Impact of the Virgin Blue Air NZ Alliance on the Cairns-Auckland Route

Impact of the Virgin Blue Air NZ Alliance on the Cairns-Auckland Route 16 June 2010 Submission to the ACCC and NZ MOT, by Access Economics Pty Limited, for Cairns Airport

Impact of Airline Alliance on Cairns Access Economics Pty Limited This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Permission for any more extensive reproduction must be obtained from Access Economics Pty Limited through the contact officer listed for this report. Disclaimer While every effort has been made to ensure the accuracy of this document and any attachments, the uncertain nature of economic data, forecasting and analysis means that Access Economics Pty Limited is unable to make any warranties in relation to the information contained herein. Access Economics Pty Limited, its employees and agents disclaim liability for any loss or damage which may arise as a consequence of any person relying on the information contained in this document and any attachments. Access Economics Pty Limited ABN 82 113 621 361 www.accesseconomics.com.au CANBERRA MELBOURNE SYDNEY Level 1 9 Sydney Avenue Barton ACT 2600 Level 27 150 Lonsdale Street Melbourne VIC 3000 Suite 1401, Level 14 68 Pitt Street Sydney NSW 2000 T: +61 2 6175 2000 F: +61 2 6175 2001 T: +61 3 9659 8300 F: +61 3 9659 8301 T: +61 2 9376 2500 F: +61 3 9376 2501 For information on this report please contact Stephen Corcoran T: 02 6175 2000 E: steve.corcoran@accesseconomics.com.au Report prepared by Stephen Brown Stephen Corcoran David Quach

Impact of Airline Alliance on Cairns Contents 1 Summary... 1 2 Supporting information... 4 2.1 A region heavily dependent on tourism... 4 2.2 Indirect flights are a poor substitute... 4 2.3 Potential for entry is low... 4 2.4 Demand is not very price sensitive... 5 2.5 Market concentration data... 7 2.6 Options... 8 2.7 Further work... 9 Tables Table 2.1 : Airlines operating on Cairns-Auckland: not a dynamic route... 6 Table 2.2 : HHI measure of market concentration... 8 Glossary ACCC ADL AKL Alliance BNE CHC CNS DUD HHI HLZ MEL MOT NZ OOL PER ROT SYD TNQ WLG ZQN Australian Competition and Consumer Commission Adelaide Auckland The proposed Alliance between Virgin Blue (incl Pacific Blue) and Air NZ Brisbane Christchurch Cairns Dunedin Herfindahl-Hirschman Index Hamilton Melbourne NZ Ministry of Transport New Zealand Coolangatta/Gold Coast Perth Rotorua Sydney Tropical North Queensland (encompasses Cairns, Port Douglas, Daintree, etc) Wellington Queenstown

Impact of Airlines Alliance on Cairns 1 Summary This Cairns-Auckland route is a non-essential element of the Virgin Blue Air NZ Alliance (the Alliance): it is not relevant to the core Alliance aspiration of competing for Qantas high-yield business travel. Therefore, the Australian Competition and Consumer Commission (ACCC) and New Zealand Ministry of Transport (NZ MOT) should consider whether the Alliance s code-sharing agreement for this route, standing alone, has a net public benefit. The Alliance is likely to result in substantial anti-competitive detriment and higher airfares on the Cairns-Auckland route. Unlike most other trans-tasman city pairs, there is no competition from the Qantas/Jetstar group, nor Emirates, on the Cairns- Auckland route. There is inadequate competition from poor substitutes, such as indirect routes via Brisbane or via Sydney. The threat of entry onto this route is low. And the Alliance s submission overstates the price sensitivity of demand. Furthermore, the public benefits described by the Alliance service quality improvements are focused on other city pairs and do not apply to the Cairns- Auckland route. Therefore, an Alliance on the Cairns-Auckland route is likely to provide few upsides and significant downsides in public benefits hence an overall net negative public benefit particularly for the tourism industry in Tropical North Queensland (TNQ) and for the NZ travelling public. Access Economics recommends that the ACCC and NZ MOT exclude the Cairns- Auckland route from the proposed Alliance. Cairns Airport commissioned Access Economics to review the proposed Alliance between Virgin Blue and Air New Zealand (the Alliance). Pacific Blue is a subsidiary of Virgin Blue, so the Alliance encompasses Pacific Blue operations. Currently, the only airlines that operate the Cairns-Auckland route are Pacific Blue and Air NZ. The Alliance will result in 100% of capacity on the Cairns-Auckland route being operated by Alliance airlines. The Cairns-Auckland route is one of only three (the others being Wellington-Brisbane and Dunedin-Brisbane) where the Alliance will result in a route that is currently competitive with both Air NZ and Pacific Blue operating on the route becoming 100% operated by the Alliance. For all other routes, if the proposed Alliance were to go ahead: High-volume routes to Sydney, Melbourne and Brisbane/Gold Coast would continue to have competition from the Qantas/Jetstar group, and in several cases, Emirates. On these routes, there may be the Alliance s claimed public benefit from having a stronger competitor to the Qantas/Jetstar group. Low-volume routes to Perth, Adelaide, Dunedin and Rotorua, which currently only have Air NZ operating on the route because the available demand cannot support more than 1

Impact of Airlines Alliance on Cairns one operator, would most likely remain a single airline route (hence no increase in concentration occurs on those routes). These routes may benefit indirectly from the Alliance connections onto the Virgin Blue domestic network. The Cairns-Auckland route is therefore different to most other trans-tasman routes. The Alliance will result in a substantial increase in market concentration on this route. While the Alliance s public submission (p60) suggests that there would be little impact on the route due to indirect competition through Brisbane and the threat of entry by Qantas/Jetstar, we find that there is likely to be both a substantial anti-competitive detriment and limited public benefits: Substantial anti-competitive detriment: Using the data in Annexure K of the Alliance public submission, the Herfindahl- Hirschman Index on the Cairns route increases from a score of 0.5338 to the maximum score of 1.0000. This is the greatest increase in concentration on any trans-tasman city pair (other than Wellington-Brisbane). Qantas/Jetstar have shown little appetite to operate on the Cairns-Auckland route for many years, and the market is dominated by NZ residents travelling to TNQ (rather than TNQ residents travelling to NZ), so the threat of entry by an Australian-based airline is low. The ease of airlines entering routes is overstated. Airlines cannot simply switch on a new route in response to an abuse of the Alliance s new monopoly on the route. In addition, a strong Alliance that dominates the Cairns-Auckland route would be a powerful deterrent to a potential new entrant. While some parts of the trans-tasman market have been dynamic in recent years, the Cairns-Auckland route has seen very little change in the competitive landscape for many years, until Pacific Blue entered the route recently. Competition from indirect flights through Brisbane are a poor substitute for direct flights, due to the additional distance and time involved in transiting and changing terminals at Brisbane or Sydney (the domestic terminals at Brisbane and Sydney are not co-located with the respective international terminals). The Alliance comment regarding Cairns-Auckland in its public submission (p60) directly contradicts its own expert (InterVISTAS, Annexure H, p3), who find that direct flights and elapsed travel time affect demand. The point-to-point leisure market serviced by the Auckland-Cairns route will only have poor substitutes available if it becomes a monopoly route. Limited public benefits: Much of the public benefits of the Alliance relate to the Alliance becoming a stronger competitor against the Qantas/Jetstar group. This argument does not apply to the Cairns route. The route is mostly leisure travellers, who will not benefit from the New World Carrier focus on high-yield passengers and lounges. While the Alliance public submission (p48) suggests there will be increased frequencies on some routes (like Perth and Adelaide), there is no proposed increase in frequencies on the Cairns route. 2

Impact of Airlines Alliance on Cairns The point-to-point leisure market on the Cairns route is unlikely to benefit from other aspects of the Alliance, such as booking systems and connections. The Alliance is focussed on capturing more business travellers, which is not a factor on the Cairns route. Any improvements in productive efficiency on the Cairns-Auckland route are not likely to be passed on to consumers due to the lack of competition on the route. Therefore, any gains in productive efficiency should be given low weight, if any, as a public benefit. Weighing up the large increase in market concentration on this route and the limited, if any, public benefits leads to the clear conclusion that an Alliance on the Cairns-Auckland route would lead to significant negative net public benefits. Access Economics recommends that the ACCC and NZ MOT omit the Cairns-Auckland route from the Alliance Agreement. If the Cairns-Auckland route were not excluded from the Alliance, as a minimum other conditions (such as maintaining current capacity, price monitoring or price caps) may be necessary to limit the anti-competitive detriment on this city pair, given its unusual characteristics compared with other trans-tasman city pairs. Access Economics, June 2010 3

