JUDGMEN BI ba Be iy eed CATCHWORDS AVIATION - two-airline agreement - Airlines Equipment Act 1958 - determination of permitted maximum aircraft capacity for each airline - estimation of traffic on competitive routes - "competitive route" - construction - whether traffic between same end points on non-competitive route counted as if on competitive route ~ purpose and policy of two airlines agreement and Airlines Equipment Act. Airline Equipment Act 1958 s.12 Kiministretive Decisions (Judicial Review) Act 1977 Airlines Aqreement Act 1981 rlines reemen c Ansett Transport Industries Limited v Morris (No. 1) (1986) 69 ALR ANSETT TRANSPORT INDUSTRIES LIMITED v PETER FREDERICK MORRIS AND THE AUSTRALIAN NATIONAL AIRLINES COMMIS FOX, MORLING AND FRENCH JJ. SYDNEY 14 JUNE 1988 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION BETWEEN: NO. G 249 OF 1987 On Appeal from the Judgment and Orders of the Honourable Mr. Justice Lockhart of the Federal Court of Australia given 20 May 1987. ANSETT TRANSPORT INDUSTRIES LIMITED Appellant and PETER FREDERICK MORRIS AND THE AUSTRALIAN NATIONAL AIRLINES COMMISSION Respondents MINUTE OF ORDER JUDGES MAKING ORDER: FOX, MORLING, FRENCH JJ. DATE OF ORDER: 14 JUNE 1988 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal is allowed. 2. Liberty to the parties to apply as to the form of declaration. 3. The respondents to pay the appellant's costs of the appeal to be taxed. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT ) OF AUSTRALIA ) NEW SOUTH WALES ) DISTRICT REGISTRY ) GENERAL DIVISION ) NO. G 249 OF 1987 On Appeal from the Judgment and Orders of the Honourable Mr. Justice Lockhart of the Federal Court of Australia given 20 May 1987. BETWEEN: ANSETT TRANSPORT INDUSTRIES LIMITED Appellant and PETER FREDERICK MORRIS AND THE AUSTRALIAN NATIONAL AIRLINES COMMISSION Respondents CORAM: FOX, MORLING, FRENCH JJ. 14 JUNE 1988 REASONS FOR JUDGMENT THE COURT: There are many paths that an aircraft can take in flying between two locations. The question in this appeal is whether its route is defined by the path it takes or only by its destination and point of departure. The English language appears to supply an immediate answer, but when it comes to construing the Airline Equipment Act 1958 the ordinary meaning of words is said to be an unreliable guide. What is commonly known as the Two Airlines Agreement is currently embodied ina written agreement made on 28 May 1981 2. between the Commonwealth, The Australian National Airlines Commission, now known as Australian Airlines Limited, and Ansett Transport Industries Limited. Its recited purposes are "the efficient and economic operation of air passenger services within Australia" and "the continued existence in competition with each other of only two operators of air passenger services over the entire trunk network within Australia". The carrying capacities of the two airlines over the routes on which they both operate, known as "competitive routes" - and over one-airline or "non-competitive" routes, are regulated for the purposes oof the Agreement according to periodic determinations of maximum aircraft capacities made by the Minister for Aviation. The determinations, operative for specified periods, are based upon estimates of total traffic for those periods. These estimates are projections derived from historic traffic volumes. The object of the exercise, in relation to "competitive routes", is to arrive at a global figure for aircraft capacity required to service the estimated traffic for these routes and to allocate to each airline half the capacity so determined. Both the estimates and the determinations are made pursuant to 8.12 of the Airlines Equipment Act 1958. Capacity Determination 54 for the period 1 February 1987 to 30 June 1987 was made on 3 November 1986. It was challenged under the Administrative Decisions (Judicial Review) Act 1977 for error of law, and as having been made in breach of the rules of natural justice in cognate applications by Ansett and Australian Airlines. Their hearing before a judge of this Court occupied ten 3. days and ultimately they were dismissed. Many points of law were agitated before his Honour, several of which were taken in the notice of appeal. In substance however, only one issue was debated on the hearing of the appeal which is brought only in respect of Ansett''s application G584/1986. The question was whether, in determining the maximum permitted capacity for each airline on "competitive" or two-airline routes, the Minister could add to his estimate of projected traffic over each of those routes, estimates of traffic carried by one-airline services between points served by the two-airline routes. One way in which the question arises in practice may be seen by posing the following question: Can traffic travelling from Sydney to Hobart on Ansett's Sydney/Devonport/Hobart route be counted as though it were traffic travelling direct from Sydney to Hobart, a route used by both Ansett and Australian Airlines? This reduces to a question of the construction of the expression "competitive route" as used in 8.12 of the Act. To appreciate how the point arises it is necessary