberalisation of policy towards this sector. Foreign carriers were29

Occasional Paper 87also specifically excluded from the carriage of domestic traffic underthe 1981 Act.State governments with licensing requirements generally did not relaxtheir controls after the changes in Comonwealth policy. In New SouthWales ,there was initially no liberalisation of the restrictions on themovement of non-bank cargo by small freighter aircraft engaged in thetransport of bank documentation. An application by Security Expressin 1984 to extend the coverage of its 1 icence from bank documentationto other goods, using the same network of flights, was generallyunsuccessful. However, a review of New South Wales air services in1986 supported an underlying policy of full deregulation of cargooperations (Review of New South Wales Air Services 1986).Mail provisionsThe Airlines Agreement Act 1981 included specific amendments to theprovisions covering air mail. The equal sharing and comon rateprovisions were abolished and quantities and rates on the'competitive' routes were made the subject of commercial arrangementsbetween the Australian Postal Comnission and the two trunk carriers.In practice the equal sharing arrangements were continued, with directnegotiation and a formula approach being used at different times todetermine the rates.CHANGES IN AIR CARGO OPERATIONSThe relaxation of regulation was accompanied by significant changes inthe cargo operations of the two trunk airlines and other operators.However, it appears that many of these changes reflected marketdevelopments rather than a response to the modifications to theregulatory framework.Wide-body aircraftTAA and.Ansett introduced A300 and B767 wide-body aircraft in 1981 and1983 respectively in response to forecast growth in the passengermarket. The new equipment also substantially increased the lower deckcargo capacity available on scheduled passenger services on some trunkroutes.The increased capacity provided by the A300 and B767 faci 1 i tatedgreater use of containers on domestic services. For example, almostone-third of all cargo carried by TAA during 1982-83 was packed in LD3containers (TAA 1983, 14).l This provided benefits such as reductions1. The LD3 is a standard international unit load device which isspecifically designed for the lower deck areas of wide-bodyaircraft. It has an internal volume of 158 cubic feet.30

Chapter 4in handling and packaging costs, fewer breakages, reduced weatherdamage and greater security. The abi 1 ity of the A300 to carry LD3containers also permitted a direct interchange facility betweendomestic and international flights.Although the introduction of wide-body aircraft increased the cargocapacity and range of services provided by the trunk ai rl ines, theprimary role of the aircraft as passenger carriers limited the extentto which the potential benefits were achieved in practice. Changes inscheduling to accommodate the requirements of the passenger marketmeant that the availability of wide-body capacity suitable forcontainerised cargo was unreliable. This adversely affected thevolume of cargo carried by the wide-body aircraft.Other trunk air1 ine aircraftThere were also changes in the narrow-body fleets operated by thetrunk airlines. Ansett sent oneof its B727-200 aircraft to theUnited States for conversion to a pure freighter in September 1983(McDonald 1984, 60-61). The introduction of this aircraft ontoservices between Melbourne and Tasmania in January 1984 permitted thesale of the three remaining Lockheed Electra prop-jet freighters tooverseas interests. The 8727-200 could carry more cargo than anElectra and had lower operating costs.The phasing out of F27QC aircraft by TAA significantly affected itsfreight operations, as the 'Quick Change' aircrafthad provided asignificant proportion of TAA's freight capacity. An agreement wastherefore reached with IPEC whereby from October 1982 that companyundertook to provide five-sixths of the capacityon its Argosyaircraft for TAA's freighter services to the curfew affected ports ofAdelaide, Sydney and Brisbane. IPEC also undertook to provide spaceon its services between Melbourne and Launceston (TAA 1983, 14). Theperiod of the agreement was five years.In April 1984 TAA leased a 8727-77C freighter aircraft from Air Naurufor an initial period of two years (Department of Aviation 1984d,22-23). Ansett shared the capacity on this aircraft on servicesbetween the east coast and Perth under a comnercial arrangement untilOctober 1985 when it introduced its own B727-200 freighter onto thisroute. The lease on the Air Nauru aircraft was subsequently extended.Trunk airline strategiesAnsett's air cargo activities were separated from the group's CargoDivision in 1980 when Ansett Air Freight (AAF) was established as aseparate corporate entity to take responsibility for air cargo (Giles31

Occasional Paper 871984, 2-3). A specialised air cargo product 1 ine including newservices such as on-board couriers, satchels and same-day services wasdeveloped. These services, which prior to 1980 had often been left tothe forwarding industry, required the enlargement of the existingground transportation fleet.In October 1982 TAA’s cargo operations were re-organised with aseparate management structure that was given responsibility forformulating and implementing policies necessary to achieve profittargets (TAA 1983, 14). Freight space on aircraft was to be sold tothe cargo division at a price determined by management and accepted bythe Commonwealth Government. TAA subsequently decided to concentrateon retailing container rates to bulk shippers while at the same timeselling net rates to the forwarding industry (Giles 1984, 5).The major changes in cargo strategies by the trunk airlines weredirected at the air freight sector. Developments in the carriage ofair mail were less dramatic. Although the equal sharing provisionsfor air mai 1 were abolished in 1981, the principle of the sharingarrangements was maintained by informal agreement between the threeparties (Australian Postal Commission 1985, 2).Other operatorsAfter the relaxation of direct Commonwealth Government regulation,several existing operators expanded their cargo operations and therewas some new entry in the domestic air freight market.In March 1982 IPEC, which was already operating charter servicesacross Bass Strait, was issued with an airline licence for cargooperations between Essendon and Launceston with its Argosy aircraft(Department of Aviation 1982, 16). The licence was extended toinclude Melbourne-Sydney-Brisbane-Rockhampton-Townsville services inSeptember 1982 and operations to all ports except Rockhamptoncommenced in the following month (Department of Aviation 1983b, 13).The Melbourne-Adelaide route was added to the licence in October 1982.IPEC also introduced a DC9-33F freighter aircraft into domesticcharter ,operations from Melbourne to Hobart and LauncestoninSeptember 1982. This was the first large turbo-jet aircraft to beused on domestic services by a cargo-only operator. The Argosyaircraft previously used on this route were redeployed on the nightlyfreight service between eastern State capitals (IPEC 1985, 1). Thecompany also re-acquired the Argosy 101 which it had earlier sold.In February 1983 new air service licences were created specifically to32

Chapter 4accomnodate pure freight operations (Minister for Aviation 1984, 7).They included cargo charter licences, cargo airline licences and cargosupplementary airline licences. Cargo charter 1 icences weresubsequently issued to two new operators, Bloodstock Air Services andCargomasters. Cargo airline 1 icences were issued to IPEC andEast-West Ai rl i nes.The only new entrant under the modified air freight policy wasBloodstock Air Services which was given approval in principle on 6September 1982 to import a 8727-1OOF aircraft for pure cargo charterservices (Department of Aviation 1983b, 13). The aircraft comnencedoperations in mid-l983 and was primarily intended to carry livestockon both domestic and international routes. However, it was leased byTAA and operated on regular freight services between Melbourne andPerth for most of the period that it was in Australia (Department ofAviation 19844, 23). TAA relinquished the lease on the BloodstockB727 in Apri 1 1984. AT1 subsequently bought the aircraft and leasedit to a freight operator in the US. Bloodstock was wound up in August1984.There was a second new entrant after the relaxation of regulation butthe operation had been approved under the specialist servicesprovision of the old policy. Cargomasters comenced domestic purefreight charter operations in August 1982 using a Hercules freighter(Minister for Aviation 1984, 8). The aircraft was operated ondomestic routes and to the Ok Tedi project in Papua New Guinea until30 May 1983 when it returned to the US to carry out operations for thecompany's joint venture partner. At this point, Cargomasterseffectively wound up its Australian operations.East-West's cargo operations were initially restricted by thecompany's concentration on the passenger market and by the limitationsof its aircraft and route network. However, after a period of rapidexpansion the company acted to upgrade its cargo operations byestabl ishing a separate air cargo operation in November 1985. Theservice initially covered 50 ports including all State capital cities.It was proposed to use lower deck areas as we1 1 as cabin space onEast-West flights with adequate empty seats and to charter space fromother operators where necesssary. The managing director of East-WestCargo stated that air cargo should ideally provide between 10 and 15per cent of airline revenue (Shires 1985).ForwardersThe large forwarder groups continued to develop their air freightoperations during this period and TNT and Mayne Nickless evolved as33

Occasional Paper 87the major operators in the industry. TNT had obtained a share in anair freight forwarder when it acquired the interest in AT1 butotherwise its expansion was achieved by the diversification of itsexisting forwarding divisions into air freight.In contrast, Mayne Nickless expanded its air freight activitiesbyacquisition. The Ward Corporation, which was the largest domestic airfreight forwarder, was acquired in 1979 and Security Express joinedthe group in 1980. Country Couriers was acquired in 1982. MayneNickless also bought a 50 per cent interest in IPEC in 1983 and in thesame year acquired Skyroad Express, a major forwarder established byformer employees of Wards.The removal of most direct Cornonwealth controls over domestic aircargo operations in 1982 was reportedly accompanied by substantial newentry in the air freight forwarding industry. However, many of thesecompanies subsequently left the industry as they were unable toachieve the economies of scale which provide significant costadvantages to larger operators.Traf f i cThe relaxation of Cornonwealth Government regulation was alsoaccompanied by significant changes in the amount of air cargo carriedon trunk routes.Fre igh tInformation on annual changes in the freight tonne-kilometresattributable to Ansett, TAA and IPEC over the 10 years to 1985-86 ispresented in Table 4.2. The first column contains the figurespublished by the Department of Aviation. The datain the secondcolumn incorporate an adjustment to offset the impact of traffictransferred from the charter sector to the airline sector in 1982.2There were both increases and falls in airline freight traffic inindividual years during the period of detailed regulation and thispattern continued after the regulatory changes. The growth ofpassenger traffic, which was subject to detailed regulation between1976-77 and 1985-86, was also both slower and faster than that of2. The adjustment for 1981-82 was made by subtracting IPEC's 1981-82airline traffic from the total airline traffic carried by Ansett,TAA and IPEC in that year. For later years, the annual equivalentof IPEC's airline traffic up to the comnencement of the TAAcontract was subtracted from total traffic in each year.34

TABLE 4.2 CHANGES IN TRUNK AIRLINE TRAFFIC^ AND GROSS DOMESTICPRODUCT, 1976-77 TO 1985-86(per cent)Chapter 4Fre igh tbYear Total Adjusted' Passengers dRea 7GDP1976-771977-781978-791979-801980-811981-821982-831983-841984-851985-860114-1-111711-150114-1-19212-16-11251134.l0367315232-1554a. Change in tonne-kilometres on previous year.b. Ansett, TAA and IPEC.c. Excludes estimated IPEC charter traffic transferred to air1 inesector in April 1982.d. Ansett and TAA.Source Department of Transport (1978, 1979c, 1982). Department ofAviation (1983a, 1985c, 1986b). Treasury (1987).freight in particular years during each of the two periods. Changesin the level of economic activity, as measured by Gross DomesticProduct (GDP), do not appear to adequately explain the variations inthe level of airline freight traffic. Initial analysis of the datatherefore does not reveal a consistent relationship between theregulatory framework and growth of airline freight traffic over the 10years to 1985-86.The changes in trunk airline cargo traffic following the relaxation ofregulation also reflected the impact of several other factors whichaffected the air freight industry after 1980-81. The introduction ofwide-body aircraft from 1981 resulted in a substantial increase infreight capacity which the trunk airlines actively marketed. The highlevel of real interest rates after 1981 increased the cost of holdinginventories and encouraged businesses to reduce transit timesandstock levels. This was accompanied by a move to central warehousingand the closure of many regional distribution facilities. There was35