Impact of Airlines Alliance on Cairns 2 Supporting information 2.1 A region heavily dependent on tourism Cairns and the wider TNQ region it serves is heavily dependent on air travel because of its remoteness and its reliance on tourism. In a landmark report on tourism vulnerability, 1 Access Economics found that of all regions in Australia, TNQ was the most reliant on tourism (both in terms of the region s economic value added and employment). The attached study provides further details on the region served by Cairns Airport and the economic consequences to the TNQ region of an aviation shock. Anticompetitive detriment caused the Alliance on the route is likely to have substantial flow-on effects on the TNQ region. Cairns, and the wider TNQ region, has suffered a number of aviation setbacks recently, with reductions in airline capacity to key destinations (such as Japan, Hong Kong, Bali and Malaysia). As a result, it is a particularly difficult time for any further setbacks in the aviation links to Cairns. 2 2.2 Indirect flights are a poor substitute The additional time and inconvenience of transiting through Brisbane Airport or Sydney Airport (both of which require a change of terminal) is a poor substitute for the direct Cairns-Auckland route. Due to the change of terminal, the minimum connection time is around 2 hours, making the trip from Auckland-Brisbane-Cairns or Auckland-Sydney-Cairns unappealing, to the point where passengers are willing to fly a red-eye overnight direct flight on Pacific Blue rather than take a daytime indirect flight via Brisbane. 2.3 Potential for entry is low The Alliance s public submission (p60) suggests that the Qantas/Jetstar group could easily enter the Cairns-Auckland route to take advantage of a situation where the Alliance was abusing its monopoly on the route. The Alliance also suggests (p4) that the trans-tasman is highly competitive and dynamic. However, the Qantas/Jetstar group has shown little appetite for operating on the Cairns- Auckland route. The route is mostly used by New Zealand residents travelling to Cairns (that is, inbound New Zealand travellers), and not Australia-resident outbound travellers. Immigration Card data shows that in recent years, on average, 60% of arrivals on this route are on NZ passports and only 10% are on Australian passports (the remainder are mostly from the US and UK). This makes it more difficult for an Australian-based airline to compete for NZ- 1 Access Economics (2009) Vulnerabilities study: regions with a high dependency on tourism, available at http://www.ret.gov.au/tourism/documents/tourism%20policiy/vulnreabilities-study.pdf, and attached 2 Access Economics (2008) Direct international aviation access to regional Australia, attached 4

Impact of Airlines Alliance on Cairns based customers against a NZ-based Alliance. The strength of the Alliance on this route would be a major deterrent to entry. Data from the Bureau of Infrastructure, Transport and Regional Economics (BITRE), www.bitre.gov.au, shows that Air NZ is the only airline operating the Cairns-Auckland route for the whole range of the dataset from the end of 2003 to the start of 2010 (see Table 2.1 on the following page). If airlines can easily enter and exit routes as claimed in the Alliance s public submission there should have been much more variation and experimentation evident in the list of airlines operating on the route in recent years. In addition, capacity on the route had been fairly flat for many years. Note that quarterly BITRE data is available from Sep 2003 to December 2005 and monthly data from Jan 2006 to Jan 2010 (and Jan 2010 is the latest available data). Only in recent months has Pacific Blue started operating the Cairns-Auckland route. This entry onto the route was a rare event, rather than a regular occurrence. If an Alliance was permitted on the Cairns-Auckland route, it may be many years before such an entry occurs again if at all 2.4 Demand is not very price sensitive The Alliance s public submission is unclear about the Alliance s assumptions or modelling about price sensitivity on the Cairns-Auckland route. Attempts to estimate the price sensitivity of demand for air travel are often mis-specified. Air travel is only one part of the tourism bundle. Tourists purchase air fares in combination with accommodation, taxis, rental cars, tours and entertainment. The elasticity of the airfare component needs to be estimated in the context of its impact on the overall price of the bundle. Indicatively, a New Zealand family might spend NZ$2,000 on airfares as part of a NZ$5,000 holiday in the TNQ region. As such, the sensitivity of demand to any onepercentage-point increase in airfares is diluted by a factor of around 2.5:1. As such, the airfare elasticities claimed by airlines tend to imply an implausibly high elasticity for the whole tourism bundle. The most common form of mis-specification comes from airlines using highly disaggregated data which omits demand substitutions across time or across airlines. For example, a passenger that substitutes from (say) a Thursday flight with Air NZ to instead fly on a Friday flight with Pacific Blue, may be seen as a highly price sensitive traveller that chose not to travel at all with Air NZ, due to a change in price, based on Air NZ s disaggregated company data. However, if more appropriately aggregated market data were used (for example, monthly data for both airlines), it would be clearly seen that the change in price by Air NZ did not actually result in a reduction in demand at all, and that there is considerable spill and recapture of demand within a route, or over time. As such, airline claims of highly price sensitive demand is often due to a myopic misreading of their company-specific data, ignoring substitutions of demand across time, or substitutions of demand across airlines operating on the same route. There is usually smaller demand responses observed when data is aggregated to the level of a monthly all-airline route total. 5

