senate · transport and regional development, 22 cooyong street, canberra, australian capital...

COMMONWEALTH OF AUSTRALIA

SENATE

FOREIGN AFFAIRS, DEFENCE AND TRADE REFERENCES COMMITTEE

Reference: The development of Australia’s air links with Latin America

CANBERRA

Tuesday, 11 June 1996

(OFFICIAL HANSARD REPORT)

CANBERRA

SENATEFOREIGN AFFAIRS, DEFENCE AND TRADE REFERENCES COMMITTEE

Members:

Senator Forshaw (Chair)Senator Ellison Senator Sandy MacdonaldSenator Evans Senator TeagueSenator Jones Senator West

Participating Members

Senator Bolkus Senator FaulknerSenator Brownhill Senator HarradineSenator Burns Senator MargettsSenator Chamarette Senator SchachtSenator Chapman Senator TroethSenator Cook Senator Woodley

Matter referred for inquiry into and report on:

The development of Australia’s air links with Latin America.

WITNESSES

BENDIXSEN, Mr Axel, Regional Manager, Aerolineas Argentinas, Level 2,580 George Street, Sydney, New South Wales 2000. . . . . . . . . . . . . . . . . 134

BROWN, Mr Justin, Assistant Secretary, Americas Branch, Department ofForeign Affairs and Trade, Parkes, Australian Capital Territory 2600 . . . 111

BUNTING, Mr John Brymore, International Relations Manager, QantasAirways Ltd, 203 Coward Street, Mascot, New South Wales 2020. . . . . . . 71

CANDIOTI, His Excellency Mr Enrique, Ambassador, Embassy of Argentina,PO Box 262, Woden, Australian Capital Territory 2606 . . . . . . . . . . . . . . 35

FONSECA, Mr Luiz, Counsellor, Embassy of Brazil, PO Box 1540, AustralianCapital Territory 2601 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

HAWES, Mr David Charles, Group General Manager, Government andInternational Relations, Qantas Airways Ltd, 203 Coward Street,Mascot, New South Wales 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

HORNE, Ms Margaret, Officer, Americas, Pacific, France, Middle East andAfrica Section, International Relations Branch, Aviation Policy Division,Department of Transport and Regional Development, 22 CooyongStreet, Canberra, Australian Capital Territory 2601 . . . . . . . . . . . . . . . . . 2

KITTO, Mr Neville Richard, Manager, Government Affairs, Qantas AirwaysLtd, 203 Coward Street, Mascot, New South Wales 2020. . . . . . . . . . . . . . 71

McARTHUR, Mr Christopher John, General Manager, Network Development,Qantas Airways Ltd, 203 Coward Street, Mascot, New South Wales2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

PARLE, Mr Andrew, Acting Director, Americas, Pacific, France, Middle Eastand Africa Section, International Relations Branch, Aviation PolicyDivision, Department of Transport and Regional Development, 22Cooyong Street, Canberra, Australian Capital Territory 2601 . . . . . . . . . . 2

ROACH, Mr Jeff, Desk Officer, Canada, Latin America and CaribbeanSection, Department of Foreign Affairs and Trade, Parkes, AustralianCapital Territory 2600 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

RYAN, Mr Richard, Director, Canada, Latin America and Caribbean Section,Department of Foreign Affairs and Trade, Parkes, Australian CapitalTerritory 2600 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

SORZANO, His Excellency Dr Luis, Ambassador, Embassy of Colombia, 101Northbourne Avenue, Turner, Australian Capital Territory 2612 . . . . . . . 35

STEGER, His Excellency Mr Raphael, Ambassador, Embassy of Mexico, 14Perth Avenue, Yarralumla, Australian Capital Territory 2600 . . . . . . . . . . 35

TARUD, His Excellency Mr Jorge, Ambassador, Embassy of Chile, 10 CulgoaCircuit, O’Malley, Australian Capital Territory 2606 . . . . . . . . . . . . . . . . 35

TOURINO, Mr Roberto, Charge d’Affaires, Embassy of Uruguay, MLCTower, Keltie Street, Woden, Australian Capital Territory 2606 . . . . . . . . 35

WHEELENS, Mr Tony, Assistant Secretary, International Relations Branch,Department of Transport and Regional Development, 22 CooyongStreet, Canberra, Australian Capital Territory 2601 . . . . . . . . . . . . . . . . . 2

YTURBE, His Excellency Mr Antonio Rodriguez, Ambassador, Embassy ofVenezuela, MLC Tower, Keltie Street, Woden, Australian CapitalTerritory 2606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

SENATEFOREIGN AFFAIRS, DEFENCE AND TRADE REFERENCES COMMITTEE

The development of Australia’s air links with Latin America

CANBERRA

Tuesday, 11 June 1996

Present

Senator Forshaw (Chair)

Senator Sandy Macdonald

Senator Teague Senator West

The committee met at 9.34 a.m.

Senator Forshaw took the chair.

1

FAD&T 2 SENATE—References Tuesday, 11 June 1996

HORNE, Ms Margaret, Officer, Americas, Pacific, France, Middle East and AfricaSection, International Relations Branch, Aviation Policy Division, Department ofTransport and Regional Development, 22 Cooyong Street, Canberra, AustralianCapital Territory 2601 ,

PARLE, Mr Andrew, Acting Director, Americas, Pacific, France, Middle East andAfrica Section, International Relations Branch, Aviation Policy Division, Departmentof Transport and Regional Development, 22 Cooyong Street, Canberra, AustralianCapital Territory 2601 and

WHEELENS, Mr Tony, Assistant Secretary, International Relations Branch,Department of Transport and Regional Development, 22 Cooyong Street, Canberra,Australian Capital Territory 2601

CHAIR —I declare open this public meeting of the Senate Foreign Affairs Defenceand Trade References Committee which is inquiring into Australia’s air links with LatinAmerica.The matter of Australia’s air links with Latin America was referred to thecommittee by the Senate on 30 November 1995. The purpose of the inquiry is to see whatprogress has been made in developing the air links since the committee reported onAustralia’s relations with Latin America in 1992. The committee intends to report on thismatter by the end of the month. I welcome officers of the Department of Transport andRegional Development.

The committee prefers that all evidence be given in public, but should you at anystage wish to give any part of your evidence in private, you may ask to do so and thecommittee will consider your request. You will not be asked to comment on the reasonsfor certain policy decisions or the advice which you have tendered in the formulation ofpolicy, or to express a personal opinion on matters of policy. The committee has before ita submission from the department dated 22 April 1996 and a supplementary submissiondated 1 May 1996. Are there any alterations or additions you would like to make at thisstage of the proceedings?

Mr Wheelens—Not to those submissions, but I would like to make an openingstatement in respect of those submissions.

CHAIR —We will come to that shortly. Is it the wish of the committee that thedocument be incorporated in the transcript of evidence? There being no objection, it is soordered.

The document read as follows—

FOREIGN AFFAIRS, DEFENCE AND TRADE

Tuesday, 11 June 1996 SENATE—References FAD&T 19

CHAIR —Mr Wheelens, would you like to make an opening statement followingwhich the committee will ask questions.

Mr Wheelens—Air services between Australia and South America continue to becharacterised by chronically low levels of demand. The entire Australia-South Americamarket produces only around 650 passengers each way each week. South America ranks28th behind New Caledonia and in front of Sweden in the list of Australia’s majoraviation trading partners. It is, of course, not a single market. The geographic size ofSouth America and competition between national governments and airlines has effectivelysplit it into several segments, further reducing its commercial viability.

Brazil has made a submission to this inquiry suggesting that it is also interested indeveloping air services to Australia, although the Brazilian government cannot yet providedetails of its airline’s operating plans.

Our key aviation markets in South America are Argentina, Chile and Brazil.Respectively, they rank 43rd with 169 passengers each way each week, 48th with 161passengers each way each week and 50th with 156 passengers each way each week. Therewould appear to be little prospect of these rankings improving significantly in theforeseeable future.

The market is characterised by low passenger numbers and long stage links. TheAustralian Tourist Commission in its submission to this inquiry points to a number ofimpediments in market growth, including the low number of South Americans wishing totravel to Australia in comparison to other destinations such as the United States andEurope. Low levels of airline services are more likely to be a symptom of marketproblems than the cause. Our experience suggests strongly that where demand is strongand yields are high airlines will inevitably commit capacity to that market.

Scheduled international air services are conducted within a complex legal frame-work. The interconnecting web of over 3,000 international treaties join together over850,000 city pair combinations in a coherent and generally efficient global industry.Multilateral fora such as WTO, GATT, the International Civil Aviation Organisation andAPEC all recognise the role played by international aviation treaties. Australia hasagreements with nearly 50 countries covering all continents.

Australian government policy encourages a progressive and liberal approach tointernational aviation matters directed at achieving outcomes that meet a broad range ofnational interest criteria. However, the government does not pursue an open skies policy.Australia has bilateral air services agreements with both Chile and Argentina and we areawaiting further advice from Brazil as to its long-term intentions in this market. We willrecommence negotiations with Argentina in August to further explore the aviationrelationship.



Our obligation in bilateral air services agreements is to ensure that there issufficient airline capacity agreed between governments to enable the effective developmentof air services and to meet broader national interest objectives. It is then a matter for thecommercial judgment of airlines as to whether those entitlements are taken up or not.

The agreement we have with Argentina provides airlines with the opportunity tooperate over 2,500 seats each way each week to carry the 169 passengers travellingbetween Australia and Argentina. With Chile, over 1,200 seats each way each week havebeen agreed to carry the 161 passengers on that route.If the entire Australia-South Americamarket was to travel via Argentina and Chile—and it will not, because of the geographicstructure—there would still be significant oversupply of capacity available to the airlines.

Not surprisingly, the airlines have exercised their commercial judgment and not allof these entitlements have been taken up. Only Aerolineas operates direct services toAustralia, and then for only four months of the year with one weekly service in the peakperiod.

It is clear from the actions of the airlines that sustained direct air services are notcurrently viable. Equally, the market responses of the airlines suggest that perhaps themost efficient way to promote and develop this market—certainly through its develop-mental stage—is through cooperative commercial arrangements using offshore collectionand distribution points such as Tahiti and New Zealand.

Travel via hubs is a daily feature of both international and domestic services—andI am sure you are all familiar with that, having to travel in and out of Canberra. It is avery efficient and effective way of improving airline efficiency and reducing costs,particularly on thin, unprofitable routes.

Australia supports the development of hubbing operations by encouraging commer-cial agreements between airlines, such as code sharing. Qantas, Ansett and Aerolineas eachdescribe in their submissions the most recent developments in these commercial arrange-ments. We believe that these arrangements provide by far the best and most appropriatemeans of developing this embryonic market and we will continue to encourage theirdevelopment.

It is a more appropriate means of market development than simply providing, ashas been suggested, open access to third country markets for foreign airlines. Thecommercial cooperation path will ensure that at least five major international airlines havea genuine stake in promoting and developing these markets. By contrast, the third countryformula would leave only one airline, or at best two airlines, with a genuine incentive topromote and develop the market, and would severely and unnecessarily disadvantageAustralian carriers in third country markets.

It has been suggested that trade and other links between Australia and South



America can only expand if third country traffic rights are given to South Americancarriers—or, to put it another way, these services will only be viable if subsidised. Thereis no proper intellectual basis for the proposition that the Australian aviation industry,which is clearly not a beneficiary of such an arrangement, should provide that subsidy.

Furthermore, third country traffic rights of itself will not increase demand for airservices between Australia and South America, nor will it reduce the number of stopoverpoints required. At best, it might reduce transit times. However, it is extremely doubtfulthat improved stopover times will significantly stimulate demand in this market.

Other submissions suggest that the aviation industry is highly regulated bothdomestically and internationally and the interests of airlines overshadow the broadernational interest. Surprisingly, this ignores the fact that the Australian domestic market hasbeen totally deregulated for a number of years and that Australia has undergone a radicalrestructuring of its international aviation policies during the same period.

Australia has been at the forefront of reforming the aviation sector. We have takenan increasingly liberal approach to air services negotiations, including multiple designa-tion; establishing a framework for a single aviation market with New Zealand; mergingand privatising two of our major airlines; and encouraging our airlines to develop majorinternational equity alliances.

Importantly, we have also taken a leading role in opening up the internationaldebate on freeing up international air services. While aviation remains outside the earlierGATT and the current WTO deliberations for a variety of sound reasons, the initiativestaken by Australia in recent years are consistent with broader trade liberalisation principlesand already place Australia well in front of our major bilateral aviation trading partners.

Again, contrary to suggestions in a submission to this inquiry, the views of a widegroup of stakeholders—including the tourism and export industries, the airlines and stateand territory governments—are sought and taken into account as negotiating strategies aredeveloped. The Departments of Foreign Affairs and Trade and Tourism are invited toparticipate on all bilateral negotiating delegations.

To conclude, we can appreciate the level of frustration in some quarters that thesemarkets are not developing as quickly as some might expect. However, there are no quickor easy solutions and many of the barriers to improved air links with South America arebeyond the control of government. It is likely to be some considerable time before thesemarkets reach the maturity of our major trading partners.

CHAIR —Thank you, Mr Wheelens. Are there any additional comments fromwitnesses? If not, we will proceed to questions. In your comments just then you referredto arguments regarding potential growth and you said that the lack of services was asymptom rather than a cause. A number of the submissions that we have received, and I



understand you have read them, project substantial growth or opportunities for growth,economic trade and potential tourism passenger growth over the next five to 10 years. Justlooking at the last 10 years and using those figures, albeit coming off a low base, if theLatin American or South American countries are entering a phase of strong growth andgreat potential for trade and tourism, what is your comment about the airlines being seento follow that or trying to follow that rather than being in there helping to actuallypromote it?

Mr Wheelens—Ultimately, that is a matter for the commercial judgment of theairlines. We have no doubt. We see the figures and we see the strength of the growth inthe South American economies and we are encouraged by that. The obligation thatgovernment has is to provide airlines with the opportunity to serve those markets.Demonstrably, that is being done with the capacity that has been agreed by governmentsto serve those markets already. We will continue, as we have in every other market thatwe operate in, to keep airline capacity agreements well and truly in front of demand.

Our global outcomes show that we put about 2½ to three seats of capacity forevery passenger that travels into and out of our major markets. We are well and truly infront of the demand for services in the capacity that has been agreed by governments, andwe will continue to do that. So the actions of government in providing capacity will not bean impediment to the growth of the market.

CHAIR —This may be something that Qantas will want to comment on later:would it be the case that, in order to provide extra services, there would need to be acorresponding reduction in another part of the globe? Is there existing capacity for Qantasto add extra services, putting aside the issue of whether or not it is commercially attractivefor them to do it?

Mr Wheelens—Do they have the capacity, in their current fleet, to do it?

CHAIR —Yes.

Mr Wheelens—I guess they can answer that themselves. I do not know the answerto that question. As a general rule, like all businesses, airlines do have to face theopportunity costs of serving particular markets and make judgements about that. Forprecisely that reason, we do not pitch the agreed capacity to the requirements of Austral-ian carriers. At the moment, the Australian carriers’ requirement for capacity in thismarket is zero.

CHAIR —The reason I asked that was that one of the points that comes through inthe submission from the Argentine airline is that they would like to increase their servicesor, in effect, review the current arrangements to give them more opportunity than theyhave now. They are also arguing for a free trade approach and asking why they should notbe allowed to do it. I am just wondering whether you have a comment on that aspect of



their submission.

Mr Wheelens—There are two parts to that. One is the issue of whether there issufficient capacity agreed between Australia and Argentina to not only deal with the trafficthat is travelling between Argentina and Australia but also use Buenos Aires as a potentialhub for the collection and distribution of South American traffic and Australian trafficgoing to South America. Demonstrably, there is. They have the opportunity to operate1,200 seats a week to Australia. If they picked up the entire South American market, beingonly 650 passengers, there would be more than adequate capacity to deal with that.

CHAIR —New Zealand seems to feature a lot in the submissions, in respect of itsarrangements and, of course, what are called ‘fifth freedom rights’ and so on.

Mr Wheelens—Yes. It is interesting, is it not?

CHAIR —Could you comment upon the position adopted by New Zealand vis-a-visthe arrangements between Australia and Latin America?

Mr Wheelens—New Zealand is held up as a shining example in a number ofareas, and this is one of them. The current MOU is in the submission that I thinkAerolineas Argentinas has made to this inquiry. If you look closely at the MOU signed byDavid Stone from the New Zealand Ministry of Transport, the rights that have beenconceded by New Zealand are to the South Pacific islands, as intermediate points, and toAntarctica and beyond to two points in Australia, in exchange for open beyond rights forNew Zealand.

The New Zealanders have point-blank refused the Argentineans access to theirAsian markets. If you look at the value of the rights that have been traded, in practicalterms there is not a great deal in it that should lead us to a conclusion other than the onethat we have already drawn ourselves.

CHAIR —Thank you.

Senator SANDY MACDONALD —Why are fifth freedom rights provided by NewZealand for Argentine airlines and not for Tahiti for Lan Chile? Why is one provided andnot another?

Mr Wheelens—In each of these cases, the judgements that are made are notuniform. You make your decision on the balance of opportunities that are available in theagreement or in that marketplace at the time.

For example, you will find that, in many of our agreements where we openly andfreely trade fifth freedom rights for reciprocal benefits, it is not always possible to draw aline through what we do, say, with Singapore, which has a very different and far more



mature market where the balance of the trade that is available to Australia is far moreattractive than it is in other markets. So it is not surprising that New Zealand or Austral-ia—or Argentina, for that matter—would take a different approach to individual bilateralagreements.

Senator SANDY MACDONALD —Could you clarify for me how it operates, withLan Chile coming to Tahiti? Is it that Qantas says, ‘We don’t want to provide Lan Chilewith the opportunity to fly on to Australia because the Chilean government doesn’t allowus the opportunity to fly on to Chile’? Or do they say, ‘We don’t want to fly into Chileand therefore we maintain the view that Lan Chile mustn’t be allowed to fly on toAustralia’?

Mr Wheelens—It would not be Qantas; it would be the government who would betaking that position, but that may reflect the Qantas view of it. Again, it depends on thenature of the trade, what is on offer, and where the broader national Australian interestrests.

Senator SANDY MACDONALD —Particularly with Lan Chile and Tahiti, canyou say why it is not provided with the freedom to fly to Australia?

Mr Wheelens—The principal point at risk would be the commercial viability ofQantas services to Tahiti and, up until recently, their beyond rights from Tahiti to theUnited States. This has always been a fragile market and Qantas have in their submissiondescribed the way that they propose to restructure that market by dropping the Tahiti-LosAngeles sector in any case. I guess the quantum shift that has occurred in that market hasbeen that commercial decision taken by Qantas. What we have ended up with now is aregime that will enable Qantas and Lan Chile to commercially cooperate far more closelyat Tahiti and give us a better product.

Senator SANDY MACDONALD —What is the distinction between Argentineairlines landing in Auckland and stopping there and being serviced by Qantas, and the LanChile connection with Tahiti? Why are the Argentine airlines allowed to fly on toMelbourne or Sydney or wherever they fly to?

Mr Wheelens—Lan Chile can fly on to Australia. They have the right to do that.That right has been conceded to them. They have chosen not to exercise those rights, butthey can do that tomorrow.

Senator SANDY MACDONALD —Thank you for that. I was under the apprehen-sion that, in my understanding of the fifth freedom rights, it meant that because theAustralian government and the Chilean government could not agree on extending theservice beyond Tahiti, then that was a fifth freedom right that was not provided to eitherairline. That is not the case?



Mr Wheelens—No, that is not the case. Just to clarify that point, the treaty that wehave with Chile enables Lan Chile to operate direct services into and out of Australia. Theprohibition on traffic rights at Tahiti simply conditions the way that they operate in theTahiti-Australia market. It does not impact on the way that they operate in the Chile-Australia market. As I said, tomorrow they can operate those direct services with the fullblessing of the Australian government.

Senator SANDY MACDONALD —But they could not pick up passengers inTahiti to bring them on?

Mr Wheelens—No, they cannot.

