Thursday, November 13, 2014

Air NZ creates market opportunity

There has been rather little wailing and gnashing of teeth from some quarters about predominantly state-owned Air New Zealand making an entirely commercial decision to restructure its regional domestic operations.

There has been some focus on it dropping flights altogether to Kaitaia, Whakatane and Westport, but it is also dropping some other services like from Wellington to Taupo (Rotorua isn't that far).  On the other hand it is significantly increasing capacity on other routes as it flies larger ATR72 aircraft into centres like Napier and New Plymouth, then enabling its 50 seat Q300s to fly into smaller airports like Wanganui, Blenheim, Timaru and Hokitika.  More seats mean cheaper fares.  For most of the regional locations this is good news.

The current services are losing money because people aren't prepared to pay the fares necessary to keep services going, at NZ$1 million a month, or NZ$26 per trip.  People aren't prepared to pay that much more, and there is a longer term issue is that the planes that Air New Zealand uses, Beechcraft 1900D (through its subsidiary Eagle Airways) need replacement.  Air New Zealand, to its credit, has been using them intensively, but there simply isn't a 19 seater turboprop airliner available that could replace them economically.

So airports that can handle the much bigger 50 seat Bombardier Q-300, get them, and the airline gets some more of the ATR72s to service larger centres.

What of the airports that are losing services?  It's a market opportunity.  One of the few acts of liberalisation of the Muldoon Government (which curiously, the then Labour Opposition opposed, with one Richard Prebble leading the debate opposing it), was to deregulate domestic air services, removing Air New Zealand's statutory monopoly on domestic services (although it took a lifting of the foreign ownership limit from 15% to 50% and later abolished altogether to see Ansett NZ challenge Air NZ on the main trunk route).   For decades it was thought "normal" for the state to guarantee air services by its own airline providing them, and woe betide any upstart with lower costs competing with the heavily unionised state carrier.  

Not any more.

Already Sunair and SoundAir have been talking about new services as a result, which is exactly how it should be.  Opportunities to shift a dozen or so people by air between small airports give rise to innovation and entrepreneurship.  With a relatively highly valued NZ$ it is also easier to bring in high capital goods like airliners.  We shall see what happens (and of course, it does beg the question as to why the state continues to own the rest of Air NZ).

Contrast that to how Auckland urban transport is treated by politicians and planners.  One of the main tasks in recent years has been to seek to snuff out entrepreneurship and innovation by bus operators running commercially viable services, preferring to dish out ratepayer and fuel/RUC taxpayer subsidies to routes the planners deem best (without even mentioning the billion dollar railway that loses money).

Odd then, if the free market is seen fit to deal with how regional towns and cities get air services (noting in quite a few countries, including Australia and the US, rent-seeking rural lobbies have gained subsidies for uneconomic air services to be operated by state approved monopolies), why not for how people get around cities?  Is it because it wouldn't deliver the planners' answer of passenger rail in lower density cities with dispersed commuter patterns, but rather a more dynamic network of buses and for roads to cost a bit more in the peak, but a lot less off peak?

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