The Coalition has argued for domestic travellers to be compensated when airlines delay or cancel flights, or when their luggage is lost or damaged in transit, as their 'Pay on Delay' bill is debated in the Senate.

The legislation introduced by Coalition senators Bridget McKenzie and Dean Smith would create new protections for passengers by obliging airlines to provide refunds or compensation where an airline chooses to cancel or delay flights, where a passenger is denied boarding for a purchased flight, or where luggage is lost or damaged.

Airlines would also be required to ensure passengers "complete their itinerary" where the delay is outside of their control, such as in weather and security events.

Additionally, the code of conduct would also create some minimum standards of treatment for passengers, including requirements that children under 14 be seated near to their parent or guardian.

The aviation industry has been under intense scrutiny since returning to the skies after the COVID pandemic, as rising ticket prices, widespread delays and cancellations, and accusations tickets for already-cancelled flights were knowingly sold to customers.

Almost a third of flights were cancelled or delayed over the January holiday period this year, with airlines little improved after the industry was knocked down by the pandemic.

Between the two major airline groups Qantas and Virgin, who dominate almost the entire domestic aviation industry, there were 1,305 flights cancelled in January alone.

Shadow Transport Minister Bridget McKenzie told the Senate compensation schemes existed in the European Union, the United Kingdom and Canada, but in Australia passengers were "left stranded".

"This issue transcends mere inconvenience. It's a matter of fairness, transparency and respect for Australian consumers," Senator McKenzie said.

"Passengers travel under consumer protections when travelling internationally. Why shouldn't domestic passengers be operating under a similar framework?"