Senator TEAGUE—That is the point.

Mr Wheelens—Yes, it is. The question then is, though, what benefit Australiareceives from conceding those rights to Chile. If we are talking about the carriage oftraffic between Australia and Chile, there is nothing at the moment that will prevent LanChile from operating those services. That agreement is in place and those rights arecurrently available.

Senator TEAGUE—Sure. I listened very carefully, Mr Wheelens, to your careful,articulate and very well researched introductory remarks. At one point, about one-third ofthe way through, you mentioned the national interest. I am mostly concerned about thenational interest. For five years now, since we began this inquiry into Australia and LatinAmerica for the Senate report, I and the committee as a whole and a large number ofmembers of parliament have been very concerned about the national interest and the factthat we are not living up to the potential of Australia’s national interest because of aninadequacy of air links between Australia and Latin America.

You have talked about the 600 to 650 passengers per week each way, and thecapacity of 1,800. We have not yet talked about price, and price is very much linked withcapacity, so there is a chicken and an egg element to any development of this kind. Haveyou read chapter 6 of this Senate report?

Mr Wheelens—I do not know that I have. I have only been in this job for abouttwo weeks.

Senator TEAGUE—Can I ask your two colleagues whether they have read chapter6?

Mr Parle —Yes, I have, some time ago.

Ms Horne—Yes, we have also read the transcripts from the last set of hearings.



Senator TEAGUE—That is, you read them at the time of our inquiry?

Ms Horne—No, I read them recently.

Senator TEAGUE—Recently, okay. There was something of a breakthrough inour discussions with Transport about a year ago. The report dealt with 75 recommenda-tions or thereabouts, wide ranging, concerning every area and a number of portfolioswithin government, various commercial matters, academic matters, education initiatives,tourism, family to family links and all sorts of foreign affairs interests and so on. Onerecommendation was that we have a task force and that this task force meet for two yearsand that we have dialogue as a committee with the continuing task force implementing thereport. The government was very responsive to this well-researched report.

The Department of Transport was a member of this task force and came along andit was fairly conservative involvement on the Department of Transport’s view. I thinkthere were other priorities—45 other priorities. You mentioned that Latin America is about46th in terms of Australia’s air traffic.

Mr Wheelens—But not in our hearts.

Senator TEAGUE—But always in your hearts, of course, it is a high priority, andthat is what I want to work on. About a year ago the penny seemed to drop a bit with therepresentatives that came from Transport to this task force, in discussion with us, thatthere was in fact a wider national interest than just the bureaucratic arrangements for theair links arrangements. The frustration continues, despite that ray of hope that came in ourdiscussions. So what we have now is this inquiry to focus upon those areas where we canactually make up for the inadequacy in the air links.

I am not just concerned about capacity but also about price, the services andquality of service that are involved. Can I ask about the national interest? When you referto ‘broader national interest objectives’ have you consciously taken into account the kindsof factors that we referred to in chapter 6 of the report five years ago? Have you con-sciously taken into account the factors that the Department of Foreign Affairs and Tradementioned in its submission to this inquiry? What is your view about the broader nationalinterest?

Mr Wheelens—Can I just start on the issue of price while we are there. As I saidbefore, the obligation the government has is to ensure that there is sufficient capacity inplace to meet the airline needs and the broader national interest requirements. If we simplymatched capacity to the level of demand—and the policy a decade ago was that airservices agreements would not be entered into unless there was sufficient end to endtraffic to ensure commercially viable services from the carriers of both countries—thepolicy today, and it is reflected with the agreements that we have in place with Chile andArgentina, would not have got up 10 years ago purely and simply because they did not



meet the policy criteria.

Today, they do meet a policy criterion that says that there needs to be a consider-ation of the broader national interest. Consequently, in the Argentine market, for example,we put 2,500 seats in to meet the demand of 169. We provide the best opportunitypossible for the airlines to serve that market, using their commercial judgment.

You are absolutely right that there is a correlation between price and the capacitythat is operated. The Australian government does not actively intervene in price setting; asa separate exercise, we do not set a price. We provide the carriers with as much oppor-tunity as is possibly needed so that the availability of capacity does not impact on price. Itthen is a matter for the commercial judgment of the airlines as to when and how theyenter those markets. And it is that decision that impacts on price, rather than decisionstaken by government.

I think I have in part answered the national interest question as well by saying thatby putting these agreements into place today, in a way that we would not have 10 yearsago, demonstrably the national interest is the driving force in the agreements. If it wereonly the interests of the Australian airlines, firstly, we would not have the agreement and,secondly, if we did have the agreement, the capacity would be very tightly regulated andsitting right on top of demand. But that is not the case.

Senator TEAGUE—I will concede that much. My general position is thatAustralia and the Department of Transport have come about halfway along the good pathand I would like you to go about twice as far. That is basically where I am at. You see,this committee, in its review of the whole relationship between Australia and Latin-American countries, and the Department of Foreign Affairs and Trade, see half a dozenfactors that relate to the national interest. We want it to be much easier for there to be afrequent exchange between politicians and public servants across the Pacific. In relation tobusiness, at the moment only 10 per cent of passengers—10 per cent of that 650 a week—are business people. They want to be able to more easily travel to Chile, Argentina, Braziland the other Latin-American countries.

Then there are education investments. A whole lot of people in Latin America wantto learn English, or to learn management and other subjects in English, and Australia is apotential supplier. There are, of course, family to family links, holidays and the wholetourism market, and so on. We are wanting to see each one of these factors serviced—andwe would sum up all of that as the national interest.

Mr Wheelens—Sure, and I would not disagree with anything that you said there. Iagree entirely with that and, again, I think that is reflected in the way that we go aboutour business. It is reflected in the significant oversupply of capacity in the governmentalagreements matched against demand. As I said in my opening remarks, the provision ofcapacity by airlines is as much a symptom of a broader problem—and it is probably more



a symptom than it is the cause. If the traffic is not there we can continue to add capacityfor the route, but capacity of itself will not stimulate demand.

Senator TEAGUE—Okay. Happily, in April, we saw capacity increase in terms ofthe Lan Chile-Qantas new agreements, especially the linking in Papeete of the arrival ofone aircraft and the departure of another. So there was a huge jump ahead in quality oflinkage and an increase in capacity. But let me put to you that further areas for improve-ment would be the ability for Lan Chile to take up any passenger in Papeete and come onto Sydney, and the ability for Aerolineas Argentinas to pick up any passenger in Aucklandand come on to Sydney or even Melbourne.

It is these abilities to take on traffic, at the moment barred to these airlines, whichwould have an impact on the price of the whole operation and so, I would argue, generatea much higher capacity because of a lowering in price. Why can’t you go further down thetrack towards the national interest? You have already said that you have gone halfway.Why can’t you grant the ability for Lan Chile to take any passengers from Papeete toSydney and for Aerolineas Argentinas to take any passengers from Auckland to Sydney?

Mr Wheelens—I would need to be persuaded that those actions would, in fact,stimulate demand in South America. I can understand fully why Lan Chile and Aerolineaswould want access to those markets, but whether or not it would dramatically increase orimprove the cost of air travel between Australia and South America is debatable. Second-ly, I do not know what the elasticities are in the South American market. Thirdly, theseare traded rights and we would trade for reciprocal benefits for Australia. We not onlyhave to worry about the impact in the South American market, and we take that intoaccount, but we also have to take fairly close account of the Australian involvement in theTahitian market, which is not by any means the most robust market in the world. The netresult may only be to force Australian carriers off that route and still leave them with anunfavourable demand situation that keeps airfares high in any case.

Senator TEAGUE—Mr Wheelens, I want to assure you that the Department ofTransport is in my heart.

Mr Wheelens—I am pleased to hear that, Senator.

Senator TEAGUE—I am not happy at all with your answer.

Mr Wheelens—It is a very conservative answer.

Senator TEAGUE—I think this is the nub of our problem.

CHAIR —We have a conservative government.

Senator TEAGUE—Why would you concede, even without the elasticity models



that you have just put forward, that there will be an impact on price and hence onincreased passengers if there is a more viable air link such as the ones that have beenestablished by Lan Chile and Aerolineas Argentinas?

Mr Wheelens—I am not denying that it is possible that that could occur. There isno evidence that I have seen that would suggest that that would be the case. It may wellbe the case; nevertheless, there is absolutely no reason in economic terms why thosepricing benefits would not be available serving it as an interline point rather than a fulltraffic point. Qantas, Air New Zealand and Ansett are operating across the Tasman. Anumber of foreign carriers already have traded rights across the Tasman. The combinationof operating on a trans-Tasman service and then picking up the Aerolineas service in NewZealand should be able to give you those price efficiencies in the same way that a throughservice might give them.

CHAIR —Can I put Senator Teague’s question a slightly different way: would it bedetrimental to the national interest to allow those arrangements—either in direct effect on,say, Qantas or Ansett, or—

Mr Wheelens—Potentially it would.

CHAIR —in a precedent value in terms of arrangements with other airlines?

Mr Wheelens—It is clearly a precedent issue but again it comes back to thequestion that I posed before: if supplementation is required to make these services viable,should it be the Australian aviation industry that pays that supplement? If you add carriersto markets where we do not get a reciprocal benefit for that presence, the presence of theforeign carriers is paid for by the Australian aviation industry.

Senator SANDY MACDONALD —Even if we do not want to take up thepotential?

Mr Wheelens—Yes.

Senator SANDY MACDONALD —It is a commercial decision as to whetherQantas should fly on from Papeete.

Mr Wheelens—Yes, it is, but the presence of Lan Chile, for example, in theTahiti-Australian market potentially destabilises that market for Australian carriers.

Senator SANDY MACDONALD —I take your point.

Mr Wheelens—The point is this: if these subsidies are required to lower the fares,should it be Australian exporters, Australian importers, the tourism industry or thegovernment who provides the supplementation? Or should the supplementation come from



the Australian airline industry which is clearly not a beneficiary?

Senator TEAGUE—Could I refer you to the general approach to APEC of formerPrime Minister Keating and current Prime Minister Howard. There is a bipartisan viewheld by Australian leadership within APEC that 18 nations should lower tariffs, liberalisetrade and achieve more than the Cairns Group’s outcome. Argentina and Chile aremembers with us of the Cairns Group, the old group in GATT. The bipartisan argument ofAustralia is that by lowering the barriers—by freeing up for commercial interests tooperate—you will get an overall increase in volume of activity to the benefit of everybodyand to the benefit of Australia’s national interest. That was the argument that formerPrime Minister Keating took to the meeting of APEC in Indonesia and it is the argumentthat John Howard and Tim Fischer will be taking to all the trade meetings of the comingyear, including that of APEC. It is that argument, concerning the national interest, that Ihave yet to see the Department of Transport really acknowledge.

Mr Wheelens—The Department of Transport and the Australian government areleading the debate within APEC on liberalising air services. We are a dominant member inthe small working group established within APEC to look at liberalisation of air services. Ican provide for the committee the submissions that we have made within APEC in respectof liberalising air services. Let me assure you we are well and truly in front of most ofour major bilateral trading partners in pushing for liberalising international air services.There is no question about that; it is a matter of public record.

Have we been liberal enough in terms of our relationships with South America?My view is that we have and that, demonstrably, if you take the position previouslyheld—that is that capacity should reflect demand—we are well and truly past that point,philosophically and in practice.

Senator TEAGUE—But quality price?

Mr Wheelens—Price is ultimately determined by the willingness of airlines to pickup the capacity that has been made available to them. At some point we have to make ajudgment about what concessions are best given. In the case of Argentina one of the bidsthat they have on the table at the moment is access to the Australian-Asian market. Isuggest to you that that will not add a single passenger to the Australia-South Americamarket—not a single passenger.

Senator TEAGUE—No.

Mr Wheelens—It is not a significantly different step, then, if you accept that as aproposition, to say that extending rights across the Tasman and extending rights fromTahiti will give us a demonstrably different outcome. The major problem that we have inthe South American markets is a structural one and it has to do with the attractiveness ofAustralia as a destination for South American consumers. That is the major structural flaw



that we have.

We will continue to provide capacity to meet that demand, and we will continue toaggressively persuade and encourage our airlines to enter into commercial cooperativeagreements with South American carriers and intermediate points so that we can nurtureand develop this market. Make no mistake about it, this is a very immature market and itsuffers as a consequence.

Senator TEAGUE—Mr Chairman, I might make one last comment. I do differ-entiate between the ability to take any passenger mid-Pacific to Australia and onwardflights to Asia. I would have to look at the statistics and the models again to accept yourargument that the Asia connection is of a kind with the other category.

In my view, consistent with APEC and consistent with our national interest—this isway beyond aviation links—we ought to go more than halfway down the good path. Weought to liberalise further, because of Australia’s national interest. As set out by theDepartment of Foreign Affairs and Trade to this inquiry; as set out by the Australian-LatinAmerican business groups to this inquiry and as set out by the Senate committee in itssummary five years ago: the trade-off is Australia’s national interest gaining against someshort-term commercial gain being given to the actual carriers in operation.

So long as we allow Qantas or any Australian carrier—Ansett or anybody—toeventually have exactly the same opportunity to take it up when they believe it iscommercially appropriate, we have covered ourselves with regard to Australian commer-cial aviation rights. It is this sense of going not just halfway down the good path but muchfurther down the good path that I am really wanting to urge upon the Department ofTransport and Regional Development.

Mr Wheelens—I understand that point. We are well and truly down this path; wehave come a long way down the path. What needs to be demonstrated—and which has yetto be demonstrated—is whether granting those additional intermediate rights to SouthAmerican carriers will add to the quantum of demand out of South America.

Senator TEAGUE—I think it will.

Mr Wheelens—We believe that the best way to test that is to have these commer-cially cooperative agreements in place at the intermediate points. Since the first inquiry wehave actively pursued the development of those commercial agreements and we haveprovided the mechanisms for carriers to take those rights up. I keep coming back to thesingle point that this is an extremely immature market. Trying to force non-marketoutcomes—

Senator TEAGUE—Rights.



Mr Wheelens—No. Asking the Australian aviation industry to subsidise thedevelopment of it may not be the best way to go.

Senator WEST—Very early in the piece you told us that there is an oversupply ofpassenger capacity. Does the same relate to cargo capacity?

Mr Wheelens—There has been no suggestion by any of the airlines operating toAustralia that they want to operate pure freighters on the route.

Senator West—Given that a lot of airlines carry freight on passenger routes—

Mr Wheelens—When we provide the opportunity for airlines to operate passengerservices, the opportunity to operate belly freight capacity comes with that. If airlines wereto bring propositions to us where they wanted to operate pure freight services on the routethey would be very enthusiastically received.

Senator WEST—What about the freight capacity that exists in the under-utilisedroutes that are being used now?

Mr Wheelens—Again, that is a matter for the commercial judgment of the airlines.As I said, we have given the airlines the opportunity to operate. In the case of Argentina itis three 747s for the Argentinian side and three for the Australian side. In the case ofChile it is three B767 aircraft. The potential to operate services is there. It is a matter forthe airlines to take up those rights.

Senator WEST—That has not quite answered the question. Maybe I am notphrasing it properly. We have 169 passengers a week, Australia-Argentina. Do you knowwhat amount of freight is going out per week?

Mr Wheelens—We could provide that.

Senator WEST—I am interested. Is it getting some economic return from the factthat it might be 100 per cent full of freight or 80 per cent full of freight or is the freightlevel similar to the passenger numbers?

Mr Wheelens—I do not know the answer to that question. I can provide it to you.I guess that the airlines are in a better position to explain to you the operational difficultyof carrying large amounts of freight against prevailing headwinds. I am not too sure that Iknow the technical answer to that. I guess that there will be some limitations because ofthe prevailing meteorological conditions on the route. It is a long way to come and flyinginto those prevailing westerlies probably restricts payloads in one direction.

Senator WEST—But if part of your payload is well below aircraft capacity thenthat gives you more capacity to fly into those meteorological conditions.



Mr Wheelens—It would, yes.

Senator WEST—What impact is the freight capacity having on the viability of theservice?

Mr Wheelens—I do not know. I do not know what contribution it makes to thebottom line.

Senator WEST—How many carriers have the right to fly from Australia to Asiandestinations?

Mr Wheelens—I can provide that information to you.

Senator WEST—And are they on-flighting or are they coming to Australia astheir final destination?

Mr Wheelens—There is a variety. Some carriers that operate from, say, Europe toAustralia have intermediate traffic rights in Asia and the ability to carry traffic fromAustralia to Asia. Some of the Asian carriers have those rights. New Zealand has thoserights. It is a mixed bag, some have them and some do not have them.

Senator WEST—Is Australia an intermediate destination for anybody?

Mr Wheelens—Yes. Some carriers operate beyond Australia to New Zealand, forexample, and we have conceded Australia as an intermediate point to a number of carriersbut those rights are generally not taken up.

Senator SANDY MACDONALD —Does Cathay extend past Australia to NewZealand?

Mr Wheelens—I do not know. They may have the right.

Senator SANDY MACDONALD —Qantas cannot extend past Hong Kong toEurope.

Mr Wheelens—To some points in Europe, but within Asia we do. I am advisednow that they do have the right. Agreements like Hong Kong are quite complex. We tradebeyond Hong Kong in some markets. Hong Kong can only provide one traffic point forAustralia but Cathay Pacific has access to all the Australian capital cities with theexception of Hobart and it does have rights beyond to New Zealand. It is quite a complexagreement.

CHAIR —Thank you for coming along. You have a couple of questions on noticethat you can provide answers to and if there is any further information we require, we will



contact you.

Senator TEAGUE—Mr Wheelens, you made reference to the Department ofTransport’s pacesetting in the APEC aviation liberalisation area. If a summary of that oran appropriate paper could be made available to us, I will read it with great interest.

Mr Wheelens—Yes, we can provide that and the outcomes of the APECsecretariat’s work on liberalisation.

Senator TEAGUE—Thank you.

CHAIR —Thank you very much.

Short adjournment



[10.47 a.m.]CANDIOTI, His Excellency Mr Enrique, Ambassador, Embassy of Argentina, POBox 262, Woden, Australian Capital Territory 2606

FONSECA, Mr Luiz, Counsellor, Embassy of Brazil, PO Box 1540, AustralianCapital Territory 2601

SORZANO, His Excellency Dr Luis, Ambassador, Embassy of Colombia, 101Northbourne Avenue, Turner, Australian Capital Territory 2612

STEGER, His Excellency Mr Raphael, Ambassador, Embassy of Mexico, 14 PerthAvenue, Yarralumla, Australian Capital Territory 2600

TARUD, His Excellency Mr Jorge, Ambassador, Embassy of Chile, 10 CulgoaCircuit, O’Malley, Australian Capital Territory 2606

TOURINO, Mr Roberto, Charge d’Affaires, Embassy of Uruguay, MLC Tower,Keltie Street, Woden, Australian Capital Territory 2606

YTURBE, His Excellency Mr Antonio Rodriguez, Ambassador, Embassy of Venezue-la, MLC Tower, Keltie Street, Woden, Australian Capital Territory 2606

CHAIR —I welcome the various heads of mission from Latin-American countries.We do appreciate you all taking the time to attend this morning’s hearing of the SenateForeign Affairs, Defence and Trade References Committee inquiring into Australia’s airlinks with Latin America. The committee prefers that all evidence be given in public but,if at any stage you wish to give any part of your evidence in private, you may ask to doso and the committee will consider that request.

We have before us submissions from the Ambassadors of Brazil, Mexico, Argenti-na and Chile. Are there any alterations or additions that you wish to make to thosesubmissions at this stage? Is it the wish of the committee that the submissions beincorporated in the transcript of evidence? There being no objection, it is so ordered.

The submissions read as follows—



CHAIR —Your Excellency, I would now invite you to make some openingremarks on behalf of your colleagues, and we will then proceed with questions.

Mr Candioti —Thank you for your welcome and for inviting us to attend thishearing and for offering us an opportunity to comment on the subject matter of thisinquiry. If you will allow me, I will make some general remarks on behalf of mygovernment concerning the views of Argentina on this question.