Occasional Paper 87also substantial growth in time-sensitive industries such as finance,legal services, advertising and computing. In addition, the takeoverof AT1 'S cargo operations by TNT caused the airline to become moreactively involved in air cargo and TAA placed greater emphasis on itscargo operations from the late 1970s. Factors such as declines intransit times and freight rates for road transport adversely affectedthe amount of freight carried by air.Initial analysis of the available data therefore does not providesufficient information to identify the impact of the regulatorychanges on the air freight industry's growth performance. It appearsthat other factors contributed to the changesin airline freighttraffic over the period to 1985-86.MailInformation on the amount of mail carried by the trunk airlines ispublished by the Department of Transport and Communications(Department of Aviation 1986b). Confidential statistics are alsoprepared by the Australian Postal Comnission. These data indicatethat the relaxation of regulation was not followed by major changes inthe amount of mail carried by the trunk airlines.INDEPENDENT REVIEWOn 7 March 1985 the Minister for Aviation, the Hon Peter Morris, MHR,announced the establishment of an Independent Reviewof EconomicRegulation of Domestic Aviation (IRERDA). The review was establishedto assist the Government to determine a framework for domesticaviation arrangements through the 1990s.The terms of reference called for a review of the existing policy aswell as advice on appropriate future arrangements. They alsospecifically directed that attention be given to a number of mattersincluding the implications of the regulatory framework for the airfreight sector. Submissions were received from airline passengers,industry organisations, tourist bodies, State governments and thegeneral pub1 ic.The Committee's report was released in January 1987. It identifiedvarious possible arrangements for domestic aviation ranging from acontinuation of the existing framework to total deregulation.In June'1987 the Minister for Aviation announced that the ComonwealthGovernment intended to give notice to terminate the Airlines36

~Chapter 4Agreement. The Government subsequently indicated that from 1990 itwould withdraw from detailed economi c regulation of aircraft importsand capacity, air fares and route entry. However, Qantas and otherinternational airlines would still be excluded from carriage ofdomestic freight or passengers services. on regular~ll37

~~CHAPTER 5 CURRENT INDUSTRY PARTICIPANTS ~Air cargo is carried on domestic routes by a variety of operators.Forwarders also provide door-to-door services incorporating the use ofair transport and have a major impact on the traffic shares ofindividual carriers. The discussion of some areas of the industry isrestricted by data limitations but the available information coversthe bulk of the traffic in terms of tonnes and tonne-kilometres.CARRIERSThe majority of domestic air cargo is carried by Australian, AAF andIPEC.1 However, there are also significant movements by the regionalairlines, TNT Air, the air express divisions of Mayne Nickless and thecommuter operators. The available information on the amount of cargocarried on scheduled services by the major airlines and airline groupsover the five years to 1985-86 is presented in Tables 5.1 (tonnes) and5.2 (tonne-kilometres). Comparable data for forwarders and charteroperators are not available, although it appears that the pub1 isheddata do include some carriage by charter operators under contract tothe airlines.Trunk air1 ines and IPECThe proportion of domestic airline cargo carried by the two trunkairlines' aircraft fell from 88 per cent in 1981-82 to 79 per cent in1985-86 in terms of tonnes and from 90 per cent to 85 per cent on a1. As noted earlier, Australian Airlines formerly traded as TAA. Itis called Australian in the remaining chapters of this Paper. Adistinction is also drawn between Ansett Airlines of Australia(Ansett) and Ansett Air Freight (AAF) as they are separatedivisions of Ansett Transport Industries (Operations) Pty Ltd.This procedure is not followed for Australian Airlines andAustralian Cargo because in this case the cargo operation is adivision of the trunk airline. The term Australian thereforerefers to both the trunk airline and its air cargo operations.39

~~ ~Occasional Paper 87TABLE 5.1 AUSTRALIAN DOMESTIC AIR CARGO TRAFFIC BY MAJOR AIRLINESAND AIRLINE GROUPS, 1981-82 TO 1985-86aAir l ineTraffic (tonnes)Averageannualchangegroup and (Petair l ine 1981-82 1982-83 1983-84 1984-85 1985-88 cent)TrunkAnsett 68 827 67 064 73 887 77 560 81 252 4.2Australian 68 878 58 919 58 135 58 110 56 469 -4.8Total 137 705 125 983 132 022 135 670 137 721 0.0Reg i ona 1Air NSW 1 538 1 390 1 363 1 197 1 379 -2.7Ansett NTC 708 630 576 506 389 -13.9Airlines SA of 528 454 430 446 342 -10.3Ansett WAd 5 467 4 932 4 918 3 981 3 091 -13.3Ai r Queens1 andf369 438 523 572 480 6.8East-West 1 681 1 497 1 596 1 588 1 927 3.5Total 10 291 9 341 9 406 8 290 7 608 -7.3Commuter 4 142 3 930 3 647 3 64Zb 3 553 -3.8I PECg 5 094 23 296 26 023 25 677 26 340 10.6Total_____~~ _____157 232 162 550 171 098 173 27gb 175 222 2.7a. Covers revenue traffic (freight and mail) carried by operators ofdomestic scheduled airline services and comnuter airlines.b. Provisional.c. Formerly Northern Airl ines and Airlines of Northern Australia.d. Formerly MacRobertson Miller Airl ines and Airlines of WesternAustralia.f. Formerly Bush Pilots Airways. Acquired by Australian in March1985.g. Commenced airline operations on 17 March 1982. To avoiddistortion, calculation of average annual change over five yearsis based on equivalent annual figure for 1981-82.Sources Department of Aviation (1983a, 1984a, 1985b, 1986b, 1987b,pers. corn. 1987).40

Chapter 5TABLE 5.2 AUSTRALIAN DOMESTIC AIR CARGO TASK BY MAJOR AIRLINES ANDAIRLINE GROUPS, 1981-82 TO 1985-8fiaAverageannualAir line Task (‘000 tonne-k i lometres) changegroup and(Pera ir 7 ine 1981-82 1982-83 1983-84 1984-85 1985-88 cent)TrunkAnsett 61 532 62 566 70 922 69 587 77 689 6.0Australian 61 378 58 786 61 076 62 032 59 638 -0.7Total 122 910 121 352 131 998 131 619 137 327 2.8RegionalAir NSW 688 629 610 515 592 -3.7Ansett NTC 475 444 400 357 278 -12.5Airlines SA of 133 115 110 113 83 -11.1Ansett WAd 6 716 6 021 6 189 5 064 4 037 -11.9Ai r Queens1 andf308 297 426 413 362 4.1East-West 832 765 838 9511 390 13.7Total 9 152 8 271 8 573 7 413 6 742 -7.4Commuter 1 609 1 541 1 457 1 475b 1 360 -4.1I P EC~ 2 389 12 341 14 871 15 135 15 641 17.3To tal 136 060 143 505 156 899 155 642b 161 070 4.3a. Covers revenue traffic (freight and mail) carried by operators ofdomestic scheduled airline services and comuter airlines.b. Provisional.c. Formerly Northern Airlines and Airlines of Northern Australia.d. Formerly MacRobertson Miller Air1 ines and Airlines of WesternAustralia.f. Formerly Bush Pilots Airways. Acquired by TAA in March 1985.g. Comenced airline operations on 17 March 1982. To avoiddistortion, calculation of average annual change over five yearsis based on equivalent annual figure for 1981-82.Sources Department of Aviation (1983a, 1984a, 1985b, 1986b, 1987b,pers. corn. 1987).41

Occasional Paper 87tonne-kilometre basis. This decline occurred despite an increasethe amount of cargo carried by these aircraft.inThe data in Tables 5.1 and 5.2 indicate that the amount of cargocarried by Ansett increased significantly over the period whileAustralian's traffic fell. These figures probably provide areasonable indication of the distribution of traffic carried by thetwo trunk airlines' aircraft. However,a significant proportion ofthe traffic handled by Australian is now carried in aircraft operatedby IPEC. The published figures therefore underestimate the proportionof trunk traffic that is handled by Australian. A market share ofmore than 50 per cent on trunk routes has been claimed by Australian,although ATI's regional operations give AAF the largest share of thetotal airl ine market.There are significant differences in the structure and scope of thetwo airli'nes' cargo operations. Australian is essentially a linehauloperator which a1 so provides door-to-door services by sub-contractingpick-up and delivery functions to other companies. In contrast, AAFprovides the complete door-to-door service itself and earnsa largeproportion of its revenue from this market. It also competes directlywith other forwarders. AAF handles the air cargo activities of Ansettand ATI's regional airline divisions.The third largest carrier of air cargo on scheduled airline servicesin 1985-86 was IPEC. This company was solely a charter operator untilMarch 1982 when it comnenced airline operations. Traffic on itsairline services grew rapidly and accounted for15 per cent ofdomestic airline cargo movements on a weight basis and 10 per cent interms of tonne-kilometres in 1985-86. A major factor in thisexpansion was the negotiation of the contract with Australian.Regional airl inesThe proportion of total cargo carried by the regional airlinesdeclined from 7 per cent in 1981-82 to 4 per cent in 1985-86 in termsof both tonnes and tonne-kilometres.The overall decline in regional airline cargo reflects severalinfluences including carriers' concentration on passenger traffic, thereplacement of many regional airline services by commuter operations,increased competition from road transport operators and the economicsituation in rural comnunities. For example, improvements to the roadsystem in New South Wales have encouraged shippers and freightforwarders to expand the use of road transport services to countrycentres from Sydney, with consequent effects on air services. Daily42

Chapter 5newspapers accounted for more than 50 per cent of regional airlines'freight traffic in New South Wales in the 1960s and 1970s but much ofthis business was subsequently redistributed to road transportcompanies as road improvements reduced their transit times (Review ofNew South Wales Air Services 1986).Air Queensland and East-West were the only regional airlines thatrecorded increases in traffic over the five years to 1985-86. In AirQueensland's case, this probably reflected the expansion of itsairline operations as it reduced its involvement in the comnutersector. East-West expanded its service network and placed greateremphasis on air cargo during the latter part of the period. A companyofficial has claimed that East-West used competitive freight rates tocreate new markets, particularly in rural areas (Daily ComnercialNews 1986, 3).There are strong ownership 1 inks between the two trunk airlines andthe regional carriers. Ansett, Air NSW, Ansett NT and Ansett WA areall operating divisions of Ansett Transport Industries (Operations)Pty Ltd. TNT and News Corporation have recently moved to acquireEast-West. Air Queensland is owned by Australian.Comnuter ai rl inesThe amount of cargo carried by comuter air1 ines has generallydeclined in recent years. Their share of total traffic fell from 2.6per cent in 1981-82 to 2.0 per cent in 1985-86 in terms of tonnes andfrom 1.2 per cent to 0.8 per cent on a tonne-kilometre basis. Thisdecline probably reflects the impact of increased competition fromroad transport operators, the concentration of comnuter airlines onthe passenger market and the deterioration in economic conditions inmany rural areas over this period. The five largest operatorsaccounted for 63 per cent of the cargo carried by comnuter airlines in1983-84 (Department of Aviation 1985b, 28-50).2Charter operators and freight forwardersAs noted earlier, the data in Tables 5.1 and 5.2 do not provide acomprehensive description of the air cargo industry as they excludetraffic carried by freight forwarders and charter operators. Chartersreportedly accounted for around 10 per cent of total tonnes embarkedin 1975-76 and 6 per cent in 1981-82 (Gawan-Taylor 1984a, 9). IPECwas the largest carrier in this group up to 1982.2. The operators were Air Queensland, Air Tasmania, Avior, Air Northand Skywest.43

