Peter Swan

On Thursday the Gillard Government launched Phase 2 of their High Speed Rail study that was produced as part of a political agreement with the Greens.

The very optimistically projected cost is $114 billion for 1,800 kms of rail to link Melbourne to Brisbane via Canberra and Sydney. Approximately 8% of the route requires exceedingly expensive tunneling, giving huge scope for costs to blow out.

The projected (internal) financial return is 0.8% compared with a minimum of 15% to be considered for a commercial project. Hence it could never be financially viable and is likely to require on-going subsidies even if the Government provided the entire capital cost.

Can the project be justified in cost-benefit terms? Certainly, the Report claims that there is a positive benefit/cost ratio at low discount rates with the benefits roughly equal to the costs with a 7% discount rate.

These benefits consist of consumer and producer surplus. It is my belief that these benefits are likely to be vanishingly small in practice with the costs far outweighing the benefits.

These benefits are assumed to arise largely from time savings due to better access and egress compared with airports such as Tullamarine. A high-speed rail connection between Tullamarine and the City could be built for less than $114 billion with considerable time and convenience savings. There might even be some spare change.

Such assumed time savings also presumably drive the 55% of passengers who are assumed to switch from air to rail and the 19% induced passenger increase.

It is hard to imagine that the 23% of passengers that are assumed to switch from cars will gain sizeable subsidiary benefits to motivate a switch. In fact, many who currently drive will face car-rental and other out-of-pocket costs that are likely to be sizeable.

In my view, these passenger estimates are likely to be even more upward-biased than the pie-in-the-sky estimates that led many toll-road providers to the bankruptcy in both Sydney and Brisbane. Projected toll-road/tunnel usage exceeded the reality, typically by 100% or more.

At least one would think that private providers taking and equity stake would be cautious in accepting ludicrous estimates of traffic projections. Governments looking for juicy election bribes have no such hip-pocket concerns. All of these failed projections tended to give excessive weight to traveler time-saver benefits.

The first question to ask is what is a high-speed rail network? It is largely duplication of air passenger routes provided for ‘free’ by nature. Unlike air-routes high-speed rail is exceedingly capital intensive with an exceedingly long gestation period.

The Report projects that cash-flow will be positive for the first time around 2060, about 45 years after commencement. Once of the few routes that is commercially viable is in major Japanese city pairings with population density about 1,000 times higher than major pairings in Australia.

Even Japanese bullet trains received a bailout in 1987 and Taiwan’s line needed rescuing only two years after commencement. In China the high-speed network is highly problematic with severe speed limitations imposed on some lines. One line was even reduced to 45 kms an hour. Even in much denser Europe, only a few city pairs are financially viable.

There is no indication that any success will be achieved in North America. The Californian line that commenced in 2008 had spent $630 million within three years without constructing even one kilometer of track.

Thus the benefits of high-speed rail are largely illusory, especially in Australia with its exceptionally low population density and existing network of relatively efficient airports. Removal of curfews could greatly improve airport efficiency, especially in Sydney. Unfortunately, the costs are not illusory and are likely to be massively understated in the Report.

There have been quite few very-fast train schemes in Australia, mostly centering on the Sydney-Canberra-Melbourne corridor.

The first one was proposed by the then head of the CSIRO who carried the appropriate handle of ‘Wilde’. Hence the ‘Wilde scheme’, of which the latest incarnation from the Gillard Government is yet another example of an exceedingly white elephant.

It is also well timed as a tempting election bribe where it joins the Gonski Report into school funding, the National Disability Scheme and numerous other unfunded projects.

Professor Peter Swan is the Professor of Finance at the Australian School of Business.

Professor Raja Junankar

Any plans to fast track US migrants for the construction and mining industries won’t help these industries find workers – because few people using a 457 work in mining, and most of them don’t come from the US anyway.

The Australian Government has announced it is going to fast track the assessment process for skilled workers. Under the agreement, US workers will able to complete a skills assessment before coming to Australia. The change will speed up the process of approving 457 visas. However I feel Chris Evans’ announcement about relaxing the rules for the 457 visa for US citizens seems to have missed the point – it appears an odd, short-sighted decision.

If there is really a shortage in workers due to the mining boom, then we should look at bringing in more plumbers and electricians, whereas the 457 visas mainly go to professionals.