Firstly, my government would like to place on record its appreciation of themanner in which the committee responded to concerns about the situation of air linksbetween Australia and Latin America; concerns which my colleagues and I expressed inour previous meeting on 28 November last year. The committee’s decision to carry outthis inquiry and to prepare a report by 30 June 1996 was a valuable and timely initiative.

The submissions so far presented to the committee by government authorities,airlines, business people, institutions, embassies and other sectors of the community areclear evidence of the relevance of and interest in these matters. Attention is thus beingfocused on an essential aspect of relations, as was recognised in this committee’scomprehensive report of 1992 on Australia and Latin America.

In the four years since that report, notwithstanding that relations intensified andexpanded significantly in the political and economic areas, very little could be achievedtowards more air links, more convenient routes or improved access by air carriers fromLatin America to Australia across the Pacific. Although business, tourism and othertravelling have clearly produced a growing demand for air services, the Argentine airlinecompany Aerolineas Argentinas—the only one that, since 1988, has consistently provideda regular and direct connection—is still operating under restricted and discriminatoryconditions. This was due to the Australian reluctance to grant increased capacity andfrequency, fifth freedom rights, additional entry points and beyond destinations. We hopethat such a protectionist policy which contributed to isolating Australia from LatinAmerica will soon be reversed.

We noted with satisfaction the electoral commitments by the present federalgovernment to a more open, liberal and flexible attitude in the negotiation and extensionof international air services agreements and, in particular, to facilitate the development ofair links between Australia and Latin America. We are very pleased with the wide rangeof support for these new strategies which are contained in the majority of the submissionsproduced for this inquiry.

It seems to us that submission number 18, by the Department of Foreign Affairsand Trade, accurately summarises the evolution and current state of the problem and thepolicies to follow. It rightly outlines the new opportunities offered to Australia by theLatin-American democracies and their fast growing and integrating markets. It concludesthat the improvement of air links will facilitate the expansion and development of relations



across a range of fields: political dialogue and cooperation; commercial relations,including services; tourism flows; and cultural and social exchanges.

We fully share the view that, in future air services negotiations between Australiaand Latin America, due account needs to be taken, beyond any particular and short-termindividual interest, of the wider Australian national interest. We welcome DFAT’s positionin favour of adherence to World Trade Organisation principles of trade liberalisation,greater transparency, and representation of all interested parties in negotiations of airservices agreements.

In submission number 8, the Argentine airline has filed with the committee acomprehensive presentation of its case and its proposals for improving aviation accessbetween our two countries. My government fully supports the requests contained in theAerolineas submission. I am pleased to anticipate, for the committee, that regularconsultations on air services between delegations from Australia and Argentina are to beresumed in the third quarter of this year in Buenos Aires. This will be a good opportunityfor some real breakthroughs. We expect that the Australian side, reflecting the newpolicies, will be in a position to make progress towards mutually beneficial and balancedaviation relations.

We would very much appreciate it if this committee includes in its report recom-mendations to the effect that, in future negotiations between Australia and Argentina, ourrequests concerning increased capacity, full traffic rights, multiple entry points and beyondrights be adequately met. Such arrangements should be without limitations, conditions ordiscriminations for carriers of either party, on the basis of equal opportunity, reciprocityand free and fair competition.

Mr Chairman, after decades of isolation and distant relations, the countries of theSouthern Hemisphere are now realising how many common interests and concerns theyshare, and how large and promising is the scope for increased friendship and cooperation.We are welcoming the Minister for Trade and Deputy Prime Minister of Australia in someof our countries and this is further evidence of the importance, the interest and thegrowing development of these relations. Our countries are working closely in internationaland regional scenarios for the promotion of free trade, protection of the environment andnatural resources, international security, non-proliferation, peacekeeping and the reform ofthe United Nations. Business people have, in turn, led the way in identifying and takingadvantage of growing opportunities for trade and investment across the Pacific.

These positive trends should not be obstructed or delayed. On the contrary,governments should encourage and facilitate them, providing the conditions and—wherenecessary—the legal and conventional framework for better communications, extendeddiplomatic and consular presence, pragmatic visa arrangements including waiver of visarequirements, and exchange of scientists, artists, tourists, sports people and students. It isobvious that in order to facilitate all these developments the availability of adequate air



links is essential.

We hope that this inquiry and the committee’s report will contribute to a newstrategy for more efficient air links, frequent flights, better service, and cheaper freight andpassenger tickets for the growing number of Australians and Latin Americans who wish todevelop contacts and exchanges among our countries and regions. These are my generalcomments, and I thank you.

CHAIR —Thank you very much, Your Excellency. Do any other members of thedelegation wish to make some additional comments before we proceed to questions?

Mr Steger—Thank you very much, Mr Chairman. I, and I think some of mycolleagues, have what could be called aide memoire papers which state our positions.What would the procedure be?

CHAIR —It would be helpful if we proceeded to do that now before the committeeasks questions.

Mr Steger—So you will allow me to read from my aide memoire?

CHAIR —Yes, certainly.

Mr Steger—The government of Mexico is highly interested in the establishment ofdirect air links between the Latin-American region and Australia. In that regard I wouldlike to reiterate some of the points presented by this embassy in its submission to theSenate Standing Committee on Foreign Affairs, Defence and Trade on Australia’s relationswith Latin America, on 8 October 1991.

In this context I would like to underline that, over the past 65 years, a network ofbasic infrastructure—communications, transportation, energy supplies, health services etcetera—has been developed throughout my country. This has enabled industry andbusiness in Mexico to expand and has led to the growth of new industrial centres andcommercial markets around the country.

Currently, Mexico has approximately 90,000 kilometres of paved roads and 35,000kilometres of railways. Seventy-five maritime ports and nine river ports handle 97 per centof all exports and 65 per cent of imports. There are two major domestic and internationalairlines: Aeromexico and Mexicana de Aviacion—both recently privatised; one increasing-ly important middle-sized domestic and international airline, TAESA, and two rapidlygrowing regional carriers, Aeromar and Aero California; and more than 10 internationalairports.

The Mexican policy on international air links is fundamentally based on theprinciple of real and effective reciprocity. The Mexican government has subscribed to



bilateral agreements on aerial transport only with those countries in which the interest ofMexican airlines in offering services exists and there is the real possibility of exercisingthe rights established in such agreements. Unfortunately, such is not the case withAustralia as of this moment.

No Mexican airline has actually manifested its interest in establishing andexploiting air transport services between Mexico and Australia. As far as the governmentof Mexico goes, the possible subscription of a bilateral air agreement would be subject tothe plans presented by Mexican airlines to operate in this territory in order to guaranteethe exercise of the rights established in such an agreement.

Although there is no bilateral agreement between Australia and Mexico on airtransportation, the Mexican authorities are well disposed towards discussing this matterwith the Australian government or, if it is the case, towards providing a unilateralauthorisation to any Australian airline that may wish to offer its services in Mexicanterritory on the understanding that they would operate under the so-called third and fourthfreedoms.

I would like to underline the highest importance that my government gives to thismatter. I would be happy to answer any further queries. Thank you very much.

CHAIR —Thank you, your Excellency. Are there any other statements?

Mr Fonseca—Since 1965, Brazil has tried relentlessly, directly and unsuccessfullyto enter into air negotiations with Australian authorities with a view to developing tradeand an overall relationship between southern hemisphere nations. Brazil has had a residentdiplomatic mission in Canberra since 1946 and Oceania—Australia and New Zealand—have been considered in the Brazilian Ministry of Aeronautic’s policy for air services as ofmaximum priority for the expansion of international routes. Contacts were made throughdiplomatic channels and the embassy has been informed that Australian policy is to enterinto air service discussions only when there is sufficient traffic.

In 1994, the Brazilian foreign minister, Celso Amorim, visited Australia and NewZealand and at the highest levels formally reiterated personally, both in discussions atDFAT with the former Minister for Foreign Affairs and with the former Prime Minister,the importance of the establishment of air links for the development of the overallrelationship between the two countries.

The Brazilian embassy consequently proposed to DFAT bilateral negotiations inCanberra. Australia suggested informal talks in the midst of a multilateral meeting inMontreal and from there a meeting of a technical group was scheduled.

Informal discussions were accepted by Australia for 7 December 1995 and adelegation headed by the chairman of the Brazilian International Air Services Commission,



Brigadier Renato Pereira, came to Canberra and was received during an afternoon by theacting director for the Americas and the Pacific of the aviation division of the internationalrelations branch of the department of transport.

Since then no progress has been achieved in the matter.Brazil reaffirms its wishesto establish concrete negotiations towards an air link with Australia as soon as possible.

I take this occasion to inform the committee that the same Brazilian delegationtravelled to Wellington where an air services agreement was initialled. This agreement isdue to be signed during the coming visit to Brazil of the New Zealand Minister for Trade,Mr Philip Burdon, next week.

CHAIR —Thank you very much.

Mr Tarud —We have made our submission in writing so I do not think it isnecessary to raise it again. I think the work you are doing is very important. Politically, itis very important that attention be paid to this matter at this level.

Today we are in a different position to the companies that secured the travelbefore. Lan Chile and Qantas are today private companies. In the past they used to begovernment directed companies. Before, when making a decision, it could take fiveminutes to sign a decree and the airlines would fly to the point of destination that wecommand it to. Today it is different; we have to find that there is real business for them todo. I would like to emphasise that, in the case of Chile, that business exists. In the 1995figures that we saw, we had nearly 15,000 passengers who travelled from point to point.That shows that the business exists, and all of that is without any promotion. We knowthat, if you do a promotion and you advertise the quality of flight which you have, youwill get double the business.

It is now a matter of convincing the private sector that there is business to do. Thebusiness sector must also understand that, on a political level, you and we were veryinterested to do it because we have common links—and I will speak for Chile—which arevery relevant to Australia. As you know, Australia today became the No. 6 investor inChile. This has occurred in record time, because our historical links in commerce havebeen with other sectors—the United States, Canada, Germany, Spain, et cetera. So inrecord time Australia has become sixth. It is very important to hurry this up so that wehave a good link regarding travelling. This is not only for business but also for the relatedbusiness of tourism. Tourism is something that we could develop if only we had goodlinks. Tourists will never wait for six, seven or 11 hours in Papeete to get the connectionto continue their trip. They will have other opportunities to go on. The flight time itself isvery long. We have to fly 20 or 22 hours. So the government of Chile appreciates whatyou are doing in the Senate. It is very important to us.

CHAIR —Thank you. We will now proceed to questions from members of the



committee. I would like to start with one question. You have correctly identified that theDepartment of Foreign Affairs and Trade in Australia has promoted the expansion of airlinks for many of the reasons that you have outlined. I was wondering what the position iswith respect to Latin-American countries and their air links with other parts of the world,particularly Europe. Is Australia the only real problem area in which you are looking forsome improvements? I appreciate your points about Asia, but could you comment uponthat? How do we compare with other long haul destinations that you may have?

Mr Candioti —At the moment the policies of the Argentine government are veryclear and open. There has been a complete deregulation of many sectors of the economy.Our airlines which were in the public domain have been completely privatised. The policyof the Argentine government is to leave the initiative to the companies in the privatesector that are interested. What we are concerned with is to create the most favourableconditions for them to do their business.

I would not say that there are no discussions or bargaining or negotiations withother countries because there may be other countries which do not have such liberalpolicies in other parts of the world. I can tell you that the position of the Argentiniangovernment, consistent with their general position on economic policies, is deregulation,non-intervention, competition, facilitating trade and free trade in all areas includingservices. I do not think there are problems or obstacles which impede air traffic with othercountries.

We have many agreements—international and bilateral—with many countries inLatin America, in North America and in Europe particularly, which are the traditionalareas of flow of trade, people and traffic. In this part of the world, which is developing asa new area of mutual interest between South America and Latin America in general andNew Zealand and Australia, we would like to see the same attitude of facilitating so thatthe private companies that wish to fly are able to fly without vetoes or limitations whichare not compatible with a liberal approach.

Senator WEST—You talked about deregulation and the privatisation of many ofthe airlines. We understand from the previous witnesses that there is excess capacity—there are more seats available than passengers who want to fly. What do you think needsto be done to actually fill up the vacant passenger seats at present?

Mr Candioti —It is up to the carriers to do their job in promoting their services. Itis also important to facilitate better conditions for the carriers so they can provide serviceswhich are competitive, cheaper and of better quality so they can expand and modernisetheir fleet in such a way that they can make more attractive offers to the public.

The demand for air tickets and for capacities is growing at an amazing rate in theworld. The submission made by the department of tourism is very clear in saying thatLatin America is a region which is developing very fast in this area because it sends a lot



of travellers to all parts of the world. The capacity now available perhaps exceeds thetraffic but it is good to be like that so that we can have competition and we can havebetter possibilities for the consumers. It is up to the companies to promote their business;it is not up to the governments.

We are interested to see that any company that wishes to compete is able tocompete and it is not subject to restrictions of the kind that we have seen in the past andwe are still seeing concerning, for instance, the fifth freedom rights. If there is a possibili-ty to grant fifth freedom rights—and this allows the companies to fill their capacity or tooffer more—they should have the fifth freedom right. It would be in the interest of thegeneral public to have more flights and perhaps cheaper flights available. Our attitude is tohave the best possible framework to offer private companies to promote and to make theirbusiness.

Senator WEST—How important do you think the beyond rights are?

Mr Candioti —They are important in many ways. It is a way of contributing to thecompanies getting more profit but it is also important from the international point of viewin which it would create connections. For instance, in the case of Argentina, Chile andBrazil—the southern countries—it would provide alternative connections to east Asia andto South-East Asia, which now have to be done mostly through North America which is amuch longer and more expensive trip. It would be politically a very important way tocontribute to the presence of Latin America in the Asia-Pacific. This is an interestingmatter.

Senator WEST—What benefits would beyond rights have for Australia?

Mr Candioti —Australia would be able to cover some points in Latin America orbeyond with their own carriers through arrangements of their companies in those areas,and compete with the local air carriers or the original air carriers. It would be beneficialfor them too.

Mr Tarud —The benefits for Australia would be many. Firstly, in our case, onethird of exports from Chile are going to Asia—to this part of the world. That means thattoday we have no straight connections for the Asian market if we want to fly. So Australiacould become a point of interest for our businessmen to start at the door of Asia. Thatmeans business will also be in joint ventures with Australian companies and workingtogether for the market. But, today, the people who want to go to Asia have to go toEurope or to the United States, and then go to Asia.

So Australia would be a gate, a base for business from our people—and not onlyfrom Chile, I believe, but also from Argentina and the others—who will look at Australiain that way. But for that you have to get a good connection of flights. A businessman doesnot want to lose time; he wants to save time. It would be very beneficial in that sense. It



will open the eyes of many people that Australia can become a base for Asia for ourcountries.

Senator WEST—Do you think the positioning in Australia of a number ofinternational companies of their regional Asian base has an impact upon that as well?There are a number of international companies which have set up a regional headquarters,a regional base in Australia to work into Asia. Would that be an important point as well?

Mr Tarud —For the links with Latin America?

Senator WEST—Yes.

Mr Tarud —Of course, it can work in that sense also. You mean antennas thatAsian countries have in Australia?

Senator WEST—Yes.

Mr Tarud —Yes, it is a common link, it is an opening, it is a door opening for allthat area of America, and we, ourselves, are really looking to Australia as being our basefor the area. Chile and businessmen in Chile are looking at that.

CHAIR —Could I just follow up on a question of Senator West’s. She said, Ithink, that a third of your exports are now going to Asia.

Mr Tarud —Yes.

CHAIR —What is the main mode of transport for that—air or sea?

Mr Tarud —Mostly by sea, of course, to Japan, Korea, Malaysia and alsoAustralia, but Australia has still not become a trading partner, in goods I mean. It ismostly by sea, but a little bit is by air—fresh food, for example, needs to be air cargo.And this is why we do not have that today because nobody will take the risk of sendingperishable food when you have to wait for a connection. As a businessman you would betaking a high risk on that, in both senses, of course.

CHAIR —Yes.

Senator TEAGUE—I welcome the four written submissions that we have receivedfrom the four ambassadors—from Brazil, Mexico, Argentina and Chile—and the openingremarks that were made here today. I say that, not just because my heart is with you orthat I wish to be friendly, but I mean it. The track record of our views is in the Australiaand Latin America Senate report which you have referred to. What this demonstrates is thecommonality, the shared view of the eight Latin-American heads of mission and theSenate committee. But not only that; Ambassador Candioti, you have rightly referred to



submission No. 18 to this inquiry from the Department of Foreign Affairs and Trade, andit also endorses this shared view. So it is not just at the political level; also, the most clearrepresentative voice in international matters, the Department of Foreign Affairs and Trade,very articulately puts the same point.

The fact that all eight missions are represented by yourselves, that every head ofmission from Latin America is present here this morning, demonstrates this shared view,and it has been a shared view for about five years now. I just make the observation thattwo of you have your photographs on the front page of our report—Ambassador Candiotiand Charge d’Affaires Tourino—and there are two of us on the Senate committee whowere here from the beginning of this discussion five years ago. So when I say I welcomeyour opening remarks and I welcome the submissions made by yourselves to us for thisinquiry, I mean it, and the Department of Foreign Affairs and Trade acknowledges andunderstands that.

I ask Ambassador Candioti to expand upon the reference he made to the Depart-ment of Foreign Affairs and Trade agreeing broadly with the national interests of Australiabeing met by increased air links. I ask Ambassador Tarud about his references in thewritten submission to the visit of President Aylwin.

Ambassador Candioti, when there is this common view now—long-time held—bythe heads of mission, all eight of you, the Magellan group, if you like, the Senatecommittee, the full Senate unanimously endorsing our report, the government respondingpositively to all of our recommendations, the Department of Foreign Affairs and Tradeendorsing the vision that is there, where, more specifically, is the difficulty arising? Whereis the blockage, in your view? Where is the area on which attention must be focused inorder to see the full vision achieved? Ambassador of Chile, in your reference to PresidentAylwin’s visit, you quote then Prime Minister Keating saying, ‘It is necessary to improvedirect air services between our two countries.’ That was the view of President Aylwin, andlater on of President Frei in his visit to Australia. Where do you see the blockage? Whereis the difficulty when there is such a shared vision that I have referred to?

Mr Candioti —Senator, I thank you very much for your generous comments aboutmy introductory remarks. I would like to say something about the political view. There isnothing more eloquent to illustrate the Argentine political view than the fact that Argenti-na in the early 1980s started doing this route, believing that this relationship was import-ant. I do not think there is a much better explanation for our position. We have keptconsistently serving the route through our company when it was a state company, and nowthrough our business people, now that the company is a private company. So our politicalinterest is very eloquently demonstrated by facts.

We had to do a lot of sacrifice to reach these shores with our planes. We had toadmit an unequal kind of agreement by which the Australian air carrier had some sort of aveto concerning certain rights which were not allowed to be exercised unless the Austral-



ian air carrier exercised them. We know that the Australian carriers never exercised thoserights, and do not propose to exercise them. So we accepted this kind of agreementbecause the overall interest was to serve this route and to put this relationship into motionand to bring people here and to take Australians to Latin America. I think that there is thegreat problem.

The kind of relationship that has been developed, from our point of view, is arelationship of consistent effort, policy and sacrifice. We now wish that a new policywould develop which would put the relationship into a more balanced situation where wecould have these rights that we are denied, independent of whether the Australian carrierswant to do the same. The conditions should be equal for every carrier, Argentinian orAustralian. That is all that we want.

Senator TEAGUE—Thank you.

Mr Tarud —Thank you, Senator Teague, for your question. You mentioned thevisit of President Aylwin and President Frei. I would just like to mention that these twovisits by two heads of state of Chile were in a period of 14 months, so there is realinterest from both our governments in strengthening relations with Australia. That is clear.

In that sense, I would like to take the opportunity to welcome the visit of DeputyPrime Minister, Tim Fischer, who was in Chile just last Saturday. I understand that themeeting held there was very successful.

