Sky-high domestic prices?

Tiny New Zealand suffers from a lack of competition across many sectors, not least for domestic air travel.

This fact was in stark relief when Air New Zealand recently announced substantial increases to its long-term domestic prices on all routes.

No percentage figure was given. The company can get away with this because it controls about 85% of the market.

The domination has allowed Air NZ to already increase domestic average airfares, perhaps by more than 30% over a year ago according to one calculation.

To no-one’s surprise, the same take-off has not occurred for overseas flights, where competition is ramping up.

Air NZ is having to sharpen its act, especially for North America.

The only notable domestic competition is from Jetstar, and that is just between Auckland, Wellington, Christchurch and Queenstown plus the link between Auckland and Dunedin.

A Horizon Research survey from March found the domestic airfare market was considered by 75% of respondents the least competitive in New Zealand, beating even supermarkets, banks and petrol companies.

But while competition is key to price, the New Zealand market is small, and Air NZ naturally guards its territory.

The bold attempt by Ansett NZ to break the stranglehold between 1987 and 2001 ended in tears. Qantas also pulled back, leaving its Jetstar subsidiary as the only other substantial player.

Air NZ had all sorts of excuses for the increases, with some truth in some of them. Its costs will have climbed along with just about everything else in this country.

Wages are up, as are jet fuel costs. The company also cites softening demand, a follow-through from straightened economic times.

Of course, one way to soften demand further is to increase prices.

Air NZ, which is listed on the sharemarket, has reported downgraded profit guidance, although the range is still $190million to $230m.

Airlines are prime users of ‘‘dynamic’’ pricing. As a business, they endeavour to bank early bookings outside peak times and then crank fares up for the likes of school holidays and around Christmas.

But while hotels might throw out late discounts to fill empty beds, most airline prices rise close to departure time.

This is especially so if fewer seats are left. In this way, the airline can make big money from those who need to make late decisions through business or family crises, including travel for funerals.

Because of the lack of effective land alternatives like brisk rail, customers have little choice but to cough up in some instances hundreds of dollars for relatively short flights.

This occurs, for example, between Dunedin and Christchurch. This undermines again New Zealand’s business competitiveness and causes public resentment.

Frustration is magnified because of the lack of solutions. It is even harder to envisage effective competition than for supermarkets or banks.

And it should be acknowledged airlines are a tough business.

At least, as Consumer NZ has called for, it would be helpful to have more transparency.

Another Commerce Commission sector market study might not achieve much but Air NZ would have to better justify itself. Perhaps consumers would not be as resentful at the near monopoly if the prices were seen as fairer.

After all, not only do taxpayers own 52% of Air NZ, but the Covid pandemic showed it was too important to fail. The Government came to its rescue.

Air NZ will have to administer stricter standards for cancelled, delayed or substantially changed flights as well as on fee transparency for its United States operations thanks to new US Department of Transport rules.

Some of these should be extended to New Zealand.

Interestingly, Australia’s Competition Taskforce has said that fares fell by 29% when a second airline was on a route and another 31% if there was a third airline. Australia, too, has its airfare price issues. The one silver lining is that higher prices could lower demand further and therefore reduce the detrimental climate effect of flying.