Airline industry faces enormous challenges

The massive hike in jetfuel prices, although moderated in recent weeks, has taken its toll in the airline industry worldwide. The most recent casualty, XL airlines (a UK low cost airline/ charter/tour operator) fell over because it hadn't hedged against price increases adequately, and had sold its tickets many months in advance. Being an operator at the bottom of the market left little room for fat, so it has gone. Others to fold have been Trans-Atlantic low cost carrier Zoom (again the bottom of the market has little profitability in it), US carriers Aloha, Skybus, ATA, Futura of Spain, Hong Kong's low cost carrier Oasis and the three all business class Trans Atlantic airlines, Maxjet, EOS and Silverjet. The last three folded because they couldn't offer the frequencies, network connections or airport access at London that was needed to be competitive.

So what does this hold for airlines down under? Well both Qantas and Air NZ have been hit hard, primarily because of a major collapse in international tourism from Europe, the USA and Japan. Long haul flights burn a lot of fuel, but the fare per passenger km is lower than short haul (and the staff/amenities required are much more elaborate than on short flights), so routes to and from Europe have been badly hit.

Air NZ in particular is vulnerable. Although it remains profitable, it is small, it retains the same risks it had before it bought into Ansett many years ago of not having much access to its nearest large market, and it extends itself far beyond New Zealand to an extent almost unparalleled by airlines of similar sized countries.

Air NZ's share price closing Friday was NZ$1.05, that is less than it was after it was largely renationalised in 2002, at NZ$1.75. More of your money Dr Cullen has spirited away. However, none of this should be a surprise:

- The domestic market remains largely stable, as Air NZ completely dominates the high yield flexible ticket business market and most provincial routes. It is shoring up that business by having converted the front half of its 737s to a new "Space +" configuration for Koru Club members, Gold and Gold Elite Airpoints members and full fare customers. That 3-4 inches more legroom will earn loyalty.

- The Trans Tasman market is growing, as Aussies and Kiwis travel closer to home, but it remains a bloodbath on prices. Pacific Blue is increasing frequencies as is (the apparently immune to oil prices) Emirates which will fly a daily Airbus A380 across the Tasman from February. Air NZ is also putting a "Space +" section at the front of economy class on its 767s and Airbus A320s on this route, also to shore up business traffic (as it will have the most legroom in economy class on the Tasman), as well as installing personal TVs for every seat in every class on 767s and A320s. Again it is hoping that aiming for the top of the market will increase yields, but it faces one huge disadvantage - no access to the Australia domestic market. Business traffic feeding to the Tasman domestically almost entirely goes on Qantas, because it can offer that.

- The Pacific Island market is low yield mostly, comprising ex.pat Pacific Islanders "going home" from NZ, and NZers going on holidays. They are all seekers of low fares. Air NZ has chosen to almost abandon the US/Europe to Pacific Island tourist markets through LA, although these have also plummeted significantly.

- The Asian market is also low yield. Tourism originating from Japan has collapsed significantly in the last few years. Air NZ has dropped routes to Nagoya, Fukuoka in recent years and the Osaka route is down to twice weekly (and about to be operated by 767s, a drop in 79 seats from 777s as well as a major drop in Business Class seating). The routes to China (Shanghai and Peking) are also disappointing, as there is very little business and premium economy demand, and the economy passengers are again at the cheap end of the market. Hong Kong has more balanced demand, though that is in part a feed to Lufthansa and Swiss flights to Europe (as well as the route to London).

- Routes to US and Canada tend to have plenty of business and premium economy traffic, but the economy class end of the market has declined significantly due to the recession in the US.

- Lastly the London routes are currently unprofitable, which is why the route via LA is being downsized to a 777 (also reflecting the increased competition between London and LA since the Trans Atlantic Open Skies agreement came into effect). UK origin tourism has dropped significantly, and Emirates has hurt Air NZ's business on routes to Europe.

So it's tough, it is a major exposure for the government as well, and like Delta/Northwest, BA/AA, Lufthansa and Brussels Airlines, Air NZ must be looking to hook up with a major foreign airline to survive and grow. To do this the government must water down its shareholding. At the very least the incoming government should look to dilute its over 80% shareholding to 50.1% to give the airline an injection of capital and the strategic linkages it needs to grow. Not doing so will see it struggle to sustain long haul routes at times like these, which is, after all, one of the key reasons for the government wanting the airline to remain in any case.

Ian, it's polite to ask ok?

I'm very surprised to see that Ian Wishart's latest weekly newsmag (which is available for sale at NZ$3 oer month, and then distributed for free online) includes a post of mine. You see I only found out because it was mentioned to me on the NZ Conservative blog (which I enjoy visiting for some good debate, as you can imagine we often disagree). The newsmag in question is on PDF here.

Now I don't mind, as what's important to me is that people read and think about what I have to say - this isn't my job. However I DO ask one thing. I don't care if you want to link to this blog and comment on posts on your own. That's part of how the blogosphere works. I also don't mind if other publications publish my blog URL and also post excerpts from it.

However if you want to repeat a post, in full, and publish it on a subscription based magazine or newspaper, ask. I know this isn't copyrighted, but it is simply polite and if you're seeking to make money from what I write I want to know.

