Submission regarding airline alliance

Submission to The Minister of Transport on the Air New Zealand / Virgin Blue Alliance from the Wellington Employers’ Chamber of Commerce

Introduction

The Wellington Employers’ Chamber of Commerce is pleased to be able to make this submission to the Minister of Transport on the application from Air New Zealand Ltd and Virgin Blue Group (the airlines) on the proposed alliance on Trans-Tasman services.

The Chamber has membership of 1,600 businesses in Wellington City. It works closely with other chambers in the region and is part of the Employers’ Chamber of Commerce (Central)1. While most of our members are in the small to medium enterprise category we also have as members 15 of the largest 20 companies in New Zealand.

The Chamber advocates policies that reflect the interests of the region’s business community and the development of the Wellington economy as a whole. In this regard it is a strong promoter of improved international transportation links. Not only are international passenger links important for Wellington as a tourist destination, it is essential that local businesses have sufficient choice and access to cost effective international flights. We believe that competition on air routes is the best way to deliver cost effective customer services and is also ultimately in the best interests of the airlines.

For these reasons the Chamber does not support the proposed alliance. As well as making this submission, we have put our name to a submission from key Wellington stakeholder organisations opposing the alliance. We have also made a submission to the Australian Competition and Consumer Commission.

Impact on the Wellington economy

We see the proposed alliance as essentially a merger of Air New Zealand and Pacific Blue’s trans-Tasman operations. Contrary to the claims of the airlines that it would result in lower fares and an increase in competition on the Tasman, we fear it would result in increased fares and reduced flights. The impact of this would be fewer visitors to Wellington and fewer opportunities for Wellingtonians to fly to Australia affordably and conveniently. Overall, it would have a detrimental impact on the Wellington economy.

Wellington has strong business linkages with all parts of Australia which depend on competitive and cost-effective air-connections. A number of regional offices of Australian businesses are based here and vice versa. There are significant twoway trade flows. There are also strong government to government links. The linkages - outbound and inbound – would be diminished under the alliance. The tourism sector (including retail, hospitality and accommodation) would also be greatly affected. Wellington is an increasingly popular tourist destination for Australians and the decision comes at a time when the region has made a concerted push to promote Wellington in Australia and increase visitor numbers. The government and rate-payers have made a financial contribution to this campaign. Without affordable and convenient trans-Tasman flights this goal would be threatened and the marketing effort, as well as committed tax-payer and rate-payer funds, would be wasted. In assessing the costs and benefits of the proposal, this is an additional cost that needs to be taken account of.

Insufficient details and speculative benefits

It is important to note that many of the claimed benefits of the alliance around frequency and fares, as specified in the application and accompanying media release, are speculative only. We are concerned that the alliance is being sold to the public and regulators with “expectations” of increased frequency and lower fares. While we acknowledge it is difficult to give commitments here, no good evidence that they are likely to eventuate has been provided.

As well as this, there is not enough detail as to what is proposed regarding number of flights and schedules etc. This is withheld either for confidentiality reasons or due to decisions yet to be made. While it is not possible to predict market developments, or total passenger numbers, the Airlines should at the very least be able to state what is proposed in terms of their daily flights.

The proposed alliance should be referred to the Commerce Commission

The airlines’ application has been made pursuant to Part 9 of the Civil Aviation Act (1990). This is the relevant legislation in New Zealand. However, we believe that the proposal needs to be considered by the Commerce Commission which is the body best placed to assess the competition impacts of the proposal.

If the legislation does not allow the Commerce Commission to fully investigate the proposal, the application should be deferred until that is possible. If it is not possible to defer the application and have the Commerce Commission consider it, then we think the Minister should decline the application.

The Minister’s powers under section 88 of the CAA are limited to authorising agreements to the extent that they relate to the fixing or application of tariffs, or the fixing of capacity, or a combination thereof.

The alliance incorporates a number of things that are outside the scope of section 88. These include revenue allocation between airlines, integration of scheduling, route collaboration, planning of flights and agreeing minimum service standards and pricing of airfares. All of these would be of interest to the Commerce Commission.

The fact that the New Zealand government is an 83% shareholder of Air New Zealand means the government has a definite stake in this outcome.

Notwithstanding the fact that the Minister’s consideration of the proposal will be made as a regulator and not as a shareholder and that there are Chinese walls that exist between the two roles, if the alliance is approved the government will still be open to the perception that it was conflicted in the decision. This is another reason why the independent Commerce Commission should be making the decision not the Minister.

Fares, frequency and capacity

Pacific Blue and Air New Zealand are two of the three most dominant trans- Tasman airlines and currently the competition between the two is strong. Consequently the market environment would change significantly if the alliance is approved and that competitive element is reduced or eliminated.

Therefore the claims made by the airlines with regard to fares, frequency and capacity need to be carefully tested.

We have assessed the proposal and, as already stated, are not convinced that the alliance would deliver cheaper airfares and increased frequency as claimed by the airlines. On the contrary, we think the proposal is likely to substantially lessen competition in the trans-Tasman market and, as outlined below, potentially result in higher fares and reduced opportunities to fly between New Zealand and Australia.

This has been the experience in the past where reduced competition has led to diminished capacity and increases in average fares (particularly the lowest available fares).

