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.”

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cgibson@nbr.co.nz