Let me go straight to the point of blockage. One of the points which has alreadybeen mentioned by Ambassador Candioti is the problem of the fifth liberty that restrainsbusiness for companies. Bringing passengers such distances from one point to another is adifficulty that you have to account for. Twenty hours of flying is a lot of money, and thatrestrains business.

The main points are on the business side. There is a blockage there. How do we dobetter business? As we mentioned before, nobody will just do it because the political levelwants it. They have to survive by themselves and, of course, they have to make a profit. Itis their intention to make profit. Countries would like to reach us but there is the businessside. We have to make the way easier and this is one of the ways to do that.

Senator TEAGUE—Thank you both very much for your answers. Later, when thetranscript of hearings for today is circulated to you all, you will see that our first sessiontoday was with the Department of Transport and our questions focused very much on thematters that you have just raised.

Let me now ask the Ambassador of Mexico a question. We have heard carefullywhat you have said about a kind of unilateral welcome, at least to exercise third andfourth freedoms, but there used to be a flourishing relationship. Qantas came into Mexico



and there was quite a lot of hope in those early days and, even when President Salinascame to Australia before these last five years that I referred to in my introductorycomment, there were hopes that there could be a revival of this link—Australia throughMexico to the US, and through Mexico to Europe. Given the efforts that the AustralianEmbassy has made, for example, to promote honeymoon tours from Mexico back toAustralia, and other tourist initiatives, in practice, what is the next step to really wooQantas and Ansett to take up the welcome that you have indicated that your governmentgives?

Mr Steger—I remember that when I was a kid when I went to the airport I sawthe kangaroo of Qantas. That was some years ago. Circumstances have changed. Unfortu-nately, Qantas decided unilaterally to stop flying to Acapulco. At that time, Qantas hadfifth freedom. Vision is something that a businessman or a business company should takeinto consideration: a vision of the future.

The next step for this Mexican proposal is just an approach. We need a directapproach, in terms of a proposition. Let us start talking. This is a matter of business; wecan negotiate everything, so we want to know what the possibilities are. We will have avisit from our minister of trade next July. He would be very happy to take, in hisbriefcase, a small message to his friend and counterpart, the minister for communications.I think this is a place to start.

Senator TEAGUE—I have a question for the Ambassador of Brazil. Varig is oneof the world’s big airlines. At the moment, the connection with Australia is really throughLos Angeles. I thank you for your statements on behalf of the government of Brazil, but Iwonder what the next step is. Do you even contemplate that there is some hope of Varig’sbeing in any direct connection with Australia?

Mr Fonseca—Of course, I must say all of this in the context that Brazil is a globaltrader. Being a global trader, we have interests in being everywhere. We are already inAsia. Varig flies to Bangkok. Varig flies to Hong Kong. We must have an interest inincreasing these links. For example—and I must say this, based on what the Ambassadorof Chile and Ambassador of Argentina have just said—we also have very big interest inincreasing links to here. I can say this by virtue of the mere fact that Brazil’s was the firstLatin-American mission to open here in Australia, in 1946. Last year we celebrated our50th anniversary. On page five of the DFAT paper, you can see bilateral commercialrelations. You can see Australia exports 178 and 328, and Australia imports 321 and 481.It means that Australia exports practically doubled from 1991 to 1995. It is a fact thatAustralian exporters would be more interested in having this linkage than Brazilian ones.

As I have said, Brazil already flies to Asia—to Bangkok, Tokyo and Hong Kong—and is very much interested in extending these links to Australia, based on the assumptionthat we are a global trader. We want to trade and have commercial and political linksanywhere in the world that can be convenient to us, and Australia is one of those places.



CHAIR —Dr Sorzano, do you wish to add something?

Dr Sorzano—Thank you. I would like to briefly explain our Colombian positionon this issue. Colombia is not directly involved or engaged in negotiations about transpor-tation between Australia and our country. But there is a growing interest in Colombia insupporting the development of new aerial links between Australia and our region.

In recent years, we have had an increasing exchange between Colombia andAustralia. There are new Australian investments in mining and oilfield industries inColombia, and our country is exporting manufactured goods to Australia. Besides that, anincreasing number of Colombians have been travelling to Australia with touristic purposes.Hence, our country is currently interested in supporting all the new links between ourregion and Australia. In the future we will be likely to be interested in discussing moredirectly with your government air boundaries for our international airlines. Meanwhile,Colombia supports the demands of other Latin-American countries for a wider and moreopen Australian international air links policy.

Senator SANDY MACDONALD —The counsellor from Brazil mentioned thatthey had air links with South-East Asia, but I would like to know what other countrieshave air services agreements with South-East Asia. Do Brazil and Argentina?

Mr Yturbe —Excuse me, I do not understand exactly that question. In general, wewould like to stress our support of the remarks that have been made here by the Ambassa-dor of Argentina, the Ambassador of Chile and the rest of our colleagues. We believe thatan increasing strengthening of air links between Latin America and the Asia-Pacificregion, complete with Australia, will develop into more concrete steps in businessassociations and in several other links. We think that Latin America right now has agigantic potential for business opportunity with this area of the region. We think that oureconomies are complementary in many aspects. The air links that could be establishedwould really help a lot to develop those relations.

Senator SANDY MACDONALD —Which countries have got air links?

Mr Steger—We have the route from Mexico to Malaysia. There is a Mexico, LA,Taiwan, Kuala Lumpur flight every two weeks and we also have with Japan Airlines aflight every day which is Mexico, Vancouver, Narita and Mexico-Tokyo through Seattle, Iunderstand. I am not an expert; I am just an ambassador.

Senator SANDY MACDONALD —Thank you, Ambassador.

Mr Candioti —As far as I am aware, we have concluded air service agreementswith Malaysia and Singapore. The Malaysian agreement is operating through a connectionwith Malaysian Airways flights from Kuala Lumpur via Johannesburg to Buenos Aires.



Senator SANDY MACDONALD —Who does Varig have air links with?

Mr Fonseca—With Johannesburg, Bangkok, Tokyo and Hong Kong. We havealready signed an agreement with China but that agreement has not started yet, because allthe companies want to fly. We do not know yet which one will fly.

Senator SANDY MACDONALD —Ambassador Candioti, the whole nub of thevery legitimate and hopeful expectation of increased services lies basically with thequestion of how expanded services with Latin America will increase the traffic. We haveseen with the Aerolineas arrangement that the capacity is 2,500 seats a week and 169people use it. That poses two questions: why do so few people use it if the capacity is sohigh, and secondly, is that service supplemented to a large extent by freight, and what isthe freight component of the connection?

Mr Candioti —Senator, I think these questions would be better answered by theAerolineas representatives who will be here this afternoon. My view is that the fact thatthe whole capacity is not filled may be due to several different reasons. One is perhapsthat the aircraft which is now used is too big for the requirements. Maybe it could besomething that the Senate committee report in 1992 examined at length: that some otherkind of aircraft would be more convenient. Of course, that requires a lot of investment andinvestment requires better conditions to be able to invest. I have the experience of mycountry that is now discovering mines all over the place, and there is a lot of investment.

The problem was that for 200 years we did not have the legislation or theframework conditions to facilitate investment. It was a kind of protective legislationwhich, in fact, prevented any mining in Argentina. We see that in some ways the presentarrangements prevent further aviation links because they do not offer enough conditionsfor having expanding services. One is the fifth freedom that we have just mentioned andthe other is the possibility of beyond points and more access points in Australia and allthese kinds of things that contribute to a private company being able to plan their strategyin a way that can generate more money and more business.

I do not think there is one reason why the capacity is not filled. It is a complex setof reasons and I would leave this point to be clarified by the carriers themselves becausethey may know better than I. My position is a position of principle and political approach.We have to create better conditions and then the business will come because the trends arevery telling the way relations have grown.

Of course, it is still not comparable to the relations you have with Asia but theLatin-American continent is experiencing a great transformation. If we create in time theright conditions then Australia and New Zealand may benefit from these growing markets,these very attractive markets which are developing in Latin America. They are countrieswhich share democratic values and share cultural values with this part of the world.



A very good partnership can arise from more contact, more traffic, more travelling.This is something that we see. Perhaps it is a little visionary but I think it was visionary,the 1992 report. It pointed out these things and it stressed Australia should not keep onlosing opportunities that are taken up by others. We have a very near experience, theexperience of New Zealand towards air aviation links. It is quite different, it is much moreopen and much more forthcoming and much more free trade oriented. We have reachedagreements with them which are, depending of what we reach with Australia, verysatisfactory to both parties.

I think your question is a very important one but we should like to hear what thetechnical people say. They are much more authorised than me. This is my general andpolitical view of the whole question. Thank you.

Senator TEAGUE—The Ambassador of Chile has said that with the privatisedairlines that we are talking about in each of our countries commercial decisions have to bemade but businessmen will make decisions with greater confidence if there is a clearpolitical will expressed by our governments. I note the aspirations we have in WTO, in theCairns Group, in the old GATT and in APEC. It is for liberalisation and it is, in terms ofyour government in Latin America and on Australia’s part, a political commitment toincreasing relations.

I now conclude with a question to the Ambassador for Chile. Can we, in any way,give a clearer signal? You mentioned the visit of the Deputy Prime Minister of Australia,Tim Fischer. That visit to Latin America this weekend is a marvellous signal. Is it by suchvisits, is it by any other initiative that you can take as heads of mission that we canreinforce this confidence in the business world that our governments are committed to theair links being improved?

Mr Tarud —Absolutely. First of all, I endorse what you have said, so you haverepresented me already in your comments. The visits of high level officials between bothcountries is absolutely helpful. The reports in the media in Chile about the visits of MrFischer were front page news. Unfortunately, in the press in Australia I saw todaysomething like two centimetres of news. So the people know; they get information aboutwhat we are doing, and that is very important in the promotion of the relationship betweenthe two countries.

We would also welcome a visit of parliamentarians to Chile. That would help a lot.You can understand how promoting the relationship between counterparts helps: you knoweach other. Things are different when there is a personal relationship; you know how theother will react, you know how to act. That is how we build relations between twocountries—at the political and business levels. All levels are important and they are apackage; everything goes together.

Mr Yturbe —I would just like to add a simple thing to what the Ambassador for



Chile and Senator Teague have said. There are other measures that have been taken: forexample, agreements in promotion and protection of investment, and agreements in doubletaxation. Those are clear measures that have been taken in order to improve thoserelations, and in order to give the business community the real impression that we meanbusiness in an open manner and that we are willing to negotiate anything that is reallybeneficial to both regions.

Senator TEAGUE—I notice by their body language and facial expressions that theheads of mission of Uruguay and Peru are in assent with the conversation that we havehad. Just for the record, I have flown into Lima, Montevideo, down to Cartagena and, ofcourse, into other capitals. Indeed, I had an accident and was nearly concussed cominginto the airport at Caracas. I will remember that forever. It has been a marvellous hearing,and it is good that we have such a common vision.

CHAIR —Thank you. I echo the comments of Senator Teague who has, of course,been a longstanding member of this committee and taken a very deep interest inAustralia’s relations with other countries and particularly, of course, Latin America. I amfairly new to this committee and I look forward to developing that cooperative arrange-ment in the years ahead. It is through hearings like this that we do improve the relation-ships. Certainly, as I think all members of the committee have indicated, we are looking atthis issue seriously and looking for ways to improve the air links to our mutual benefit.

Thank you very much for giving up your time. I know that His Excellency fromArgentina has been here a number of years, and it is good to have him contributing hisexperience. Others, over a coffee break, were telling me that they are more recent arrivals.Welcome to Australia, and we certainly hope that you enjoy your term here and that it isproductive.



[12.02 p.m.]BUNTING, Mr John Brymore, International Relations Manager, Qantas AirwaysLtd, 203 Coward Street, Mascot, New South Wales 2020

HAWES, Mr David Charles, Group General Manager, Government and Internation-al Relations, Qantas Airways Ltd, 203 Coward Street, Mascot, New South Wales 2020

KITTO, Mr Neville Richard, Manager, Government Affairs, Qantas Airways Ltd,203 Coward Street, Mascot, New South Wales 2020

McARTHUR, Mr Christopher John, General Manager, Network Development,Qantas Airways Ltd, 203 Coward Street, Mascot, New South Wales 2020

CHAIR —Welcome. The committee prefers that all evidence be given in public,but if at any stage you wish to give any part of your evidence in private, you may ask todo so and the committee will consider that request. The committee has before it asubmission from Qantas, dated 17 April 1996. Before we proceed to an opening statement,are there any alterations or additions that you would like to make to that written submis-sion at this stage?

Mr Kitto —No.

CHAIR —Is it the wish of the committee that the document be incorporated in thetranscript of evidence? There being no objection, it is so ordered.




CHAIR —I now ask you to make an opening statement, following which we willproceed to questions from the committee members.

Mr Hawes—Thank you, Chairman and members of the committee, for thisopportunity to appear and to speak to our submission and respond to questions. It hascertainly been very interesting for us to have the opportunity to sit and listen to thepreceding session.

At the outset, I want to indicate that Latin America is not at the forefront ofQantas thinking. The growth opportunities and challenges currently confronting us ininternational aviation lie elsewhere. However, having said that, we certainly are notignoring Latin America. We have that market under review. We are certainly aware of thesignificant interest that exists within government and within the business community inseeing improved air links between Australia and Latin America.

The difference from Qantas’s point of view is that we need to look at that marketfrom a commercial perspective. We can certainly sympathise with some of the viewswhich have been expressed about the need and the desire to build a closer and a moreeffective air link to South America and how that relates to Australia’s relations—commercial, political and so forth—with that part of the world. But we really do come atthis from a commercial perspective—a commercial perspective very much post-privatisation of Qantas—where there is a focus on route by route performance in terms ofthe effective utilisation of our assets.

Since the committee’s 1992 report there have been some developments. One or twohave been flagged in our submission. Also since our submission was presented to you, wehave seen the conclusion of an air services agreement with Chile. We have also sought totake further forward our discussions with Lan Chile at the commercial level. We arelooking to rearrange our scheduled operations through Tahiti in a way which willhopefully result in improved connections. There are further improvements in that regardwhich we would hope to see later this year.

The other development flagged in our submission relates to further bilateralnegotiations with Argentina. This has resulted in an expansion of rights and capacityavailable to carriers from both sides but could be utilised by Aerolineas.

As has been noted in other submissions and in discussions, the negotiated capacitybetween Australia and Latin America is currently ahead of demand. That demand isrelatively small, particularly in international aviation terms. We believe there is a need,when looking at further prospects for the development of these routes, to look at market-based issues—the structure and direction of the different markets; matters relating topricing; promotion of tourism; product quality and service; and, of course, from acommercial perspective, the return on investment on a route which, if operated on aminimal basis, is high cost and low yielding.



From an internal perspective, we have not been able at this stage to justifyoperating a direct service between Australia and a Latin-American market. In terms of theform of operation which would produce the lowest seat-mile cost—that is, a 747 typeaircraft—that 400 seats or thereabouts would virtually swamp the existing capacity in themarket. The way we have approached this, therefore, is to look at cooperative scheduling,working with one of the Latin-American carriers. I have indicated that we are in discus-sions with Lan Chile. We would hope that, in time, the expansion of demand will justifyadditional flights and, who knows, at some stage in the future, direct flights.

One has heard reference to the fact that we have a chicken and egg situation, thatthe demand may be greater if there were more services. From a Qantas point of view, wefind it difficult to justify an investment in expensive eggs. So that is the reason that wehave taken the approach of seeking to improve air links based on existing services.

One of the features we have indicated in our report is the nature of the structure ofthe market between Australia and Latin America. Some 80 per cent of that is taken bypeople moving between Brazil, Argentina and Chile, so that there is, for us, no naturalgateway evident, or no single predominant gateway evident. The 80 per cent is dividedroughly in thirds between those three markets. That is another reason why, perhaps,working with a Latin-American carrier, which would have a network of its own withinLatin America, offers one of the better solutions. And, from their point of view, workingwith an airline such as Qantas, which has a network not only within Australia but beyondinto Asia, represents an attractive alternative. I will stop at that point, Mr Chairman, andleave the rest for questions.

CHAIR —Are there any comments from other members of the delegation? You sayin your written submission, and you have repeated it here, that your current approach is tokeep South America under close evaluation and hopefully in the future improve theservice. You have made the comment that it is a chicken and egg argument. What do youmean by keeping it under close evaluation? What do you see would have to happen tolead Qantas to a position where it decides that it is in its interests, or in the nationalinterests, or that it is commercially viable—and I accept that those three things may notnecessarily all come together at the one point in time—for it to look at operating either adirect service or increasing the current availability through some cooperative arrange-ments?

It seems that everybody has the view that the service should be improved. There isa growing market there. This is a large land mass with substantial population, significantincreasing economies and trade potential. It is probably the last remaining land mass onthe globe that we do not have substantial air links with. How do we jump the barrier?

Mr Hawes—It comes down to seeing the market grow in terms of demand forservices. Very often it is said to us that if we dedicated aircraft or additional services tothat market, then the demand would follow. That is a recipe, perhaps, for losing money.



You cannot expect to start up on a route at an impressive level of profit from day one.You need to be prepared to invest in the development of a route. However if you cannotsee the prospect of a real rate of return which, let us say, would compete with anadditional service between, say, Sydney and Jakarta or Sydney and Hong Kong or Sydneyand Singapore, then to be responsible to shareholders and the board, the management ofQantas will not be able to justify that sort of investment. Indeed the board would beunlikely to agree to that.

CHAIR —What market are you talking about there? Is it a Latin America-Australiamarket or could we look at other markets which comprise Australia, Latin America andAsia?

Mr Hawes—The primary focus is the Australia-Latin America market or theAustralasia-Latin America market, not markets beyond.

CHAIR —It seems to me—and I stand to be corrected on this—that if you purelylook at Australia-Latin America, or Australia and individual countries within LatinAmerica, then even if the potential for tourism or trade is growing we may still be hearingthe same arguments in a number of years time—that it is still not substantial enough tomake it commercially viable for that sort of—

Mr Hawes—We may very well. And that is why the approach which we havechosen is to seek to improve the basis of the existing connections, to try and makeimprovements in that service, and to work with people who know the market—just as weoffer our knowledge of the markets in which we operate—and, hence, arrive at somecooperative basis with a Latin-American carrier.

CHAIR —Do you see Latin America as a single market in this context? You talkedearlier about the recent agreement with respect to Chile. There are negotiations later thisyear with respect to Argentina. We have a substantial submission from Aerolineas which,as you are probably aware, seeks certain changes—and no doubt they will have them onthe agenda when the talks get under way. When the agreement was negotiated with respectto Chile, was it just looked at in the context of Australia-Chile, Qantas-Lan Chile, or wasit looked at more globally with respect to the South American continent?

Mr Hawes—Primarily in respect of Australia and Chile. However, because of thestructure of the market and the actual source of passengers travelling between Australiaand Latin America one could not ignore the neighbouring markets in Argentina and Brazil,for example. I would like to give the opportunity to two of my colleagues here to speak toa couple of the points that you have raised. Chris McArthur is general manager respon-sible for network development and I think it would be interesting if he could explain toyou how we would look at developing a market, or the considerations that need to beevaluated in determining whether new services, new routes or additional capacity isjustified. And John Bunting was involved in the recent negotiations in Santiago.



CHAIR —Can I just make this preliminary comment, then I would like to hearthat. What is running through my mind is that, prior to your appearance, we had all theLatin-American heads of mission putting forward a fairly common view, as you no doubtare aware. When we talk about expanding our trade with Asia in terms of air links, wehave the natural advantage that Asia sits between us and Europe so it can be looked at inthe context of a bigger market; you are not just talking about a single end point when youare talking about expanding trade with Asia in respect to air links. Following on from that,how does the airline industry—not just Qantas but other airlines—look at Latin America?

Mr Kitto —I would like to just make a short point. It has slightly changed. In theearly days, when we were developing long haul services through Asia, that short haulmarket played a role. These days, of course, our biggest trading partners for tourism,freight and whatever tend to be in Asia themselves, so there is a development of the Asia-Australia market as distinct—and quite separate—from the development of—

CHAIR —Sure; I appreciate that. But you are not trying to expand a market, say,from here to Bangkok which is an end point in itself. It is part of something that isalready there because of the longer hauls.