For example, Pacific Blue has been introduced to the Wellington–Sydney route on two occasions causing significant growth in passenger numbers both times. When the services were discontinued the first time, after a 15 month period, passenger numbers returned to their previous level.

A similar story has played out with airfares. When Pacific Blue services were introduced on the Wellington-Sydney route the first time in March 2004, average fares for the following 12 months were around 20% lower than the preceding 12 months. When those services were discontinued in June 2005 average fares for the following 12 months were 15% higher.

Most of the increases occurred at the lower/leisure end of the market rather than the business end but this is still relevant to business travellers, particularly smaller businesses and business owners, who depend on competitively priced fares.

Looking across New Zealand airports at the current time it is easy to show that flights to any Australian destination are cheaper from airports where there are more operators. It is also true that the more operators the cheaper the flights tend to be. The Wellington stakeholder submission which we have signed up to contains data providing evidence of this.

This has disadvantaged Wellington where fewer operators and fewer flights have contributed to higher fares on average. Frequency of flight and level of airfare are the predominant determinant of passenger numbers into and out of an airport. It is interesting to note that 90% of people travelling from Nelson to Sydney, for example, choose to go via Auckland rather than the much closer Wellington or Christchurch. This is likely to be because the greater number of flights and in turn the cheaper airfares available from Auckland make it a much more attractive option.

The combining of the operations of Air New Zealand and Pacific Blue, as is proposed by the alliance, is effectively a reduction in the number of competing airlines operating on the Tasman and most likely a reduction in flight capacity and passenger numbers.

The airlines claim the alliance will provide increased frequency and additional capacity by combining service offerings but passengers already have the ability to fly with either airline so this does not constitute an increase from the passenger point of view. We think a more likely scenario would be a gradual reduction in aggregate frequency and capacity by the airlines with increased load factors the aim.

While higher load factors have the potential to reduce fares there would be less incentive to pass on the lower costs under the less-competitive environment brought about by the alliance. We think that a competitive environment (as we have currently) is best able to provide a spur to lower fares.

Whether there would be any barriers to entry and expansion under the alliance would also need to be investigated. We think competition from any new carrier would be less likely in an environment dominated by one or two airlines.

Wellington is particularly vulnerable here because unlike Auckland and Christchurch there are no fifth freedom carriers servicing Wellington. Additional products and services

We acknowledge the airline’s stated benefits in the form of onward connectivity, better connections, expanded lounge access and loyalty scheme reciprocity but we think these benefits are overstated relative to the likely impact of diminished competition, higher fares and reduced flights.

While these features are positive aspects of the alliance, it should be noted they are not significant drivers for increased travel as implied by the airlines (price and frequency are what matters most) and they are certainly not sufficient to outweigh the aforementioned costs.

The alliance should be considered ‘route by route’

While we are opposed to the alliance as a whole, we are particularly concerned about the Wellington trans-Tasman market. Not only is Wellington where our membership is based, the Wellington market has fewer operators than other New Zealand centres and so is something of a special case.

Currently there are only three competitors operating scheduled trans-Tasman services to Wellington. Three on the Wellington-Sydney route, two on the Wellington-Melbourne route and two on the Wellington-Brisbane route. The alliance would leave these at two, two and one respectively resulting in an effective duopoly in the first two and a monopoly on the latter.

If there is a case for the alliance from a national perspective, and we do not think there is, this does not apply to all routes and we think, at the very least, Wellington and other routes where competition is diminished considerably should be excluded from the alliance.

In this regard it is important to note that the trans-Tasman passenger market is not a single market. Accordingly, the effect of the alliance on individual routes needs to be considered.

In travelling the three-hour flight from Sydney to Wellington, say, going via Melbourne or Auckland is not usually an option due to the doubling of the time taken (unless there are no seats offered directly on the preferred day at the required price) and so the number of direct flights from centre to centre is the relevant metric – not the number of trans-Tasman flights generally.

Concluding remarks

In assessing the proposed alliance, it needs to be considered whether there are sufficient public benefits which would outweigh the anti-competitive and other costs associated with it.

This is at least the third time in a decade that airline operators have attempted what we consider to be anticompetitive trans-Tasman strategies. It is frustrating that these companies should be pursuing such schemes rather than focusing on

improving their competitiveness. Thank you for the opportunity to make this submission. We are happy to elaborate further on any point.

Summary of recommendations

1. The Wellington Employers’ Chamber of Commerce recommends that: the application be referred to the Commerce Commission for scrutiny as this body is better placed to consider the implications of a loss of competition.

2. If the legislation does not allow the Commerce Commission to fully investigate the proposal, the application should be deferred until that is possible.

3. If it is not possible to defer the application and have the Commerce Commission consider it, then the Minister should:
- carefully consider the airline’s claims that the alliance will result in reduced fares and increased passenger numbers and note that recent history would suggest that this is unlikely.
- consider the effect of the alliance on individual routes and not treat the Tasman as a single market.

4. Having considered the application, we expect the outcome should be that either:
- authorisation for the applications be declined due to the public costs of the proposal exceeding the benefits, or
- routes with significantly reduced competition (being resultant duopolies or monopolies) be excluded from the alliance.

5. If the alliance is authorised:
- checks should be carried out to ensure that the improved services are delivered and the approval should be withdrawn if they do not eventuate, and
- rigorous conditions should be set to ensure that the negative implications of the alliance are ameliorated.

ENDS

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