Impact of Competition Enhancing Air Services Agreements: A Network Modelling Approach

Staff research paper

Impact of Competition Enhancing Air Services Agreements: A Network Modelling Approach by Tendai Gregan and Martin Johnson was released on 19 July 1999. The research paper supplements appendix F (Impact of Liberalised International Air Services Agreements) of the inquiry report, International Air Services. It provides the technical details to the model developed in the course of the Commission's inquiry. This paper is directed to a technical audience. Policy details and institutional information are found in the Inquiry report.

The objective of the modelling is to support the Inquiry report in addressing a number of its terms of reference, namely:

• assess whether the International Air Services Commission allocation process provides net benefits to Australia, including reference to the value of provisions designed to favour new entrants;
• analyse and assess the benefits, costs and overall effects of the international aviation regulatory framework ... for tourism, consumers, air freight and the aviation industry; ... and
• assess the options for greater liberalisation.

The paper has five parts. The first part is a review of recent literature regarding the passenger aviation industry and its applicability to the questions addressed by the inquiry. The second part presents the general theory of the airline network problem, the price-setting behavioural model and its numerical solution algorithm. The third part presents the specification of the model for the Australia-Asia air travel market. The fourth part presents the implementation of the Ansett entry simulation. The fifth part examines the impact of altering current Air Services Agreements (ASAs) by creating an open club of countries, in which club member airlines can fly as they wish between each others' countries. An appendix contains a table of base cost data by flight sector, a summary of validation experiments which test the ability of various demand and cost specifications of the model to replicate observed quantities and prices, a discussion of the sensitivity of Ansett results to various demand parameter assumptions and a representative GAMS 1 program used for the base case scenario in the multi-market network model.