Looking at the data on the ‘class 457’ visas, in 2011 72% of class 457 visas went to managers and professionals, and only 21% to trades and technicians. He says “The Australian states that received the vast majority of class 457 visa applicants was in New South Wales – which isn’t known as a big mining area. WA gained 23%, and Victoria 20%. Not Queensland, or the Northern Territory.

Also, look at how much they are earning. Wages for professionals are rising strongly, unlike those for non-professionals such as tradies: electricians, plumbers and the like. Certainly in the mining states such as Queensland, there is no increase in wages, compared with other states. This goes against what the miners are telling us – if there was a shortage, surely we would see wages go up.

The data for the 457 visas seems to go against what we are told they are for. The 3 main industries getting 457 visas are construction, health services and ‘other services’: nothing connected to mining. Also if we look at where people have come from that get a 457, the list in order is the UK, India, Ireland and then at 4^th, the USA. So we have to look at why the USA has been singled out to be fast-tracked, and the only conclusion I can come to is that it has nothing to do with demand, but is just down to being nice to the US. If the government really wanted to help mining companies they would help the UK, Ireland and India too.

We are told that fast tracked Americans will get mining jobs, doing the fly-in fly-out rotation, often from the US. But this seems a little odd – most of the jobs in mining are in very difficult conditions, and workers will not fly from the US to take them for a fortnight and then fly back. The USA market is also depressed, but not that many people will want to move over to take a job in a remote area. It just seems like the wrong move to make.

Professor Raja Junankar is a Professorial Visiting Fellow in Economics at the Australian School of Business.

Nina Mistilis

Qantas is facing a further drawn-out battle with the unions, and that may cause yet more long-lasting damage to its brand. The Qantas dispute is settling in for the long haul, now that it has been taken into binding arbitration – a move that could take months to resolve.

This confrontation with the unions has been building for years and seem and has now culminated in arbitration. All of this has taken place in full view of the travelling public. Qantas – in going to arbitration – has won what it was seeking – which is a stay on industrial action – but in the long term it seems to have lost the war.

I believe it has alienated passengers, the industry and the government, and that’s not a good position to be in. The Qantas brand is tarnished.

Negotiations between the airline and the Transport Workers Union, the Australian and International Pilots Association and the Australian Licensed Aircraft Engineers’ Association collapsed just before a deadline set by Fair Work Australia (FWA).

I believe the longer this dispute rumbles on, the more the Qantas brand image will be badly impacted.

That’s a global perception, because passengers all over the world who want to get to Australia for a holiday, or back home for work, are wondering if it is safe to book a Qantas plane, or whether it will be cancelled again. Many are saying they will never trust Qantas again, particularly in business class, because business wants reliability above everything else. Certainly, in the immediate future, the brand is tainted and they’re really behind the eight ball.

I don’t see how they’re going to catch up easily. Even if the arbitration settles on the side of Qantas, it may still hurt Qantas in the medium to long term, although I think it’s really hard to say what the long term damage will be. It partly depends on how events unfold. If it is solved quickly, which seems very unlikely, then the brand will be restored. But if it continues, and if there’s a perception – as the unions are saying – that service will drop due to the “asianisation” of the airline, then the brand will be completely damaged. Will that mean that less passengers book on Qantas? I don’t know the answer to that. Time will tell.

Qantas chief executive Alan Joyce yesterday said while his preferred option had been to resolve the dispute through negotiation, it was now time to let FWA bring the matter to a close.

But it is reliability is an important factor in terms of the branding of an airline. When it comes to the crunch, we need to get to the destination on a certain date and we cannot afford to be stranded at home, or somewhere in Australia, or abroad. So when it comes to the choice, will we choose Qantas or will we choose another airline?

Nina Mistilis is a senior lecturer in Tourism at the Australian School of Business.

Michael Peters

There is perhaps no greater failure of competition policy than access to airports.

The Australian Competition and Consumer Commission’s (ACCC) submission to the Productivity Commission’s inquiry into the economic regulation of airport services states that airports should face tougher rules to discourage excessive parking and other fees.

I can’t help but feel we all pay for this anomaly.

The ACCC has stopped short of suggesting that there should be price caps, however the ACCC has revealed airport charges passed on to passengers make up as much as 20% of the cost of Qantas and Virgin’s cheapest airfares, and even more for budget carriers, and wants to curb the potential for privatised airports to reap excessive profits through market strength.  The ACCC is concerned that some airports may have used their market power to achieve monopoly profits in services provided to airlines and in car parking.