first to turn to the statutory framework and then to the Minister's determination. Statutory Framework (i) The Agreement The Two Airlines Agreement in its current form is found in a schedule to the Airlines Agreement Act 1961 by which it is given legislative approval. Clause 6 provides that the parties shall take all reasonable action within their powers to ensure that Australian Airlines and Ansett "are the only two operators which provide scheduled domestic passenger air services over trunk 4. routes within Australia". It also makes provision for exceptions to that general principle which are not material for present purposes. By sub-cl.6(1)(e) "trunk route" is defined as "a_ route linking any two trunk route centres". Trunk route centres are then listed by reference to capital cities and other major centres within Australia. Sub-clause 9(2) requires the two airlines to comply with the provisions of the Airlines Equipment Act as amended from time to time and by sub-cl.9(3) it is provided:- "the Commonwealth will ensure that the Minister will exercise his powers under the Airlines Equipment Act 1958, as amended from time to time, to allow equal capacity to the Commission and the Company over competitive routes." The agreement is also concerned with the maintenance of services on less profitable non-trunk routes in rural areas. This is reflected in sub-cl.12(1) which stipulates that "For the purpose of providing for the maintenance and encouragement of rural airline services", the airlines are, except as otherwise provided, to maintain airline services to all places already covered by them at the commencement of the clause. (ii) Airlines Equipment Act 1958 Principal definitions in the Act are set out in sub-s.11(1), those relevant to the appeal being:- "raircraft capacity', in relation to an aircraft in respect of a period, means the number of revenue passenger kilometres capable of being performed by the aircraft in the period"; make 5. "competitive route' means a route over which passenger air services are operated both by the Commission and by the Company"; "'non-competitive route' means a route other than competitive route"; "'traffic' means traffic in respect of passengers". a The obligations and associated powers of the Minister to estimates of traffic and determine maximum aircraft capacities derive from 8.12 which provides:- "(1) The Minister shall, from time to time, in relation to a specified future period - (a) (b) (2) estimate the total traffic on - (i) each of the competitive routes; (ii) the non-competitive routes of the Commission; and (iii) the non-competitive routes of the Company; an determine the maximum aircraft capacity of the aircraft required by the Commission and the Company, respectively, for the purposes of - (i) carrying one-half of so much of the total traffic estimated by the Minister in respect of the competitive routes as will not, in the opinion of the Minister, be carried by regional operators or commuter operators; and (11) operating its services on non-competitive routes. For the purposes of this section, the Minister shall have regard to - (a) (b) (c) rates of traffic increase; the types, speeds and reasonable extent of utilization of the aircraft proposed to be used; the passenger revenue load factor that would be the optimum passenger revenue load factor for the operation of aircraft on each route during the period concerned, due consideration being given to the interests of the public and the maintenance of a proper relation between revenue and costs; 6. (ad) the necessity for the overhaul and maintenance of aircraft; (e) the necessity for having aircraft available to meet emergency situations; (£) aircrew training requirements; (g) any services operated otherwise than by the Commission or the Company; and (h) any other factors affecting the stability of the domestic air transport industry. (3) Where the Minister makes an estimate and a determination under sub-section (1) of this section, he shall, not less than 90 days before the commencement of the relevant period, give notice of the terms of the estimate and of the determination to the Commission and to Ansett Transport Industries Limited and shall, in the notice, specify the portion of the determined aircraft capacity that is related to traffic on the competitive routes. The principal consequence of the determination made under s.12 is that the airlines are obliged to tailor their aircraft capacity accordingly. This is provided for in s.13:- "The obligations to which the Commission and the Company are, in accordance with the agreement referred to in section 5 of the Airlines Agreement Act 1981 or, if that agreement does not have force and effect, the agreements referred to in section 3 of the Airlines Agreements Act 1952, to be subject are the following: (a) where the Minister has made a determination under the last preceding section in relation to a period - an obligation not to provide, on competitive routes, during that period, air services capable of performing a number of revenue passenger kilometres in excess of the aircraft capacity specified in respect of the competitive routes in