Impact of Airlines Alliance on Cairns Table 2.1: Airlines operating on Cairns-Auckland: not a dynamic route Month In/Out Australian International Airline Route Sep-03 I Cairns Auckland Air New Zealand AKL-CNS Sep-03 O Cairns Auckland Air New Zealand CNS-AKL Dec-03 I Cairns Auckland Air New Zealand AKL-CNS Dec-03 O Cairns Auckland Air New Zealand CNS-AKL Mar-04 I Cairns Auckland Air New Zealand AKL-CNS Mar-04 O Cairns Auckland Air New Zealand CNS-AKL Jun-04 I Cairns Auckland Air New Zealand AKL-CNS Jun-04 O Cairns Auckland Air New Zealand CNS-AKL Sep-04 I Cairns Auckland Air New Zealand AKL-CNS Sep-04 O Cairns Auckland Air New Zealand CNS-AKL Dec-04 I Cairns Auckland Air New Zealand AKL-CNS Dec-04 O Cairns Auckland Air New Zealand CNS-AKL Mar-05 I Cairns Auckland Air New Zealand AKL-CNS Mar-05 O Cairns Auckland Air New Zealand CNS-AKL Jun-05 I Cairns Auckland Air New Zealand AKL-CNS Jun-05 O Cairns Auckland Air New Zealand CNS-AKL Sep-05 I Cairns Auckland Air New Zealand AKL-CNS Sep-05 O Cairns Auckland Air New Zealand CNS-AKL Dec-05 I Cairns Auckland Air New Zealand AKL-CNS Dec-05 O Cairns Auckland Air New Zealand CNS-AKL Jan-06 I Cairns Auckland Air New Zealand AKL-CNS Jan-06 O Cairns Auckland Air New Zealand CNS-AKL Feb-06 I Cairns Auckland Air New Zealand AKL-CNS Feb-06 O Cairns Auckland Air New Zealand CNS-AKL Mar-06 I Cairns Auckland Air New Zealand AKL-CNS Mar-06 O Cairns Auckland Air New Zealand CNS-AKL Apr-06 I Cairns Auckland Air New Zealand AKL-CNS Apr-06 O Cairns Auckland Air New Zealand CNS-AKL May-06 I Cairns Auckland Air New Zealand AKL-CNS May-06 O Cairns Auckland Air New Zealand CNS-AKL Jun-06 I Cairns Auckland Air New Zealand AKL-CNS Jun-06 O Cairns Auckland Air New Zealand CNS-AKL Jul-06 I Cairns Auckland Air New Zealand AKL-CNS Jul-06 O Cairns Auckland Air New Zealand CNS-AKL Aug-06 I Cairns Auckland Air New Zealand AKL-CNS Aug-06 O Cairns Auckland Air New Zealand CNS-AKL Sep-06 I Cairns Auckland Air New Zealand AKL-CNS Sep-06 O Cairns Auckland Air New Zealand CNS-AKL Oct-06 I Cairns Auckland Air New Zealand AKL-CNS Oct-06 O Cairns Auckland Air New Zealand CNS-AKL Nov-06 I Cairns Auckland Air New Zealand AKL-CNS Nov-06 O Cairns Auckland Air New Zealand CNS-AKL Dec-06 I Cairns Auckland Air New Zealand AKL-CNS Dec-06 O Cairns Auckland Air New Zealand CNS-AKL Jan-07 I Cairns Auckland Air New Zealand AKL-CNS Jan-07 O Cairns Auckland Air New Zealand CNS-AKL Feb-07 I Cairns Auckland Air New Zealand AKL-CNS Feb-07 O Cairns Auckland Air New Zealand CNS-AKL Mar-07 I Cairns Auckland Air New Zealand AKL-CNS Mar-07 O Cairns Auckland Air New Zealand CNS-AKL Apr-07 I Cairns Auckland Air New Zealand AKL-CNS Apr-07 O Cairns Auckland Air New Zealand CNS-AKL May-07 I Cairns Auckland Air New Zealand AKL-CNS May-07 O Cairns Auckland Air New Zealand CNS-AKL Jun-07 I Cairns Auckland Air New Zealand AKL-CNS Jun-07 O Cairns Auckland Air New Zealand CNS-AKL Jul-07 I Cairns Auckland Air New Zealand AKL-CNS Jul-07 O Cairns Auckland Air New Zealand CNS-AKL Aug-07 I Cairns Auckland Air New Zealand AKL-CNS Aug-07 O Cairns Auckland Air New Zealand CNS-AKL Sep-07 I Cairns Auckland Air New Zealand AKL-CNS Sep-07 O Cairns Auckland Air New Zealand CNS-AKL Oct-07 I Cairns Auckland Air New Zealand AKL-CNS Oct-07 O Cairns Auckland Air New Zealand CNS-AKL Nov-07 I Cairns Auckland Air New Zealand AKL-CNS Nov-07 O Cairns Auckland Air New Zealand CNS-AKL Dec-07 I Cairns Auckland Air New Zealand AKL-CNS Dec-07 O Cairns Auckland Air New Zealand CNS-AKL Jan-08 I Cairns Auckland Air New Zealand AKL-CNS Jan-08 O Cairns Auckland Air New Zealand CNS-AKL Feb-08 I Cairns Auckland Air New Zealand AKL-CNS Feb-08 O Cairns Auckland Air New Zealand CNS-AKL Mar-08 I Cairns Auckland Air New Zealand AKL-CNS Mar-08 O Cairns Auckland Air New Zealand CNS-AKL Apr-08 I Cairns Auckland Air New Zealand AKL-CNS Apr-08 O Cairns Auckland Air New Zealand CNS-AKL May-08 I Cairns Auckland Air New Zealand AKL-CNS May-08 O Cairns Auckland Air New Zealand CNS-AKL Jun-08 I Cairns Auckland Air New Zealand AKL-CNS Jun-08 O Cairns Auckland Air New Zealand CNS-AKL Jul-08 I Cairns Auckland Air New Zealand AKL-CNS Jul-08 O Cairns Auckland Air New Zealand CNS-AKL Aug-08 I Cairns Auckland Air New Zealand AKL-CNS Aug-08 O Cairns Auckland Air New Zealand CNS-AKL Sep-08 I Cairns Auckland Air New Zealand AKL-CNS Sep-08 O Cairns Auckland Air New Zealand CNS-AKL Oct-08 I Cairns Auckland Air New Zealand AKL-CNS Oct-08 O Cairns Auckland Air New Zealand CNS-AKL Nov-08 I Cairns Auckland Air New Zealand AKL-CNS Nov-08 O Cairns Auckland Air New Zealand CNS-AKL Dec-08 I Cairns Auckland Air New Zealand AKL-CNS Dec-08 O Cairns Auckland Air New Zealand CNS-AKL Jan-09 I Cairns Auckland Air New Zealand AKL-CNS Jan-09 O Cairns Auckland Air New Zealand CNS-AKL Feb-09 I Cairns Auckland Air New Zealand AKL-CNS Feb-09 O Cairns Auckland Air New Zealand CNS-AKL Mar-09 I Cairns Auckland Air New Zealand AKL-CNS Mar-09 O Cairns Auckland Air New Zealand CNS-AKL Apr-09 I Cairns Auckland Air New Zealand AKL-CNS Apr-09 O Cairns Auckland Air New Zealand CNS-AKL May-09 I Cairns Auckland Air New Zealand AKL-CNS May-09 O Cairns Auckland Air New Zealand CNS-AKL Jun-09 I Cairns Auckland Air New Zealand AKL-CNS Jun-09 O Cairns Auckland Air New Zealand CNS-AKL Jul-09 I Cairns Auckland Air New Zealand AKL-CNS Jul-09 O Cairns Auckland Air New Zealand CNS-AKL Aug-09 I Cairns Auckland Air New Zealand AKL-CNS Aug-09 O Cairns Auckland Air New Zealand CNS-AKL Sep-09 I Cairns Auckland Air New Zealand AKL-CNS Sep-09 O Cairns Auckland Air New Zealand CNS-AKL Oct-09 I Cairns Auckland Air New Zealand AKL-CNS Oct-09 O Cairns Auckland Air New Zealand CNS-AKL Nov-09 I Cairns Auckland Air New Zealand AKL-CNS Nov-09 O Cairns Auckland Air New Zealand CNS-AKL Dec-09 I Cairns Auckland Air New Zealand AKL-CNS Dec-09 O Cairns Auckland Air New Zealand CNS-AKL Jan-10 I Cairns Auckland Air New Zealand AKL-CNS Jan-10 O Cairns Auckland Air New Zealand CNS-AKL Source: BITRE 6

Impact of Airlines Alliance on Cairns A counter-example of this is that industry-wide price increases (such as the ubiquitous fuel surcharge increases a few years ago) actually had relatively little impact on aggregate demand or route-specific demand, drawing into question the airline assertions of highly price sensitive demand for air travel. If the Cairns-Auckland route was really highly price sensitive, then past increases in fuel surcharges would have caused a collapse in demand on the route. It is recommended that the ACCC and NZ MOT request further information about the modelling of price sensitivity to come to their own views about its robustness. 2.5 Market concentration data This section provides market concentration statistics for the Cairns-Auckland route and compares that with other trans-tasman routes. There are other statistical tests that could also be undertaken to demonstrate the competitive impacts of the Alliance. Unfortunately, Cairns Airport was not informed of the proposed Alliance until shortly before submissions to the ACCC were due. As a result, Access Economics has not had time to undertake more detailed market analysis or modelling. However, we would welcome the opportunity to provide further analysis at the Draft Decision stage of the Authorisation process. Some options for further work are provided in Section 2.7. In the time available for this submission, we have prepared market concentration indices, using the Herfindahl-Hirschman Index (HHI) method. This is a well-documented measure of market concentration, calculated as the sum of the squared market shares of each airline on the route. For example, a monopoly route, with 100% of capacity operated by a single airline, would have the maximum HHI of 1.0 2 = 1.0. A route with two airlines, each with 50% market share has a HHI of 0.5 2 +0.5 2 =0.5. As the number of (independent) airlines operating on the route increases, the HHI becomes closer to zero. In these calculations, we treat the Qantas/Jetstar group as one airline. We then calculate the HHI without the Alliance and with the Alliance (the latter uses the sum of DJ/NZ capacity). We use the market capacity data from the Alliance s public submission, Annexure K. The results in Table 2.1 clearly show that the Alliance will cause a significant increase in market concentration on the Cairns-Auckland route, from a HHI of 0.5338 now, increasing to 1.0000 with the proposed Alliance. Other things equal, this would tend to result in greater market power on this route. Additional, the poor substitutability of the indirect Auckland-Brisbane- Cairns route, the low threat of entry, and the overstatement of price sensitivity, suggests that the Alliance will result in a substantial anti-competitive detriment on this route, and higher airfares. 7