Mr McArthur —And supported by beyond traffic. In evaluating this market,leading on from the previous comment, yes, the core of the traffic that we are looking forto support this service has to be broadly Australasian-South American traffic, in that weare actively looking for any other, if you like, top-up traffic, whether it be traffic withinSouth America. David commented on the fundamental problem being the overall size ofthe market plus its fragmented nature. Also, clearly, we can bring other traffic from withinAustralia or points behind, to further support the viability of a scheduled service. The coretraffic remains fundamentally the Australasian-South American traffic. The biggest issue issimply the size of the market. In trying to make effectively a commercial decision, theresimply is not a lot of traffic in those core markets, notwithstanding the fact that you cantop it up here and there with various other origin-destination combinations, if you like.

CHAIR —Would you comment on the approach adopted by New Zealand,following on from what you have just said?

Mr McArthur —In bilateral terms?

CHAIR —Yes. Do they see the same difficulties?

Mr McArthur —I think they face exactly the same difficulties in arriving at acommercial decision in evaluating the potential for the scheduled services, in that againthey are faced with very small markets—small, fragmented and seasonal in nature, none ofwhich helps support a regular scheduled service on any sort of scale.

Senator SANDY MACDONALD —Do they have a regular service—Latin



America to New Zealand?

Mr McArthur —No. They are effectively adopting a similar approach to us. Wesee the most appropriate means of Qantas serving the South American market at present asbeing through a revised schedule connecting with Lan Chile. We are very keen to see thatdevelop as the most appropriate vehicle for us to serve the South America-Australasiamarket in a commercially responsible way, given that I could not put up a proposal withany credibility internally within Qantas, as part of my role, for the full-blown directservices for which clearly there is a lot of support, which we have heard about today.

Senator SANDY MACDONALD —Why has Aerolineas been prepared tocontinue?

Mr McArthur —I do not think it is for me to speculate on what their objectivesare in serving markets. All I can really comment on is that Qantas’s objectives areunambiguously to make commercial decisions on a route by route basis. In the currentenvironment we are very much focused on, if you like, re-allocation of assets from poorperforming routes to better markets. The consideration of new routes has to be treatedequally as part of that process, in that any new route has to demonstrate a very solid casefor having a commercially viable future.

Senator SANDY MACDONALD —This is a very difficult question, I suppose, butif you look back with 20:20 vision now, do you think the failure to continue with youraccess to Mexico, where you had fifth freedom rights, et cetera, would be somethingwhich you may regret?

Mr McArthur —I do not think there are any regrets at all in that, again, that isanother market which in today’s circumstances would be very difficult for us to servedirectly.

Senator SANDY MACDONALD —The only thing I would say about Mexico isthat it is on the way to somewhere. It is on the way to Europe and North America, butperhaps the actual distances are too great.

Mr Hawes—If people want to go to Europe via North America, they can do that,so there is a market for both. But is there a market for somewhere via Mexico? Onewould doubt it.

Senator SANDY MACDONALD —Is it possible to fly directly from Sydney toMexico City?

Mr Hawes—Via Los Angeles.

Senator SANDY MACDONALD —Do you have direct routing?



Mr Hawes—No, there is no direct route. Do you mean in terms of the technicalcapability of an aircraft? Yes, you could.

Mr McArthur —There may be some payload restrictions on that non-stopservice—which, again, is one of the difficulties in looking at the market. Perhaps I couldmake a general comment with regard to opportunities within South America. It is not,from Qantas’s perspective, a neglected or an overlooked market. The earliest study I coulddig out was the 1957 study on using Constellation aircraft. Since then, in the past decade,there have been over a dozen studies on roughly an annual basis. Each of those, again, ineffect has confirmed, from a commercial perspective, the decision. It is not that anyopportunity has been overlooked; it has been actively under consideration. Withoutexception, each of those studies has concluded with the same answer.

Senator SANDY MACDONALD —Which country’s airline has the best domesticnetwork through Latin America?

Mr McArthur —The largest? Is that what you are defining as the best?

Senator SANDY MACDONALD —Which are the largest and the best?

Mr McArthur —I would guess it is between Argentina and Brazil, those two. Interms of the actual intra South America market, I could not be more specific.

Senator SANDY MACDONALD —It is interesting to look at the way that marketsdevelop. A few years back when you started your service to Zimbabwe, for instance, itmust have been a pretty lean service. It may have been lean for a little while, but then itstarted to develop.

Mr McArthur —There are again some interesting analogies there. Zimbabweservices were supported by Air Zimbabwe in terms of an alliance with them. Our currentstrategy is to adopt a similar approach with a South American carrier, and to try and usethat as, if you like, a first step to developing the market.

Senator SANDY MACDONALD —That is what you are doing with Lan Chile?

Mr McArthur —Yes, and we are very keen to see that that works and fosterstraffic.

CHAIR —Senator Teague has some questions, but I just wanted to follow up withone before he begins. You have talked about what restricts Qantas from expanding itsservices at the moment. You would be aware of Aerolineas’s submission and, in particular,the specific proposals that it would like to see taken up: increased capacity services, fifthfreedom rights and beyond rights. What is the response of Qantas to that? That is theother side of the argument, I suppose.



Mr McArthur —In terms of the bilateral issue?

CHAIR —In terms of the impact of their being given increased opportunities andQantas staying as it is.

Mr Bunting —The simple answer is that we come from a point where we have noobjection to expanded rights being agreed with foreign countries, provided there is areciprocal opportunity created for us. My understanding of the situation with the last roundof Argentine talks was that the Argentine side was not keen to expand the rights thatalready existed for the Australian side, while they were asking for a considerable expan-sion of what they themselves had.

CHAIR —We will hear from them later, but I think they would argue that it isalready weighted our way rather than theirs, so they might just be catching up. We willquestion them about that. What would you see as being reciprocal rights that might bemade available? What are we talking about here? We know what Aerolineas’s views arein terms of traffic between New Zealand, Australia and beyond Asia, but what is the quidpro quo of this reciprocal proposal?

Mr Bunting —The only thing that could be found—and I do not know whether itwould necessarily at any point in time be our favoured response—would be broadeningthe opportunities that we would have within Argentina and beyond. Within other parts ofSouth America, there are other options to go beyond. We already have a route whichallows us to fly to Europe.

CHAIR —Am I right in concluding that, at the moment and for the foreseeablefuture, the opportunities or the potential for those reciprocal rights, those on-flights and soon are limited in the view of Qantas, but are pretty substantial in terms of the Latin-American airlines? In other words, they would be looking at this huge market of Asia andAustralia and seeing their opportunities there, but when you look at the position in LatinAmerica you do not necessarily see the same level of opportunity.

Mr Bunting —That is probably broadly right.

CHAIR —I am not saying that is my view. I am wondering if that is a summary ofthe position as you see it.

Mr Bunting —We describe many of the South American rights for that reason aspaper rights. They are there on paper but they are unlikely to be taken up.

CHAIR —So it is similar to your answer to Senator Macdonald’s question aboutAcapulco?

Mr Bunting —I suppose so.



Mr Hawes—Rights may exist but the likelihood of their being capable of beingutilised on a commercially viable basis is very limited. In the case you have struck, it isunlikely.

Senator TEAGUE—We began this series of questions and answers, as it were,five years ago in 1991 with the reference given to us by the Senate which led to the reportAustralia In Latin America. You will have studied chapter 6, which talked about transportlinks, and heard the aspirations from time to time expressed by former Prime MinisterKeating, by Senator McMullan and more recently by Deputy Prime Minister Fischer.

The gist of the argument from this report, which was abundantly welcomed by thegovernment of the day and still is on track, is this. There is a huge Australian nationalinterest that is not being fully provided for. We need a bridge for political and officercontact between Latin American countries and Australia. We need a greater facility forbusiness links. There have been huge investments: 21 companies have got head offices inSantiago, Chile at the moment. There is a lot that is happening but if the bridge isstrengthened we believe it will lead to more.

There could be education investments. Latin Americans are looking for businessand other courses—even English language—that could be—and in some cases alreadyare—provided in Australia. There are family connections. Then there is the whole marketfor tourism.

I know that in the perspective of air links this is very small—600 to 650 passen-gers per week each way at the moment. But we tried to express—and nothing has changedsince this report—that there is a huge political priority on the bridge being stronger. Oneof the reasons for the reference that looks at the annual reports of Qantas and theDepartment of Transport is that there is a blockage in the system which may well besummarised by your written submission to us and by your opening remarks to us about thecommercial realities of Qantas being a privatised company that is answerable to its boardand it must act rationally with regard to commercial viability.

Our problem is that all of the governments of Latin America, through their headsof mission as you saw in the preceding session, are wanting to see a stronger bridge butwe are to some extent in the hands of—I do not want to be too dramatic—a Qantas veto. Iam not saying that Qantas should act beyond commercial interest, but let me just concen-trate on fifth freedom rights.

Qantas would be sacrificing something—and I would like you to try to measureit—if fifth freedom rights were given to Aerolineas Argentinas to come on to Sydney withany passenger at all from Auckland and, similarly, to Lan Chile to come from Papeete toSydney with any passenger whatsoever. I am yet to hear an argument that would deny thatfifth freedom right to those two airlines, given that it would make their bridge strongerand more viable and that, because of that, price would come down, quality of service



would improve and we would have the national interest that I have referred to in thebroader sense directly served by a stronger bridge.

So the nub of my main question to Qantas—and I put the same question to theDepartment of Transport—is this: in terms of extending rights to foreign airlines, as longas Qantas has got the same paper rights to go into that arrangement in the future when, inQantas’s mind, it becomes commercially viable, why not give the liberalisation to thoseairlines that want to build a stronger bridge, so that we can serve the Australian nationalinterest? Could not Qantas support the extension of fifth freedom rights to AerolineasArgentinas and Lan Chile on the basis that reciprocal equivalent rights would be given toQantas, even if you do not want to, at the moment, exercise them?

Mr Hawes—I would like to begin my response by addressing the first part of yourobservations. A little under two years ago, I was a senior officer of the Department ofForeign Affairs and Trade. Relations with Latin America came under my responsibilities. Itravelled the region quite extensively in the early part of 1994, visiting all of the Austral-ian missions in Latin America and, in addition, one or two other places.

Because of my previous role and responsibilities, I can identify well with some ofthe remarks that I have heard from the ambassadors of Latin America, with some of thecomments in the submission from the Department of Foreign Affairs and Trade and,indeed, the sentiment which is coming from your side of the table. It was a question that Iasked in the early days of my joining Qantas: when you open the international route mapyou do not see any red or blue lines, as it were, to that continent. Why is it so?

The answers which we are providing are commercial answers. They are theanswers which are embodied in our submission. The airline cannot take an entirelynational interest view in determining whether or not it should operate the services for thereason that you have identified in your remarks. The responsibility, really, is to sharehold-ers, and to operate commercially viable services. Therefore, what we have is a picturewhich reflects current circumstances and, as far as we can see, for the foreseeable future,and that is something that does not justify operating direct services.

Coming to the second part of your observations as to why we might have areluctant view, I certainly was not aware that we had any veto powers over any element ofair services negotiations. But, in terms of the strengthening of that bridge, I would havethought that the interests of strengthened links between Australia and Latin America wouldhave been better served by having greater competition.

It will be a multiplicity of carriers operating those routes which will enhancecompetition, rather than something which necessarily strengthened the position ofAerolineas. To have competing with Aerolineas, let us say, Qantas working with LanChile or other airlines working those routes, that is where competition will come from.And that will be the competition which will have an impact on fares and service levels. I



do not know that it would necessarily come from having an additional set of rights toAerolineas in that regard. I invite my colleagues to comment on that.

Mr Bunting —I would add that you have put the suggestion that we might take aview towards the concession of Tasman rights to Aerolineas. As I recall it, this wasproposed at the last round and, again, there was no willingness to concede any expandedright for Australia, be it paper or not, at that time.

Senator SANDY MACDONALD —What would you be wanting?

Mr Bunting —It is not easy to put a simple hat on it. There is a whole range ofthings, I suppose. We currently have the rights to operate to two points in South Americabeyond Buenos Aires. Perhaps there could be a third point. Perhaps there could be asecond point in Argentina. It is hard to answer that definitively, but something of thatorder would still be the paper rights that we were talking about.

Senator SANDY MACDONALD —Do you have on paper rights from Argentinato both North America and Europe?

Mr Bunting —Not to North America.

Senator SANDY MACDONALD —To Europe?

Mr Bunting —To Europe.

Senator TEAGUE—With regard to the question of veto, Qantas does not have aveto, but it has a de facto veto. That is, the Department of Transport will be most attentiveto Qantas’s interests in determining negotiations about rights for other airlines. I am notasking Qantas to take on a financial sacrifice, using shareholders’ money to pay for thenational interest that you have identified rightly in the submission of the Department ofForeign Affairs and Trade, or to this committee in its five year position. I am not askingQantas to pay commercially for it. If it were possible to put a bottom line price, evenadjusted year by year, as to what Qantas would be suffering as a result of extending fifthfreedom rights to both Lan Chile and Aerolineas Argentinas, let that come from the rest ofAustralia. The national interest, in terms of having a stronger bridge, is so enormous thatto be facilitated it needs to have the stronger bridge.

That is why I am talking about a veto. The way in which you have responded justnow, David and John, on behalf of Qantas with regard to discussions we had withAerolineas Argentinas made me ask about the veto. There was not a quid pro quo withAerolineas, and therefore we did not go ahead with the trans-Tasman rights concession.That is what I am talking about as a de facto veto. I think that we need to find a solutionto that which is not worn commercially, to the detriment of Qantas, but is worn byAustralia for the benefit of achieving Australia’s national interest. That is why—maybe



too sharply or with a little bit too much of a caricature or short cut—I was putting theheat on Qantas to say, ‘Why won’t you concede? Why won’t you allow the Department ofTransport to concede fifth freedom rights for these two airlines so that we can get astronger bridge between Australia and Latin America?’ What are the disadvantages toQantas in conceding fifth freedom rights?

Mr Bunting —Dollars and cents.

Mr Hawes—Ultimately—and we cannot put a dollars and cents figure on it—if inorder to develop stronger third and fourth freedom links between those markets, anotherparty says, ‘We can’t do it or we can’t justify it ourselves unless we have a share of yourfifth freedom traffic as well on other routes’, then that is at some cost to us. But Icertainly take your remarks in the spirit in which they were intended. Very clearly, theDepartment of Transport, in advising the minister, is reflecting the view of numerousstakeholders, of which Qantas is but one, and we put in our views for what they are worthon each of these occasions in addressing bilateral negotiations, and the government’sposition is worked out accordingly.

We should not lose sight of what has been a basic observation on our part, and thatis that, in terms of the bridge, certainly it can be improved by better connections andimprovements or enhancements to services. But in terms of the number of people whowant to move across that bridge, that is very small at this time and the capacity whichexists between Australia and Latin America at the moment is adequate, or more thanadequate, to meet the needs of the market. Should that market grow, as we hope it will,we certainly would have an interest in participating in that on a commercially viable basis,but to set it up in a way that the market does not justify would be making a veryexpensive bridge.

CHAIR —Would you also be concerned about precedence in terms of otherarrangements if you acceded to fifth freedom rights for Aerolineas? Would that not worryyou?

Mr Hawes—Not necessarily. We certainly approach markets and routes case bycase, as they are negotiated case by case, although one would have to note an evolution ora development in the government’s approach to negotiation of international traffic rights.There has also been an evolution or a development at the commercial level in the way thatairlines approach their accessing of markets—accessing of traffic—in working with othercarriers, either through alliances, partnerships or code share arrangements. You do notnecessarily see that direct services are the only way, or the preferred way, in which tooperate to distant markets.

Senator TEAGUE—I accept your point about competition. I do not thinkAustralia’s aviation interest is going to be served by any monopoly emerging in themedium term. I do not think our national interest is, in the broader sense, going to be



served by any monopoly. So what you have just said about competition, I accept absolute-ly.

What I am really wanting to put to you is the same argument as has been put forthe last five years. It is: please can Qantas allow Transport to negotiate government togovernment air arrangements where maybe it is only a paper equivalent right and you, forcommercial reasons, decide not to exercise that right for the time being? So you havesatisfied your shareholders but the Latin American airlines, which do want to exercise therights, get on with it.

It is then a joint Qantas-Lan Chile, Qantas-Aerolineas arrangement which buildsthis bridge. There are two things we have not focused on at all yet. The capacity isthere—600 to 650 return journeys a week—but the capacity is 1,800 and, some wouldargue, with a combination to Los Angeles it would be even greater than that. If you havea barrel of wine and it has got a huge pipe at the bottom of it, the capacity is big, butcritically the question revolves on the tap.

If price is the tap you can have the tap flat out allowing the capacity to be fullyused if your price is low, and similarly with quality of service. Quality of service is good,as evidenced by the connection that you have just now improved. Chris McArthur is rightto refer to Qantas really heart and soul wanting to reschedule so that you get a betterPapeete connection. That is quality of service. You do not have to sit around there for aweek or half a day or whatever it was in the past, you can do it now in 22 hours, Sydneyto Santiago. A lot revolves on price and quality of service and one way to get price downis to give fifth freedom rights to the operators.

Mr Hawes—I hope we are not losing sight of the commercial perspective inreferring to the need to get prices down because it may well be that that is an impedimentto entry onto the route on a commercially sustainable basis, particularly where you arelooking at a route which does not have frequency; that is, you are not flying beyond oneor two services a week. That is a very inefficient use of your assets unless you haveopportunities to blend it in with schedules elsewhere.

It would certainly be relatively high cost in terms of crew operations if you had toleave crew laying over in distant ports or move them out as passenger traffic elsewhere. Ido not know that necessarily depressed fare situations, which would be those which excesscapacity may bring, would be the best way to ensure the development of and the buildingup of viable services.

We describe capacity, incidentally, as the seat entitlements which have beennegotiated—which have been provided for under the bilateral agreements—which youwould distinguish from the capacity which is operated—the number of seats that youactually have flying. Of course, airlines are quite familiar with yield management andother techniques which seek to fill as many of those seats as possible when flying. But



what really counts is the revenue obtained; what you are yielding out of that operationagainst the costs of operation.

If the end result of that equation is something which does not stack up in commer-cial terms as bringing a rate of return which justifies the use of the assets on thatparticular route then you would surely be better off in putting on additional services onroutes which are growing. Bear in mind we are in a market for aviation services which isgrowing worldwide at about six per cent per annum. In the Asia Pacific area—Asianmarkets—it is growing at about eight to nine per cent per annum. In Latin Americagrowth is about five to six per cent.

Senator TEAGUE—Your figures are—

Mr Hawes—That is off a relatively low base. In fact, you may be interested toconsult some figures from the 1996 current market outlook produced by Boeing whichlooks forward to the period 2000 to 2015. From that you can see an analysis of projectedtraffic within regions such as North America, South America, China, et cetera, and thenthe intra-regional traffic.

What you would find very interesting in there is to compare Oceania-NorthAmerica, Oceania-Asia and Oceania-Latin America. You will see, extending the growthoutlooks for the next five or 10 years, that this is a very small traffic route that we arelooking at. That is something we are very conscious of as we look ahead and do our sumsas to the likely viability of services.

Senator TEAGUE—We listened most carefully to all of the experience thatQantas has. There was Neville Kitto’s letter with the original written submission to us,your opening remarks and the answers you have given to our questions, but it is my viewthat we try to achieve what DFAT’s submission to us puts as the national interest.Therefore, we have to try to find out where the blockages are. If there is a de facto veto—or something even approaching that—that Qantas can help to ease, even by putting afigure upon what fifth freedom rights mean commercially to Qantas, can that be madetransparent so that we can actually see the air links between Australia and Latin Americaactually growing, not only in capacity but in lower price which, of course, would lead togreater volume?

