Thin air routes should be bought like bus services

Before I worked for an airline, I spent seven years in finance at a bus operator that earned almost all of its revenue from state governments. We ran metropolitan bus services under contracts that would surprise many people in aviation. The government set the routes, the timetables and the fares. It kept the fare revenue. It paid us an agreed rate for each kilometre and hour of service we ran, indexed each year for wages, fuel and other costs, with deductions when we missed trips or ran late. We carried the risk of running buses efficiently. The government carried the risk of how many people chose to ride them.

That arrangement, usually called a gross-cost contract, is common in Australian public transport. It is not perfect. Operators complain, with some justice, that indexation formulas lag real cost increases, and governments complain that operators have little reason to grow patronage. But the contracts are clear about who carries which risk, and that clarity makes them bankable. A well-run operator can finance buses and depots against such a contract because it knows what it will be paid for the service it provides.

Thin regional air routes are usually handled differently. In parts of Australia a state government grants one airline exclusive rights to serve a regional route for a fixed term, in exchange for commitments on frequency and on fares for local residents. On other routes a government pays a direct subsidy to keep a service flying. On many it does neither and leaves the market to decide. Each approach has its place. My argument is that the first, exclusivity in return for fare and service commitments, has become the weakest of the three for the thinnest routes, and that governments would get more dependable services by buying them the way they buy buses.

What the bus contracts got right

The strength of the gross-cost model is that it separates two questions a single fare cannot answer at once. The first is what it costs to run a service of a given frequency and quality. The second is how much a community should pay to use it. On a metropolitan bus route, fares cover only part of the cost and the government pays the rest from its budget, openly. Nobody pretends the fare box funds the service.

On a thin regional air route, the exclusive model asks the airline to answer both questions with one number. Fares must be low enough to honour the residents' commitments and high enough, with whatever business and visiting traffic the route attracts, to pay for an aircraft, two pilots, cabin crew, engineering support, airport charges and fuel. When a resources project nearby is busy, the arithmetic works, because contractors fill seats at full fares. When the project finishes, or moves its workforce onto a dedicated charter, the same route can lose money for years while the airline remains committed to flying it.

Exclusivity is not a subsidy

Exclusive rights have value only where there is demand to protect. On a route with steady traffic, exclusivity stops two operators splitting a market that can support one, and that is a genuine public benefit. On a route where demand has fallen away, exclusivity protects nothing. The airline holds the right to serve a market that cannot pay for the service, together with obligations to keep serving it.

I have watched what follows. Operators bid keenly for the rights in good years, because the routes look profitable and exclusivity seems worth paying for. When the cycle turns, they seek to renegotiate fares or frequencies, trim service quietly within the terms, or decline to bid when the term ends. The government then discovers what the service really costs, usually at short notice and with few alternative operators. In a state as large as ours, the nearest airline with a suitable aircraft and crews based nearby may be two thousand kilometres away, and it will price its bid for an emergency accordingly. Residents experience the change as an airline abandoning their town, when the underlying problem was a contract that asked a fare to carry a social obligation.

A contract that names its risks

What I would propose for the thinnest routes is straightforward. The government specifies the service: frequency, aircraft size, the residents' fare and the reliability it expects. Operators bid a price for running that service over a term, indexed against a published basket that includes fuel, wages and the charges set by the airport owner. The government keeps the fares, or shares them above an agreed level, and pays the contract price. Deductions apply for cancellations within the operator's control, and weather exclusions are defined in advance, because on the north-west coast in cyclone season they will certainly be needed.

This model would cost governments more in visible budget money than exclusivity does. It would also cost them less than the alternatives they face when a route collapses: emergency subsidies, rushed tenders and towns without a service for months. It would let operators finance aircraft against a defined revenue stream rather than a forecast of passenger numbers they cannot influence. And it would place the decision about what a remote community's air link is worth with elected governments, where it belongs, rather than with airline pricing teams.

I should declare my interest. Saltbush flies regional routes, some of which would fall under any reform of this kind, and a gross-cost contract would reduce our upside on busier routes as well as our downside on thin ones. In 2024 we declined to match a rival's bid for one exclusive route, because we did not believe its fare commitments could be honoured at the price required. We may prove wrong about that route. But I have helped run one business on gross-cost contracts and another on route exclusivity, and I know which arrangement told its customers, its lenders and its government more honestly what each of them was paying for.

Thin routes will never pay for themselves from fares alone, and they do not need to. A hospital, a school or a police station in a remote town is not expected to cover its costs from the people who use it, and nobody thinks less of it for that. Thin routes need contracts that say plainly who pays for what, and airlines willing to bid on those terms.