Saving Air NZ: So What's The Real Deal Michael?

Note: Scoop is a supporter of the Save Air New Zealand campaign...

On http://www.comcom.govt.nz there are 70 submissions to the Commerce Commission on the merger. The Commerce Commission has said it will publish a "draft determination" in Early April.

Most submissions are in opposition to the airlines' two applications, but those that are supportive, for instance, from the New Zealand Amalgamated Engineering, Printing & Manufacturing Union and Tourism Industry Association, are interesting.

They support the transactions for their benefit to Air NZ, but recognise that it would be necessary to then introduce measures to protect consumers.

As the Union submission notes " Protection against unjustified price hikes can be achieved through price control measures."

This is complete nonsense. There is no example anywhere of controls on airlines protecting consumers. All (NB. All!) evidence is that the removal of "protections and controls" results in competition and better cheaper terms for consumers.

In effect the merger supporters support is conditional on something demonstrably unworkable, does that still constitute support?

Two opposing submissions of particular note are those of Save Air New Zealand and a group of interested parties lead by Mayor Kerry Prendergast. The Mayor's submission was prepared by lawyers Chapman Tripp and economists LECG and merely addresses the Airline case rather than delving into particular sector interests.

[ To view the submissions in Adobe PDF format see…
http://www.saveairnz.org.nz/SaveAirNZSubmission.pdf)
&
http://www.saveairnz.org.nz/WellyMayorAndOthersSubmission.pdf ]

To illustrate just one example of the implausibility of the benefits "identified" by the airlines. (which happens to be the largest one). The airlines claim that if the transaction progresses, Qantas will spend an additional $14 million pa. marketing New Zealand, and this will increase annual tourist numbers by 50,000 and provide the country with a benefit of $645million over five years.

It can be noted that not one piece of "evidence" exists to substantiate Qantas' intentions and they would not be bound to spend the money. As to whether it is even plausible, LECG's analysis of the economics makes it seem very unlikely that Qantas would spend the money and very very unlikely New Zealand would see any benefit. Consider the figures. Qantas' hypothetical $14million averages out at $280 for each additional tourist. If this tourist flies Air New Zealand, Air New Zealand will have to make $1,244 after tax profit from that passenger for Qantas to break even on the deal! ie as Qantas would own 22.5% of Air New Zealand, if Air New Zealand made $1,244, Qantas' share would be $280.

Given the clearly shonky nature of the benefit calculations, it is no surprise that Mr Norris is now assuming that the Commission will not find the transactions to be in the National Interest. Don't underestimate the importance of this admission. Air New Zealand's CEO is saying that the $1.2billion ($1,200,000,000) benefit the airlines thought they had found back on 23 December is now all gone! Make sure that the next claim the airlines raise is assessed in the context of this vanishing trick.

For most people, the big issue is "what will a loss of competition mean". None of the economists really addresses this, but the Save Air New Zealand submission has some interesting facts from the NZ department of statistics and the Australian Bureau of Transport & Regional Economics. Between September 1994 (the earliest Australian figures that are available) and September 2002 (the most recent available figures):

Australian domestic "Best Discount" fares fell 10.9%.
Australian domestic "Discount" fares rose 9%.
Australian domestic "Business" fares rose 20.7%
New Zealand international air travel costs fell 5.2%
New Zealand domestic air travel costs rose 45.5%

What is the difference? In Australia there is competition for Qantas at the "budget" end of the market from Virgin Blue and there are competition international services to and from New Zealand. The message is "don't underestimate how much fares could rise without competition."

The LECG analysis of the merger is so damming that it may well have precipitated the climb down of Dr Cullen and Mr Norris this week. Their admission that the airlines' applications are merely a straw man with the "real deal" only to surface once the Commerce Commission has given its draft determination is totally in keeping with the furtive exclusive way this deal has been managed by Dr Cullen and Mr Norris thus far.

What is the "real deal"? It will no doubt depend on the arithmetic of the Commission.

Perhaps Freedom will be sold? Perhaps Air New Zealand's international and domestic arms separated?

There is always the delightful possibility that the "real deal" is "no deal".

Perhaps all this has been a cunning charade by Air New Zealand to keep Qantas at bay while Air New Zealand mended its operations after the Ansett Debacle?

That would be a truly Australian twist.

See…. http://www.saveairnz.org.nz for much more information on the proposed merger

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