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Key not bluffing about Air NZ regional fares

A lawyer who specialises in regulatory issues says Craig Foss backing John Key’s comment on Air New Zealand’s regional fares indicates the matter is being taken seriously.

Prime Minister John Key said yesterday he’d told Air NZ that the company should reduce regional fares if it can, and was supported by Commerce Minister Craig Foss.

Mr Foss says that the Commerce Commission was assessing a recent complaint but investigation is still "unliekly."

The Prime Minister’s comment followed the national carrier’s announcement of a strong financial result with  a 45% increase in profit to $262 million.

Wigley & Company principal Michael Wigley told NBR ONLINE that the Commerce Act as it stands is weak in driving regional airfares down.

He says John Key’s comment could have been overlooked but, since the Minister of Commerce has expressed concern, the issue could result in an inquiry.

He says Mr Foss would be looking at Part 4 of the Commerce Act, which concerns regulation of goods and services.

“It is a major step for the Minister of Commerce to say he is considering options,” says Wigley. “The Minister and his officials will have considered the position carefully before going public like this.

“The worst case scenario for Air NZ is that it has its prices dictated by government. Raising the possibility there might be regulation of any provider has an impact on the share market, for example, so the Minister generally won’t do that lightly.”

The Government has a 52.3% share in the airline.

Mr Wigley says Air NZ could be guilty of what he calls a ‘Tall Dwarf’ strategy, whereby a monopoly ensures there are minnow competitors in the market that give the appearance of competition, with little risk of them growing bigger.

“Tall Dwarfs may even support or ring fence [the minnows] – but only select providers that will remain minnows.”

Aviation NZ chief executive Samantha Sharif says Air NZ isn’t a monopoly, pointing to the other 40 airlines with air operator certificates.

However, the vast majority of these airlines offer aviation training, freight, scenic or private charter services. Very few have scheduled flights from regional airports.

Ms Sharif says other competitors could try to compete with Air NZ but the aviation industry is expensive and when potential competitors cost up regional flights, they realise they can’t offer cheaper airfares than Air NZ.

She added the airline likely made little to no profit from regional airfares and the bulk of its revenue came from international flights.

Mr Wigley says other airlines don’t see an opportunity to operate regionally so they won’t even start.

“If an airline’s started competing over a regional route, general Commerce Act provisions are largely not particularly effective in stopping the dominant player on a regional route from cross-subsidising and under-cutting the new entrant,” Mr Wigley says.

“Air NZ's competitors are already behind the eight ball.”

The NZ Airports Association has called for the Commerce Commission to regulate Air NZ.

NZ Airport Association chief executive Kevin Ward says domestic flights between major centres are often discounted but he questions whether regional flights are generating excess profits.

“The Commerce Commission could be directed by the government to include monopoly regional airlines in an information disclosure regime. That would be the best way to assure New Zealanders that Air NZ’s prices are fair.”

Air NZ chief executive Christopher Luxon says the airline had not raised the cost of regional tickets for the past six years, despite increasing fuel and airport costs.

“Regional average fares haven’t actually changed over the past six years when the price of bread and milk and cheese is going up…That’s no mean feat to compete and keep prices constant over that period.

“I appreciate people have a perception that our regional airfares are high but we’ve worked really hard – often when we’ve had high cost inputs – to be more productive to make sure our costs are under control.”

What do you think? Should the Commerce Commission investigate Air NZ's regional fares? Click here to vote in our subscriber-only business pulse poll.

cgibson@nbr.co.nz

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Comments and questions
6

It's called competition. The only way to sort this from a government angle is to ask AirNZ for the tax payer money back that it used to bail it out. Otherwise no real say in anything - regardless of how morally or ethically it might be.

Another stupid comment about AirNZ.
The government made an investment in AirNZ and they have been paid back in Taxes, Dividends and the sale of shares.
What is not realised is that the cost of small aircraft is up to 5 more than the bigger ones.

Agree

And how stupid for John Key, technically the CEO of the main shareholder to suggest reducing the profit of Air NZ

Especially when Qantas is losing billions and most other airlines are losing money. Airline profits can vary majorly from year to year so Air NZ should be applauded for it's result.

And didn't the Government sell down shares to Mum and dad Kiwi investors and promise good dividends and returns

Kind of hypocritical

I think Key has a point
I just checked a flight for Nelson Wellington , one way ,next week
Smaller is cheaper
Sounds Air $ 120
Air NZ $ 164 low $ 214 high

John Key couldn't do anything but what he has. He is not stupid. He knows that AirNZ needs to be profitable and healthy, but he also has to be SEEN to be proactive on behalf of ordinary NZer's to at least question the situation, even if there is no room for change.
I'm afraid a large portion of our population have no idea of the huge costs and low margins involved. The international average return was recently reported as being around $3.50 per seat/trip. Hardly price gouging. For instance I believe it costs about $700,000 to move a 747 across the Tasman. That's about $1800 per seat one way!! Clearly the balance is paid by freight. Like-wise our trunk routes have substantial airfreight, but not our regionals, mainly passengers who bear the brunt of fares.
How many people travel 5 days a week from Nelson to Dunedin to justify lower fares? Not enough I would think.

Really

Why has John Key only come out with this comment now during the election campaign then

Hardly as a concern for ordinary New Zealanders as you say - they have been getting ripped off for decades

He is also the Tourism Minister - hardly enhancing regional tourism for the past 6 years with a Govt airline over charging!!

Is John Key like Winston and creating headlines for free coverage for Nationals election campign too??

C'mon you can't all have it both ways