Impact of Airlines Alliance on Cairns Table 2.2: HHI measure of market concentration HHI calculations using the data from Annexure K in the Alliance's public submission NORTHERN SUMMER 2010 ROUTE NZ DJ QF/JQ EK OTHERS NZ+DJ HHI WITHOUT ALLIANCE HHI WITH ALLIANCE CHANGE IN HHI SYD AKL 28% 6% 35% 17% 13% 34% 0.2503 0.2839 0.0336 SYD WLG 30% 19% 51% 0% 0% 49% 0.3862 0.5002 0.1140 SYD CHC 20% 9% 39% 33% 0% 29% 0.3091 0.3451 0.0360 SYD ZQN 32% 29% 39% 0% 0% 61% 0.3386 0.5242 0.1856 SYD HLZ 0% 100% 0% 0% 0% 100% 1.0000 1.0000 0.0000 SYD ROT 100% 0% 0% 0% 0% 100% 1.0000 1.0000 0.0000 SYD DUD 0% 0% 0% 0% 0% 0% 0.0000 0.0000 0.0000 MEL AKL 34% 12% 33% 21% 0% 46% 0.2830 0.3646 0.0816 MEL WLG 45% 0% 55% 0% 0% 45% 0.5050 0.5050 0.0000 MEL CHC 32% 26% 42% 0% 0% 58% 0.3464 0.5128 0.1664 MEL ZQN 74% 0% 26% 0% 0% 74% 0.6152 0.6152 0.0000 MEL DUD 0% 0% 0% 0% 0% 0% 0.0000 0.0000 0.0000 BNE/OOL AKL 38% 21% 26% 15% 0% 59% 0.2786 0.4382 0.1596 BNE/OOL WLG 45% 55% 0% 0% 0% 100% 0.5050 1.0000 0.4950 BNE/OOL CHC 29% 38% 33% 0% 0% 67% 0.3374 0.5578 0.2204 BNE/OOL ZQN 56% 29% 15% 0% 0% 85% 0.4202 0.7450 0.3248 BNE/OOL HLZ 0% 100% 0% 0% 0% 100% 1.0000 1.0000 0.0000 BNE/OOL DUD 29% 71% 0% 0% 0% 100% 0.5882 1.0000 0.4118 ADL AKL 100% 0% 0% 0% 0% 100% 1.0000 1.0000 0.0000 AKL CNS 63% 37% 0% 0% 0% 100% 0.5338 1.0000 0.4662 AKL PER 100% 0% 0% 0% 0% 100% 1.0000 1.0000 0.0000 NORTHERN WINTER 2010 ROUTE NZ DJ QF/JQ EK OTHERS NZ+DJ HHI WITHOUT ALLIANCE HHI WITH ALLIANCE CHANGE SYD AKL 31% 6% 34% 16% 13% 37% 0.2578 0.2950 0.0372 SYD WLG 38% 17% 45% 0% 0% 55% 0.3758 0.5050 0.1292 SYD CHC 26% 8% 36% 30% 0% 34% 0.2936 0.3352 0.0416 SYD ZQN 31% 29% 40% 0% 0% 60% 0.3402 0.5200 0.1798 SYD HLZ 0% 100% 0% 0% 0% 100% 1.0000 1.0000 0.0000 SYD ROT 100% 0% 0% 0% 0% 100% 1.0000 1.0000 0.0000 SYD DUD 100% 0% 0% 0% 0% 100% 1.0000 1.0000 0.0000 MEL AKL 35% 11% 30% 23% 0% 46% 0.2775 0.3545 0.0770 MEL WLG 55% 0% 45% 0% 0% 55% 0.5050 0.5050 0.0000 MEL CHC 40% 26% 34% 0% 0% 66% 0.3432 0.5512 0.2080 MEL ZQN 100% 0% 0% 0% 0% 100% 1.0000 1.0000 0.0000 MEL DUD 100% 0% 0% 0% 0% 100% 1.0000 1.0000 0.0000 BNE/OOL AKL 33% 21% 26% 15% 5% 54% 0.2456 0.3842 0.1386 BNE/OOL WLG 47% 53% 0% 0% 0% 100% 0.5018 1.0000 0.4982 BNE/OOL CHC 32% 40% 28% 0% 0% 72% 0.3408 0.5968 0.2560 BNE/OOL ZQN 100% 0% 0% 0% 0% 100% 1.0000 1.0000 0.0000 BNE/OOL HLZ 0% 100% 0% 0% 0% 100% 1.0000 1.0000 0.0000 BNE/OOL DUD 0% 100% 0% 0% 0% 100% 1.0000 1.0000 0.0000 ADL AKL 100% 0% 0% 0% 0% 100% 1.0000 1.0000 0.0000 AKL CNS 63% 37% 0% 0% 0% 100% 0.5338 1.0000 0.4662 AKL PER 100% 0% 0% 0% 0% 100% 1.0000 1.0000 0.0000 2.6 Options The Cairns-Auckland route is not an essential element of the code-sharing agreement between the Alliance. Including this route in the code-sharing agreement would not help the Alliance be a more effective competitor against the Qantas/Jetstar group since the Qantas/Jetstar group does not fly this route. Furthermore, most of the flights in the code share agreement are on other routes. The Cairns route is dominated by leisure travellers (mostly inbound NZ 8

Impact of Airlines Alliance on Cairns residents) and does relate to the core Alliance aspiration of a New World Carrier with highyield business travellers using lounges. Since the Cairns-Auckland route is not an essential element of the code-sharing agreement, the ACCC and NZ MOT should consider whether the Alliance s code-sharing agreement for this route, standing alone, has a net public benefit. This report shows that when considering the code-sharing agreement for the Cairns-Auckland route in isolation, there is likely to be significant negative public benefits. Accordingly, the ACCC and NZ MOT should only grant authorisation if the Cairns-Auckland route is entirely excluded from the proposed code-sharing agreement. At a minimum, the ACCC and NZ MOT could consider imposing other conditions that limit the anti-competitive detriment: requiring the current level of capacity (of Pacific Blue plus Air NZ) to be maintained on the route; monitoring prices or number of flights or passengers travelling on the route; imposing price caps for flights on the route. 2.7 Further work Since Cairns Airport was only informed of the proposed Alliance shortly before submissions to the ACCC were due, Access Economics was not able to conduct further analysis that would be useful in informing the ACCC and NZ MOT s decision. Other relevant statistical and economic analysis that could assist the ACCC and NZ MOT in assessing the impact of the Alliance on the Cairns-Auckland route include: Analysing the correlation between airfares on the Brisbane-Auckland route and the Cairns-Auckland route. Once network-wide sources of price variation are removed (such as oil prices and exchange rates), we anticipate that there is little remaining correlation between these two routes, hence price movements on the Brisbane-Auckland route do not affect the Cairns-Auckland route, thus Brisbane-Auckland is a separate market and not a close substitute for the Cairns-Auckland route. This would thus contradict the assertions in the Alliance s public submission (p60). General Equilibrium modelling of the downstream impacts of the proposed Alliance on the TNQ tourism industry. We anticipate that this would show significant knock-on effects to the regional economy from a monopoly air link on one of the region s key tourism source markets. There would also be a significant welfare loss for the NZ travelling public. Estimation of the elasticity of demand on the route. As noted above, because airfares are only one part of the tourism bundle (indicatively, a New Zealand family might spend NZ$2,000 on airfares as part of a NZ$5,000 holiday in the TNQ region), the elasticity of demand to the airfare component of the tourism bundle is relatively low. Combined with other common mis-specifications, we dispute the claim in the Alliance s public submission (p60) that demand on the Cairns route is highly price sensitive and are confident that a robust econometric study would show that the own-price elasticity of demand with respect to airfares is inelastic. 9

Impact of Airlines Alliance on Cairns We encourage the ACCC and NZ MOT to consider these additional sources of evidence. Access Economics, June 2010 Attachment 1: Access Economics (2009) Vulnerabilities study: regions with a high dependency on tourism Attachment 2: Access Economics (2008) Direct international aviation access to regional Australia 10

COMMERCIAL-IN-CONFIDENCE February 2009 Vulnerabilities study: regions with a high dependency on tourism Report by Access Economics Pty Limited for Department of Resources, Energy and Tourism