CHAIR —I just have one final question. You were commenting a moment agoabout how in the overall scheme of things this is still a very small market and potentialmarket. What is the position with South Africa and southern Africa and indeed the Africancontinent in comparison with Latin America? I suppose I ask that question just from thegeneral knowledge point of view of having seen substantial political change in Africa inrecent years. Obviously, there are new opportunities that people, companies and airlineshave identified. Is there some way that we can look at what is happening there and maybesee some similar opportunities for Latin America, or are they vastly different?



Mr McArthur —I could comment on that. I think the two markets are vastlydifferent in terms of size. South Africa is significantly larger—without going into thespecifics of visitor arrivals and resident departures. Also, as you would be aware, there hasbeen very large growth in our African markets and we have added a third 747 service aweek.

CHAIR —That is to Johannesburg, is it?

Mr McArthur —Collectively to Africa. We have two triangulated routings and onenon-stop to Johannesburg in each direction. We have a fourth coming on stream. If thereis any analogy between the two markets, we would like to see South America at somepoint in the future following a similar path. But going back to this very fundamental issueof market size, it is a long way behind that at the moment.

Mr Kitto —I can just add another comment on this matter. The two markets arealso very different in the way they look. For example, South Africa generates a lot of firstand business class travel so you get a high yielding return on each flight. There is a verystrong tourism market inbound from Africa to Australia that we are very pleased with.There is also a significant movement of freight, including freight that emanates in Asiaand is destined for South Africa, and we actually carry that through our services. We bringit down to Asia, then put it on the Africa service and send it through. Of course, the sizeof the market is much greater and the growth is higher. When you put all those factorstogether, you can see that it is a more attractive financial package than what we aredealing with with Latin America. We wish Latin America looked like South Africa verymuch but unfortunately at this stage it does not.

In reading the submissions of the ambassadors, I was most interested to see acomment that was made by the ambassador from Mexico who, I think, has hit the nail onthe head. He talks a lot about the promotion of business and tourism and the fact thatdisposable income will lead to a demand for travel, whether it is to Australia, Europe orthe United States or somewhere else. The South Americans, we know, like to travel but Ithink our Tourist Commission perhaps has to do a little bit more. They carry the responsi-bility for getting Australia higher up the preference list. I think there needs to be somework done there. Of course, the more business that is done with South America, the morewe are encouraged. There is a view in some quarters that supply creates demand. We havebeen ‘discussing’ this with people for many years.

Senator TEAGUE—That is why I concentrate on fifth freedom rights, forinstance.

CHAIR —Thank you very much, gentlemen, for your appearance. Sorry we havegone a little bit over time but I am sure that members of the committee have found thecontribution and discussion informative.

Luncheon adjournment



[1.52 p.m.]BROWN, Mr Justin, Assistant Secretary, Americas Branch, Department of ForeignAffairs and Trade, Parkes, Australian Capital Territory 2600

ROACH, Mr Jeff, Desk Officer, Canada, Latin America and Caribbean Section,Department of Foreign Affairs and Trade, Parkes, Australian Capital Territory 2600

RYAN, Mr Richard, Director, Canada, Latin America and Caribbean Section,Department of Foreign Affairs and Trade, Parkes, Australian Capital Territory 2600

CHAIR —I welcome officers from the Department of Foreign Affairs and Trade tothis public meeting of the Senate Foreign Affairs Defence and Trade References Commit-tee. The committee is inquiring into Australia’s air links with Latin America. Thecommittee prefers all evidence to be given in public but, should you at any stage wish togive any part of your evidence in private, you may ask to do so and the committee willconsider your request. You will not be asked to comment on the reasons for certain policydecisions or the advice which you have tendered in the formulation of policy, nor toexpress a personal opinion on matters of policy. The committee has before it from thedepartment a submission which is dated 31 May 1996. Are there any alterations oradditions to that submission?

Mr Brown —None.





CHAIR —I now ask you to make an opening statement, following which thecommittee will ask some questions.

Mr Brown —I will be very brief in my opening statement. Our submission is reallya comprehensive summary of the department’s view on the question of the existing airlinks between Australia and Latin America. There are several reasons why we supportmoves to improve the level of links, and they can be divided into trade policy reasons andcommercial, trade and investment reasons.

On the commercial side, the submission goes into quite a bit of detail about theexpansion that we have seen in recent years of trade and investment flows betweenAustralia and Latin America. Latin America is emerging from a period when its economicpolicies have been quite inward-looking and protectionist in many ways, and it is adoptingmore and more market-oriented approaches to trade and investment policy. That iscreating a number of interesting opportunities for Australian exporters and investors. Wehave already seen a very strong wave of Australian investment in the Latin Americanmining sector. We have, for example, over $2 billion worth of investment in Argentina inthe mining sector alone. We are seeing very significant investment in Chile and alsoprospectively in the northern part of Latin America, particularly in Venezuela.

Our hope and expectation is that those investment links will gradually lead toimproved export links. At the moment we are seeing some of the export figures increasingquite substantially, albeit from a fairly low base over the past few years. We think thatthere will be an export pull as a result of the investment flows that we have seen over thelast few years. Latin America, as you can see from our submission, is the second fastesteconomic growth region in the world, after East Asia. From our viewpoint, we are tryingto achieve the best possible trade and investment linkages between our part of the world,East Asia, and Latin America. There is tremendous potential for that relationship todevelop and for Australian exporters and investors to benefit from those linkages.

That leads me to the second reason we want to see increased air links, and that isreally from a trade policy viewpoint. Since the formation about 10 years ago of the CairnsGroup, a group of agricultural fair-trading nations, there has been an increased pattern ofcooperation between Australia and Latin American countries on trade policy issues wherewe share mutual interests. The Cairns Group deals exclusively with agriculture, but we arealso seeing cooperation between Australia and Latin America on international environ-mental issues. We also have a preliminary dialogue between Australia and New Zealand asCER and with the Mercosur common market group comprising Brazil, Argentina,Paraguay and Uruguay.

One of the issues on the agenda of the CER—Mercosur dialogue is greatercooperation between the two sides in the WTO—the World Trade Organisation—wherewe both share an objective of seeking a faster pace of multilateral trade reform. We thinkthat that is something which is very important in Australia’s long-term national interests,



and Latin American countries are very keen to cooperate with Australia in a coalition-building activity.

Both the trade policy and commercial activity are, we believe, being impeded bythe existing, frankly inadequate, air links between Australia and Latin America. As anagency, our department has made many efforts over the years to try and secure some sortof improvement. There has been incremental progress, but it has been extremely slow. Wereceive constant representations from the business community about the state of air links.The mining industry, in particular, has been extremely critical of the slow movement onthis front and the impact that has on their activities. It takes 36 hours, for example, to getfrom Sydney to Buenos Aires for, often, very short periods of time. We believe that anysteps that can be taken to improve air links is going to benefit Australia, and there aregoing to be very few disadvantages in opening up these routes.

CHAIR —Thank you. Are there any additional points from the other witnesses? Ifnot, let me start off the questions by picking up your last point. You said that there wouldbe many benefits and very few disadvantages. Already we have had evidence this morningfrom the Latin-American heads of mission who were enthusiastic in pushing for greaterlinks. Qantas does not appear terribly keen to get too adventurous, claiming that there arecommercial problems and that the market is very small.

First of all, could you comment upon the position that is put forward by Qantas? Iam sure that you are aware of it. Secondly, what disadvantages do you see? Thirdly, whatcan you do, or what is being done other than to continue to urge action, talk about it, andconduct inquiries like this to get some positive movement, rather than express an interestand hope for the future?

Mr Brown —I guess, in terms of the possible disadvantages, the view of ouragency is that the government’s approach should be to set policy parameters whichencourage increased air links. At the moment, our impression is that opportunities arebeing passed up because of the view within Qantas which may or may not be a correctassessment that these routes are not economical.

The next step from that view is that if they are not economical for Qantas, thenthere will be no other carriers flying on those routes. We think that the government’sapproach should be to set parameters for air services between Australia and LatinAmerica, rather than taking what is, in effect, a market sharing approach of saying,‘Unless there can be straight reciprocity between the two carriers, then no carriers shall beoperating at all on the route.’

As to the second part of your question, which is what can we do about it, it is avery difficult question. I wish that I knew the answer. We have been trying for a longtime—



CHAIR —If you did, we would not need this inquiry.

Mr Brown —Precisely. It all helps. I am not sure that I know the answer, actually.

CHAIR —Let me put this to you: there are proposals from Aerolineas Argentinasthat there be some relaxation in the restrictions placed upon its airline in terms of fifthfreedom rights. There are other proposals that they have put forward which I expect youwould be aware of. Do you have any comment about those proposals and whether or notthere are any disadvantages that flow from them to Australia or, in particular, to Qantas,that we should take account of rather than just recognise?

Mr Brown —I should say that our department is not privy to consultations betweenthe transport department and Qantas. So we are not privy to information that may bepassed to and fro between Aerolineas Argentinas and Qantas and Transport. So it is quitepossible that we are working on the basis of information that is incomplete.

On what we do know—and I might get Mr Ryan to comment further—we wereconcerned at the very conservative approach that was adopted at the last round ofconsultations with the Argentineans. They were seeking additional frequencies and arelaxation of the fifth freedom rights. As we understood it, this was in the early part of theyear or the latter part of last year. The dispute over the trans-Tasman air services situationwas a factor there. It was certainly difficult for us to understand why the transportdepartment took such a cautious approach to increased frequencies, given that AerolineasArgentinas was, in effect, carrying the risk of the increased frequencies.

Mr Ryan —In my understanding of the Aerolineas case, Aerolineas sought fullfifth freedom rights and also, I believe, beyond rights. Prior to those particular negotia-tions in November last year, our views were sought. We took an attitude that, providedthere was a reciprocal right for Australian airlines to have access to other entry points intoLatin America and fifth freedom rights, it seemed to be a balanced approach. Theparticular problem with the current Aerolineas situation is that, until an Australian carrierdecides to operate the route, they cannot access full fifth freedom rights. It is a bit of a—

CHAIR —Chicken and egg situation.

Mr Ryan —So we never get beyond first base. My understanding is that Qantashas no intention to operate the route, at least for the next five years.

CHAIR —They would say that they are paper rights, and whilst they may be ableto be agreed upon, there is not really much value in them. They would argue that it is notcommercially viable for them really to do much at all at the moment—at least, that is theway I understand their submission. You said earlier, Mr Brown, that it may be or it maynot be economic or uneconomic.



Does the department have a view about whether or not there is sufficient potentialgrowth in tourism and business and other necessary components of the air traffic to makeit worthwhile? Or would you accept Qantas’ view that, compared to everywhere else, andlooking at the straight position at the moment, it is not really worth their while to look ateither direct flights or even really improving the current arrangements all that much? It isa pretty crucial issue, really.

Mr Brown —Yes, it is.

CHAIR —It seems to me that we hear a lot about potential growth, large markets,and all these changes. Latin America, as you said, is the second fastest growing area.

Mr Brown —I do not think that we are able to make a judgment as to whether theroute is commercially viable or not. From our department’s viewpoint, what we can say isthat we are hearing very consistently from the Australian business community the messagethat there is a need for more capacity, that they need greater frequency and that they needmore direct services. What we are also hearing is that if they can secure that, they wouldbe able to do more business and they would be able to do their business more efficiently.

CHAIR —Is that for trade or passenger travel, or both?

Mr Brown —This is business travel. They are servicing investments and tradinginterests in Latin America. We are assuming that that sort of message would also beechoed from the Latin American end of the operation for those doing exports andinvestment in Australia.

Senator WEST—Have you any idea what sorts of numbers they are talking about?

Mr Brown —Numbers of people?

Senator WEST—Yes, bodies.

Senator TEAGUE—I think it is 10 per cent of 600 going each way each week. Itis about 10 or 11 per cent of the traffic.

Senator WEST—I am interested in knowing if you have got any handle on thenumbers of people saying that they want more and they want an improvement.

Mr Brown —I think it is fair to say that we have heard it from all of the majormining companies.

Mr Ryan —The major Australian companies operating in Latin America, such asAMP, BHP, MIM, CRA—



CHAIR —We had submissions from them. Qantas is saying that it is under-utilisedat the moment. There is capacity for 2,500 and you have got about 600 or so taking it up.

Mr Roach—One of the issues about the whole demand question is that the currentdemand reflects the existing state of air services. What we have had is an indication thatthere is a repressed demand out there and that, should services improve, the demandconsequently would also improve—for example, in service exports. The nature of ourservices industry often requires being able to get personnel to their location very promptly,have them do the job and remove them promptly. At the moment the state of air servicesdoes not make Australian services exports competitive in the Latin market. For instance, ineducation services we have had representations that there are service exporters who areinterested in developing the Latin market but given the state of existing links, it is just notcommercially viable for them to even test the water.

Senator WEST—Are these education services at the level of university or highschool?

Mr Roach—University predominantly. A lot of universities are interested indeveloping links with Latin-American universities on the cultural exchange angle and alsoin marketing English courses and things like that. At the moment, obviously, the UnitedStates is the major location for English service exports into Latin America. We know of acouple of universities who have expressed interest in developing operations in LatinAmerica, teaching English.

Senator WEST—So English is a sought after language and degrees and qualifica-tions from English-speaking universities are also highly sought after, are they?

Mr Roach—Certainly. It is seen as the lingua franca for trade within the Latin-American region.

Senator WEST—English? Yet most of them speak Spanish or Portuguese.

Mr Roach—But in terms of international trade the US would be their primemarket and probably the European Union is their second. It is very rare that you will meetan international business operator from Latin America who does not speak English verywell. Generally, they speak it with an American accent.

Senator WEST—Some of us have been around this report for five years now andthere are some familiar faces on both sides of the table. Have you seen in that five-yearperiod an increase in the number of industries and businesses—and even educationsectors—who are expressing interest to you by coming to you and talking to you aboutLatin America or is the level remaining the same?

Mr Ryan —Certainly from my experience there has been a marked increase in the



number of complaints expressed to me directly in dealings with business. You only haveto track the increase in the Australian commercial presence in Latin America to know thatthere is an increased—albeit from a small base—interest on the part of the major andsmall Australian companies in investing and trading with Latin America. Santiago is nowthe headquarters of some 40 Australian companies—or something of that nature. Three orfour years ago it was, at best, half that. Certainly, the Australian business presence there islarger. You might point out that the inadequacy of current links has not impeded that, butit could well have been a lot more. Companies need to act quickly on business dealings orinvestments, and you cannot do that on two or three connections to Latin America perweek.

Mr Roach—Encouragingly, there has also been a diversification in Australia’sexport trade to Latin America in that you are beginning to see now elaborately trans-formed manufactured exports—although still only a very small percentage. A number ofexporters are beginning to almost ride that first wave of Australian mining investment andto develop and diversify our export market into Latin America.

Mr Brown —One of the things we have noticed is that, over the last decade, therehas been a very heavy concentration in our export community on East Asia. That has beenquite natural. The growth rate has been there and the opportunities have been there. Whatwe think will happen over the next decade is that some of the constraints that we arecurrently seeing on our export performances will be resolved in a way which will expandour overall capacity. So we will be able to not only service the East Asian market, butalso not have to give up opportunities in other markets.

For example, if you have been following our export performance in the US, therehas actually been a levelling off in our exports there because a number of exports havebeen diverted into East Asia. So we expect that if there is progress on some of thesedomestic constraints to our export capacity, we will be able to service the US market.Increasingly, you are seeing a process of economic integration between North America andLatin America which is going to generate a lot of additional growth and trading opportuni-ties.

I guess we are looking at five or 10 years hence, seeing what we might be able todo in Latin America then, rather than at the moment. The presence is small. We shouldnot exaggerate how well we are doing in Latin America. It is a small market, but it ispromising.

Senator TEAGUE—I welcome entirely everything that has been said by DFAT inits submission. It has already been referred to a few times throughout our hearing today.This poses the threshold question that it seems to me we are at—one where even JustinBrown, with all of his experience, did not have a direct answer—which is how to solvethe impasse that we have with inadequate air links.



I have in front of me your submission and the summary. It is in our transcript. Thesummary should be read, doubly read and triply read by every area of government tryingto resolve this problem. I have in front of me as wellLatin America Links, which is yourdepartment’s newsletter about Australia and Latin America. Of course, it features our twonew ministers: Mr Fischer, the Deputy Prime Minister, who is visiting Latin America atthe moment, and Alexander Downer, the Minister for Foreign Affairs.

I am entirely confident that the summary you have given to us in your submissionabout this matter—about our terms of reference—is endorsed by your ministers and is thenormal developing summary of Australia’s national interest. It is totally consistent with thereport of this committee of four years ago to which the government responded sopositively. So we come to the question of the impasse. With Transport in front of us todayand Qantas in front of us today, I think some progress was made.

But the Chairman’s question to you just now, Mr Brown—his first question aboutfifth freedom rights—is really the nub of it in the short term. That is this: without anycommercial loss being sustained by Qantas having to operate flights that they think arebeyond them at the moment, the dialogue that is there between the Department ofTransport and Qantas, which is leading to the Department of Transport not conceding fifthfreedom rights to Aerolineas Argentinas and Lan Chile, is one of the blockages thatactually can be removed. I wonder if you would elaborate on that element.

You have already said in your introductory remarks that Department of ForeignAffairs and Trade officers are not present in that dialogue, and there may be someelements of the evidence that you are not aware of. But I believe we have a degree ofschizophrenia and this schizophrenia has been around for a while—in government, I mean.The department of foreign affairs, the Senate and the heads of mission in Canberra of theLatin-American countries, representing their governments, have in common a vision thatwe need to strengthen our links. But those on the other side, almost without that visionand without the imperatives of the Australian national interest that you in your departmentdefined so articulately, are not moving, out of status quo-ish thinking or maybe out of aview that there is a risk in it for us; that maybe we will lose, that maybe if we concedefifth freedom rights we will be creating some difficulty for our commercial bottom line.

It is the breaking of that that I think is going to require a freshly returned DeputyPrime Minister and the Minister for Foreign Affairs making a submission to cabinet thatthis blockage just has to go, that the government is no longer being schizophrenic—it hasbeen so for four years—and we get the enlightened ministers with vision making sure that,in the area where decisions can be made in transport infrastructure, they actually happen. Iam not asking you to reflect on everything here, but I am asking if you can focus moredirectly upon that impasse.

Mr Brown —Fifth freedom?



Senator TEAGUE—Yes.

Mr Ryan —I am aware of Qantas’s position, and Transport’s, that is why introducenew services based on traffic from alternative sources; that any new service should bejustified on point to point traffic. Were you to concede that, as I think we have said in thesubmission, provided there is a reciprocal right to Australian airlines, there is a basis forincreasing air services. Transport is not prepared to concede the point based on currentstatistics.

CHAIR —Do you think there would be any benefits to the national interest,flowing to us, if we did concede those rights?

Mr Ryan —The current approach is phased, but if you were to introduce additionalservices based on existing rights, that is, up to fourth freedoms, maybe beyond rights,there are any number of permutations that you could adopt. But we are not the Departmentof Transport. I guess they would have views on the viability of these approaches. But untilyou take those steps—

CHAIR —But I suppose there are at least two ways in which you can approachthis. One is that you can look at it from the point of view of deregulation, free market andso on, and advancing that trend which we support in respect of all other issues all aroundthe world, or you can look at it from the point of view of whether it will have anadvantageous or a disadvantageous impact on Australia or upon the national airline andother airlines of Australia. What I am trying to ascertain is: if that step were taken, thatstep that Senator Teague is putting forward, what does the department believe would flowfrom that, beneficially or not? Do you have a view?

Mr Brown —It is difficult to ask us that question because we are simply not in aposition to make fine judgments about the commercial viability of routes. I guess there isalways going to have to be a judgment made as to the—

CHAIR —Can we get away from the commercial viability in terms of Qantas’sposition for the moment. I am interested in whether you would see that as an initiativethat might lead to improved trade, passenger numbers and so on down the track. Would itbe an incremental step that could lead to this objective that we all seem to have, which isto have more air links with Latin America, resulting in increased trade and passengermovements?