ExpressOccasional Paper 87The major forwarders providing scheduled services are TNT Air and theWards ~ and Security Express - Country Couriers divisions ofMayne Nickless. These companies generally fill market niches that arenot adequately served by the airlines. They specialise in the highyielding air express market including the carriage of bankdocumentation.International airlinesThe pub1 ished data exclude domestic carriage by internationalairlines. Qantas can provide transport on domestic routes foroverseas cargo which is under bond.3Where an international container is landed in Sydney on a Qantasflight but has an ultimate destination elsewhere in Australia, thereare several arrangements for domestic transfer. Melbourne traffic ismainly moved on Qantas flights and the majority of Brisbane traffic isalso carried by Qantas. There is limited carriage on internationalservices through other ports. The available data indicate thaton-carriage of international cargo on domestic sectors by Qantasamounted to 22.7 million tonne-kilometres in 1985-86 (Qantas, pers.comm. 1987). This was equal to 14 per cent of the cargo carried bythe domestic airlines in that year.Where Qantas does not provide domestic on-carriage on its own flights,it attempts to use air transport wherever possible. Internationalcargo transferred direct from Qantas flights to domestic aircraft fordomestic' on-carriage amounted to 2.1 million tonne-kilometres in1985-86 (Qantas, pers. corn. 1987). Additional cargo is passed to thedomestic airlines by freight forwarders who handle most of Qantas'cargo. However, industry sources indicate that international oncarriage(including forwarders' traffic) passed to the domesticcarriers accounts for less than 10 per cent of the trunk airlines'traffic.Forwarders contacted during the study advised that internationalconsolidation cargo arriving by air in Melbourne or Sydney is mainlymoved by road on domestic routes. This reflects the relatively highcosts of air transport and the ability of road transport operators toprovide overnight delivery on the major routes. Several companiesspecialise in moving freight by road between forwarders' premises atvarious ports.3. Cargo under bond has not been cleared by the Australian CustomsService.44

Chapter 5If cargo is not under bond, Qantas can only undertake carriage ondomestic routes with the approval of the domestic airlines. Thisoccurs when Ansett or Australian does not have adequate capacity. Itmainly involves horse pallets which do not fit into the lower deckareas of domestic aircraft. Qantas services may a1 so be used when adomestic carrier's freighter aircraft is unserviceable.FREIGHT FORWARDERSFreight forwarders are heavily involved in the operation of domesticair cargo services. They are also a major source of traffic for AAFand Australian, accounting for an estimated 40 per cent of the cargocarried by Australian in 1983 (Wise 1984). Industry sources suggestthat the proportion of AAF's cargo provided by other forwarders isbetween 40 per cent and 50 per cent. Most of the trunk airlines'forwarder traffic is handled by the two major forwarder groups.TNT operates in the domestic air freight forwarding industry through anumber of divisions including TNT Air, Kwika Air and Comet Air as wellas its affiliates AAF and Ansett Freight Express. These companiesgenerally use AAF for linehaul services a1 though other carriers areused where AAF services are not available. TNT Air also operates acomplementary network of air services.The forwarding activities of Mayne Nickiess encompass Jetspress AirCouriers, Wards Express, Skyroad Express and Security Express -Country Couriers. The affiliate IPEC also provides forwardingservices. The Mayne Nickless divisions generally service particularmarket areas such as high volume comnercial customers (Skyroad), smallcasual users (IPEC and Wards) and consignors requiring personalisedservice (Jetspress). Mayne Nickless has close links with Australianbut uses AAF services where apprcpriate.Mayne Nickless and TNT reportedly account for 95 per cent of thedomestic air freight forwarding market (Potter Partners 1986, 4).Revenue of the two major groups was estimatsd at more than $3GOmillion in 1985-86.Several other forwarders operate in the domestic air freight market.Brambles is a major forwarder in surface transport but has only alimited involvement in air freight through its Grace Express Divisonwhich was acquired in 1983-84. East-West has established a freightforwarding operation which uses other carriers as well as its ownservices. There are also some other smal 1 operators. Emery AirFreight became involved in the domestic market in 1983 as an extensionof its international activities but the domestic operations were sold45

Occasional Paper 87to Mayne Nickless in mid-1987. Independent forwarders have tended touse Australian for linehaul services on the major routes.Detailed consideration of the profitability of air freight forwardingis beyond the scope of the present Paper. However, one observer hasclaimed that margins are good, with Mayne Nickless earning a profit of$14 mi 1 1 ion on revenue of $165 mill ion from its air express operationsin 1985-86 (Potter Partners 1986, 1, 4). These activities accountedfor 11 per cent of group revenue and 19 per cent of group profit inthat year. Industry sources suggest that margins might not accuratelyreflect the return on capital invested.46

CHAPTER 6 CURRENT OPERATIONAL PRACTICESOperational aspects of the domestic air cargo industry can beconsidered in terms of mixed-configuration aircraft, cost structures,freighter aircraft, freighter networks and capacity utilisation.MIXED-CONFIGURATION AIRCRAFTMixed-configuration aircraft provide a substantial amount of capacityfor the movement of air cargo as well as access to a large number ofports. In June 1985 Ansett and Australian operated passenger servicesto 38 capital cities and major regional centres (Department ofAviation, pers. comn. 1987). Regional airlines provided access to anadditional 58 large towns and comnuter airlines served a further 158smaller centres. In many cases, the operations of the variouscarriers are co-ordinated to provide connecting services betweencentres which do not have direct links.As the services on non-trunk routes are generally provided by regionalor comnuter airl ines, on-carriage arrangements have been negotiatedbetween the trunk airl ines and the smaller operators. Thesearrangements are facilitated in some cases by ownership or operationallinks but there are also agreements between carriers from thedifferent ownership groups.1 These links enable each of the majoroperators to provide a national network of services.A1 though the mixed-configuration aircraft used on passenger servicesprovide access to a large number of locations, they have severalshortcomings from the viewpoint of air cargo operations. The basicproblem is that their schedules are determined by the needs of thepassenger market, which is a daytime operation, whereas a largeproportion of express air freight requires overnight transport.1. The IRERDA report noted that 31 of the 36 comnuter airlines forwhich information was available had operational links with trunkor regional airlines. Five of the ten major comnuter operatorshad financial links with one of the trunk or regional operators.47

Occasional Paper 87Schedule variations in response to the seasonal nature of passengertraffic may also disrupt express freight services. In addition, manysmaller towns either do not have scheduled air services or receiveinfrequent services. For example, a survey of 52 major New SouthWales towns in 1985 found that 19 towns had no air service whileoperations to several other towns were infrequent (Mayne Nickless1985, 7-8) .2Further limitations are imposed by the characteristics of mixedconfigurationaircraft since they often have restricted cargocapacity. As many air1 ines consider themselves to be primarilypassenger carriers, cargo may be off-loaded to make room for passengerbaggage. This is an important factor in regional and comnuter airlineoperations where the smaller aircraft used are more susceptible toweight variations. Mixed-configuration aircraft are also unable tocarry certain over-size or hazardous cargoes.COST STRUCTURESThe inability of mixed-configuration aircraft to service the whole aircargo market has led to the operation of freighters on a variety ofroutes and services. However, opportunities for profitable operationof all-cargo aircraft in Australia have been limited by the availablecargo volumes and the imbalances in traffic flows. The marginal costfloor for pricing on mixed-configuration aircraft includes theadditional fuel costs incurred in carrying cargo as well as costs ofhandling, promotion and administration. In most cases in Australiathis is less than the fully allocated costs relevant to freighters.All-cargo aircraft therefore need high utilisation and highloadfactors to be competitive with mixed-configuration aircraft.As a result of these differences in operating costs, carriers usemixed-configuration aircraft for the carriage of cargo wheneverpossible. Industry sources suggest that the major airlines' freighterservices have historical ly incurred losses when considered inisolation but that they contribute to the airlines' overallprofitability (Freight and Container Transportation 1979a, 23;Austra7ian Transport 1983, 14). This reflects the desire of manyshippers for a total service which means that a major carrier would2. The 52 towns included locations in New South Wales with apopulation of 5000 persons or more that were serviced by anairport in the State. They excluded Newcastle and seven othertowns that met the population criterion but which would notnormally require scheduled daily air services due to their closeproximity to Sydney.48

