We might hope that Alan Joyce’s resignation as Qantas CEO will create an opportunity for real change to the airline’s corporate culture. But if history is anything to go by, it’s just as likely to come out the other side largely unchanged.
The revelations that the airline allegedly sold tickets for already cancelled flights and paid its CEO $10m in shares have sent its already poor reputation into freefall.
Economists describe big firms with lots of market power as oligopolies. They usually have the power to resist attempts to change their behaviour, especially if those changes stop them from earning bigger profits.
Take the big banks. Back in 2017 a string of stories about terrible corporate behaviour forced the then Coalition government to set up a royal commission. It uncovered a slew of horrible stories brought about by firms that were solely focused on making profits. But years later many of the recommendations have been abandoned, watered down or rolled back.
The reality is that highly profitable companies can play the long game. They can wait out the white-hot anger and then lobby to minimise any real change.
Qantas is the major player in Australia’s airline sector and it has recently benefitted form the Albanese government’s decision to block Qatar Airways’ application to fly an extra 21 flights each week into Sydney, Melbourne and Brisbane. This decision is estimated to cost the economy around $1bn in lost tourism income.
Higher airline fares due to lack of competition doesn’t just hurt people who regularly fly. Right now Australia is suffering from high inflation. Initially this was because of supply chain disruptions caused by Covid and Russia’s invasion of Ukraine. But big companies such as Qantas have been increasing prices by more than their increase in costs. The result, as Australia Institute research indicates, is inflation caused by big corporate profits.
The Australia Institute estimates travel and accommodation contributed half a percentage point to the CPI over the last 12 months. Without it, the CPI would be 5.5% rather than 6%. This of course is not all Qantas’ fault but it does show the outsized impact this sector is having on inflation.
The cost of this higher inflation has hit all consumers from the higher interest rates that have come from the Reserve Bank. The cost of big companies such as Qantas being able to wield their power due to a lack competition has a real and tangible cost for all consumers.
So what can be done?
The best solution is the one big companies fear the most: more competition.
The sad truth is powerful companies don’t really care about their customers. But competition forces businesses to keep customers happy. If they don’t, they will vote with their feet.
Competition forces firms to compete on price, improve the quality of service and also improve their behaviour. Imagine the world of pain Qantas would be in today if consumers had lots of options when deciding to fly.
It was not surprising to hear Qantas had lobbied the government to reject Qatar Airways’ request to expand flights to and from Australia. This would have added to competition – something that scares the hell out of oligopolies.
In order to avoid competition, oligopolies have even tried to claim that less competition is good for consumers. The big banks claim their huge profits mean they are strong and less likely to collapse.
Less competition might mean higher profits, worse service and terrible behaviour but, they argue, they’re less likely to go broke.
This argument was also partly behind the government’s decision to block Qatar Airways on national interest grounds, with claims that more competition could make Qantas unviable.
This is the oligopoly Catch-22: the “strength” of fat, lazy oligopolies such as Qantas and the banks is their profits, but those profits occur purely because of a lack of competition. If you increase competition, forcing them to compete against more efficient companies, that strength is revealed as a weakness.
While more competition will produce better outcomes for consumers, the second-best solution is regulation. If Qantas really wants to claim that more competition is not possible because of the uniqueness of the industry, then the solution is to make sure it does not run wild.
When competition is not possible to constrain business behaviour, then the government needs to step in. This could include price controls like in the electricity market and stronger rules around business behaviour that would, for example, force airlines to act in their customers’ best interests.
Currently consumers have the worst of both worlds: low competition and low regulation. We either need more competition or more regulation. Without either we should expect continued poor corporate behaviour and higher prices.
-
Matt Grudnoff is a senior economist at the Australia Institute