Mr Ryan —Basically, you are talking about freeing up the market. The currentapproach is the phased approach, which is a regulated approach. Until you deregulate, it isa question of suck it and see. Certainly, in terms of the areas that we have outlined in oursubmission, there would be a number of benefits in the wider national interest. There maybe some costs in the way that Qantas or Transport identifies. We are not in a position toreally comment on that.



CHAIR —I appreciate that these are not easy questions to give clearly definedanswers to. I suppose that is why we are here really; we are not here to ask easy ones. Ido not know the answers myself either, so that is why we are asking you.

Let us say nothing happens. Let us say we go through the negotiations later thisyear with Argentina and nothing really happens and we just carry on for a couple moreyears. Given that it is the department’s view that there is potential real advantage here forAustralian business and tourism and just the general national interest to tap into thisexpanding market, let us say nothing happens. What do you see are the consequences ofthat? Do we lose opportunities? Do we find ourselves in five or 10 years time havingmissed out on substantial benefits to this country in trade, tourism and whatever elsebusiness because the decisions had not been made now? That seems to be really where weare at; we have got this impasse.

Mr Ryan —I guess one obvious thing is that the issue will remain an irritant in ourbilateral dealings with Latin-American governments. To the extent that that causesdiscomfort, I guess it is a disadvantage.

CHAIR —Use this example: if we had not started to do something about expandingour trade, our contact with Asia and particular countries, we were going to miss the boat.We have done that—and some people would argue about how successful it has been—because we recognised some years ago that that had to happen.

Senator TEAGUE—Four years ago.

CHAIR —And we have done that. We have recognised that in respect of thePacific area as well in terms of other arrangements. We have recognised that there areopportunities in southern Africa because of changed political and economic circumstancesand so on. It appears to me and, I think, to other members of the committee, that we aretalking about similar potential of great magnitude.

Senator TEAGUE—That is right.

CHAIR —But we are at the starting line, trying to figure out how to get underway.

Mr Brown —It is very difficult to speculate as to how much we might lose if thestatus quo continues. We would certainly lose something. It is difficult to say whether thatwould be a significant loss over the next, say, two to five years or whether it would be amarginal loss. What you can say with some certainty is that the efficiency of our oper-ations in Latin America, the existing operations, would be pretty significantly affectedbecause they are unable to do business efficiently—to get there to service the investments,to service the trade. So that is an immediate up-front loss.



To what extent that would inhibit our ability to secure new business, who can say?There is going to be some cost. My own guess is that there probably would be a relativelysmall cost, but bear in mind that this part of the world is about to enter a free trade areaof the Americas that is going to be a preferential agreement and discriminatory againstAustralia. So we are going to be up against changing tariff rates already. We are going tohave, through that, a built-in discrimination against our interests.

So, as an agency, we are thinking of the turn of the century when some of thesediscriminatory barriers will be put in place. What is driving us is the need to positionourselves as a country so that we can start to get into the commercial world in LatinAmerica in a big way so that some of those discriminatory effects are minimised.

CHAIR —Well, that is good.

Mr Brown —It is impossible to put a dollar figure on it. My guess is that in thenext five years it is a small impact but in the five years after that it will grow.

CHAIR —Yes, I was not trying to be specific in terms of dollars but in terms ofthe potential competitors we face that may be able to tap into these expanding industries ifwe do not. I would have thought the mining industry was particularly concerned aboutthat.

Mr Ryan —But our competitors must be affected. The efficiency of doing businessis lessened because of the ability to move and to move quickly. An economist could tellyou that there must be an increase in the transaction cost or opportunity cost. I cannotquantify it but there is a cost, simply because it is less efficient to conduct business in theway it is being done at the moment. It is still being done, but how you quantify the actualcosts in the end is—

CHAIR —I will make one more comment and then hand it over to others again. Itwould seem to me that you, as the Department of Foreign Affairs and Trade looking atAustralia’s overall national interest, would not want to see the situation being the same infive years time or 10 years time as it is now in terms of air links. I am not suggesting thatwill happen but it just seems to me that that is what you are putting.

Mr Brown —If our transport links with Latin America remain pretty much as theyare, then we think that there would be a significant and growing disadvantage toAustralia’s traders and investors over the next decade. That is what we are saying.

Senator TEAGUE—May I ask about bilateral agreements, especially with Chile,Argentina and Mexico. I have been arguing that we could have a bilateral trade agreementfor some years now. I notice that the new government has emphasised in its foreign affairsand trade policy that it will give greater attention to bilateral negotiations, bilateralagreements. Transport arrangements can be part of a bilateral agreement and, in the case



of Aerolineas Argentinas, Qantas or Ansett could therefore be directly included in abilateral agreement made between now and Christmas between Australia and Argentina.

Similarly, with regard to Lan Chile and Qantas, that could be part of a bilateralagreement between Australia and Chile, along with science, double taxation and any othermatters that are ready to be incorporated. What prospects are there for those two or threecountries to be included in new bilateral agreements? I am asking you a difficult question,I suppose, because you are not fully free to disclose what is only half determined. I amnot asking you to reflect upon your discussions with ministers but, if there is anything thatyou can publicly say on this question, I would be glad to hear it.

Mr Brown —It is the government’s policy to strengthen bilateral trade linkagesacross the board, including linkages with Latin America. You may have noticed somepublic comments that Mr Fischer made prior to his current visit, endorsing the prospect ofincreased trade investment linkages between Australia and New Zealand (CER) and Chile,and with Latin America more generally. Exactly what shape those increased linkages willtake is something that we are working on. There is a variety of different approaches,ranging from a free trade agreement to a more consultative agreement—of which, it is fairto say, the latter has been the vehicle discussed in the past.

One of the challenges that we are currently grappling with as an agency is, as Imentioned earlier, the preferential agreements occurring in Latin America which willdiscriminate against Australia’s interests. What steps do we need to take as a country andas a government to try and address those problems? That is an issue that I am sure theDeputy Prime Minister will be discussing in Latin America right now.

To the best of my knowledge, air services, per se, have not been included in tradeagreements of a traditional kind. Trade agreements are usually agreements to reduce tarifflevels and to reduce other forms of non-tariff barriers. I guess it is not impossible for airservices to be included in those but that does, of course, imply a willingness to trade offsome issues against others, with the aim of getting an overall package stitched up. To thebest of my knowledge, that is not being raised as a specific proposal. I am not surewhether it is a live proposal or not.

CHAIR —In the submissions from the Latin-American heads of mission and fromAerolineas, there seems to be a message coming through that they have been moresuccessful in their dealings with the New Zealand government and airlines than withAustralia. Do you have any comment to make about the approach that has been adoptedby New Zealand? I might just say that Transport this morning said that, if you actuallyread the agreement, you will see that they are not dissimilar in effect to those that existwith Australia. Do you have a comment to make about that general proposition?

Mr Ryan —We have endeavoured to get some background on the recent NewZealand-Brazil arrangement. Because of the commercial sensitivities involved, it has been



very difficult to get anything out of Wellington other than that it is an open agreement inwhich full fifth freedom rights apply. But we have not been able to substantiate that. Onthe surface it seems to be a more liberal approach, but New Zealand certainly is in adifferent position than Australia is in.

CHAIR —Yes, I appreciate that. Any other questions?

Senator TEAGUE—I want to raise one last point. The report of this committee bythe end of this month, the return of the Deputy Prime Minister from his visit to America,and the prospect of developing bilateral country to country trading and other agreements—even with the innovation of air links—are three things in the short term which may be ahappy conjunction to further the vision of your submission to us and to bring intellectualrigour to the Department of Transport in really coming to grips with the Australiannational interest. I just leave that as a possible way ahead.

CHAIR —I would like to thank you for coming along this afternoon and appearingbefore the inquiry. If there are any further details that we may wish to ask you we willcontact you.



[2.38 p.m.]BENDIXSEN, Mr Axel, Regional Manager, Aerolineas Argentinas, Level 2, 580George Street, Sydney, New South Wales 2000

CHAIR —I welcome Mr Axel Bendixsen of Aerolineas Argentinas to this publicmeeting of the Senate Foreign Affairs, Defence and Trade References Committee. As youare aware, we are inquiring into Australia’s air links with Latin America. The committeeprefers that all evidence be given in public but if at any stage you wish to give any part ofyour evidence in private you may ask to do so and the committee will consider thatrequest. The committee has before it a quite detailed submission from Aerolineas dated 21March 1996. We thank you for submitting that. Are there any alterations or additions youwould like to make at this stage?

Mr Bendixsen—No.





CHAIR —Mr Bendixsen, would you like to make some opening remarks and thenwe will proceed to questions and discussions.

Mr Bendixsen—Thank you very much for this opportunity. I guess, being last, alot of the points that I will be talking about have been well and truly aired already. I hopethat my version can be a bit more constructive.

I would like to start with an overview. Expanded direct access between Australiaand South America, in our view, is critically important to cement relations betweenAustralia and South America and to promote awareness of Australia. It would be inAustralia’s national interest. It would facilitate strong growth in trade and tourism andreinforce Australian investment links with South America and with the successfulMercosur common market. Expanded direct access has received the support of industrybodies and corporations alike.

I would like to, by way of some background, just talk about some of the initiativesand activities of Aerolineas Argentinas to date. The airline introduced the first service tothe south-west Pacific in 1980. This was a monthly flight from Buenos Aires to Aucklandwhich developed, amid a series of difficulties, into a fortnightly and then a weeklyscheduled service. Although the bulk of that early traffic travelled through to Australia, theservice did not reach Sydney due to the absence of an air services agreement.

During 1988 such an agreement was signed and Aerolineas Argentinas extended itsoperations through to Sydney in December of that year. This was achieved in cooperationwith Qantas Airways by means of a block seat lease agreement. The arrangement failed towork as Qantas was not willing to actively promote or invest in the route in order to sharein its development and sell its blocked space. The investment and risk was left entirely upto Aerolineas Argentinas.

In June 1992 a similar Senate hearing committee chaired by Senator GrahamMcGuire put forth its recommendations and, with reference to transport links, describedthe basic concept of air services agreements. It said:

A basic concept underlying international bilateral air services arrangements is that two countriesagree that the air traffic that originates in the territory of one and moves to the territory of the other,and vice versa, be treated as a common asset. Bilateral air services agreements also provide forairlines of each country to have ‘fair and equal’ opportunity to participate in the carriage of thiscommon air traffic. The trading of traffic rights is commonplace among international airlines.

The current air services agreement is not satisfactory to Argentina or Aerolineas, althoughsome modifications were made to capacity and the cessation of the commercial agreementwith Qantas.

The imbalance in traffic rights and access points still remains and does not providea fair and equal opportunity. Analysing the recommendations under the ‘Route Schedule’



section, the report states that the route for the designated airline for the Republic ofArgentina is Argentina via Auckland to one point in Australia. The route for the designat-ed airline of Australia, or airlines, I should say now, is Australia via points—plural—inthe Pacific to one point in Argentina and beyond to two points in South America and onepoint in Europe, including the European Economic Community.

Initially, the exercise of rights at Auckland for the designated airlines of Argentinashould be limited to own stopover rights, meaning that we can only take out what webring in. Full traffic rights may be exercised when the designated airline of Australiacommences operating with full traffic rights beyond its nominated point in Argentina totwo points.

Australian designated carriers have not taken up the option to operate in their ownright. Although at the time of signing in 1988 it was indicated that Qantas wouldcommence an operation within 12 months, we are now in 1996 and Aerolineas Argentinasis still operating with these artificial constraints which benefit no-one and which aredetrimental to growth. These conditions we seek to change.

The stop in Auckland en route from Buenos Aires to Sydney is mandatory.Operational requirements, even with the most modern of aircraft today, make it impossibleto fly that route without severe payload penalties. Such a stop adds approximately threehours to the elapsed time of the full journey and also adds a variety of costs. These rangefrom navigational, landing fee, fuel and terminal charges to additional crewing require-ments, and add significantly to the operating costs of the route. Aerolineas Argentinas’sinability to uplift passengers in Auckland bound for Sydney, and vice versa, not onlydenies it the opportunity to recover these additional costs, but also hinders its ability tooperate profitably. It is necessary and fair to be able to realise the full revenue potential ofthe entire route, which would ultimately lead to a reduction in fares.

Since the early 1980s, Aerolineas Argentinas has single-handedly worked towardsthe development of this route, utilising mainly its own resources and assuming all the risk.It has been the sole promoter of Australia in South America. It has been the creator ofnew markets. It has actively promoted the study of the English language here in Austral-ia—with great success, I might add. It has created a climate for school sporting exchangesand a wide variety of cultural developments. All this has added to the growth we havewitnessed in tourism and business travel. Australia is continuously increasing its invest-ment in South America, and we regularly hear of the need for better air links fromcorporations involved and from those becoming involved. Aerolineas Argentinas wishes tocontinue growing and it needs the space to do so.

With regard to South America, Asia and the Australian connection for those twofastest growing markets, the explosive growth in Asia has naturally caused Australianairlines and tourism entities, such as the ATC, to concentrate on those markets. This isperfectly understandable and logical. However, we must be conscious that South America



ranks second only to Asia in its economic growth rate. With a population in the vicinity of450 million inhabitants, the current political stability and the economic reform beingwitnessed, the potential is undeniable.

Aerolineas Argentinas intends to develop Sydney as a natural gateway betweenSouth America and Asia. For this reason, it seeks more access points in Australia as wellas points in Asia. The intention is to facilitate code sharing flights with Australian carriersbetween the two regions. Aerolineas does not have the fleet capability to fly through toAsia. Additional traffic on the route, however, would be conducive to additional frequen-cies.

During the last two years we have seen aggressive initiatives from the governmentsof Malaysia and Singapore. Malaysian Airlines commenced services from Kuala Lumpurto Buenos Aires via South Africa and is currently operating twice weekly. Singaporeshould be following in the near future. It would be to Australia’s detriment for KualaLumpur or Singapore to become the point of entry to Asia from South America.

For the future, whilst Aerolineas Argentinas continues to provide the only directroute, and wishes to continue its development, permitting it to grow will not only be to itsbenefit but to that of Australia and Argentina as well as other Latin-American countries.For Australia it would mean better access for its businessmen, more tourist influx, morethrough traffic and foreign exchange, and ultimately more jobs. For Australian carriers thiscan also only be of benefit. The larger the market, the more participation they may expectwhen they decide to service the route. In the meantime, more access to Aerolineas wouldalso benefit them with traffic feed.

On 20 August next, Australia and Argentina will meet for further bilateral talks onthe air services agreement. Being only 2½ months away, it would be unreasonable toexpect that recommendations will be available by then. However, should this committeefeel that it will be possible to issue some form of advanced opinion on air transport links,it will be greatly appreciated. Thank you very much.

CHAIR —Thank you, Mr Bendixsen. You have been present, I think, through mostof the proceedings today and have had an opportunity to hear the submissions of otherwitnesses. Do you have any specific response to the arguments advanced by Qantas and,somewhat, by the Department of Transport about the potential opportunities? They do notseem to have much confidence, at least in the short to medium term, that increasedservices would necessarily be taken up, and indeed made some comments that there isover-capacity at the moment.

Mr Bendixsen—Certainly, we have every confidence in the future of the route.We would not be here and we would not have continued for the last 15 years or more ifthat had not been the case. As far as the volume of traffic is concerned, it is a littledifficult, based on the Australian Bureau of Statistics figures, to accurately pinpoint this



sort of traffic as the statistics are collected on a sampling basis. If you have a long, thinroute, as this one is deemed to be, the sampling is quite inaccurate at times. It is differentif you have, for instance, a Sydney to Tokyo route. That is an example where there is a lotof volume and many flights and most of the traffic is point to point. So you do get anaccurate statistic.

In our case, if you look at our Buenos Aires service you will probably come upwith a figure and you will wonder how we can survive. But we are not only servicingBuenos Aires; we are carrying passengers to other South American cities. We are carryingpassengers through to Europe because we have got combined fares with Qantas and so on.Statistics are not really very accurate in that respect. I can say that from our point of viewour boardings indicate that we are carrying 30,000 passengers a year now, over the route.

The restrictions that we have over Auckland mean that we have had to stop ouraeroplane in New Zealand, as you are probably aware, and we have been chartering aQantas aircraft up until last December. Now we are using Ansett to do the Tasman for us.This can be seen to be satisfactory from an operational point of view, but it is notsatisfactory from the passengers’ point of view because it means a change of aeroplaneand a change of seat. They have not got the seat they originally wanted when they startedthe journey. There are many reasons why it is unsatisfactory from their point of view.Furthermore, we have had a bottleneck in Sydney with Ansett because they have a verylow configuration of business class seats so we have not been able to accommodate thedemand on business class since 8 December last.

CHAIR —Do they go business class to Auckland and then drop down?

Mr Bendixsen—No. Our allotment on Ansett was six first class and 12 businessclass seats. That is very few. Even combining the 18 seats, we were not able to accommo-date the flow of traffic that is going through these days. The business traffic is growing.You have had a lot of evidence of the increased activity in Latin America and obviouslythe low frequency means that very often, even though we might have a flight two or threedays away, it is no good because business people have to move quickly. We hear thosecomments a lot. But the market certainly is a growing market.

I have heard mentioned quite often today the issue of what you do first. Do youput in the capacity or do you wait for the demand? We increased services at the beginningof 1994. We put on one extra service and we immediately saw an increase of 45 per centthat year, so obviously there is a need. The need is there; it is a matter of getting it thereand developing it and offering the services.

The alternatives are not very attractive. To travel via Tahiti up until next Augustwhen Qantas puts in its new schedules is difficult because the connecting times in Tahitiare long. To travel via Los Angeles we all know is a bit of a marathon—it is over 30hours. What does surprise us, however, with the Qantas-Lan Chile thing that is being



exercised next August is that, knowing that we have traditionally operated on a Mondayand a Friday, they have chosen to operate on a Monday and a Friday, so it does not givethe travelling public an option at all. It is the same service except that, instead of havingone stop in Auckland, it has three stops en route. I do not really believe that it is analternative for what this committee is addressing, which is the lack of quality of servicesbetween the two continents.

We can see this continue to grow. We are committed to making it grow. Webelieve that we just need the facility to do so without this bottleneck that we have. It isimportant to us to be able to realise, as I said before, the full potential revenue of theroute and, in doing so, it will give us the ability to then say, ‘Yes, we can take it a stepfurther and put another service on.’ The company is already looking at the third permanentservice and this certainly would help us do it.

Traffic through to Asia would help us put another frequency; it would increasedtraffic on the route, as I mentioned before. We would look to feed that traffic into Qantasand Ansett in Sydney or in other points in Australia. The more diversity we are able tooffer at both ends—in other words, we would be making the funnel bigger at both ends—the more traffic we would get on the route and the better the bridge that you have beentalking about will become.

CHAIR —Thank you. Are there any questions?

Senator TEAGUE—I listened very carefully to every word that you have said.Your submission and your answers are highly measured and careful, and I thank you forthat. What kind of study have you done to see how fares would be reduced if you hadfifth freedom rights, Auckland to Sydney?

Mr Bendixsen—It is hard to put a figure on it at this point in time. The reason forthat is that our company operates all its accounting systems in US dollars, so the actualincome of the route varies according to the exchange rate, to start with, because obviouslywe are selling here in Australian dollars and then we have to convert to US dollars, so itcould vary. Of course, the Australian dollar has shown a bit of strength lately, so we arerather pleased.

On the reduction of operating costs on the route, I would not have here with meexactly the figures that it would represent in the savings, but it is considerable.

Senator TEAGUE—Would it be 20 per cent less?

Mr Bendixsen—I would hate to put a figure on it right now, to be quite frank.

Senator TEAGUE—Okay.



CHAIR —Maybe you could take that on notice and let us know within the nextfew days if you have some data on that.

Mr Bendixsen—Yes.

Senator TEAGUE—It is important, as the chairman says, for us to have a moreprecise estimate because—at least speaking for myself—I would be arguing that fifthfreedom rights should be conceded in order that the fare be reduced. Therefore, the bridgewould be stronger and our broader national interest would be achieved.