Commercial-in-Confidence Vulnerabilities study TABLE OF CONTENTS EXECUTIVE SUMMARY... i 1. Introduction... 1 2. Background... 2 2.1 Australia s Tourism Regions... 2 The Top 20 Tourism Regions... 4 2.2 Assessing vulnerability... 5 3. Profile of Australia s Top 20 Tourism Regions... 7 3.1 Population characteristics... 7 3.2 Key economic indicators... 8 3.3 Industrial composition... 13 3.4 Locational characteristics... 14 4. Regional reliance on tourism... 17 4.1 Establishing economic reliance... 17 4.2 Reliance estimates... 19 4.3 Reliance on particular markets... 22 5. Conclusions & implications for vulnerability... 38 6. Tropical North Queensland: A tourism-reliant regional economy... 41 7. Economic modelling... 44 7.1 Model framework... 44 7.2 Key parameters... 45 7.3 Modelling results... 47 7.4 Summary of modelling results... 54 7.5 Regional comparisons... 55 8. References... 56 Appendix A: List of Tourism Regions... 58 Appendix B: Detailed outlook for international tourism... 59 Appendix C: AE-RGEM Technical Note... 61 Disclaimer While every effort has been made to ensure the accuracy of this document, the uncertain nature of economic data, forecasting and analysis means that Access Economics Pty Limited is unable to make any warranties in relation to the information contained herein. Access Economics Pty Limited, its employees and agents disclaim liability for any loss or damage which may arise as a consequence of any person relying on the information contained in this document.

Commercial-in-Confidence Vulnerabilities study FIGURES Figure 2.1: Tourism Regions of Australia by statistical local area 3 Figure 2.2: Stylised representation of the analysis of economic vulnerability 6 Figure 3.1: Industry structure of selected Tourism Regions 13 Figure 4.1: International and domestic visitor nights, total Australia 2000-2008 23 Figure 4.2: Source of tourism expenditure in each Tourism Region (% total) 24 Figure 4.3: Regions with largest share of interstate and intrastate overnight domestic visitors 26 Figure 4.4: Domestic visitor nights to Top 20 Regions by purpose of visit, 2007 26 Figure 4.5: Visitor nights to Top 20 Regions by country of origin, year ending September 2008, aggregate 29 Figure 4.6: Visitor nights to Top 20 Regions by purpose of visit, year ending September 2008 35 Figure 6.1: Visitor nights to Tropical North Queensland by country of origin, Year ending September 2008 41 TABLES Table 2.1: Top 20 Tourism Regions, by visitor type, 2008 ($M) 5 Table 3.1: Key population characteristics of Australia s Top 20 Tourism Regions 7 Table 3.2: Key economic indicators for Australia s Top 20 Tourism Regions 10 Table 3.3: Key Locational characteristics of Australia s Top 20 Tourism Regions 16 Table 4.1: Concordance of TRA and ABS industry classifications 18 Table 4.2: Economic reliance on tourism in Australia s Top 20 Tourism Regions: tourism value-added as a proportion of total value-added 20 Table 4.3: Economic reliance on tourism in Australia s Top 20 Tourism Regions 22 Table 4.4: Domestic visitors and expenditure in Top 20 Regions, 2008 25 Table 4.5: Top 20 Regions with more than 50% of domestic visitor nights for holidays, 2007 27 Table 4.6: Top 5 Regions by purpose of trip, 2007 28 Table 4.7: Top 5 countries of origin, Top 20 Regions, by expenditure 30 Table 4.8: Regions with more than 15% of total visitor nights from one country of usual residence, year ending September 2008 32 Table 4.9: Tourism Forecasting Committee forecasts for visitor arrivals, 2009 and average 2007-2017 34 Table 4.10: Holidaymakers as share of total international visitors to Top 20 Regions, year ending September 2008 36

Commercial-in-Confidence Vulnerabilities study Table 4.11: Main reason for visit, top 5 Regions for each category by % of total visits to that Region, year ending September 2008 36 Table 5.1: Top 5 Regions reliant on domestic day, domestic overnight and international visitors, by proportional expenditure, 2008 39 Table 5.2: Top 5 Regions reliant on leisure travellers and single source markets 39 Table 7.1: Regions and sectors in general equilibrium modelling 45 Table 7.2: Baseline macroeconomic assumptions, 2009-2013, on average (%) 46 Table 7.3: Estimated elasticities, by primary purpose of travel 46 Table 7.4: Expenditure per TNQ visitor, 2008 47 Table 7.5: Direct impacts, scenario 1, 2009 to 2013 48 Table 7.6: Key macroeconomic results, Scenario 1, cumulative results for the TNQ economy 49 Table 7.7: Sensitivity analysis, direct effects, Scenario 1 49 Table 7.8: Sensitivity analysis, cumulative impacts on real output in the TNQ economy in 2013, scenario 1 50 Table 7.9: Direct impacts, scenario 2, 2009 to 2013 50 Table 7.10: Key macroeconomic results, Scenario 2, cumulative results, 2013 51 Table 7.11: Direct impacts, scenario 3, 2009 to 2013 52 Table 7.12: Key macroeconomic results, Scenario 3, cumulative results, 2013 52 Table 7.13: Direct impacts, scenario 4, 2009 to 2013 53 Table 7.14: Key macroeconomic results, Scenario 4, cumulative results, 2013 54 Table 7.15: Summary of general equilibrium modelling results, 5yr NPV 54

Commercial-in-Confidence Vulnerabilities study EXECUTIVE SUMMARY Access Economics was engaged by the Department of Resources, Energy and Tourism (RET) to undertake an economic analysis of Australia s Top 20 Tourism Regions, assessing their economic reliance on domestic and international markets and their vulnerability to tourism-related and broader economic shocks. As an example of a region with high dependency on tourism, particular focus is afforded to the Tropical North Queensland (TNQ) region. Australia s Top 20 Tourism Regions Tourism Research Australia (TRA) establishes Australia s Top 20 Tourism Regions based on estimated total tourism expenditure the combined expenditure on tourism-related goods and services in a given region by intrastate, interstate and international visitors (summarised in Table A). Expenditure estimates are based on data collected through the International Visitor Survey (IVS) and National Visitor Survey (NVS). Against this measure, Sydney was Australia s top tourism region in 2008 with just under $12 billion in tourism expenditure. TABLE A: AUSTRALIA S TOP 20 TOURISM REGIONS, 2008 Rank Region Domestic day trip ($m) Domestic Overnight ($m) International ($m) Overall ($m) 1 Sydney 4,786 1,599 5,366 11,751 2 Melbourne 4,822 1,298 3,000 9,120 3 Brisbane 2,757 957 1,354 5,068 4 Gold Coast 3,090 498 940 4,528 5 Experience Perth 2,161 832 1,481 4,474 6 Tropical North Queensland 1,546 185 1,030 2,761 7 Sunshine Coast 1,822 456 180 2,458 8 Adelaide 1,529 340 456 2,325 9 Mid North Coast 1,561 395 85 2,041 10 South Coast 1,263 521 140 1,924 11 Canberra 992 261 211 1,464 12 Hunter 773 451 144 1,368 13 Australia's SW 910 289 107 1,306 14 Northern Rivers 819 245 121 1,185 15 Central NSW 605 308 21 934 16 Hobart and Surrounds 661 96 157 914 17 Western 622 201 57 880 18 Fitzroy 550 269 55 874 19 Central Coast 509 312 23 844 20 Northern 604 135 79 818 Source: Tourism Research Australia i

