Wednesday, April 26, 2006

Jim Eagles: Living in sin may be costly

Having had their previous marriage plans blocked by our competition watchdog, Air New Zealand and Qantas now hope we'll all be happy if they live in sin instead. They've even agreed to call off their earlier engagement (with Air NZ promising to repay the $98 million dowry it got from Qantas).

But should their proposed codeshare on the transtasman market really make Kiwi travellers happy? I'm far from convinced.

It is certainly true that the international aviation market is a tough place to survive and a tiny sparrow like Air NZ is at particular risk of being torn to pieces by bigger, richer birds of prey. It is also true that if Air NZ can get into bed with Qantas - the fattest buzzard in this part of the world - it can do a lot to improve profits and safeguard its future.

But what is good for Air NZ is not necessarily good for the country in general or for the individual traveller.

When it came to the planned marriage of the two, the Commerce Commission ruled that securing the existence of our national carrier was a lot less important than preserving competition in the aviation industry. It concluded that if Air NZ and Qantas were allowed to get together prices would rise and service levels would fall.

The proposal to live in sin offers some improvements over the previous scheme. It avoids the problem of how to deal with the domestic market and it maintains the present level of competition in the Pacific and long-haul markets.

But it still has serious implications for the transtasman market which is, after all, crucial to New Zealand travellers. More than half the trips we make overseas each year are to Australia and a high proportion of the rest go via Australia.

In support of their proposal Air NZ and Qantas argue that the transtasman market is highly competitive with 13 airlines battling for passengers.

But the fact is the two airlines, and their low-cost subsidiaries, have around 70 per cent of that market with the others only nibbling round the edges.

Furthermore, the nine airlines which share the remaining 30 per cent mostly cross the Tasman as part of longhaul routes which start and finish elsewhere. By the time they get to New Zealand they often don't have many empty seats, usually depart at strange hours and offer limited timetables.

If you're a casual traveller looking for a cheap flight to Sydney and don't care about the timing, that sort of arrangement is great. But if you're a business person heading for a meeting, or a family planning a holiday in Adelaide, Air NZ and Qantas are probably your only option.

The Commerce Commission's decisions and practice notes indicate it is not keen on arrangements between organisations which between them control 40 per cent of a market, let alone 70 per cent. That is for a good reason. Competition keeps companies honest.

The two airlines have indicated that the economies from codesharing will mostly come from reducing the number of services. For instance, Air NZ and Qantas fly 10 times a day between Auckland and Sydney. They plan to reduce that to eight, though the flights will be spread more evenly through the day.

With fewer flights, and fewer empty seats to be filled, what does logic suggest will happen? As Brent Thomas, retail manager for House of Travel observes, "The reality is that with this scenario comes reduced capacity and the simple laws of economics tell us that at some point in the future ... airfares on the Tasman will rise."

Of course. If the two big supermarket chains were allowed to co-ordinate prices and shut down stores close to each other, if the big oil companies were given approval to work together openly, if Telecom was allowed to sort out phone charges with Telstra Clear and Vodafone, would you expect prices to rise or fall?

Air NZ and Qantas maintain that, contrary to what happens everywhere else, by working together they will be able to afford to retain the present low airfares.

But when the Commerce Commission looked specifically at the effect the proposed merger on the transtasman market it concluded that within three years fares would rise by 16 per cent.

And there seems to be little difference between the effect the merger would have had on the transtasman market and the way the new codeshare scheme will work.

What is different this time is that unlike the merger plan the codeshare proposal does not have to get approval from the Commerce Commission. It only requires the assent of the Minister of Transport.

That is a worry. If the marriage had gone ahead, Finance Minister Michael Cullen would have been best man at the wedding, so eager was he to get rid of his responsibilities as financial godfather to Air NZ.

Hopefully this time Cullen and his colleagues will give more thought to the reality that if marriage between Air NZ and Qantas would have been bad for the children - the travelling public - there's no reason to think living in sin will be any better.


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