US taxpayers' kids will pay

First came the effective renationalisation of Fannie Mae and Freddie Mac, both Frankenstein monster creations of the US Federal Government in the first place. Then came the monster loan to AIG, effectively nationalising one of the world’s biggest insurers and now the US Federal Government is taking off the dud loans of banks.

This from the Bush Administration, long hated by the left internationally – it has now grown the size of the US Federal Government beyond recognition, in effect printing more money and engaging in what may be the largest action of intergenerational theft seen in history.

The banking sector has been bailed out, the losses have been socialised and will be born by this and succeeding generations of taxpayers. The profits remain private. If ever an event in recent history could fire up the critics of capitalism this is it – and it is because anything but capitalism has been applied to the banking sector.

The Bush Administration has decided to borrow from future generations to avoid a wholesale collapse of the mortgage market and several US banks. What that collapse would have meant has largely been glossed over as “disaster”, because it would mean banks folding, their shareholders losing out, depositors (a key political concern) also losing out, but debtors to banks having new creditors who may call in the assets to sell. That would have meant homeowners with worthless mortgages (those worth more than the property), but also airlines leasing planes from ILFC - a subsidiary of AIG - (although it is hard to believe that they would’ve been sold themselves given the same companies would be using them).

The result would have been significant deflation of many assets, in particular bank shares and properties – the housing bubbles would certainly be over, mortgages would be far harder to get, but prices would have dropped.

Of course there would have been winners from it, those banks which were far more prudent, those wanting to purchase properties, and other prudent investors. The wise would have won, the foolish would have lost – but that would have included many householders with dud mortgages, and not a few depositors. Bush politically knew that if that happened, McCain would have been finished, as would the Republican Party for at least two more elections. He renationalised for political reasons, and passed the bill onto everyone’s children.

The left will blame loose banking regulations, and “greed” – but wont say that same greed applies to those on modest incomes seeking to buy properties with 100% mortgages. The left will want to constrain the buying and selling of shares, and the availability of credit, with the sort of mindlessness of those who don’t understand economics and finance. Yet failing to note the state’s role in what is a boom/bust cycle. Both US and UK governments have long continued to borrow from their own and foreign economies, injecting inflationary spending into their economies, fuelling property inflation with central banks anxious to always avoid recession, on top of regulations requiring financial institutions to lend a proportion of mortgages to the “less well off”.

It’s notable that John McCain has been distinctively uncomfortable with the bailouts – they go against his own political instinct. Barack Obama is swimming in it though, because he mindlessly blames the Bush Administration, ignoring the Clinton Administration when so much of this started to happen. Lying being the standard stock in trade for politics. However McCain would have hardly done any different. The bigger question is how quickly McCain or Obama would privatise these new enormous liability companies – have a guess who would be slowest.

In the UK, Gordon Brown looks distinctly on the sidelines, as the banking sector itself responds to the crisis through mergers and acquisitions, but also taking the US taxpayers’ injection of their future earnings as a boost to confidence.

Sadly the worst part of all of this is not the bailing out of shareholders, not the bailing out of debtors, not the billions of US dollars worth of intergenerational debt that taxpayers will be forced to bear, but the erosion of a core capitalist principle by the US Federal Government’s actions. Those involved in investment and business take risks daily, whether it be farmers, shopkeepers, taxi drivers, publishers, radio stations, food processors, furniture manufacturers, trucking firms, hotels or charter airlines – the owners, their employees and customers rise and fall on the risks taken. Such businesses fold daily, with not a sign of taxpayer bailout – which is appropriate. Banking is different. The bigger the bank or insurance firm, the better equipped it should be to manage risk, but the bigger likelihood the state will bail them out – if only because the state fears the fallout from all those who deposit with and borrow from them.

This of course means that mortgages, finance and bank shares are clearly less risky than other investments in other sectors. It also means that if the revival of share prices flows onto property finance, the property bubble will return and shares will rise on the back of a massive injection of future taxpayers’ money.

It will happen again.

As Gareth Morgan says in the Dominion Post - the tendency for governments to "save the world" on these occasions is only increasing the frequency at which it will need to happen, and the cost to be met in later years.

Loser Labour candidate number 2 - Paul Chalmers

He is the Whangarei electorate candidate. He was the candidate last time. He got 27.9% of the electorate vote against Phil Heatley on 53.8%.

The profile on the website says:

"The National Party will simply serve the interests of the already wealthy and ignore the aspirations of those less well off. "

Such mindless rhetoric suits a man who has no chance of getting elected. Keep your day job Paul.

Poor Labour candidate of the day - Sam Yau

OK, he seems a nice enough chap. He's the electorate candidate for Ilam (not on the list) but he is so heavily deluded it isn't funny. He claims on his profile that National sold assets to fund tax cuts - absolute bollocks - it ran surpluses. The profile on the Labour website talks how the Labour government led the world on nuclear free policy -um, Sam, that was the PREVIOUS one. The one with Roger Douglas in it.

Sorry Sam, Ilam is well served with you being a JP and being self-employed. Good for you. However, the Labour Party just likes taking from the self-employed and telling people how to run their lives, and wanting to buy their education, healthcare and pensions for them.

However we needn't worry, Gerry Brownlee isn't going to be shifted by Sam. That will be good for both Sam and New Zealand.