Commercial-in-Confidence Vulnerabilities study Assessing vulnerability The conditions in which the tourism industry operates can be volatile. However, despite shocks such as SARS, changing global economic conditions, and movements in underlying factors such as exchange rates, the tourism industry has shown resilience. A focus of this report is assessing the vulnerability of Australia s Top 20 Tourism Regions to tourism-related economic shocks. In making such an assessment, several key factors are considered: economic reliance; reliance on particular markets or market segments; and, broader economic and locational characteristics. Economic reliance among Australia s Top 20 Tourism Regions As Table B shows, the ranking of Australia s Top 20 Tourism Regions changes considerably under these metrics. For example, while Sydney was the top region by absolute tourism expenditure, in terms of value-added reliance, it ranks 13. This is because, despite high levels of tourism expenditure, the size of Sydney as an economy means that tourism makes a relatively lower contribution than it does in, for example, TNQ. TABLE B: ECONOMIC RELIANCE ON TOURISM IN AUSTRALIA S TOP 20 TOURISM REGIONS, 2008 Rank Region Emp. Rank Region Two of the primary indicators of a region s reliance on tourism are the proportion of valueadded or net output which is generated by tourism, and the proportion of a region s employment which is directly associated with tourism. Table B shows estimates for both of these measures, ranking the Top 20 Tourism Regions according to tourism share of valueadded. Valueadded Valueadded Emp. 1 Tropical North 15.5% 19.9% 11 Canberra 4.1% 4.8% Queensland 2 Mid North Coast 15.1% 15.8% 12 Fitzroy 3.7% 5.5% 3 Sunshine Coast 13.2% 16.9% 13 Sydney 2.7% 4.1% 4 Gold Coast 11.5% 15.6% 14 Melbourne 2.7% 3.7% 5 Australia's South 9.1% 10.4% 15 Hunter 2.7% 4.3% West 6 Western 8.6% 9.4% 16 Central Coast 2.6% 6.6% 7 South Coast 8.1% 13.9% 17 Northern 2.6% 4.3% 8 Explorer Country 5.6% 6.2% 18 Brisbane 2.5% 3.5% 9 Northern Rivers Tropical NSW 10 Hobart and Surrounds 5.3% 6.5% 19 Experience Perth 2.5% 3.4% 4.7% 5.8% 20 Adelaide 2.1% 2.5% ^ Ranking based on total reliance on tourism Reliance on particular markets or market segments To the extent that the tourism industry is a significant component of the region s economy, high dependence on particular aspects of the industry can increase the regional economy s vulnerability. For example, heavy reliance on domestic tourism exposes an economy to the impacts of a slowdown in the domestic economy, or a shock to the price of domestic tourism, ii

Commercial-in-Confidence Vulnerabilities study while heavy reliance on international tourism generates exposures to the global economy, and to movements in currency rates. Table C shows the top five Regions for each broad visitor classification based on the share of total expenditure in the region and hence the top five regional tourism industries susceptible to shocks specific to each segment of the market. The analysis shows that, as a proportion or tourism expenditure in the region, Central Coast is the most reliant on domestic day travellers, the Mid North Coast on overnight travellers, and Sydney the most reliant on international travellers. Rank 1 2 TABLE C: TOP 5 REGIONS RELIANT ON DOMESTIC DAY, DOMESTIC OVERNIGHT AND INTERNATIONAL VISITORS, BY PROPORTIONAL EXPENDITURE, 2008 Domestic day Central Coast Central NSW % total expenditure 37.0% 33.0% Domestic overnight Mid North Coast Sunshine Coast % total expenditure International % total expenditure 76.5% Sydney 45.7% 74.1% 3 Hunter 33.0% Northern 73.8% 4 Fitzroy 30.8% 5 South Coast Hobart and Surrounds Tropical North Queensland Experience Perth 37.3% 33.1% 72.3% Melbourne 32.4% 27.1% Western 70.9% Brisbane 26.7% In terms of international tourism, the greater the reliance on a single, or small number of source markets, the greater the vulnerability. Heavy reliance on a single market generates risks for a region, simply through absence of diversification. In addition, the characteristics of that individual market whether it is an expanding or contracting market, and the travel patterns of residents can accentuate this. Table D shows the five Regions in the Top 20 that rely most heavily on a single international market. TABLE D: TOP 5 REGIONS RELIANT ON A SINGLE INTERNATIONAL SOURCE MARKET Rank Region % total visitors 1 North Coast 33.8% (United Kingdom) 2 Central Coast 30.5% (United Kingdom) 3 Sunshine Coast 28.4% (New Zealand) 4 Gold Coast 25.9% (New Zealand) 5 South Coast 25.1% (China) Purpose of travel can have a major bearing on the way travellers respond to changing market economic conditions, and in particular to changes in price. The relatively high price sensitivity of leisure travellers leaves regions heavily reliant on holidaymakers particularly susceptible to price shocks, such as fuel price spikes. As Table E shows, of the Regions in the Top 20, Western and TNQ are the most reliant on leisure travellers. iii

Commercial-in-Confidence Vulnerabilities study TABLE E: TOP 5 REGIONS RELIANT ON LEISURE TRAVELLERS (%TOTAL VISITORS) Rank Region % total visitors 1 Western 69% 2 Tropical North Queensland 66% 3 Gold Coast 64% 4 Australia s South West 63% 5 Mid North Coast 62% ^International and domestic overnight Broader economic and locational characteristics When considering vulnerability, certain economic characteristics can be thought of that render an economy more resilient to economic shocks, or more able to respond in a way that limits the adverse consequences on the economy of a tourism downturn. The key economic indicator adopted to gauge conditions in the regional economy is unemployment. To the extent that the unemployment rate demonstrates the scarcity of labour in an economy, it can indicate the ease with which those who lose work as a result of an industry downturn are able to regain it elsewhere in the economy. Though no Region in the Top 20 can be deemed to have a particularly high rate of unemployment at present, those where unemployment is highest, and hence the job opportunities are lowest, include Sunshine Coast, Adelaide and Sydney. A region s locational characteristics demonstrate, among other things, its accessibility both for domestic and international visitors and the magnitude of its proximate source market. These factors can be key determinants of a region s ability to attract and retain visitors of a certain origin, as well as their propensity to be impacted by transport-related shocks. Based on the locational indicators analysed here, it is observed that: Most Regions in the Top 20 are within relatively close proximity to a domestic airport and are hence readily accessible to tourists utilising domestic air services. The main exceptions to this and the only regions more than 100km from a domestic airport are Australia s South West (224km), Explorer Country (222km) and Western (165km). Accessibility to international air services varies markedly across the Top 20 again, driven mostly by their proximity to capital cities. Gold Coast and TNQ (Cairns) rank highly against this measure due to the presence of their own airports. Those regions which are relatively less accessible by direct international air services include Hobart and Surrounds (604 km from the nearest international airport), Fitzroy (479km) and Northern (297km). Similarly, the size of the proximate domestic catchment is greatest for Regions close to capital cities, with more remote Regions such as TNQ and Northern ranking lowly against this measure. The proximity to international source markets is greatest among regions on the west and north coast of Australia, with these areas falling within narrow-body aircraft range of many South-East Asian nations and major aviation hubs an important factor in their capacity to attract Low Cost Carriers (LCCs). Tropical North Queensland: a tourism-reliant regional economy Based on the estimates developed in this report, TNQ is determined to be the most tourismreliant regional economy in the Top 20. An estimated 15.5% of the Region s value-added is attributable to tourism, and nearly 20% of employment. Domestic overnight visitors are the iv

Commercial-in-Confidence Vulnerabilities study major source of tourism income for the region, accounting for 56% of tourism expenditure. Reflecting the fact that 37% of tourism expenditure in the region accrues from international visitors, an estimated 5% of TNQ s value-added (i.e. one third of the total attributable to tourism) is generated by international tourism the highest of any region in the Top 20. The TNQ tourism industry depends heavily on a small number of international markets. Japan (25%), the United Kingdom (19%) and the United States (13%) account for nearly 60% of international visitors to the Region. The vulnerability associated with the region s heavy reliance on the Japanese market has been underscored in recent years, and this will continue to pose a threat to tourism in the region until new markets are effectively developed. In addition, with around three-quarters of visitors to the region travelling for leisure, the susceptibility to price shocks, including aviation fuel price shocks, is high. The locational characteristics of TNQ are mixed. Though the distance to the nearest capital city is vast Brisbane is some 1,362km away domestic and international air access to the region is strong, thanks to the presence of Cairns airport. The region s remoteness, relative to the Australian population, means the proximate domestic source market is relatively small, with just 494,000 people residing within 800 km. Conversely, the Region has the largest proximate international source market among the Top 20, with 344 million people within a 5,000 km radius. Economic modelling In order to illustrate the economy-wide impacts of various tourism-related economic shocks on a regions heavily reliant on tourism, general-equilibrium modelling is undertaken. In this modelling, TNQ has been considered as a regional case study. Four scenarios are developed and modelled over the five years to 2013: 1 The withdrawal of the air services from Nagoya, Japan to Cairns 2 A slowdown in the domestic economy 3 A slowdown in the international economy 4 A shock (increase) to the price of aviation fuel In the case of scenarios 2 and 3, the modelling reflects the impacts of a slowdown on the regional economy, via its impacts on tourism. The broader impacts of an international slowdown on the TNQ economy are not considered here. A summary of the results of the general equilibrium modelling are summarised in Table F below which shows, in five-year net present value (NPV) terms, the economic impacts on the TNQ economy of the alternative economic shocks which have been modelled. v

