Fair regional airfares

It must be election season. A nothing story about a couple in Nelson complaining about what they paid to fly to Dunedin caused the Prime Minister to chime in and the story ended up on the front page of stuff.co.nz.

To be fair to the PM, his heart wasn’t really in it. With every equivocation imaginable he says: “I’ve made it clear that I think Air New Zealand needs to continue the work it’s doing while making sure that it reduces prices to the regions if it can.” And then in the next breath he congratulates Air New Zealand for being one of few airlines around the world making profit.

In between, he acknowledges that Air New Zealand might be in a position to exploit its market power, and that’s the interesting bit of the issue. But first lets pause on the specific complaint that began all this. A couple had to travel from Nelson to Dunedin for a funeral. They bought last minute fares and paid $340 per person per sector. And they were grumpy about that, but that’s more to do the structure of airline fares than whether Air New Zealand is abusing monopoly status.

Airline fares tend to be more expensive towards the date of travel even though the airline is essentially selling the same product regardless of when its bought. This price discrimination is used to increase airline profit. But it also means that cheaper tickets are available to folks booking well in advance who might never be able to afford to fly if fares were priced constantly. Business travelers who are more likely to be making last minute bookings are therefore effectively subsidising other travelers without complaint. It’s only when travelers who generally pay lower fares need to travel urgently that complaints arise. My sympathies to the couple involves, going to a funeral is one such example, but they’re rare and the general model is good.

But Air New Zealand’s a monopoly, right?

Okay, enough trolling. The big question is whether Air New Zealand’s fares represent an abuse of its market power because on the face of it, it does have a monopoly: it’s the only carrier offering connecting flights from Nelson to Dunedin. I’m not convinced this is the case. First, $340 for Nelson to Dunedin is not much more than you would pay for a last minute fare from Auckland to Christchurch or Welligton tomorrow a route in which Air New Zealand faces competition in the for of Jetstar. Flying AKL-CHC tomorrow will cost you $299, about 15% less. Second, a large part of that difference is explained by the higher costs of flying to regional destinations. Smaller aircraft and smaller airports mean fixed costs are spread across fewer passengers.

The question then becomes, why isn’t Air New Zealand abusing its market power? It’s company with a duty to its shareholders to turn a profit. Partly because ground transport creates come competition. But more because the threat of regulation. Regulators are meddlesome and their rulings cumbersome. Their potential can be enough to keep some (though certainly not all) monopolies in check. I posit the same is true for New Zealand Post, which goes so far as to self regulate access to its network for other providers.

Ordinarily I’d say the threat of competition also keeps prices in check, but I don’t think that’s true in this context. The market isn’t genuinely big enough to sustain competition. The last airline to try, Origin Pacific, lasted for only a couple of years. It’s been hard enough on trunk routes where by my count seven airlines have had a go in the last twenty years. The Air New Zealand/Jetstar combo with jets between main centres is the most stable we’ve had in that time and likely to stick around. So too, I’d say, is Air New Zealand’s relatively benign monopoly on regional routes.

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