Chapter 6not obtain as much of the profitable daytime traffic if it did notoperate freighters at night.Curfews on the operation of jet aircraft have affected the ecor,omicsof cargo operations at Sydney, Brisbane and Adelaide airports wherethey have restricted access by mixed-configuration aircraft and jetfreighters at night. Turbo-prop aircraft which satisfy the noiserestrictions have therefore been used on night flights. However, thishas probably involved some cost penalties as a result of the use ofinefficient aircraft for the movement of air cargo and inability toachieve economies of scale in aircraft operation. For example, it isreported that an A300 carrying freight without passengers can upliftapproximately double the payload at the same cost as existing turbopropfreighter aircraft (Independent Review of Economic Regulation ofDomestic Aviation 1987, 254). One industry participant has claimedthat the curfew at Sydney airport costs operators $15 mill ion perannum in lost opportunities alone (Australian Financial Review 1986).FREIGHTERSTable 6.1 presents information on the configuration of aircraft usedby the trunk and regional airlines to transport domestic air cargo in1984-85. Around 67 per cent of air cargo moved on domestic scheduledservices in that year was carried on mixed-configuration aircraft.The proportion of cargo carried on pure freighter aircraft variedbetween carriers with Ansett, Australian and IPEC being the majoroperators of large aircraft in the dedicated cargo configuration.The airlines' scheduled freighter operations are concentrated onseveral major routes where there is inadequate capacity on mixedconfigurationaircraft and a lack of competitive road transportservices. In 1984-85 services from Melbourne to Hobart and Launcestonaccounted for 38 per cent of airline freighter traffic in terms oftonne-kilometres (Department of Aviation 1987b, 35-45). The nextlargest operation involved the Melbourne-Perth route where thecorresponding figure was 31 per cent. Australian's freighteroperations were concentrated on the Melbourne-Perth route while themajority of Ansett's and IPEC's trafficinvolved services betweenMelbourne and Launceston.The large aircraft operated in an all-cargo configuration by AAF,Australian and IPEC include both pure freighters and mixedconfigurationaircraft which carry freight without passengers.AAF's 8727-200 freighter has a capacity of 18 tonnes and is crewed andmaintained by Ansett. AAF also charters aircraft from other operating49

~~~~~~~Occasional Paper 87TABLE 6.1 DOMESTIC AIRLINE CARGO TRAFFIC BY AIRCRAFT CONFIGURATIONAND AIRLINE, 1984-85aCarrierMixedconfiguration Pure cargo' TotalTonnesAnsettAustralianAir NSWAnsett NTAi rl ines of SAAnsett WAAi r Queens1 andEast-WestI PEC54 12351 5611 1975064463 9815721 588023 4366 54700000025 67777 56058 1101 1975064463 9815721 58825 677Total 113 974 55 66Tonne-kilometres ('000)AnsettAustralianAir NSWAnsett NTAirlines of SAAnsett WAAi r QueenslandEast-WestI PEC55 49447 9685153571135 06441395 1014 09314 06300000015 13569 58762 0325153571135 06441395 115 135Total 110 875 43 166 29a. Covers revenue traffic carried by operators of domestic scheduledairline services. Excludes charter and commuter traffic.b. Services provided for the carriage of both passengers and cargo;c. Services provided solely for the carriage of freight and mail.NoteFigures may not add to totals due to rounding.Source Department of Aviation (1987b, 22-45).50

Chapter 6divisions of AT1 at rates which are negotiated on an annual basis.Ansett B767s with a capacity of 18 tonnes are used as freighters onsome evening services by utilising the lower deck area and leaving theupper deck empty. Fokker F27QC aircraft are operated in the purecargo configuration which enables them to lift 5 tonnes. The companyalso uses F28 aircraft operated by Ansett WA.Australian's B727-77C freighter can carry up to 14 tonnes of freighton transcontinental services. Australian also operates F27QC and DC9aircraft in an all-cargo configuration. The DC9s have a capacity of 2tonnes in their lower deck areas but can carry up to 11 tonnes whenadditional cargo is loaded in bags on the passenger seats.IPEC's DC9-33F is a customised version of the standard DC9 operated bythe trunk airlines. Modifications such as a stronger floor and morepowerful engines enable it to carry up to 18 tonnes of cargo. Thethree Argosies used by IPEC are the only aircraft operated by thedomestic airlines that were specifically designed as freighters. Thetwo Argosy 222 aircraft have a maximum payload of 14 tonnes each whilethe Argosy 101 can carry up to 13 tonnes.A variety of smaller aircraft are operated as freighters by chartercompanies, generally under arrangements with the major airlines orfreight forwarders. Several forwarders also lease or own smal 1aircraft which are configured to carry carg'o. The largest aircraft inthis group are the Learjet 35a and the Westwind 1124 which havemaximum capacities of 1.8 tonnes and 2.0 tonnes respectively. Othersmall aircraft operated in the all-cargo configuration include theBandierante (1.4 tonnes), Citation I1 (1.4 tonnes), King Air (1.2tonnes) , Navajo (0.8 tonnes) , Aerostar (0.6 tonnes), Cessna 210 (0.4tonnes) and Twin Comnanche (0.4 tonnes).The effective capacity of the smaller aircraftis affected by thedensity of cargo. These aircraft mainly carry low density items suchas documentation and packages but they were all specifically designedfor passenger operations rather than cargo. The cabin volume istherefore often filled before the maximum payload is reached.FREIGHTER NETWORKSDetails of the freighter networks operated by the domestic airlinesand major freight forwarders in late 1986 and early 1987 are presentedin Appendix I. The data cover Australian (Table I.l), AAF (Table1.2) , TNT Air (Tables 1.3 and 1.4) and the Wards Express and SecurityExpress - Country Couriers divisions of Mayne Nickless (Table 1.5).51

Occasiona 7 Paper 87Most of the airlines' freighter services are designed to provideovernight delivery but the freight forwarders also have a large numberof daytime operations associated with the movement of bankdocumentation. The forwarders' services are concentrated on daysduring the business week and weekend services are 1 imited. Thenetworks are regularly adjusted in response to carrier requirementsand market conditions.Australian's freighter services operate in the evening and in theearly hours of the morning. They provide connections to 12 portsinvolving capital cities (except Darwin), Tasmania and major coastalcentres in Queensland. Australian operates its leased 8727-77Cfreighter on the Perth route, its F27QC aircraft on the east coast andits DC9s on several routes when other aircraft are not available. Itre1 ies heavily on the IPEC aircraft for capacity on the servicesbetween east coast capitals and from the mainlandto Tasmania.Commuter airlines and charter operators provide the remaining eastcoast and Tasmanian intrastate services as well as capacity on theroute from Brisbane to north Queensland.AAF's services generally operate during the evening and the earlyhours of the morning, the major exception being the service from Perthto Melbourne which arrives in the early afternoon. The network of 19ports includes capital cities (except Darwin and Adelaide), Tasmaniaand major regional centres in Queensland and Western Australia. AAFoperates its 8727-200 freighter on services to Tasmania and Perth.Ansett and Air NSW provide large aircraft for east coast services andAnsett WA is the major operator in Western Australia. Charteroperators and comnuter airlines operate the remaining services.TNT Air charters aircraft such as the Westwind 1124 to operate itsfreighter services. It fills the gaps in the major airlines'schedules and services and rarely runs aircraft in para1 le1 with AAFor Australian. TNT Air's network of 87 ports includes all capitalcities except Perth and Canberra as'well as a large number of regionalcentres in New South Wales, Queensland, South Australia and theNorthern Territory. The services to northern and central Australia,Tasmania, east coast capitals and Queensland ports are operated in theevening or early morning in line with the requirements of theovernight express market. The intrastate services in New South Walesand South Australia operate during the day in the business week as thebase cargo is bank documentation which must be picked up and deliveredin the morning and afternoon on each working day. TNT Air holds the52

Chapter 6combined banks contract for the movement of bank documentation in theNorthern Territory, South Australia and most of New South Wales.3Mayne Nickless operates freighter services through its Wards Expressand Security Express - Country Couriers divisions. Wards Express is amajor freight forwarder and uses Australian, IPEC and AAF services asmuch as possible. It operates two leased Learjet 35a aircraft onroutes between Sydney, Melbourne and the Northern Territory to fi 11the gaps in the airlines' services. The aircraft carry overnightexpress freight such as business documentation, computer tapesandspare parts. The Security Express - Country Couriers operation useschartered aircraft to provide a network of daytime services inQueensland, coastal New South Wales north of Sydney and Victoria. Thebase cargo for most of these operations is bank documentation andcomputer tapes under the combined banks contracts and thelevel ofother cargo is determined by the regulatory policies of the relevantState authorities. Overnight services are operated on theCairns-Brisbane and Sydney-Brisbane routes.IPEC operates its four large aircrafton two routes linking fivecities. As noted earlier, a significant proportion of capacity isleased to Australian. Integration of IPEC's operations with theservices provided by Wards Express and Australian increases the numberof ports that it serves in its role as a freight forwarder.Limited freighter operations are also undertaken by some othercarriers. For example, the contract for the carriageof bankdocumentation in southwest Western Australia is reportedly held by aprivate operator.There are co-operative arrangements between the various operators offreighter services as no single carrier operates a comprehensivenational system. For example, AAF have the only overnight connectionto northern Western Australia and hence other operators such asAustralian and Wards use this service when they have cargo for thatarea. Similarly, AAF use TNT's services on the Adelaide-AliceSprings-Darwin and Adelaide-Sydney routes. Australian use Wards'service to Darwin if they have freight requiring delivery by the3. The movement of bank documentation between country branches andState head offices is co-ordinated by a Combined Banks TransportCommittee in each State. Banks involved are Westpac BankingCorporation Ltd, Australia and New Zealand Banking Group Ltd, TheNational Comnercial Banking Corporation of Australia Ltd andComnonwealth Banking Corporation.53

Occasional Paper 87beginning of the working day and TNT Air use Australian for uniqueservices such as the Brisbane-Darwin service on Wednesdays.CAPACITY UTILISATIONDetailed information on the utilisation of cargo space on domestic aircargo services in Australia is not available. However, estimates ofthe average cargo weight load factor for the airline industry areprepared by the Department of Transport and Comnunications (Departmentof Aviation 1986a, 21; 1987c, 17).4 These data indicate that the loadfactor increased from 41.7 per cent in 1980-81 to 44.0 p.er cent in1982-83 and then declined to 36.6 per cent in 1985-86. A decl ine offive percentage points between 1984-85 and 1985-86 was associated withan increase of 14 per cent in cargo capacity.The average cargo weight load factor should be interpreted withcaution as it is only a partial indicator. An aircraft's volumetriccapacity is often reached before the maximum weight of cargo is loadedand in some cases aircraft range considerations may preclude fullutilisation of the available cargo space. For example, the 8727-77Coperated by Australian has a capacity of 19 tonnes but can only carry14 tonnes on the Melbourne-Perth route as a result of fuelrequirements. In these circumstances, the cargo weight load factormay underestimate the extent to which available aircraft capacity isused. The validity of the figure is also affected when aircraft hoursflown are below optimal or achievable levels as the calculations arebased on services provided.In addition, the indirect method ofcalculating the cargo weight load factor and the assumptions aboutvariables such as average passenger weight may further limit theusefulness of the data.4. The cargo weight load factor indicates the proportion of availablecargo tonne-kilometres on scheduled airline services that isactually utilised. Cargo capacity is estimated by subtractingavailable passenger tonne-kilometres from total availabletonne-kilometres. Passenger tonne-kilometres are calculated bymultiplying passenger-kilometres by 0.09, the latter figurereflecting a standard passenger weight (including 1 uggage) of 90ki 1 ograms.54