There is little doubt that airports have taken advantage of their market power to the detriment of key industries such as tourism and couriers, as well as everyone who flies for business. The extra costs the airports impose impacts on the entire economy.

The ACCC says the threat of arbitration would encourage fairer commercial negotiations between airports and airlines when determining charges, but it has not pushed for a return of price caps fearing tourism could be harmed.

That’s fair enough, however this form of profiteering is a burden to the economy.

It restricts productivity and distorts the market. In particular the cost to the community is significant. For many years successive governments and the regulator have attempted to do something about our airports – just as they tried to do with Telstra. The answer is the application of sound public policy and to vigorously pursue competition law enforcement to ensure access to key infrastructure.

I want to see a total reform of this area. Rod Sims – the new Chairman of the ACCC – and the ACCC as a whole is in a unique position to finally deal with the elephant in the room that is passengers using the nation’s airports.

Michael Peters is a Lecturer in Business Law and Taxation at the Australian School of Business.

Larry Dwyer

Confidence in the domestic and international tourism sectors has taken a nosedive according to the latest survey, and this is likely to be due to the high dollar. However tourism operators in Australia may also be losing touch with their market, and should be continually reinventing their game.

With the Australian dollar hovering just above parity with the US dollar there are plenty of deterrents to tourists coming to Australia from overseas. If you add in the long distance, it’s no surprise that numbers are dropping, and so is confidence.
Six out of ten tourism operators are reporting forward sales to be worse or much worse than they were, according to the Mastercard Tourism Industry Sentiment Survey, with 80 percent of respondents saying the exchange rate is the number one impediment that dampens overseas visitor arrivals.
Certainly the Australian dollar is very high and that deters tourism to Australia. Even though figures show that the number of international passengers through Sydney and Melbourne airports is rising, Americans have always regarded Australia as a dream destination, but they regard the cost and the distance to come here as daunting.
Many more people are now finding that Australia is just too expensive for them – particularly holiday makers from Western Europe, who also have the tyranny of distance to cope with.
I feel we’ve been locked into the traditional ways of marketing for too long. Increasingly, marketers are recognising the extremely important impact of the internet and word-of-mouth marketing. Australians are net savvy, and will look up resorts, and read reviews. Why should they stay in a tired resort in Queensland – when they can travel to Bali and get something much more modern for half the price?
Australian holidaymakers may need reminding of the allure of the attractions that are right under their noses. And with domestic travellers representing three quarters of Australia’s tourism market, it’s an area that resorts need to capitalise on.

The impact of strikes at Qantas may further dent Australia’s attractiveness. Now with the added complication of industrial relations problems at Qantas causing flight disruption, many more holiday makers from overseas might become even more reluctant to make the trip.

Professor Larry Dwyer is an expert in tourism and tourism marketing at the Australian School of Business

Larry Dwyer

What is the future for tourism in Australia?

Aussies travelling and taking their holidays at home seem to be a “dying breed”, thanks to the high dollar, with most Australian residents having a taste for international travel only cataclysmic world events could change.

I feel Australia should place more emphasis on its urban tourism attractions, rather than the outback. Its cosmopolitan cities, its attractive streetscapes, its fine dining, sophistication and the sheer liveability of its cities are second to none. There are many fine urban tourism precincts that rival any around the world. And remember that Melbourne has vaulted Vancouver to become the best city in the world to live, according to the latest Economist Intelligence Unit’s Global Liveability Survey, with Sydney not far behind.

Domestic tourism products struggling the most are large-scale resorts in remote or outback destinations which are harder and more expensive to reach, and which simply can’t compete for value for money with overseas destinations.

I’ve also seen that consumer values are changing in ways that favour urban tourism, including strong Generation Y attributes such as being money rich and time poor, plus seeking hedonistic, discerning experiences. They are less loyal to brands – something the airlines know well now – and they seek value for money, not necessarily low prices, within authentic tourism experiences.

Australia should give up trying to compete at the mass-market level to attract tourists. A move to putting emphasis onto Australia’s urban areas has a good synergy with meetings, conferences, and events. Business tourism would be an important market in this context. However there is a place for the outback, and tours to more remote areas could piggyback on this.

One of the world’s fastest growing tourism markets is that of business events tourism. It is typically one of the highest yielding inbound tourism segments because of the high per-delegate spend. Worldwide, there is competition among destinations for such business and, with substantial government support for marketing activity and infrastructure development, this trend is expected to continue.

