Tuesday, November 03, 2015

Wellington Airport Runway Extension: Definition of a Cargo Cult: Part One

For those unfamiliar with the term "cargo cult" it is a description of what might best be called as a naive practice of some cultures with low levels of scientific understanding and a high belief in animist religions that certain rituals will result in untold riches arriving from the skies.  Nowadays it is often shortened into "built it and they will come".

Such is the hype around the planned extension to the runway of Wellington Airport - a proposal that completely lacks pure commercial merit and has no net wider economic benefit - but is being promoted by the opportunistic, encouraged by the naive and to be paid for, largely, by those will get no benefit from it at all.

I say this as someone who grew up 1.5kms from the airport and knows a bit about the aviation sector, having recently been part of the team that reviewed over 50 proposals for expanding airport capacity in London.  I know Wellington Airport very well, and the likelihood that there will be long haul flights into that airport that will generate net benefits to Wellington ratepayers to recover the costs of subsidising the runway extension is very low indeed.

Let's remember the airport is a commercial concern, two-thirds owned by Infratil, which itself is not willing to contribute two-thirds of the capital costs of the project.  It's the owner of the other third - Wellington City Council - that is the problem, because it is willing to force ratepayers (along with other Wellington councils) to cough up half of the liability to boost the value of Infratil's investment. This in itself should cause both believers in the free market and socialists to baulk at public subsidy for a predominantly private entity, but no - they have cargo cult syndrome.

They believe that magically if an airport extension is built, there will be long haul flights from Wellington to Asia and the Middle East, making the city more attractive for business.  However, it is far from clear exactly:

- Why airlines will fly long haul to Wellington;
- Are the assumptions about the the benefits claimed valid?

Who would fly to Wellington?

Let's kill off one idea quickly.  

Air New Zealand will not fly long-haul from Wellington. Its international hub is Auckland, the reason being that it is the business hub for the country, and also enables it to attract traffic between Australian cities and the Americas/South Pacific (which it does rather successfully).   Given its location it can generate high yielding (i.e. not economy class travelling) passengers with enough of an economy of scale to be just profitable enough to sustain a business, in a very volatile sector.  It once flew long-haul out of Christchurch (to LA, Singapore and Tokyo), but has recently dropped the last of these services.  Even the Trans Tasman services from Wellington are no great money spinners, as the decision about the Air NZ-Virgin Australia Alliance revealed.

Wellington Airport and two Wellington Councils (and associated bodies) all demanded that in exchange for approving the Alliance, Air NZ and Virgin Australia be forced to maintain a minimum flight frequency on their routes between Wellington and Australia.  This hardly indicates confidence in the commercial attractiveness of flying to Wellington Airport.  The Australian Competition and Consumer Commission in its approval of the Alliance required the two airlines to maintain a minimum level of service between Wellington and Brisbane.  

Hardly great confidence that Wellington is a lucrative destination.  Air NZ has made it clear it has no plans to fly long-haul from Wellington and that a runway extension would not change this.

Beyond that, there have been claims that the latest generation of longhaul aircraft - Boeing 787s and Airbus A350s - will suddenly make it viable to fly to Wellington.   However, a useful guide to who this might be is to look at Christchurch, which with both a wider pool of air cargo and as a gateway to the main tourism destinations of the country, has some long haul flights.

By some I mean actually 2 non-stop from Christchurch.  One is Singapore Airlines and the other is China Southern to Guangzhou.  Singapore Airlines has been decidedly lukewarm on flying to Wellington, and China Southern is driven mostly by outbound Chinese tourism traffic, which has limited interest in visiting Wellington.  Emirates flies from Christchurch to Dubai via Sydney and Bangkok, which of course is not at all better than flying to Dubai via Sydney from Wellington, except it is a larger aircraft.  China Airlines flies from Taipei to Christchurch, but only via Australia.  Same issue again.  This isn't a long haul flight, and isn't substantially different from flying Air NZ or Qantas into Sydney or Melbourne to connect to a long haul flight to Asia or Europe.

If Christchurch can only attract one flight from Singapore and one from China, what's all the hype about Gulf airlines flying to Wellington (when the other two big Gulf airlines, Etihad and Qatar Airways don't even fly to Auckland)?  

China Southern (which is going through a rapid growth phase) has indicated it might consider Wellington, but given it is Chinese Government owned airline, it is operating not to grow profit but to find markets it can grow.  Quite how many business people or tourists wish to hub through Guangzhou to and from Europe or elsewhere in Asia, on an airline with a mixed reputation for service when things go wrong, is unclear.   I wouldn't want to base the decision to spend millions of taxpayers' dollars on giving one airline the chance to start a flight it might cancel a year later.   Neither does the major owner of the airport, who is happy to let taxpayers cough up the money to subsidise its ambitions (bear in mind Infratil recently offloaded completely failed airport investments in the UK for token amounts).

Why would there be benefits from long haul flights to Wellington?

The whole premise of the Wellington runway cargo cult is that Wellington is less attractive for business because it doesn't have long haul flights.  The same arguments are made for Canberra, which even struggles to get Trans-Tasman flights, because airlines simply aren't interested.  However, the benefits of direct flights come from reduced travel time and assumptions about lower airfares, yet these are wanting.

Ernst and Young authored the study into the benefits of the project, but some of its assumptions demonstrate a paucity of understanding of the airline industry and some heroic assumptions about benefits that airline passengers are willing to pay for.

In the next installment, I review the report and find it full of assumptions and assertions that don't bear close scrutiny.


paul scott said...

Yes, thanks for clarity on this idea of extended runway. As soon as we demolish Christchurch Council, you guys can do Wellington.

Colin Kelly said...

Good article. However you are overlooking the best reason in favour of spending $350m, then also paying Infratel to use it: Legacy Ego Projects for Elected Councillors. Past examples : The Overseas Terminal & loathsome Events Centre locally. John Keys' Sky City Convention Centre is one, Tiwai point and Taranakis' gas to urea plant were clever private parties exploiting NZ politicians ego. Internationally they are legion, the largest perhaps the recent Russian Winter Olympics. Calculating cynics like Infratel use this ego drive to draw simple souls on Wellington Council ever into their clever but ridiculous schemes. This is the most important reason for building the extension no matter what the economics, and we must remember it.