Commercial-in-Confidence Vulnerabilities study TABLE F: SUMMARY OF GENERAL EQUILIBRIUM MODELLING RESULTS, 5YR NPV Scenario Real household consumption ($m) Real output ($m) Scenario 1-16.7-48.2 Scenario 2-36.7-102.9 Scenario 3-68.0-188.1 Scenario 4-52.2-147.4 The results indicate that of the scenarios modelled, those which impact on both the domestic and the international tourism markets have considerably larger effects. The greatest impacts are observed under the global economic slowdown scenario (Scenario 3), where a fall in domestic and international visitor numbers combine to significantly decrease tourism activity in TNQ. Under this scenario, the loss in real output to the Region over the five years to 2013 is estimated at $188 million in NPV terms, while the loss in real household consumption an indicator of economic welfare is around $68 million. The magnitude of the impacts under the domestic economic slowdown scenario (Scenario 2) is around half that estimated for the global economic slowdown. Also affecting both the international and domestic segment of the market, the aviation fuel price shock (Scenario 4) has the second greatest impact, reducing real output and real household consumption by $147 million and $52 million respectively, in five-year NPV terms. The impacts of the withdrawal of the Cairns-Japan services (Scenario 1), while by no means insignificant, are the smallest of those modelled here in their quantitative impact. Real output is reduced by $48 million over the five years and real household consumption by $16.7 million. As only a single source market is affected and as a large proportion of visitors are assumed to still make their way to Cairns (albeit spending less) the magnitude of the impacts under this scenario are far less than when large segments of the industry are affected. While regional comparisons have not been modelled, the high concentration of tourism in TNQ reflected in an estimated 15.5% of value-added and 19.9% of employment being generated by tourism means that the TNQ economy would be the most heavily impacted by a general shock to tourism activity. Access Economics February 2009 vi

Commercial-in-Confidence Vulnerabilities study 1. INTRODUCTION Following the announcement of the withdrawal of international air services from Nagoya, Japan to Cairns in June 2008, the Minister for Tourism, the Honourable Martin Ferguson AM MP, announced that the Australian Government would provide $4 million in funding to assist the Tropical North Queensland (TNQ) tourism industry. As part of a range of measures encompassed in the package, it was indicated that funding would be allocated to the Department of Resources, Energy and Tourism (RET) to undertake research into enhancing the understanding of Australia s tourism industry and its susceptibility to economic shocks. As part of this research agenda, Access Economics was commissioned by RET to undertake an economic analysis of regions with a high dependency on tourism, assessing their economic reliance on domestic and international markets and their vulnerability to tourismrelated and broader economic shocks. The focus of the analysis is on Australia s Top 20 Tourism Regions in particular the TNQ Region, with other Regions drawn upon as comparators. The analysis is principally concerned with the vulnerability of the regional economy itself - which, in broad terms, is a function of the size of the tourism industry relative to the overall economy, together with the characteristics of the regional economy and its tourism industry. The vulnerability of the tourism industry is therefore considered insofar as it impacts on the vulnerability of the region s economy, however the nuances of various tourism attractions are not analysed in detail in their own right. The report is structured as follows: Section 2 outlines the basis for establishing Australia s Top 20 Tourism Regions and provides other background to the report. Section 3 profiles Australia s Top 20 Tourism Regions, focussing in particular on those characteristics relevant to and associated with tourism reliance and vulnerability. Section 4 analyses the reliance of Australia s Top 20 Tourism Regions on tourism, including measures of overall economic reliance and reliance on particular domestic and international markets and market segments. Section 5 brings together the findings of Section 3 and 4 to present a summary of the relative tourism reliance and vulnerability of the Top 20 Regions. Section 6 presents economy-wide modelling results for a series of tourism-related and more general economic shocks in the context of the TNQ Region, with results and lessons extrapolated to other Regions. 1

Commercial-in-Confidence Vulnerabilities study 2. BACKGROUND 2.1 AUSTRALIA S TOURISM REGIONS Australia s Tourism Regions are geographical areas defined by national and state/territory tourism organisations and adopted by peak industry bodies. They represent aggregations of Statistical Local Areas (SLAs) small units of the Australian Standard Geographical Classification. Concordance files provided by the Australia Bureau of Statistics (ABS) allow SLA-level data to be readily aggregated into Tourism Regions, allowing the geographic, demographic and economic characteristics of these Regions to be analysed. There are 85 Tourism Regions in Australia, varying in size from the inner capital cities such as Sydney and Melbourne to the vast expanses of outback Western Australia captured in Australia s Golden Outback and Australia s North West. Figure 2.1 shows the concordance between SLAs and Tourism Regions. The Top 20 Tourism Regions (defined and discussed below) are also identified. 2

Commercial-in-Confidence Vulnerabilities study FIGURE 2.1: TOURISM REGIONS OF AUSTRALIA BY STATISTICAL LOCAL AREA Boigu (IC) Erub (IC) Badu (IC) Mer (IC) Tiwi Islands (CGC) Hammond (IC) Bamaga (IC) SLA Boundary Alawa Kunbarllanjnja (CGC) Jabiru (T) Marngarr (CGC) Mapoon (S) Napranum (S) Coomalie (CGC) East Arnhem - Bal Nauiyu Nambiyu (CGC) Daly Thamarrurr (CGC) Angurugu (CGC) Binjari (CGC) Elsey Yugul Mangi (CGC) Lockhart River (S) Aurukun (S) Cook (S) Pormpuraaw (S) 6 Hope Vale (S) Tourism Region Boundary Wyndham-East Kimberley (S) Timber Creek (CGC) Borroloola (CGC) Gulf TROPICAL NORTH QUEENSLAND Douglas (S) Mornington (S) Derby-West Kimberley (S) Victoria Daguragu (CGC) Elliott District (CGC) Unincorp. Islands Carpentaria (S) Doomadgee (S) Cairns (C) - Barron Mareeba (S) Atherton (S) Johnstone (S) Broome (S) Burke (S) Cardwell (S) Lajamanu (CGC) Tableland Croydon (S) Hinchinbrook (S) Halls Creek (S) Port Hedland (T) Roebourne (S) East Pilbara (S) Exmouth (S) Ashburton (S) Carnarvon (S) Ngaanyatjarraku (S) Meekatharra (S) Wiluna (S) Shark Bay (S) Murchison (S) Cue (S) Northampton (S) Laverton (S) Chapman Valley (S) Mount Magnet (S) Leonora (S) Geraldton (C) Morawa (S) Irwin (S) Perenjori (S) Menzies (S) Carnamah (S) Dalwallinu (S) Dandaragan (S) Koorda (S) Kalgoorlie/Boulder (C) - Pt A Kalgoorlie/Boulder (C) - Pt B Westonia (S) Victoria Plains (S) EXPERIENCE PERTH 5 Boddington (S) Bunbury (C) AUSTRALIA'S SOUTH WEST 13 Dundas (S) Corrigin (S) Kulin (S) Dumbleyung (S) Esperance (S) Ravensthorpe (S) Kent (S) Albany (C) - Central Tanami Yuendumu (CGC) Watiyawanu (CGC) ADELAIDE 8 WESTERN 17 NORTHERN EXPLORER COUNTRY MELBOURNE 2 20 Alpurrurulam (CGC) Mackay (C) - Pt A Nebo (S) Hanson Anmatjere (CGC) Boulia (S) Belyando (S) Winton (S) Aramac (S) Arltarlpilta (CGC) Livingstone (S) - Pt B Peak Downs (S) Sandover Livingstone (S) - Pt A Jericho (S) Fitzroy (S) - Pt A Ilfracombe (S) Alice Springs (T) - Charles Ltyentye Purte (CGC) Calliope (S) - Pt A FITZROY Miriam Vale (S) Diamantina (S) Isisford (S) Blackall (S) 18 Monto (S) Petermann-Simpson Bundaberg (C) Tambo (S) Barcoo (S) Eidsvold (S) Taroom (S) Mundubbera (S) Goondiwindi (T) Lismore (C) - Pt A Coober Pedy (DC) Brewarrina (A) Bourke (A) Guyra (A) Narrabri (A) Roxby Downs (M) Uralla (A) Coonamble (A) Unincorp. Flinders Ranges Unincorp. Far West Warren (A) Bogan (A) Gilgandra (A) Central Darling (A) Broken Hill (C) Peterborough (DC) Kimba (DC) Northern Areas (DC) Elliston (DC) Wentworth (A) Barunga West (DC) Unincorp. Riverland Mildura (RC) - Pt A Lower Eyre Peninsula (DC) Mildura (RC) - Pt B Southern Mallee (DC) Yarriambiack (S) - North Hindmarsh (S) Yarriambiack (S) - South Kingston (DC) Horsham (RC) - Central Naracoorte and Lucindale (DC) Glenelg (S) - North Quilpie (S) Cherbourg (S) Booringa (S) Maroochy (S) - Coastal North Murilla (S) Anangu Pitjantjatjara (AC) Dalby (T) Warroo (S) Jondaryan (S) - Pt B Bulloo (S) Paroo (S) Clifton (S) Maralinga Tjarutja (AC) Tennant Creek (T) Mount Isa (C) Tennant Creek - Bal Richmond (S) Cloncurry (S) Unincorp. West Coast Ceduna (DC) Unincorp. Lincoln Port Lincoln (C) Kangaroo Island (DC) Unincorp. Pirie Orroroo/Carrieton (DC) Carrathool (A) Bland (A) Hay (A) Narrandera (A) Conargo (A) Urana (A) Berrigan (A) Moira (S) - West Albury (C) Gr. Shepparton (C) - Pt A Strathbogie (S) Mitchell (S) - North 15 Wellington (S) - Rosedale Wellington (S) - Alberton South Gippsland (S) - East City Burdekin (S) Whitsunday (S) Balonne (S) Warwick (S) - West SUNSHINE COAST BRISBANE GOLD COAST NORTHERN RIVERS TROPICAL NSW Cabonne (A) Blayney (A) Boorowa (A) CANBERRA 11 E. Gippsland (S) - Orbost Tamworth Regional (A) - Pt A 10 12 19 1 7 3 4 14 9 Greater Taree (C) HUNTER CENTRAL COAST SYDNEY SOUTH COAST NORTH COAST NSW Liverpool Plains (A) Lord Howe Island King Island (M) Flinders (M) George Town (M) - Pt A Launceston (C) - Inner Northern Midlands (M) - Pt B Central Highlands (M) HOBART AND SURROUNDS 16 3