There are substantial opportunities for operators to associate themselves with business event tourism by way of accommodation, catering, tour operations, and organising professional conferences. Herein could be the future of Australian tourism, with business tourism capable of providing increased opportunities for the Australian tourism industry with strong appeal across all key markets.

Larry Dwyer is a Professor in the School of Marketing at the Australian School of Business.

Dean Wilkie

I have been thinking about Qantas’s moves to start a new airline up in Asia.

Starting a new airline from scratch means that consumers will hold absolutely no information about the new brand. Nothing beats a fresh start right?

Wrong.

I really question Qantas’s approach from this perspective. Qantas as a brand has strong positive associations, which consumers will use in forming brand judgments and in comparing to alternatives. A quick search of the internet and you can see that in 2006 it was voted the 2nd best airline in the world. In 2011 it was voted the 8^th best. A dramatic drop but still, Qantas is seen as the eight best airline in the world and it currently has a 14% share of the Asian market.The point is that Qantas has equity where as a new brand has none.

 The next thing I want you to consider is something called the order of entry effect. Essentially, in many categories a brand’s market share has been shown to decrease with its entry position. The later a brand enters, the lower the brand’s share. There are several economic reasons but from a marketing perspective, consumers will learn more about earlier entrants than later entrants. The more you know about a brand, the more likely you are to purchase it. To illustrate, the market share of airlines in the domestic market is roughly Qantas (65%), Virgin Blue (20%), Jetstar (10%), Tiger (5%). It is no coincidence that it follows the order in which these brands entered the market.

 My rough calculations have it that this new brand into the Asian market will be at least the 20^th entrant. Using the average order of entry estimate, the 20^th entrant into a category will get about 2.4% share. This is based on having parity with all other entrants on every other variable. In the airline category, this would be advertising, number of planes, flights, price, service, lounges etc. If this new airlines was at a disadvantage in any of these (which it will be), the market share will be even lower. In addition, the connection we have to Qantas because it is an Australian airline is the same connection every consumer will have with its local airline carrier. (Another barrier to consider).

 So you have to ask the question, does it make sense to launch a new airline or should they try and improve the competitiveness of its existing brand which has 14% share.

Lecturer Dean Wilkie is an expert in branding at the Australian School of Business.

– Ray Spurr

There is little doubt that the strength of the dollar is hurting the Australian tourism industry. As with other trade exposed industries, Australia’s tourism industry will face increasingly tough times in a high Australian dollar world.

The Tourism and Transport Forum has reported that the number of Australians heading overseas outstripped international visitors in the past year. This is the biggest deficit in tourism data history, with 7.4 million trips out of the country and only 5.9 million trips inbound.

A time lag between planning a trip, and arrival, means the full effect on international tourists coming to Australia still isn’t showing up in the statistics. For international tourists coming to Australia full awareness of the extent to which Down Under has become a more expensive destination is likely to filter through only gradually – and having filtered through, these perceptions will take time to dispel when eventually the dollar turns down again.

The Aussie dollar has been at a high of 110 US cents, although it has dropped a little from there. It is also at a 28 year high against Sterling. Against a broad basket of currencies the Aussie Dollar is the best-performing major currency in the past year. The strong dollar is encouraging many locals to leave the country. There is a deficit of 1.5 million people and that is the largest gap ever between the number of Aussies going overseas compared to people from overseas coming to our country.

We can expect to see a further decline in visitor numbers as the impact of the more expensive Australian dollar on our price competitiveness, relative to competing destinations, becomes more widely appreciated. In the meantime tourism incomes will suffer a further cut as those visitors who have set a limit on their holiday budget in advance of their arrival in Australia spend less on tours, wine, food, and souvenirs during their stay.

It is not just tourists from overseas who are staying away from Australia – so are home-grown tourists. Just as important as the loss of income from inbound visitors, however, is the effect of the rising dollar for those leaving the country. As Australians recognise how much further their dollars now go, more of them are choosing to take their holidays overseas. They fund that travel by reducing their spending on consumer goods within Australia or by not paying down their mortgage, and very often by switching from taking a holiday in Australia. The loss is likely to fall most heavily on longer-haul Australian destinations like Far North Queensland, the Gold Coast and the Northern Territory, which compete most directly with holidays abroad.

Ray Spurr is a senior research fellow at the Australian School of Business.