CHAPTER 7 RATING PRACTICESThe structure of freight rates provides additional information onoperational practices in the domestic air cargo industry. Trends inrates may also indicate changes in the operating environment.STRUCTURE OF FREIGHT RATESRates for domestic air freight can be considered in terms of publishedtariffs and discounts provided to larger shippers. Differentconditions apply to the setting of rates for the carriage of air mail.Published freight ratesRetail freight rate schedules are published by AAF, Australian andvarious freight forwarders. The schedules indicate the rates forselected origin-destination combinations under specified deliveryconditions. Rates for carriage between major centres generallycomprise a basic charge plus a rate per ki logram which varies with theroute. Special rates are available for light bulky consignments anddiscounts are provided where pre-paid satchels and coupons are used.Charges also vary with the speed of delivery specified by shippers.The highest rates are applied to same-day delivery, with Australiancharging $54 for movement of consignments up to two kilograms by itsdoor-to-door courier service in October 1986. The overnight expressrate is lower and there are further discounts for later delivery. Forexample, in October 1986 Australian's kilogram rate for Melbourne-Brisbane consignments picked up by 5 pm and delivered by 10 am on thefollowing morning was $6.01. This fell to $2.92 for delivery by 1 pmand to $2.05 for delivery up to 72 hours after lodgment. Similardiscounts are provided by AAF although the specified delivery timesare slightly different.There is also variation in rates on some routes according to thedirection of travel. For example, AAF's schedule published in October1986 indicated that the kilogram rate for movement from Adelaide toBrisbane with 9 am delivery was $10.28 whereas the charge in theopposite direction was only $9.76.55

Occasional Paper 87After the removal of Comnonwealth controls over air freight rates,Australian set its published rates below those of AAF (Wise 1984, 20).The margin was initially 10 per cent but it subsequently fluctuatedand at one stage reached 15 per cent. Industry sources suggest thatthe differentia.1 reflects the historical dominance of the air cargomarket by AAF and shippers' perceptions of the services provided bythe two carriers. Similarly, when East-West established a separatecargo division in November 1985 its published rates were set belowthose quoted by Australian and AAF (Shires 1985).The variation in scheduled rates published by the major airlines andfreight forwarders in October 1986 is illustrated in Table 7.1.Australian's rates were generally the . lowest, with AAF's kilogramrates being up to 47 per cent higher. There was wide variation inforwarders' rates which in several cases were higher than those quotedby AAF, Differences in rates may reflect variations in the range andquality of services provided by individual airlines and forwarders.DiscountsPublished rates mainly apply to small shippers and in other casesshippers or forwarders negotiate lower rates with the carriers.Ithas been suggested that only 10 per cent of domestic air cargo isTABLE 7.1 SCHEDULED AIR FREIGHT RATES FOR SELECTED ROUTES BYOPERATOR, OCTOBER 1986(do l lars)Rate per kilogramBasic Sydney- Sydney- Sydney- Sydney-Opera tor charge Me Jbourne Ade la ide Perth HobartAustralianWardsAF ~aCometTNT AirAAFSkyroadKwi ka Air15.0021 .oo26.0029.6029.8024.0020.4632.003.164.334.254.454.814.254.905.225.877.637.948.198.268.369.089.6213.5017.0319.6019.5318.3119.8019.8419.935.867.788.4110.048.498.419.069.65a. Ansett Freight Express.Source Transport and Distribution Letter (1986b, 6).56

Chapter 7carried at the published rates and that discounts of up to 80 per centare provided by the two major airlines where substantial accounts areinvolved (Gawan-Taylor 1984a, 19; Shires 1985; Transport andDistribution Letter 1986b, 2). Similar discounts are provided toshippers by forwarders.The extent of discounting is illustrated by rates for movement fromSydney to Melbourne provided by one forwarder contacted during thestudy. In late 1986 the average basic charge paid by shippers was 51per cent below the company' scheduled charge and the average rate perkilogram was 60 per cent less than the rate in the forwarder'spublished schedule.Shippers with large amounts of cargo are able to negotiate discountswhere they require regular runs as a steady volume of base cargo has afavourable effect on carriers' cost structures. This is in contrastto irregular shipments where variability in traffic imposes some extracosts on carriers. Similarly, discounts are available where a shipperis prepared to accept longer delivery periods as this facilitates theuse of otherwise under-utilised capacity.Where there are significant imbalances in cargo flows, there may alsobe substantial variations in rates. Industry sources indicate that inlate 1986 the rate into Tasmania was around $1.20 per kilogram whereason the return leg where cargo was 1 imited the rate was only 30 centsper kilogram. Backhaul rates are generally 1 irniteci to lower ratedcomodities as carriers do not want to dilute their revenueunnecessarily by providing low rates for high value comnodities whichwould continue to travel at the higher rates. Where ground costs area high proportion of total costs, lower linehaul costs associated withexcess capacity may not be reflected fully in freight rates.There are still some links between rates and comnodity type. Forexample, perishables receive high priority and a low rate inrecognition of the fact that the trafficis economical for theairlines to carry but very price-sensitive. Officials from onecarrier contacted during the study indicated that they were trying tolink urgency and service requirements (for example, cold storagefacilities at.terminals) to price and eliminate the links to comnoditytype. However, it was recognised that the extent to which this couldbe achieved was limited by the constraints imposed by demandelasticities.Rates on particular routes may be reduced be1 ow attributable costswhere a large national shipper is involved. The most comnon case isservice to a centre such as Darwin which incurs high operating costs.57

Occasional Paper 87If a shipper has large quantities of traffic moving to other locationswith a carrier, the operator may heavily discount rates on theexpensive leg in order to retain the national account. Industrysources indicate that shippers often assess accounts primarily on thebasis of a carrier's performance on difficult routes, and hence thereis a strong incentive for a carrier to be more accomodating in thesecases.The level of discounts available to large shippers under favourableconditions was illustrated in late 1985 when details of an AAF accountwere pub1 ished (Transport and Distribution Letter 1985, 1). It wasreported that a company was paying very low rates such as 20 cents tosend a 1 kilogram parcel from Sydney to Melbourne by air. Thiscompared with the going rate of about $5 on this route. The low rateswere achieved by a member of a business group which was a majorshipper. They were based on several conditions including 72-hourservic'e, a minimum charge and movement on services where AAF had sparecapacity.Mai 1Rates for the carriage of mail are currently based on several paymentscales. Different rates are applied to air mail, courier traffic,priority paid mail and surface mail by air.lPayments to trunk a,nd regional carriers are administered by theAustralian Postal Comission's central office. Rates are mainlydetermined by a cost-based formula with annual adjustments, althoughthere is also an element of negotiation in the setting of rates. Therate is not affected by the route or direction of travel. Paymentsfor the carriage of mail by 'comnuter air1 ines are handled by theAustralian Postal Comnission's State offices.The Commission has recently completed a review of the arrangements forthe transport of mail by air. The findings of the review and anyeffect's on the determination of rates were not available at the timethis Paper was completed.TRENDS IN RATESAn index of published domestic freight rates basedon an industrysample is prepared by the Department of Transport and Comunications1. In this case air mail refers to the sub-group of articles whichrequire a high quality of service and rapid delivery.58

Chapter 7(Department of Aviation 1987~). Figure 7.1 shows the trend in theindex in real terms for various haulage distances since 1977.There was a clear acceleration in the rate of increase of the indexafter 1979, with rates for short-haul and medium-haul services risingsubstantially compared with those for long-haul routes. Theintroduction of fixed handling charges by Ansett in June 1980 and byTAA in Apri 1 1981 was the major factor in the increases recorded inmid-l980 and 1981 (Department of Avi'ation 1984b, 16). Published rateswere relatively stable during 1983 but further rises were recorded in1984 and 1985. They fell in 1986 as a result of factors such as asubstantial decline in cargo capacity uti1 isation and attempts byshippers to reduce distribution costs.An index of airline freight rates is also produced by the BTE (1987).This generally indicates a similar trend to that in Figure 7.1, with adecline of 21 per cent in 1986.The data prepared by the Department of Transport and Comnunicationsand the BTE indicate thatpublished freight rates paid by smallshippers increased in real terms until 1986. However, the indexes maynot accurately reflect the trends in rates for large shippers whoreceive discounts. Time series data on actual rates paid are notavailable but some information on trends can be obtained from airlineyields and other sources.Trunk airline yieldsData for Australian's cargo and passenger yields over the 10 years to1985-86 are presented in Table 7.2.2The average yield for cargo was virtually unchanged in real terms overthe period, suggesting that the reported increases in published ratesmay not accurately reflect the trends in market rates. However, therewas significant variability in developments in individual years.Australian's cargo yields declined in the first three years during theperiod of detailed regulation and in the two years imnediatelyfollowing the relaxation of regulation. Increases in average yieldswere recorded in the two years prior to the regulatory changes and inthe three years up to 1985-86. Initial analysis of the data thereforedoes not reveal a consistent relationship between the regulatoryframework and the trend in Australian's average yield for cargotraffic.2. Average yield is computed by dividing revenue by tonne-kilometresfor the traffic.59

m0XUa,340 -320-300 -280 -c 260-72 240-aLc, 220-r m'G 200-LrcaJ7 160n/ ................... I .\I- -' Long haul120 -100 -80 I I I I I I I I I I I I I I I l l 1 1 1 I ~ I l l 1 1 1 1 1 1 11977 1978 ' 1979 1980 ' 1981 I 1982 I 1983 1984 I 1985 I 1986YearSource Department of Aviation (1986a, 1987~).Figure 7.1 Published domestic airline freight rates in real terms, 1977 to 1986

Chapter 7TABLE 7.2ANNUAL CHANGE IN AVERAGE YIELD IN REALTERMS FOR AUSTRALIAN AIRLINES CARGO ANDPASSENGER TRAFFICS, 1976-77 TO 1985-86a(per cent)TrafficYear1976-771977-781978-791979-801980-811981-821982-831983-841984-851985-86Cargo-8.4-4.7-2.55.99.2-5.3-3.41.65.04.5Passenger-4.2-4.91.0-1.42.0'4.34.12.71.4-2.5a. Change on previous year.Sources TAA (1980, 1985a).(1986).Australian AirlinesThe data also indicate that Australian's average passenger yields didnot change significantly from 1975-76 to 1985-86. However, there wassome variability in the relationship between changes in cargo andpassenger yields. Cargo yields declined more quickly than passengeryields between 1976-77 and 1978-79 and fell while passenger yieldsrose over the three years imnediately following the relaxation ofregulation of cargo activities. In the remaining years cargo yieldsincreased more rapidly than passenger yields.The changes in Australian's cargo yields also reflected the impact ofother factors which had a significant impact on its operations overthe period to 1985-86. In particular, the introduction of wide-bodyaircraft from 1981 was associated with changes in Australian's ratingpractices as it attempted to obtain a revenue contribution from itsdoubled cargo capacity. Discounts as high as 60 per cent off normalrates were introduced for cargo which was lodged for shipment incontainers (TAA 1982, 13). Australian subsequently placed greateremphasis on obtaining higher yield cargo (TAA 1985a, 12)-61