Commercial-in-Confidence Vulnerabilities study THE TOP 20 TOURISM REGIONS The basis for establishing Australia s Top 20 Tourism Regions is total tourism expenditure the combined expenditure on tourism-related goods and services in the Region by intrastate, interstate and international visitors. Tourism expenditure in a given Tourism Region is estimated by Tourism Research Australia (TRA) using data collected through the International Visitor Survey (IVS) and National Visitor Survey (NVS). A model-based approach is adopted to allocate a visitor s total tourism spend across different Regions visited during the trip, including the origin. 1 For the purposes of establishing the Top 20 Tourism Regions in 2008, data were collected from RET and TRA on national and international tourism expenditure throughout Australia s Tourism Regions during 2008. Table 2.1, outlined on the next page, show the Top 20 Tourism Regions for each main visitor classification (domestic day visitors, domestic overnight visitors and international visitors), together with the overall Top 20 based on the aggregation of these. Though there are strong similarities across the lists, it is apparent that significant variation exists in the travel and expenditure patterns of different types of visitors and therefore in the reliance of different Regions on different types of tourists. The implications of this are explored in Section 4, below. Throughout this report, it is the Top 20 Tourism Regions based on aggregate expenditure domestic overnight, domestic day trip and international visitor expenditure combined which is defined and referred to as the Top 20. 1 For more information on the TRA expenditure allocation methodology, see http://www.tra.australia.com/regional.asp? lang=en&sub=0162. 4

Commercial-in-Confidence Vulnerabilities study TABLE 2.1: TOP 20 TOURISM REGIONS, BY VISITOR TYPE, 2008 ($M) Rank Domestic day trip Domestic overnight International Overall Region Exp Region Exp Region Exp Region Exp 1 Sydney 1,599 Melbourne 4,822 Sydney 5,366 Sydney 11,751 2 Melbourne 1,298 Sydney 4,786 Melbourne 3,000 Melbourne 9,120 3 Brisbane 957 Gold Coast 3,090 Experience Perth 1,481 Brisbane 5,068 4 Experience Perth 832 Brisbane 2,757 Brisbane 1,354 Gold Coast 4,528 5 South Coast 521 Experience Perth 2,161 TNQ 1,030 Experience Perth 4,474 6 Gold Coast 498 Sunshine Coast 1,822 Gold Coast 940 TNQ 2,761 7 Sunshine Coast 456 Mid North Coast 1,561 Adelaide 456 Sunshine Coast 2,458 8 Hunter 451 TNQ 1,546 Canberra 211 Adelaide 2,325 9 Mid North Coast 395 Adelaide 1,529 Sunshine Coast 180 Mid North Coast 2,041 10 Adelaide 340 South Coast 1,263 Petermann 163 South Coast 1,924 11 Central Coast 312 Canberra 992 Hobart and Surrounds 157 Canberra 1,464 12 Central NSW 308 Australia's SW 910 Hunter 144 Hunter 1,368 13 Australia's SW 289 Northern Rivers 819 South Coast 140 Australia's SW 1,306 14 Fitzroy 269 Hunter 773 Whitsundays 131 Northern Rivers 1,185 15 Canberra 261 Hobart and Surrounds 661 Northern Rivers 121 Central NSW 934 16 Peninsula 252 Darwin 628 Australia's SW 107 Hobart and Surrounds 914 17 Northern Rivers 245 Western 622 Darwin 105 Western 880 18 Darling Downs 226 Central NSW 605 Mid North Coast 85 Fitzroy 874 19 New England 211 Northern 604 Northern 79 Central Coast 844 20 Geelong 207 Australia's NW 569 Australia's Coral Coast 76 Northern 818 TNQ: Tropical North Queensland 2.2 ASSESSING VULNERABILITY The focus of this paper is on the vulnerability of the regional economies of Australia s Top 20 Tourism Regions to adverse shocks to the tourism industry, of varying nature. Several factors contribute to the extent of this vulnerability: (i) the economic size of a region s tourism industry, relative to the total economy (i.e. the level of economic reliance); (ii) the characteristics of the tourism industry the markets and market segments relied on; (iii) the broader economic and locational (geo-economic) characteristics of the region; and (iv) the nature of the tourism activity itself. The first three of these factors can be readily incorporated into an economic analysis and/or informed by available statistics: economic reliance demonstrates the extent of a regional economy s exposure to tourism-related economic shocks. the markets relied upon shows the type and extent of market risk to which a region s tourism industry is exposed. 5

Commercial-in-Confidence Vulnerabilities study The region s broader economic and locational characteristics can demonstrate both its resilience (ability of the regional economy to resist changes), and adaptability (ability of the regional economic to adapt to a tourism related shock and minimise overall economic costs) Figure 2.2 below presents a diagrammatic depiction of how these three elements relate to the vulnerability construct. The nature of the tourism activity itself and the reasons why the tourists are attracted to the region, is less amendable to an evaluation of this nature and is not included explicitly in the analysis here. However, to some extent this is reflected in the type of visitors the region attracts therefore, in other aspects of the analysis. FIGURE 2.2: STYLISED REPRESENTATION OF THE ANALYSIS OF ECONOMIC VULNERABILITY Tourism Industry 1. Significance of tourism to the regional economy: Economic output Employment Regional Economy 3. Broader geo-economic characteristics of the region: Labour force Industrial diversification Accessibility Proximity to source markets 2. Characteristics of the market: Domestic/International Leisure/Business Source markets Tourism Industry 6