the notice under sub-section (3) of the last preceding section; (b) where, at any time during a period in relation to which the Minister has made a determination under the last preceding section, the Minister - (i) notifies the Commission or Ansett Transport Industries Limited that he is satisfied that the aircraft owned, operated, or otherwise 7. available for use, by the Commission or the Company, as the case may require, exceed the aircraft required to provide, in that period, the aircraft capacity determined in relation to the Commission or the Company, as the case may be; (il) directs the disposal of aircraft to a specified extent (being the extent which the Minister considers necessary to eliminate the excess), an obligation to comply with the direction within the time specified by the Minister; (c) an obligation not to purchase, lease or otherwise obtain the use of any aircraft unless the Minister has certified in writing that, in his opinion, the obtaining of the aircraft will not result in the Commission or the Company, as the case may be, having the use of any aircraft in excess of the aircraft required to provide the aircraft capacity determined from time to time under the last preceding section, and that, in his opinion, the ~ obtaining of an aircraft of the type proposed to be obtained will not, having regard to the types of aircraft operated by the Commission and the Company or in respect of which any other certificate under this paragraph has been or is proposed to be issued, be detrimental to the stability of the domestic air transport industry; and (d) an obligation to furnish to the Minister, within such times as the Minister specifies, such information in respect of traffic as the Minister requires." There are also in the Act analogous provisions relating to regional operators (ss.18 and 19). Against that background consideration must be given to the Minister's decision. The Minister's "Working Definition" of Competitive Routes and Notional Transfer of Traffic The decision in question was set out in a document described as "Determination Number 54 for the Company and the Commission", dated 3 November 1986 and signed by the Minister. It related to the period 1 February 1987 to 30 June 1987. The document shows that after excluding traffic carried by regional or commuter operators (see para.12(b)(i)) the Minister estimated total passenger traffic on all competitive routes to be 4,036.917 million passenger kilometres. His estimate for traffic on non-competitive routes was 51.522 million passenger kilometres on those operated by Australian Airlines and 330.9 million passenger kilometres on those operated by Ansett. Dividing maximum aircraft capacity on the competitive routes equally between the two airlines, his determination for each was 2,703.767 million available seat kilometres. Separate maximum aircraft capacities at 92.046 million and 542.786 million available seat kilometres were determined for Australian Airlines and Ansett respectively on their non-competitive routes. In a statement dated 1 December 1986 and made pursuant to 8.13 of the Administrative Decisions (Judicial Review) Act the Minister set out the reasons for his decisions. There is nothing to be gained by canvassing in detail those reasons and their extensive annexures. The important point emerging from them however, is that in estimating total traffic on "competitive routes", he used his own "working definition" of that term and took into account passengers travelling on non-competitive routes between points served by competitive routes. As his Honour at p.33 of his reasons:- "The Minister's approach was to examine the routes over which passengers who used the passenger air services that operated over the relevant routes had common origins and destinations." This is borne out by a departmental submission upon which Minister acted in coming to his decisions. In section 1 of found the the submission entitled "Ansett and Australian Capacity Determination Number 54", it was said:- "The Act defines a competitive route as a route over which passenger air services are operated by both the Commission and the Company - the interpretation of this definition has been disputed in appeals to the Arbitrator and Co-ordinator under previous Agreements. The working definition of competitive routes adopted for this determination, developed in the light of decisions by the Co-ordinator and Arbitrator under previous Airlines Agreements is - a competitive route is a city pair between which traffic is carried either directly or indirectly by both Ansett and Australian, including their subsidiaries and operating divisions." It was proposed in Attachment G to the submission that "base period traffic statistics be prepared on a city pairs basis, being city pairs between which traffic is carried by both Ansett and [Australian Airlines), either directly or indirectly". 