Occasional Paper 87Comprehensive data on trends in AAF's cargo yields are not publiclyavailable. However, information on ATI's airline activities between1975-76 and 1979-80 suggests that the decline in the company's averageyield over this period was less than the fall in Australian's yield(Ansett Transport Industries 1980).It has also been claimed that the two carriers' average freight yieldswere similar in 1979-80 but that there was subsequently a major changein their relative positions (Giles 1984, 3-5).3 AAF's average yieldreportedly doubled in real terms between 1979-80 and. 1982-83 as aresult of a deliberate policy of shedding low yielding traffic. Thiscompared with a decline of 17 per cent in Australian's average yieldover the period.Other informationThe different trends in yields for the two carriers raise thepossibility that the changes in Australian's cargo yield may notclosely reflect developments in average market rates. Statistics fromseveral other sources suggest that rates paid by some shippers havedeclined in real terms since 1979.Data on trends in one forwarder's air freight rates on theSydney-Melbourne route are presented in Table 7.3. They indicate thatbulk users received substantial reductions in rates in real terms forboth consignment-note traffic and pre-paid satchels between 1979 and1986.4 One-off users received fewer benefits, with a smal lerre&ction in satchel rates and a substantial increase in charges forconsignment-note traffic. A forwarder contacted during the studyindicated that the less favourable trend in rates for one-off usersreflected the high costs of servicing this market as a result ofdisruptions to regular delivery runs, a higher proportion of bad debtsand the location of one-off users away from the major customers inbusiness areas.Some caution must be exercised in applying data for a particular routeand from one forwarder to the industry. However, several forwarders3. The discussion in this paragraph refers to freight whereas theearlier parts of the section involve cargo (freight and mail).4. Traffic which moves with an accompanying consignment-notegenerally involves large bulky items such as machinery spares andmedical equipment: Pre-paid satchels are used for smaller itemssuch as documents and computer tapes.62

Chapter 7contacted during the study indicated that Table 7.3 provides areasonable indication of the general direction of market rates in theindustry. They also noted that the Sydney-Melbourne route was thecorridor most affected by increased competition from road transportand hence reductions in rates on other major routes would not havebeen as great.Several other observers have made general comnentson movements infreight rates since 1981. An executive of Mayne Nickless noted thatactual rates had fa1 len in real terms across the product range afterthe introduction of the regulatory changes (Comnonwealth ReportingService 1985, 230). Similarly, on services to Tasmania freight rateswere reportedly held down and at certain times reduced substantially,particularly on backhauls (Government of Tasmania 1985, 30).TABLE 7.3AIR FREIGHT RATES ON THE SYDNEY-MELBOURNE ROUTE IN REALTERMS, 1979 AND 1986Rate ($1Traffic and ratecomponent 1979 1986a (per cent)Bulk usersConsignment-note trafficBasic charge 5.00 2.50 -50Rate per kg 1.20 0.61 -49Pre-paid satchel 5.00 2.50 -50One-off usersConsignment-note trafficBasic charge 8.50 13.06 54Rate per kg 1.50 2.32 55Pre-paid satchel 8.00 6.67 -17a. Data deflated using CPI for March 1979 and March 1986.Source Australian FJying (1986, 46).63

CHAPTER 8 FUTURE PROSPECTSIt is difficult to accurately predict the future size and structure ofthe domestic air cargo industry. However, recent trends provide someindications of potential developments and it is possible to identifyseveral major factors that will affect the industry.MARKET SIZEPublicly available forecasts of future growth in the domestic aircargo market have been prepared by Gawan-Taylor (1984b, 3) and the BTE(1986).The estimates prepared by Gawan-Taylor indicate average market growthof 6 per cent per annum for the period between 1985 and 1990. Thisestimate was based on several parameters including average annualgrowth rates of 3 per cent for real GDP and 1 per cent for real airfreight rates.The BTE forecasts are presented in Table 8.1. They indicate thatfreight carried by IPEC and the trunk air1 ines is expected to growsignificantly over the period to 2000. Comnuter traffic is forecastto grow at a slightly faster rate, despite the downturn in this sectorover the last few years. Very low growth or a slight contraction intraffic is predicted for the regional airlines. In all sectors, thegrowth rate for air freight is expected to decline over time.As the adequacy of cargo capacity on mixed-configuration services willbe affected by the relative growth rates of passenger and cargotraffic, estimates for the passenger market are alsopresented inTable 8.1. They indicate that passenger traffic carried by regionalairlines is expected to grow more quickly than the amount of cargocarried on these services over the period to 2000. For trunk andcommuter airline operations, the cargo market is forecast to increasemore quickly than passenger traffic under the high growth scenario butmore slowly under the low growth scenario.65

Occasional Paper 87TABLE 8.1 FORECAST AVERAGE ANNUAL GROWTH RATES FOR DOMESTIC AIRLINETRAFFIC, 1986 TO 2000(per cent per annum)PeriodMarket sector Scenario 1986-90 1991 -95 1996-2000FreightaTrunk bRegionalCommuterPassengerTrunkRegionalCommuterHighLowHighLowHighLowHighLowHighLowHighLOW4.03.20.40.04.13.34.02.23.72.64.82.53.32.60.2-0.13.42.73.52.23.42.34.32.52.61.90.2-0.12.72.03.11.83.01.94.02.2a. Excludes mail.b. Includes IPEC.Source BTE (1986, 47-53).The forecasts in Table 8.1 were prepared using an econometric modelbased on quarterly traffic data for the eight years to 1984. Theresults are heavily influenced by the scenarios for GDP growth andreal fares and freight rates that were used to generate the forecasts.They are also based on the recent regulatory framework and industryrelationships. Major policy changes could therefore substantiallyaffect actual traffic growth through effects on variables such .asrating practices. Other variables assumed constant in the preparationof the forecasts include the structure of Australian industry and theimpact of factors such as real interest rates on shippers' modalchoices.Industry participants contacted during the study identified a varietyof factors which will affect the size of the domestic air cargomarket. Computer equipment has been an important source of growthinthe past but this traffic is now declining. In addition,computerisation is expected to reduce the amount of documentation that66

Chapter 8is carried by air in future. Increased use of facsimile machines islikely to further undermine the level of document traffic.Trends in freight rates will affect the amount of cargo that is movedby air. Industry sources indicate that in some cases market growth isa1 ready being restricted by buyer resistance to the level of airfreight rates. At least one carrier has recently shed some low ratedvolumetric cargoes in order to increase average yields.Developments in the road transport industry will also affect the sizeof the air cargo market. Continued upgrading of the national highwaysystem is likely to result in increased competitive pressure on airtransport operators on some routes. In particular, the eventualintroduction of overnight express road services on the Sydney-Brisbaneroute is expected to reduce the amount of traffic available to airtransport operators in the long run. On the other hand, one shippercontacted during the study indicated that a reversal of the recenttrend to lower real freight rates in the road transport industry wouldadversely affect the competitive position of this mode.Two views on the future relationship between the road and air sectorshave been expressed by forwarders. One vjew is that air transportoperators will develop their cargo activities by attracting low-yieldtraffic which is currently carried by road transport. This approachwas used by the trunk airlines when the introduction of wide-bodyaircraft substantially increased their capacity (TAA 1982, 13). Theother view on the development of the air cargo industry is thatoperators will concentrate on urgent, high-yield traffic and withdrawfrom the sectors of the market whereroad transport is highlycompetitive. The approach adopted by the air cargo industry willobviously have a significant effect on the amount of traffic that ismoved by air but there is no general agreement on the direction inwhich the industry will develop.The level of domestic air cargo traffic mayalso be affected bychanges in domestic transport arrangements for international cargo.The Australian Customs Service has proposed the introduction of anIntegrated Cargo Control and Clearance System under which mostinternational cargo will be cleared from Customs control when it isdischarged at the Australian port of arrival. Many forwarders believethat this system will concentrate customs clearance in Sydney andMelbourne and substantially reduce the movement of cargo under bondfor clearance in smaller centres such as Brisbane and Adelaide.In these circumstances, the amount of cargo moved under bond on67

Occasional Paper 87domestic routes by Qantas could be substantially reduced. However,this traffic would not necessarily be transferred to the domesticairlines. If containers were broken down by forwarders in Sydney andMelbourne, most of the cargo would probably be moved by roadtransport.The extent to which international cargo is positioned domesticallycould also be affected by changes in schedules for international airservices. In particular, the introduction of more direct services tosmaller ports such as Adelaide could reduce the level of domestictransfers.The impact of these kinds of changes is not included in the forecastspresented in Table 8.1. Actual growth in domestic air cargo trafficmay therefore deviate substantially from these estimates.INDUSTRY STRUCTURE AND OPERATIONThe major influences on the future structure and operation of thedomestic air cargo industry can be considered in terms of theregulatory arrangements, curfews, aircraft and the broader operatingenvironment.Regulatory frameworkIt was noted in Chapter 4 that the domestic air cargo industry isstill subject to significant direct regulation. Several Stategovernments continue to regulate intrastate operations, access todomestic cargo by international airlines is restricted and theCommonwealth Government requires prospective entrants to establishthat there is a demand for their proposed services. Changes to thesepolicies could directly affect the structure and operation of thedomestic air cargo industry.The regulatory framework for airline passenger operations will also bea key determinant of the industry's structure in coming years.Inparticular, the arrangements implemented by the ComonwealthGovernment when the Airlines Agreement expiresin 1990 will have asignificant impact.Current arrangementsUnder the present regulatory regime for the domestic airline passengermarket, Australian and AAF would be expected to retain prominentpositions in the domestic air cargo industry. This reflects the lowoperating costs of mixed-configuration aircraft for daytime cargoservices, the advantages associated with established customer andservice networks and the links with major forwarding groups. Some68