My next question is: how do you explain Aerolineas Argentinas making this biginvestment since 1982 in flying to New Zealand and then, since 1988, flying on toAustralia when Qantas—this is the reciprocal airline in Australia—has not decided to doit? You could even add Ansett that is contracting your trans-Tasman passengers at themoment. So, what are the two or three factors that make it more viable for you?

Mr Bendixsen—If we go back to the commercial agreement we had with Qantas,they could have made it work but it was difficult for them to make it work because theyhad a total lack of knowledge of the destination. They had a lack of knowledge of themarkets over there, in contrast with ourselves who—we like to think—have great expertiseon all of Latin America, our systems, the cultures, how you sell it and what you sellwhere. It is very diverse. You are talking about 13 countries and they are all different. Ithink that very often it gets put into the too-hard basket.

The other thing that you have to consider is that it has traditionally been verydifficult to sell a product that you are not actually providing, and Qantas never reallyconsidered our service one of theirs. So virtually they sold only what came to buy. Theywere not actively promoting the service. I am going back to 1988; it is changing now, ofcourse. I think that we have always had the strength of marketing knowledge, and we havethe product, and that would probably be most significant. We have also had the ability notjust to sell the one destination but myriad destinations around the continent.

Senator TEAGUE—Do you have any subsidy from the government?

Mr Bendixsen—No.

Senator TEAGUE—Do your bread-and-butter services within Latin Americacross-subsidise this as an investment for the future?

Mr Bendixsen—No. This particular route is marginal at the moment.

Senator TEAGUE—It is marginal. Right.

Mr Bendixsen—It is not losing tonnes of money or it would not be here. It has



been a long road but we can see that the future is there, and it is certainly going to bebright. The fact that Qantas or Ansett have not chosen to participate is basically becausethey have seen that we have started from a very small base and that we are building it up.Obviously they do not see that it is worth their while and they do not have the expertise tosell it.

Senator TEAGUE—Are there any other factors like wages, food costs andmaintaining aircraft? Are there any other advantages?

Mr Bendixsen—I would say that the operating costs of Qantas would be higherthan ours, and that would probably also deter them from jumping into the market at thispoint in time.

CHAIR —I think that Senator Macdonald has some questions.

Senator SANDY MACDONALD —With the charter arrangement you have withAnsett, do they do that as part of a normal Sydney-Auckland commercial trip, or is it anactual charter aircraft that meets your aircraft, unloads passengers, collects passengers andbrings them back to Sydney?

Mr Bendixsen—No. Ansett was not actually participating in the Tasman route atall. When Qantas advised us that they had no fleet capacity to provide us with an aircraftpast last December, we had to go out and find someone else who could help us in thatinstance. Ansett was very keen. The way that their schedules are made up, their aircraftcome in from different points in Asia, depending on the day, and they sit on the groundmost of the day at Sydney. To be able to utilise them on a Tasman crossing on the daywas ideal for them. That gave them the vehicle to put on a trans-Tasman service.

Senator SANDY MACDONALD —Is that what is happening twice a week now?

Mr Bendixsen—Yes, that is what happens twice a week now. They put on one oftheir 747s of which we take 300 seats and they take the balance of 100 seats, in roundfigures.

Senator SANDY MACDONALD —And the remaining seats, what are they usedfor?

Mr Bendixsen—Ansett sells them as a Tasman sector.

Senator SANDY MACDONALD —Surely it must be only a marginal cost savingto you but perhaps there are other reasons why you do this, why you do not bring youraircraft. You are going to have to charter a 747 to go across to Auckland. Why do you notbring your 747 to Sydney?



Mr Bendixsen—The problem is that to bring a 747 over to Sydney with anaverage of 100 empty seats is not good business, especially when you can turn it aroundand send it back and utilise that same aircraft elsewhere, which is what we do. So it is nota matter so much of the money that is saved; it is the aircraft utilisation.

Senator SANDY MACDONALD —I think you said you had 30,000 seats soldeach year.

Mr Bendixsen—We carry 30,000 passengers a year. They are not necessarily allsold here. That is returning traffic; it is traffic that comes into—

Senator SANDY MACDONALD —Is that 30,000 this way and 30,000 back, or15,000 this way and 15,000 back?

Mr Bendixsen—It is the 15,000.

Senator SANDY MACDONALD —We heard this morning from the Chileanambassador that the market there is approximately 15,000 too. So that would be at least30,000 from both Argentina and Chile.

Mr Bendixsen—No, I beg your pardon. Our 30,000 passengers are from Sydney toSouth America per year.

Senator SANDY MACDONALD —Right.

Mr Bendixsen—The total market as per the bureau is about 60,000.

Senator SANDY MACDONALD —That sounds about right. You have 30,000.The Lan Chile people say they carry about 15,000 from Chile. That is 45,000 and theremust be a number who go via Los Angeles and other ways.

Mr Bendixsen—Yes, that is right. A number go via Los Angeles because of days.That is the difficulty. Obviously, frequency is the issue but it is not easy because everytime you are adding a 747 you are adding another 400 seats in one block. It is quitesignificant growth.

Senator SANDY MACDONALD —For each 400 seats that come in, what is yourload?

Mr Bendixsen—Do you mean our average load factor at the moment over theyear?

Senator SANDY MACDONALD —Yes.



Mr Bendixsen—We were running at about 55 to 56 per cent last year.

Senator SANDY MACDONALD —And what about freight?

Mr Bendixsen—That was considering that it was the first year we had a thirdservice on.

Senator SANDY MACDONALD —Right. But the third service only runs for partof the year?

Mr Bendixsen—That is right, December through to March.

Senator SANDY MACDONALD —Concerning your freight component, whatfreight do you bring in and do you have excess freight capacity? How important is it toyour operation?

Mr Bendixsen—At the moment our freight is virtually to capacity. This isAustralia and New Zealand on the polar route. What goes out is quite varied at themoment. There are a lot of agricultural related products that go from Australia and NewZealand. There is a lot of electronics that is going out. As you are probably aware, therehave been Australian companies involved in telecommunication projects in Argentina. Alot of that equipment goes and comes. With the mining industry, when there are thingsthat we can fly, we carry that for them.

As for freight coming in, it is quite varied. It is mostly IBM equipment. I do notknow if you aware but IBM has this policy of making different components for computersin different countries around the world. Argentina seems to make printers. So we bring inan awful lot of printers and consolidated cargo.

Senator SANDY MACDONALD —Do you see enormous potential growth of theairline industry in South America? For instance, we are a nation that flies although we donot fly to the level that the Americans fly. But within Latin America itself do you have anextensive airline history so that people fly a lot or is it something that is developing?

Mr Bendixsen—No—

Senator SANDY MACDONALD —We heard this morning the growth was five orsix per cent. Maybe that was the GNP growth of Latin-American countries.

Mr Bendixsen—Air travel in South America has a long history. The nature of thecontinent is such that it has been virtually mandatory that air travel has been there fromthe onset, so most of the airlines date back to the 1920s and early 1930s.

The difficulty is that the whole continent, as you are aware, has had many years ofinstability for political and economic reasons and that has obviously put the brakes on



development and so on. But air travel has always been a very important part of thecontinent’s development and its existence. The distances are vast. If you want to go froma northern city of, say, Caracas, down to the southern tip of Argentina, it is like flyingfrom Kuala Lumpur to Dunedin or something like that.

Senator SANDY MACDONALD —It is 3,000 miles from the top of Brazil to thebottom of Brazil.

Mr Bendixsen—That is right. Even though there is a very good road network andrail is very strong, air travel is still very active. Now, with the economic recovery that weare seeing and with the way the whole area has become deregulated, as the commonmarket of the Mercosur has become a great success, it is becoming very important.

Senator WEST—Are you flying 747s?

Mr Bendixsen—Yes.

Senator WEST—In 1991, you were asking for two or three flights a week to meetthe requirements of business. You say you now have 30,000 passengers a year loading.Can you give us some indication of what your load factors have been? How have theyincreased in the last—

Mr Bendixsen—We have grown at a percentage rate of between, say, 11 and 13per cent per annum, except in 1993-94 where we put on that extra service and had a bigmarket increase of 45 per cent. Cargo was even more significant in growth.

Senator WEST—We heard this morning that some of the rights and things in airtransport are tradable rights—multiple entry points and things like that. Are you able tosay what sorts of things you are interested in trading in or are able to trade?

Mr Bendixsen—At this point in time—I think it was mentioned before—we are ina very unusual position if we are going to trade traffic rights or entry points because wehave virtually given everything away already. For an Australian carrier to be able to fly toBuenos Aires, two points beyond in South America and on to the European Community isconsiderable. But, as you heard the ambassador say today, Argentina is very liberal in itsapproach if it is something that would suit and it is going to be to the country’s benefit.

We are today a private company—a commercial entity. We do not enjoy theprotection that we once did as a state company. Therefore, I think that what we couldtrade away would obviously be looked at by government as to what we were getting inreturn. But, at this point in time, they are adamant that they are trying to balance it outbecause it is very much unbalanced. The reason for that was that in 1988 when we finallysigned the first ASA, it was tied in with this commercial agreement with Qantas. It wasbasically a take-it-or-leave-it situation. So, therefore, we entered into it with the need to



want to extend the service into Sydney.

Senator WEST—With the beyond rights—I am just looking at maps and trying tothink which would be the quickest way to go from, say, Buenos Aires to Tokyo, KualaLumpur—

Mr Bendixsen—At the moment, the traffic to Japan, Korea and that part of Asia isvirtually all via Los Angeles. The reason for this is frequency and, because of frequencyand volume of traffic, pricing.

However, we believe that a certain amount of that traffic could be captured andbrought via the south. To do so we need to have proper arrangements in place to be ableto make it an attractive proposition. The spin-off for Australia would be that all thosepeople would be coming through here. Many of them would be staying en route andspending here and, of course, all that is beneficial.

Senator WEST—What is the flying time difference, say, between Buenos Aires-Auckland-Sydney-Tokyo and Buenos Aires-Los Angeles-Tokyo?

Mr Bendixsen—It is about two hours shorter this way, but we have not got thefrequency, that is the problem.

Senator WEST—But there is nothing to stop business people who are comingfrom Buenos Aires doing the Auckland-Sydney route with you and then taking anotherairline. There is no restriction on people travelling that way. Do many people travel thatway: do business in Sydney and then go on?

Mr Bendixsen—This is obviously what we are seeking to develop. Business inSydney is growing and as people come through to Asia—because obviously Asia has agreat attraction for business and the Asian countries are very aggressive—what we areseeking to do is to bring some of that traffic here and get them interested in whatAustralia has to offer, as well as New Zealand, of course.

Senator WEST—Do you have the fleet capacity capabilities of running a loop likethat?

Mr Bendixsen—No, at this point in time our company, with the fleet that it has, asI said before, cannot really aspire to fly to points in Asia. The reason that we are seekingbeyond points is because it gives the ability to code share and if you code share you cansell a product as a point-to-point product. Both carriers can. So it makes it much moremarketable, it makes it easier to get fares in place without having to get the bilateralagreement between the two companies in place because you are using a block space thatyou have agreed.



Senator WEST—Are there other airlines that are interested in doing that routewith you, say, code sharing with you?

Mr Bendixsen—If you look at cargo, for instance, we have recently entered anagreement with Qantas for cargo from Korea to South America, and that is working verywell. There is no difference between dealing with cargo and dealing with passengers aslong as the agreement and the mechanics of it are in place.

Senator SANDY MACDONALD —Where does it go via?

Mr Bendixsen—Via Sydney.

Senator WEST—Cargo does not complain as much either; it does not need to befed.

Mr Bendixsen—True. And when we signed the agreement with New Zealand theirview was that, when we reached a situation where we got access to Australia with fullrights and we wanted to explore the possibility of beyond into Asia, they would then be ina position to look at beyond rights out of Auckland for code sharing purposes with AirNew Zealand to the Far East. So I think it is a matter of options.

Senator WEST—So you have already got an arrangement with Qantas for freight?

Mr Bendixsen—Yes.

Senator WEST—Just out of Korea, out of Seoul?

Mr Bendixsen—And soon in Taiwan as well.

Senator WEST—And what is the name of that airline? The use of the Qantasname in that respect is—

Mr Bendixsen—Australia Asia.

Senator WEST—Australia Asia, yes.

Senator TEAGUE—You have got these discussions again with the Department ofTransport—

Mr Bendixsen—In August.

Senator TEAGUE—Okay. Whilst you have got two or three items on the agendafor extended rights, is it clearly the fifth freedom rights that are the most urgent?



Mr Bendixsen—They are, because, as I said before, they help us with the viabilityof the service and they reduce the operating costs, because we are able to generate somemore revenue on the route.

Senator TEAGUE—With regard to bilateral agreements, that is country tocountry, Argentina-Australia, the foreign minister of Argentina, Guido Ditello, was hereabout a year ago and met with us, and I had met with him in Buenos Aires. He may wellbe involved in a bilateral agreement. Would Aerolineas Argentinas be happy to cooperatewith the wording of a country to country agreement? You are a commercial company, youare not owned by your government, but if you saw that as having positive outcomes foryou, reinforcing what you may negotiate in August, do you see any problems in beinginvolved, consulted, for a country to country bilateral agreement?

Mr Bendixsen—No.

Senator TEAGUE—That is good. Lastly, for multiple entry, which are youralternative targets to Sydney?

Mr Bendixsen—Well, initially Melbourne would be a preferred second point ofentry. Certainly, the government of Victoria has been wooing us for a while.

Senator TEAGUE—Probably, South Australia as well.

Mr Bendixsen—No, I think that will be later on, but I think Melbourne would beour initial point of entry.

Senator WEST—You say that a lot of your airfreight goes to the Asian marketthrough Los Angeles—through North America anyway. What do you think would be thereaction of some of those airlines if you were to actually get fifth freedom rights fromNew Zealand, Australia and then beyond rights through to Asia? What do you think wouldbe the reaction of those countries and airlines that potentially stand to lose services andlose usage by you of their airports?

Mr Bendixsen—Well, to start with, we already have air service agreements withSingapore and Malaysia. The Malaysians in particular have been extremely aggressive.They mounted a service to Buenos Aires, as I mentioned in my note here, a couple ofyears ago, and at the beginning it was slow going for them but they have stuck with it andestablished quite an acceptable service. We understand that Singapore Airlines is intendingto mount a service as early as January or February next year. So it is not as if they do notalready have the means to access South America, albeit by different routes.

Senator WEST—I was not thinking of them; I was thinking of, say, the Unitedsand the American—



Mr Bendixsen—United and American we have a totally different scenario withbecause the South America and North America traffic is so dense and so busy that I donot think that Asia would come into it with them at this point of time. As far as othercarriers from the Far East are concerned, we have been approached by EVA, and I believesome of the Chinese carriers now from mainland China have become quite adventurous aswell; they have been approaching most South American countries. It is all happening.

Senator TEAGUE—Sure, it is all very competitive.

CHAIR —Can I just ask two more questions. In your submission you are proposingthat, even if Qantas were not to take up any reciprocal rights that might be made availableor look at direct flights, there should still be some changes made to provide moreopportunities for your airline. What would be the impact if Qantas did bite the bullet ortake the plunge and actually look at either direct service or some of these other options.Do you see that that would impact on your profitability?

Mr Bendixsen—Well, naturally, if we realised the revenue that we are notrealising now across the Tasman it would. In doing so, the equation changes, because youroperating profit really comes down versus the revenue that you are making. That would beconducive to being able to grow fast and consider putting on more services at an earlierdate than otherwise. I think that that is the key issue here: we need to have more frequen-cy if we want to service this market properly. It is not a matter of having the bigger orsmaller aeroplane; it is frequency, frequency and the direct service.

CHAIR —But you see it as benefit for both airlines in that—

Mr Bendixsen—Well, somebody mentioned paranoia today about the fifth freedomrights, and I think that is exactly what it is. The Tasman is a market of 800,000 passen-gers a year. For someone to come on with two or three flights a week, with a very hightransit figure, because most of our traffic is through to Australia, is not going to makemuch of a difference.

For Qantas and Air New Zealand at this point in time to be worried about theimpact that somebody like Aerolineas could have is unjustifiable. You have to bear inmind that we are the only carrier flying the Tasman which does not have the rights thatThai, Malaysian nor Korean have. You are still getting the advent of all these kiwis andNo Frills freedom, who are taking business anyway.

CHAIR —You will recall that I asked a question about whether or not there was aconcern about precedent. I think the answer was no, but we will consider that.

Mr Bendixsen—I will cross the fence here and put on a Qantas hat now, but Iwould have thought that they would be happy for someone to do all the ground work,making it grow and then, when it is nice and ripe, pop in and take half. To me that is the



way I look at it.

Senator TEAGUE—That is part of my argument as well. As long as Qantas hasgot the ability to come in when they think it is commercially viable, they will do so.

Mr Bendixsen—They do, and they have a lot more than we have. What we aresaying here is that, firstly, we want it balanced out and, secondly, we want the opportunityto be able to realise the maximum potential of the route and then go with it. The otherthing is the Lan Chile connection. Lan Chile is a carrier that has been flying the Pacific toTahiti since 1967 or 1968. Tahiti is a very difficult point for any airline to operate into.They have been reasonably successful and is the only operator that has done that. In SouthAmerica you talk about the Pacific Islands and the only thing they know about is Tahiti,so that is where they go. They have had a very successful yield of high holiday traffic toTahiti from Argentina and Brazil mainly.

CHAIR —That actually leads me to my final question. We do have the AustralianTourism Commission appearing before us next Monday to give us some evidence and theyhave put in a submission. We have heard a lot about the business trade and economicaspects of this and there has been some mention of tourism. What is your company doingto promote more tourism travel between the two countries?

Mr Bendixsen—I can assure you that Aerolineas has been the only airlineorganisation that has actively promoted Australia in South America as a whole. With theabsence of the ATC—because their nearest office is in Los Angeles—it is very ineffectualfor Latin America, in fact it is zero. There was a brief period there when Qantas had anactual office because of the arrangement they had with us, but there was no real effort,investment or resources put in place to do much. Really we have undertaken to do most ofthe promotion. We have gone to extent of having inflight videos that are played on ourworldwide network that show Australia. They talk about the route, the South Pacific andAustralia in particular.

We are active in all the travel forums. We are constantly bringing in travel agentsto familiarise them with the route. We have invested not only in advertising campaignsboth in Australia and Argentina, but we have also invested in carrying a lot of peoplebackwards and forwards in both directions to actually get them to learn. There is anevident lack of familiarity here about Latin America and it is also over there. If you talkabout Australia they know about the wallabies and a few key icons, but apart from that, itis not the USA and it is not Europe. We have sought to familiarise travel agents and touroperators alike to put packages together. We have been quite successful—as I mentionedbefore—with the prices for students to come to Australia and learn English. It is verycompetitive these days.

We have been successful in selling it because, being on the same seasons, it ispointless to get a student who has just finished his winter schooling and send him up to



the Northern Hemisphere to study English. So we bring them down here and we sell themthe lovely beaches and the whole thing. That is working very well, particularly fromBrazil.

Senator WEST—Would our school term times be similar to yours?

Mr Bendixsen—No. In most of South America you only have two terms in theyear. You have a very long summer break—from December through to the beginning ofMarch—and then they go right through to July and have two weeks winter holiday in July,and then right through to December again, with the exception of Easter and traditionalshort breaks like that.

CHAIR —Thank you, Mr Bendixsen, it has been very helpful and we haveappreciated your frankness and the effort and time that has been put into the submissionfrom Aerolineas Argentinas. If you could take that request on notice from Senator Teagueand provide that information to us, we would appreciate it.

Senator TEAGUE—Also, on that point, we do hope to complete our report and tobring recommendations to the government this month.

Mr Bendixsen—Wonderful.

Senator TEAGUE—So we would really appreciate a quick response.

Mr Bendixsen—Thank you very much for that, I appreciate it.

CHAIR —The secretary of the committee will contact you if you need the precisequestion from theHansardthat was asked by Senator Teague. That completes the hearingsfor today, and I adjourn further proceedings until next Monday.

Committee adjourned at 3.29 p.m.


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