10. The Arbitral Decisions The previous arbitration decisions referred to were those of Sir John Spicer on 11 December 1964 and Sir Nigel Bowen on 11 March 1980, each made under the Agreement of 1961. In its recital that Agreement specified as one of its objects' the securing and maintenance of a capability for "effective competition" between the two airlines. The first arbitration related to Ansett's desire to get equal access with its rival to intermediate points in the Adelaide/Darwin run. It was in this context that Sir John Spicer observed that the provision of competitive services did not necessarily mean that each service would be a mere duplicate of the other leaving at the same time and stopping at the same intermediate stopping places. "What is required is that each operator shall be capable of effective competition with the other on the route." No question of the definition of "route" or "competitive route" arose. The question before Sir Nigel Bowen in the 1980 arbitration was whether the Australian National Airlines Commission, as it then was, should be permitted to operate a second weekly DCS service Perth/Port Hedland/Darwin. He made reference to cl.10 of the 1961 Agreement which required the parties to keep under review at all times passenger and freight load factors necessary to permit their profitable operation "in relation to particular periods on specified groups of competitive routes". He referred to the fact that both the Commission and ll. the Company were operating a weekly DC9 service Perth/Port Hedland/Darwin and return on Wednesdays. In this respect both were conducting a trunk route in competition. He also adverted to a five times weekly F28 service offered by Ansett' for Perth/Derby/XKunanarra/Darwin and concluded that it must be considered to be operating in competition with the DC9 service. As he commented "It offers travellers an alternative means of travel from Perth to Darwin". He therefore rejected an argument that he should restrict his consideration to competition solely between the DC9 services and disregard the F28 service. Both these arbitral decisions were concerned with effective competition between services irrespective of the routes used by the operators. The Purposes of the Airlines Equipment Act The approach taken by the Minister was said, by his counsel, to serve the purposes of the Act which, in relation to the two airlines, were:- 1. To ensure the continual existence in competition with each of only two operators of air passenger services over the entire trunk route. 2. To match capacity with demand for passenger services. 3. To prevent development of excess capacity or pursuit of increased market share, an objective served by:- (i) the distinction between competitive and non-competitive routes; (ii) the allocation in equal shares of aircraft capacity which may be deployed on competitive routes; 12. (iii)preventing the two airlines from deploying, in the course of competition, capacity beyond their respective fifty per cent shares. And as to these purposes reliance was placed upon the _ fourth recital and clauses of the 1981 Agreement, the provisions of the Airlines Equipment Act and the Minister's Second Reading speech upon the introduction of the Bill for the Act in 1958. In _ the course of that speech it was said:- "The rationalization of fleets will eliminate excess aircraft capacity and, at the same time, retain the competitive incentive which has contributed so greatly to the efficiency of the domestic air transport system. Furthermore, it should contribute greatly to stability in an industry which is receiving considerable financial support from the Government." Counsel for the Minister also referred to the judgment of Lockhart J. in Ansett Transport Industries Limited v Morris (No. 1) (1986) 69 ALR 49, in which his Honour comprehensively reviewed the history of the Two Airlines Agreement in its various forms since 1952 and that of the legislative machinery established to implement it. Of the Airlines Equipment Act he said (at p.55) that, at the time it was passed, Ansett, which was poorly equipped, was seeking to acquire suitable aircraft to enable it to compete with TAA (as it then was). He said:- "The Government sought to ensure that a "re-equipment race" causing surplus capacity did not occur; hence there arose the policy of comparable equipment which became a cornerstone of the two airlines policy. The Federal Parliament passed the Airlines Equipment Act 1958 which contained detailed provisions for rationalisation of aircraft fleets designed to ensure that neither airline had excess capacity and that the acquisition of additional aircraft would be governed by principles which ensured that neither airline had a qualitative advantage over the other in relation to equipment." 