Chapter 8expansion of other existing operators could occurbut this wouldprobably be limited to market niches requiring small aircraft or otherspecialist services not provided by the major airlines.The opportunities for profitable operation of freighter aircraft inthe Australian market are unlikely to increase significantly in thenear future. The small size of the domestic air cargo market,directional imbalances in traffic and the relatively high freightrates required for profitable freighter operations mean that the scopefor additional all-cargo operators is limited. AAF has reportedlyconsidered the operation of an Adelaide-Melbourne-Sydney-Brisbanefreighter service using two BAe 146 aircraft but concluded thatpresent traffic would not be sufficient for a viable operation(Aircraft 1986, 12). The experience of Bloodstock Air Services andCargomasters suggests that additional specialist freight carrierswould find it difficult to secure viable long-term niches in themarket, particularly if they did not have substantial financialsupport and links with major shippers. However, managerial strategiesand changes in economic conditions may have been significant factorsin the withdrawal of these operators.It seems unlikely that changes in the trunk airlines' operations wouldhave major effects on the networks operated by TNT Air, Wards Expressand Security Express - Country Couriers. The forwarders havespecialised in the carriage of high yielding traffic in smallfreighters and operate at times or on routes where the airlines do notprovide the required cargo services. However, scheduling changesbythe trunk airlines could eliminate the need for some small freighteroperations such as services into Darwin.The forwarders' operations could be significantly affected by anychanges to the arrangements for the transfer of bank documentation.In particular, increased use of electronic facilities could lead tothe withdrawal of many freighter services as non-bank cargo alonecould not support these operations.Arrangements for the transport of mail by air may be affected by theoutcome of the review recently undertaken by the Australian PostalComnission. The successful use of small charter aircraft on a trialbasis to move mai 1 between Melbourne , Sydney and Brisbane from June1986 may also have implications for the carriage of air mail. Thisexercise arose from attempts to overcome capacity problems on theearly evening passenger flights into Brisbane. The operation wasextended to include Canberra in June 1987. Limited use of charteraircraft on selected routes where the major air1 ines cannot provide69

Occasional Paper 87adequate capacity is expected to become a permanent feature of airmai 1 operations.Revised arrangementsThe entry of additional passenger carriers on the trunk routes wouldprobably affect the positions of AAF and Australian.In a highlycompetitive environment, new operators would be expected to competefor cargo traffic as a means of increasing their revenue andprofitability. However, the form of entry would be an importantconsideration. The introduction of additional wide-body aircraftcould,result in a substantial increase in cargo capacity on some majorroutes. On the other hand, the effect on capacity and competitionwould be smaller if the new operators used narrow-body aircraft.Inboth cases the established carriers would probably have competitiveadvantages as a result of their established operations.A substantial liberalisation of the regulatory framework for passengerservices could also affect the outlook for freighter operations sincethe removal of the present restrictions would allow greaterflexibility in pricing and aircraft use. As noted in Chapter 4, thecurrent regulatory framework for passenger operations reduces theattractiveness of using wide-body aircraft on night services which areprimarily directed at the freight market. A rapid expansion ofpassenger services would also increase the cargo capacity available onmixed-configuration aircraft. In this case, there could be someeffects on the operations of freighters.The IRERDA Comnittee recommended that Qantas should be permitted tocarry domestic freight on the domestic sectors of its internationalservices (Independent Review of Economic Regulation of DomesticAviation 1987, 29). Any relaxation of the restrictions on Qantascould affect the operations of the existing domestic carriers.However, the amount of additional cargo that Qantas could carry wouldprobably be limited by the international orientation of its operationsand the available capacity.In 1984-85 the capacity available fordomestic cargo on Qantas flights was around 20 000 tonnes which wasless than 12 per cent of the traffic carried by the domestic operatorsin that year (Qantas 1985, 53).Several other factors would also affect the penetration of thedomestic air cargo market by Qantas. Most of its capacity betweenAustralian ports is on daytime flights on the Sydney-Melbourne andSydney-Brisbane routes where there is already substantial capacity onthe domestic airlines' wide-body aircraft and strong competition fromroad 'transport operators. Service frequencies on other routes wouldbe too low for many domestic shippers. Arrival times for70

Chapter 8international services are also vulnerableto delays which wouldadversely affect the quality of service. In addition, the closerelationships between the major freight forwarders and the existingoperators of domestic air cargo services could make it difficult toattract a large amount of purely domestic cargo.CurfewsThe policy on curfews at Sydney, Brisbane and Adelaide airports willhave a major effect on the future structure of the air cargo industry.Completion of the new airport in Brisbane in late 1987 is expected topermit the removal of curfews in that city and a1 low the operation ofjet aircraft on night services (Gawan-Taylor 1984b, 25). However,industry sources suggest that the Sydney curfew is the key factor andthat unfettered access to Brisbane alone will not significantly affectnight freight operations in eastern Australia. The introduction ofquieter freighters such as the BAe 146 or revision of the noiseregulations could permit the operation of overnight jet services atthe other airports which are currently affected by curfews.Increased use of jet aircraft in these circumstances would enablecarriers to increase capacity on overnight cargo services and replacethe older turbo-prop equipment with newer freighters or aircraft fromtheir passenger fleets. This could adversely affect IPEC's mainlandoperations in particular as Australian, which uses mostof thecapacity on the Argosy aircraft, could find that it was moreeconomical to use its own jet aircrafton night freight services(Gawan-Taylor 1984b, 2). The agreement between Australian and IPECexpires in October 1987 but has reportedly been extended. AAF hasalso claimed that a moderate relaxation of curfews would enable it tooperate a1 l-cargo services on the Me1 bourne-Sydney-Brisbane routeusing B767 aircraft in place of the present Friendships and Westwinds(Aircraft 1986, 12).AircraftThe two trunk air1 ines are currently undertaking major aircraft reequipmentprograms. Changes in their fleets are primarily determinedby passenger market considerations but there are also implications forair cargo operations.Australian initially acquired five wide-body aircraftin the early1980s but has recently sold one and has another aircraft on lease toan overseas operator. The use of the A300 on the Perth route has beensubstantially reduced and these aircraft are now concentrated on theeast coast network. Any further changes in the wide-body fleet wouldhave a significant impact on cargo operations as the A300 provides a71

Occasional Paper 87large amount of capacity and is the only aircraft currently operatedby Australian which carries international containers.New aircraft purchases by Australian involve replacements for theand the 8727. The 8737-300 has similar cargo capabilities to theaircraft which it has replaced and hence it has not significantlyaffected cargo activities. Australian also placed an order for nineA320 aircraft to replace their B727 fleet but the acquisition wassubsequently deferred. The A320 program included equipment forcontainer operations which would improve cargo transhipment times ondomestic services and require significant expenditure on new groundhandling equipment.DC9DC9AT1 currently has A320 and F50 aircraft on order and underoption.The recent introduction of B737-300 aircraft into the domestic fleethas not significantly affected AAF's operations at this stage. Majorchanges in scheduling or the introduction of additional freighteraircraft are not expected in the medium term, although the purchase ofBAe 146 freighters is still a possibility. Various options are underconsideration by AAF.IPEC has also considered the purchase of new aircraft but the existingequipment is expected to be retained for some time. The BAe 146 hasnot been acquired as it is not compatible with other equipment used inAustralia and has a high capital cost.Broad operatl ng environmentThe future structure of the domestic air cargo industry will also beaffected by changes in the broad operating environment such as generaleconomic conditions and overall industry policy.The size of the domestic air cargo market will obviously have asignificant effect on the industry's structure. Other things beingequal, rapid growth would be expected to facilitate the emergence ofnew services by providing greater scope for the creation of viablemarket niches. It could also encourage increased specialisation orchanges in the mix of pure cargo and mixed-configuration operations.Slow growth or a contraction of the market could limit the scope forthese developments.The pattern of economic development in Australia will also influencethe structure of the air cargo industry. Increased activity inmanufacturing industry could lead to changesin air cargo movementsand the type of service required by shippers. Future development oftirne-sensitive industries such as finance and advertising will alsoaffect air cargo operations.72

~Chapter 8Changes in fuel prices could affect the relative economi CS of mixedconfigurationand freighter aircraft. Substantial increases wouldraise the operating costs of freighters. Under the existingregulatory framework, there would probably be a smaller effectonmixed-configuration operations due to the marginal nature of cargo onmany routes. Fuel price changes could also affect the relativecompetitiveness of road transport.73

CHAPTER 9 CONCLUDING REMARKSThe domestic air cargo industry has grown substantially in the postwarperiod but it still accounts for a relatively small proportion ofthe total domestic cargo market in terms of tonnes and tonnekilometres.Overnight express cargo is probably the largest categoryin terms of revenue. The major competitor in the markets serviced byair transport is express road services and there has been some loss oftraffic to road transport operators in recent years.Commonwealth regulation of airline passenger, freight and mailservices has had a major impact on the development of the domestic aircargo industry. Detailed economic regulation comenced in 1952 andthe two airline pol icy subsequently enabled TAA and Ansett to attainprominent positions in the domestic passenger and cargo markets.The Cornonwealth Government was generally opposed to the establishmentof specialist air freight carriers for much of the post-war period butthere was some relaxation of this policy after 1976. This enabled thefreight forwarders to increase their presence in the air cargo market.The new entrants essentially filled market niches that were notadequately serviced by the major airlines, although there were alsosome areas of competition.Legislative changes passed in 1981 reduced direct Comnonweal thGovernment controls over the domestic air cargo industry and enabledspecialist freight operators to acquire large turbo-jet aircraft.However, the industry was not completely deregulated as significantdirect and indirect regulation still remained.These amendments were followed by the temporary entry of two all-cargooperators. In addition, IPEC expanded its freighter operations andEast-West increased its involvement in the cargo market. Forwardersa1 so continued to develop their air freight activities, with MayneNickless acquiring the remaining major independent operators. Changesin the trunk airlines' activities included the introduction of widebodyaircraft and jet freighters, establishment of new managementstructures and changes in the nature and scope of freight activities.75

