Air NZ's boss defends domestic regional air fares

Air New Zealand [NZX: AIR] chief executive Christopher Luxon has defended its pricing on domestic regional routes, saying it's one of only a few airlines in the world servicing as many smaller towns as it does, and that such routes are often considered uneconomic.

Speaking at the airline's annual meeting in Christchurch, Luxon told shareholders regional airline economics are "very challenging" and will always be more expensive as smaller aircraft operate at a higher cost per seat. Citing unidentified independent research, Luxon said Air NZ covers every town with a population of more than 20,000, compared to just half of similar-sized towns in Australia, Canada and Sweden having air services. The same study showed New Zealand has the cheapest like-for-like regional fares. Australia came in second with prices 29 percent higher.

"The key for us it to up-gauge and get markets into larger aircraft to realise lower costs per seat to keep a downward pressure on prices," Luxon said. "Some markets have sufficient demand that can support the larger aircraft, some struggle and we have to adjust the schedule and frequency of services with the larger aircraft, and then some are so challenged that even at high prices we cannot cover our costs."

Last month, Prime Minister John Key said he had told the airline it should lower regional airfares if it could, and was supported by Commerce Minister Craig Foss, who oversees competition law. Separately, the New Zealand Airports Association lobbied the Commerce Commission to regulate Air New Zealand's regional air fares, where the national carrier has an effective monopoly.

Luxon said one of his priorities this year has been to engage with mayors, chambers of commerce, airport management and business leaders to better understand the needs of regional New Zealand.

"We recently announced our new domestic pricing structure, with four options tailored to what customers value and offering increased flexibility," Luxon said. "This was developed following focused feedback sessions with customers, and the reviews have been extremely positive."

Last month the airline reported a 45 percent lift in annual profit, and announced a special dividend after reviewing its capital structure, something Luxon today put down to turning the international business back into a profitable unit.

"Profit from our regional network has declined over the last five years, and our average regional airfare is down 2 percent over the last five years," he said.

Government data shows domestic air transport prices rose 9.1 percent in the 12 months ended June 30, outpacing the 1.6 percent annual pace of broader inflation. Still, domestic airfare prices were 3.7 percent below a peak in June quarter of 2012, while the broader measure of consumer prices was up 2.3 percent over the same period. Over a five-year period, domestic airfares rose almost 13 percent, while the consumers price index increased about 11 percent. International airfares rose 18 percent over the five-year period.

Shares of Air NZ fell 1.5 percent to $1.94, and have climbed 26 percent this year, outpacing the 6.7 percent gain on the NZX All Index over the same period.

(BusinessDesk)