13. And later in the judgment (at p.75), speaking of capacity control his Honour identified its principal objectives as matching the supply of aircraft capacity and forecast demand for passenger travel, thus avoiding excess capacity, the cost of which would ultimately be borne by the travelling public and ensuring that regional airlines do not have excess capacity available which could be used on trunk routes. There was no controversy about the accuracy of these general observations. The question arises whether capacity matched to demand in equal shares would leave any room for competition with respect to market share. However the capacity determinations are calculated taking into account an optimum passenger revenue load which in Determination 54 was assessed at 74.6% for the competitive routes. While this factor is designed to maintain a proper relation between revenue and costs (s.12(2)(c)), it does support a capacity margin available to each operator which should enable it to benefit by competitive conduct. The Act does not seek to regulate competition in areas such as in-flight and ancillary services, seat configuration and the like. It is, however, intended to prevent competition in the provision of aircraft capacity beyond the ceilings imposed by the Ministerial determination. It would be consistent with that purpose that the Act regulate, in the same way, effective competition arising from the provision of capacity on one-airline routes which serve end points covered by a two-airline route. And it is substantially for that reason that the Court is invited to accept the Minister's "working definition" as an appropriate basis for identifying the "total traffic on each of the competitive routes" even though it 14. does not reflect the terms of the statutory definition and introduces the concepts of "city pair" and "direct" or "indirect" carriage of traffic. Before turning to the merits of that proposition it is necessary to see how his Honour dealt with the question, Approach taken by Trial Judge His Honour accepted that the word "route" in its ordinary usage contemplates a certain or particular direction taken in travelling from one place to another or a regular line of travel or passage but added the qualification that it is not to be treated separately or distinctly from the passenger air service provided over it. He continued (at p.33):- "Section 12 is not concerned with routes as such but with the passenger air services which operate on them. For presently relevant purposes an air route exists in my view only in relation to passenger air services that are or may be conducted over it." There is nothing controversial in that proposition and no complaint is made of it. The next step in his Honour's reasoning however is the critical one for this appeal. In _ the passage immediately following that cited, he said:- "The Minister's approach was to examine the routes over which passengers who used the passenger air services that operated over the relevant routes had common origins and destinations. In my opinion that was a permissible approach. It has not been established that the Minister fell into error in adopting the course which he did by applying his working definition ("city pairs") to which I referred earlier." 15. His Honour did not further elaborate upon his view that the Minister's approach was permissible. As can be seen however, the reasoning implies a resolution of the question of construction in favour of the Minister. Construction of the Airline Equipment Act We accept that when an Act of Parliament is open to a construction which serves its purpose, whether that purpose be ascertained from the text or from extraneous material, it should be given that construction. The real question in this case is whether the language of sub-s.12(1)(a) can accommodate the procedure adopted by the Minister in forming his estimates. The section draws a distinction in the estimation process between "competitive routes" and "non-competitive routes" and the Minister is required by para.12(1)(a) to estimate the total traffic on:- (4) each of the competitive routes; (ii) the non-competitive routes of Australian Airlines; (14i)the non-competitive routes of Ansett. This requires, at least notionally, a step in which there is a route by route estimate of traffic on the competitive routes. The non-competitive routes can be treated globally for each airline. From that route by route estimate the Minister arrives at a figure which is, for the purpose of para. 12(1)(b), "the total traffic estimated by the Minister in respect of the competitive routes". 16. It is upon that figure that he bases his determination of maximum aircraft capacity. The estimation process is not a control device, it is in essence a predictive or actuarial exercise. The control device lies in the determination of maximum aircraft capacity. The process of estimating total traffic on "each of the competitive routes" will not permit the taking in of any of the traffic from one-airline routes unless those routes, insofar as they serve the same end points, are part of the "competitive route" under consideration. That can only happen if the term "competitive route" describes not only one primary path used by two airlines but extends to the group of secondary paths over which services are offered by one airline in competition with those offered on the primary path. The definition of "competitive route" in s.11 limits its meaning to "a route over which passenger air services are operated both by the Commission and by the Company". The definition gives meaning to the word "competitive" as used in the collocation so defined. "Competitive" on the face of it indicates no more and no less than that the route in question is operated by the two