Occasional Paper 87Initial analysis of the available data does not provide sufficientinformation to identify the impact of the regulatory changes on thelevel of air freight traffic. Developments in the industry after 1981were affected by a variety of factors such as the introduction of newaircraft to meet the requirements of the passenger market, high realinterest rates, changes in distribution practices and increasedcompetition from road transport operators.AAF and Australian still have major rolesin the carriage of airfreight and mail in Australia. IPEC has grown rapidly to become thethird largest carrier but traffic carriedby regional and commuterairlines has generally declined in recent years. Qantas providesdomestic transport for some overseas cargo under bond.Freight forwarders provide a substantial proportion of the cargocarried by the trunk airlines. Most of the forwarder trafficishandled by affiliates of TNT and Mayne Nickless and several of theseorganisations also operate air services. Companies controlled by TNTsupport AAF while Mayne Nickless has a close comercial relationshipwith Australian.Mixed-configuration aircraft provide a substantial amount of capacityfor the movement of air cargo but have several shortcomings from theviewpoint of air cargo operations. This has led to the operation offreighters on various services. The use of freighters is limitedbyfactors such as the small size of the Australian market, imbalances intraffic and the relatively high operating costs of these aircraft.Freighters are used for the movement of both overnight express freightas well as bank documentation and other urgent cargo during the day.Networks are operated by Australian, AAF, TNT Air, IPEC and the WardsExpress and Security Express - Country Couriers divisions of MayneNickless. The available data suggest that capacity utilisation onair1 ine freighter services has declined in recent years.Freight rate schedules are published by the major airlines and variousfreight forwarders. Rates vary between carriers andin response .tofactors such as delivery time and direction oftravel. Publishedrates generally apply to smaller shippers but there are substantialdiscounts for large shippers. Payments for the carriage of mail aremainly determined by a cost-based formula although there is also anelement of negotiation.Published freight rates generally increased in real terms during thelate 1970s and early 1980s but they declined in 1986. Information onthe market rates paid by larger shippers is more difficult to obtain,76

Chapter 9but it appears that in at least some cases they have declined in realterms in recent years.Forecasts prepared by the BTE indicate that freight carried by thetrunk airlines and IPEC will grow significantly over the period to2000. Freight carried by comuter operators is expected to grow at aslightly faster rate but regional airline traffic is forecast toincrease slowly or contract slightly. The amount of cargo moved byair may be affected by factors such as computerisation, increased useof facsimile machines, penetration of the express market by roadtransport operators and changes in the structure of Australianindustry.The future structure of the domestic air cargo industry will bedetermined by a variety of factors. The regulatory framework for thepassenger market will be a particularly important influence and willalso affect the level of traffic. The policy on curfews will havemajor effects. Other important considerations include aircraft reequipmentprograms by the trunk airlines, the size of the domestic aircargo market and the pattern of economic development in Australia.77

APPENDIX I FREIGHTER NETWORKS OF DOMESTIC AIRLINES AND FORWARDERS79

a30TABLE 1.1 AUSTRALIAN AIRLINES' FREIGHTER NETWORK, NOVEMBER 1986Days operatedavOpera tor andRoute aircraft Non Tues Wed Thurs Fr i lCdt Sun P2>Transcontinental %Perth-Melbourne-Perth Australian B727 X X X XEast coast capitalsAdelaide-Me1 bourne-Sydney-Bri sbane IPEC Argosya X X X XBrisbane-Sydney-Melbourne-Adelaide IPEC Ar osya X X X XSydney-Melbourne-Sydney Norfolk% .King.Air X X X XPurcell CitationX X X XMe1 bourne-Canberra-Sydney' NorfolkbKing X Air X X XAustralian DC9XMelbourne-Canberra-Melbourne Interai r Mu2 X X X X XCanberra-Melbourne-Canberra L1 oydai r Aerostar X XBrisbane-Sydney-Brisbane Australian F27QC X X X X XSydney-Brisbane-SydneyAviation CentreAerostar X X X XSydney-Brisbane Australian DC9QueenslandCairns-Townsville-Mackay-Brisbane-Rockhampton-Mackay-Townsville-Cairns Norfolkb King X Air X X XXY.05

TABLE 1.1 (Cont.) AUSTRALIAN AIRLINES' FREIGHTER NETWORK, NOVEMBER 1986RouteDays operatedOpera tor anda ircraf t Mon Tues Wed Thurs Fr i Sat SunTasrnani aMelbourne-Launceston-Melbourne IPEC DCgd X X X X X XHobart-Melbourne-Launceston-Hobart Australian DC9 XLaunceston-Hobart Air TasfHeron X X X XHobart-Launceston-Hobart Ai r TasfNavajo X X X Xa. Five-sixths of capacity is leased to Australian.b. Norfolk Island Airlines.c. Aircraft is operated under contract to Wards who lease a1 1 space to Australian on this leg and use itthemselves on the return flight.d. Equivalent of one flight per evening available to Australian. Three or four flights are operated eachnight.f. Airlines of Tasmania.Source Australian Airlines (pers. corn. 1986).m

W TABLE 1.2 AAF'S FREIGHTER NETWORK, NOVEMBER 1986Route-l.Days operatedQ=lOperatora andn!va ircraf t Mon Tues Wed Thurs Fri Sat Sun 2TranscontinentalMe1 bourne-Perth-Me1 bourne AAF X B727 X XEast coast capitals and QueenslandMelbourne-Sydney Ansett B767 X X X XSydney-Melbourne Ansett B767 X X X XSydney-Melbourne-Sydney Rundle Cessna 404 X X X XCanberra-Melbourne-Canberra Vee H Cessna 380 X X X XMe1 bourne-Brisbane-Me1 bournebPel Air Westwind X X X XBrisbane-MelbournebPel Air Westwind XMelbourne-Brisbane-Cairns Starflight Westwind X X X XCairns-Mackay-Brisbane-Melbourne Starflight Westwind X X X XSydney-Brisbane-Mackay-Townsville Air NSW F27QC X X X XTowsville-Brisbane-Sydney Air NSW X F27QC X X XSydney-Brisbane-Sydney Air NSW F27QCTownsville-Brisbane Air NSW F27QCXTownsvi 1 1 e-Cai rns Rundle Cessna 404XBrisbane-Townsville-Cairns Air NSW F27QCMt Isa-Longreach-Brisbane-returnc Rundle Cessna 404 X X X XTownsville-Mt Isa Rundle Cessna 404Rockhampton-Brisbane-Rockhampton Pel Air Shorts X 360 X X XXXXXXXcnB 5CO\I

TABLE 1.2 (Cont.) AAF'S FREIGHTER NETWORK, NOVEMBER 1986Days operatedOpera tora andRoute a ircraf t Mon Tues Wed i Sat Thurs SunFrTasman i aMelbourne-Launceston-Melbourne AAF 0727 X X X X XLaunceston-Hobart-Launceston Air Tas X HeronAi r Tas NavajoXWestern AustraliaPerth-Pt Hedland-Perth Ansett F28 WAX X XPt Hedland-KarrathaFortescueAerocomnander X X XPt Hedland-ParaburdooFortescueAeroconmander X X XPerth-Pt Hedland-Karratha-Paraburdoo-Geraldton-Perth Ansett WA F28 XPerth-Pt Hedland-Broome-Derby F28Ansett WA XPerth-Karratha-Pt Hedland-Paraburdoo-Perth Ansett WA XF28a. Abbreviations are used for Rundle Air Services (Rundle), Vee H Aviation (Vee H), Airlines of Tasmania (AirTas) and Fortescue Air (Fortescue).b. Aircraft chartered by Australia Post for this service.c. Designates identical ports on return journey.WSource AAF (pers. corm. 1986).

TABLE 1.3-TNT AIR'S OVERNIGHT FREIGHTER NETWORK, INTERSTATE AND QUEENSLAND ROUTES, NOVEMBER 1986Days operated2Opera tora andB5Route aircraft Mon Tues Wed i Sat Thurs Sun FrNorthern and central AustraliaDarwin-Katherine-Tennant Ck-Adelaide-Sydney-returnbPel Air Westwind X X X XDarwin-Katherine-Tennant Ck-Alice Springs-Adelaide-Melbourne-Sydney Pel Air WestwindSydney-Melbourne-Adelaide-Alice Springs-Tennant Ck-Katherine-Darwin Pel Air X WestwindA1 i ce Spri ngs-Adel ai de-Me1 bournereturnbTillair Conquest X X X XEast coast capitalsSydney-Me1 bourne-Sydney Aviation Aerostar X X XbBrisbane-Sydney-Melbourne-return Tillair Citation X X X XBrisbane-Sydney-Coolangatta-Brisbane Tillair ConquestXXX%

~~ ~~TABLE 1.3 (Cont.) TNT AIR'S OVERNIGHT FREIGHTER NETWORK, INTERSTATE AND QUEENSLAND ROUTES, NOVEMBER 1986RouteQueenslandBrisbane-Mackay-Townsville-CairnsTownsville-Brisbane-Mackay-TownsvilleBrisbane-Townsvi 1 le-Bri sbaneBrisbane-Emerald-BrisbaneEmerald-Brisbane-EmeraldEmerald-Longreach-EmeraldTasmaniaHobart-Launceston-Devonport-Melbourne-Devonport-HobartDays operatedOpera tora andaircraft Mon Tues Wed Thurs Fr i Sat SunIPEC Argosy XCountry Bandierante XTillair ConquestXNorfolk King AirXCentral ChieftainXCentral Aztec X X X XCentral LanceXAirChieftain TasX X X Xa. Abbreviations are used for Aviation Centre (Aviation), Country Couriers (Country), Norfolk Island Airlines(Norfolk), Central Highlands Air Taxis (Central) and Airlines of Tasmania (Air Tas).b. Designates identical ports on return journey.Source TNT Air (pers. corn. 1986).

% TABLE 1.4 TNT AIR'S DAYTIME FREIGHTER NETWORK, NSW AND 1986 SA ROUTES, NOVEMBER :Routed Operator b -2. andNew South Wales2Sydney-Tamworth-Armidale-Glen Innes-Inverell-return Aviation Aerostar-Q m5Sydney-Bathurst-Mudgee-Coolah-Coonabarabran-Coonamble-Walgett-return Donoghue BaronSydney-Dubbo-Warren-Nyngan-Cobar-Bourke-Brewarrina-return Donoghue % BaronSydney-Cowra-Cootamundra-Narrandera-Jerilderie-Deniliquin-return Aviation AerostarDeniliquin-Moulamein-Balranald-WentworthMacKnightsCowra-West Wyalong-Griffith-Hay-return Western SeneSydney-Canberra-Tumut-Wagga-A1 bury-Corowa-return Le Claire AerostarTamworth-Narrabri-Moree-Mungindi-Collarenabri-Lightning Ridge-return Donoghue Twin ComnancheSydney-Goulburn-Canberra-Cooma-returnAviationSydney-Nowra-Moruya-Merimbula-returnDonoghueSydney-Orange-Parkes-Condobolin-L. Cargelligo-Hillston-Ivanhoe-Wilcannia-Broken Hi 1 l-return Aviation AerostarSouth AustraliaAdelaide-Pt Pi rie-Whyal la-Pt Augusta-Hawker-return Cessna 402Adelaide-Pt Lincoln-Lock-Wudinna-Streaky Bay-Ceduna-return Cessna 310Adelaide-Minlaton-Cowell-Cleve-Kimba-return Cessna 310Adelaide-Kingston-Naracoorte-Millicent-Mt Gambier-return Cessna 402a. Return journey generally covers the same ports.b. Abbreviations are used for Aviation Centre (Aviation), Donoghue Executive Charters (Donoghue), WesternAirlines (Western), Le Claire Aviation (Le Claire) and MacKnights Airlines (MacKnights).Source TNT Air (pers. comm. 1986).n11,cnQ3mY

TABLE 1.5 WARDS EXPRESS AND SECURITY EXPRESS - COUNTRY COURIERS FREIGHTER NETWORK, APRIL 1987Days operatedRoute’ A ircra f t Mon Tues Wed ThursWards ExpressDarwin-Alice Springs-Melbourne Learjet 35a X X X XMelbourne-Sydney-Alice Springs-Darwin Learjet 35a X X X XSecurity Express - Country CouriersVictoriaEssendon-Horsham-Hamilton-return Navajo X X X X XEssendon-Warrnambool-Portland-return Aero Comnander X X X X XbEssendon-Swan Hill-Mildura-return Baron X X X X XEssendon-Sale-Bairnsdale-return Partenavia X X X X XEssendon-Wangaratta-Albury-return X X X X XEssendon-Bendigo-Essendon C C C C CNew South WalesSydney-Lismore-Coolangatta-returnSydney-Macksville-Coffs Harbour-Grafton-returnSydney-Taree-Port Macquarie-Kernpsey-returnSydney-Belmont-SydneySydney-Newcastle-Warkworth-returnSydney-Newcastle-Williamtown-returnAerostar X X X X XBaron X X X X XJet Ranger X X X X XX X X X X bX X X X XBX X X X X %a2(+

CO03 2r,TABLE 1.5 (Cont.) WARDS EXPRESS AND SECURITY EXPRESS - COUNTRY COURIERS FREIGHTER NETWORK, APRIL 1987a(nDays operatedaURoutea Aircraft Mon Tues Wed FriThursQueenslandCairns-Townsville-Mackay-Rockhampton-Brisbane-return Spence X X X XBrisbane-Mackay-Proserpine-Townsville-Cairns-return Cessna 210 X X X X XBrisbane-Thangool-Emerald-Dysart-Mackay-return Partenavia X X X X XBrisbane-Maryborough-Bundaberg-Gayndah-return Chieftain X X X X XMackay-Hughenden-Cloncurry-Mount Isa-return X X X X XdBrisbane-Dalby-Roma-Mitchell-Charleville-return X X X X XEmerald-Alpha-Barcaldine-Longreach-return X X X X XRockhampton-Townsville-Rockhampton X X X X XTownsville-Gladstone-Townsville X X X X XTownsville-Rockhampton-GladstoneXSydney-Brisbane-Sydney X X X XBrisbane-Sydney-Brisbane X X X Xa. Return journey generally covers the same ports.b. Return flight includes Bendigo.c. Back-up flight where required.d. Return flight includes Toowoomba.Source Mayne Nickless (pers. corn. 1987).

REFERENCESAbbreviationsAGPS Australian Government Publishing ServiceBTE Bureau of Transport EconomicsTAA Trans Austral ia Ai rl inesAge (1986), Curfews hinder air cargo: Ansett, Transport Supplement,19 May, 3.Aircraft (1982), TAA - a complete cargo division, October, 16-19.- (1986), Deregulation a failure - cargo boss, August, 12.Ansett Transport Industries (1980), Annua7 Financial Report Pursuantto Clause 11 of 1972 Airiines Agrement, 1979-80 and earlier issues.Australian Airlines (1986), Annua7 Report 1985-86, Frankland.Australian Bureau of Statistics (1986), Interstate Freight Movement,Australia, 1984-85, Cat. No. 9212.0, Canberra.Australian Financial Review (1986), Airlines battle for $500m freightmarket, 2 April.Australian F7ying (1986), Carrying the Costs of Air Freight,March/April, 46-47.Australian Postal Comnission (1985), Suhission to Independent Reviewof Economic Regulation of Domestic Aviation, Melbourne.Australian Transport (1979a), New airfreight system, March, 27.- (1979b), Ai rl ines, April, 6-7.- (1983), Wide-body Airbus A300 boosts cargo for TAA, March, 14-15.BTE (1980), Papers and Proceedings of the Forkshop on the Future ofAir Freight in Australia, AGPS, Canberra.89

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ABBREVIATIONSAA F Ansett Air FreightAFE Ansett Freight ExpressANA Australian National AirwaysAT I Ansett Transport IndustriesGDP Gross Domestic ProductIRERDA Independent Review of Economic Regulation of DomesticAviationTAA Trans Australia Airlines95l