airlines. Counsel for the Minister pointed out that the word "route" was left undefined and submitted that it took its meaning from the qualifier "competitive". It was further submitted that one route in relation to two end points means any path that may be followed between them where there is effective competition between the services on those paths. It is at this point that the argument breaks down. It offends common sense to describe as 17. travel on one route, travel from Sydney to Perth direct and Sydney to Perth via Melbourne and Adelaide. This does not mean that the term "route" is not sufficiently wide to describe any number of paths separated by trivial deviations. It would be wide enough, for example, to cover the "sham" deviation exemplified in the evidence of Mr G.J. McMahon, Deputy General Manager of Ansett Airlines of Australia Limited, in relation to the operation by Air New South Wales of the Melbourne/Albury/Sydney route. On that route, said by Mr McMahon to have been wrongly treated by the Minister as competitive, the aircraft lands at Albury, taxis on the runway without letting any passengers out and then takes off. Such a device is unlikely to prevent characterisation of the path followed in that case as one with the Melbourne/Sydney competitive route. But these are questions of judgment and evaluation for the Minister and his advisers. Trivial or sham deviations should not be permitted to change the identity of the route followed from competitive to non-competitive. On the same basis, differences in flying heights or air corridors referred to by counsel for Australian Airlines, would not justify characterisation of the paths followed as different routes. Allowing for these penumbral areas, the Act requires adherence to the central concept of a_ route as one path between two points. It is a concept which has been part of the Act since it was passed in 1958. And it may well be that the draftsman did not address the question of the use of one-airline routes to compete with services provided on two-airline routes. It is 18. apparent from the evidence however that this kind of competitive conduct is now non-trivial and may have a real effect on the balance of capacities between the two airlines. If that is thought to be undesirable, then the statute can be amended to authorise the kind of estimating process that the Minister has followed in this case. But in spite of the considerable support it derives from the general two airlines policy and the purpose of the Act, that process does not accord with any reasonable construction of sub-s.12(1) as it presently stands. Further, to take in those figures under the present statutory regime may involve some distortion of the capacity determination given the differing (generally greater) distance covered by the secondary paths. The Minister in making his determination has' therefore erred and his error was an error of law. The Appropriate Relief In one sense the case is moot as the period covered by the determination under review expired on 30 June 1987. However no subsequent determination has been made and the Court was informed that the next determination could be expected to proceed on the same basis as its predecessor. It was submitted for Ansett that the Court ought to award declaratory relief and various forms of such relief were proposed. Counsel for the respondents were of the view that if the appeal were allowed a declaration could more properly be framed in the light of the Court's reasons. In the circumstances of this case the Court is of the view that there is a sufficient purpose to be served by a 19. declaration to warrant such relief being granted. The Court has framed a proposed declaration but will hear from the parties before making any final order. As to the matter of costs, Ansett has indicated that it does not seek to disturb the costs order in the court below. It should however have the costs of the appeal as against both respondents. The declaration which the Court proposes to make subject to hearing from the parties is as follows:- "It is hereby declared that in making Capacity Determination Number 54 under Section 12 of the Airlines Equipment Act 1958 the first-named respondent erred in teeatin as part of one competitive route, being a route between two cities over which both the appellant and second-named respondent operate passenger air services, all other paths between those cities on which passenger aic services are operated directly or indirectly by either the appellant or the second-named respondent or their respective subsidiaries." I certify that this and the preceding eighteen (18) pages are a true copy of the Reas Judgment of The Court. Associate: a Date: 14 June 1988 20. Counsel for the Appellant : Mr N.J. Young Solicitors for the Appellant: Arthur Robinson & Hedderwicks Counsel for the First Respondent: Mr D. Graham Q.C. and Mr R. McK. Robson Solicitors for the Pirst Respondent: Australian Government Solicitor Counsel for the Second Respondent: Mr J.1. Fajgenbaum Q.C. and Mr D.F.R. Beach Solicitors for the Second Respondent: Phillips Fox Date of Hearing: 24, 25 May 1988 Date of Judgment: 14 June 1988