Forum Archive Index - December 2002

["Capitalist" <capitalist@paradise.net.nz>]

Here is Gareth's article FYI.

 

Qantas deal - just deserts for a mug public

industry policy - 27 November 2002

From the crescendo of squeals emanating from across New Zealand anyone would think the Air New Zealand–Qantas deal was not inevitable. The day the government decided to re-nationalise Air New Zealand was the day it broadcast loud and clear that it had no concerns to preserve competition in our domestic skies.

Polls of public opinion indicated at that time that Kiwis overwhelmingly supported the ego-driven preservation of our flying flag pole. Now the dopiness of that consensus has been revealed it’s depressing to see darby and joan coming out in their thousands bemoaning the elimination of competition. If these silly voters hadn’t clamoured for their elected representatives to save the ‘national carrier’ a more rational outcome would have emerged last year.

The facts were always out there. Air New Zealand needed more capital than the measley $1bn the taxpayer stretched to inject. It is operating in an international business where most participants are prepared to run at a loss. And to play in that sandpit you need deep pockets – far deeper than any sustainable private enterprise of a New Zealand scale could raise.

There were then a couple of courses open to the government at the time of Air New Zealand’s haemorrhage last year. It could just have avoided any direct involvement and stuck to its regulatory knitting ensuring whatever happened in the private sector resolution of the industry the most competitive outcome was facilitated. To do this it would have had to deregulate our domestic skies to all-comers and open up reciprocal landing rights as well. That would have delivered the most competitive, low cost solution and without doubt the best deal for users of air transport. As part of that course we may have ended up with the disappearance of the Air New Zealand brand as its business was absorbed by some other player. But any objective economic assessment would have weighed that up against the benefits to the economy from having a lowest cost, competitive air transport industry.

The other alternative, which was the one the government has half-heartedly embraced was to preserve the flag-carrier with taxpayer funds and commit to continually underwrite the company – either by continuing to write cheques or via regulatory protection and locking out competition. By letting politics have a say in the so-called “national interest” this is the mud bath the industry and its customers have been tossed into.

The government opted for the politically easy, but most damaging economic choice. Like the possum in the headlights it’s political expediency has left it stranded in the middle of the road as the approaching reality of sustaining a high cost outcome has too slowly dawned upon it. The protective walls government has chosen to keep in place guarantees the survival of a high cost airline and they suck cash like crazy.

Inevitably it has dawned on the airline’s major shareholder that its fiercest competitor could pick it apart by loss-leading into its routes. The political sensitivity of having to keep going back to taxpayers to keep our insignia on the fuselage would be bound to bring the political commitment to keeping Air New Zealand going to an early end. So it has been.

So instead of the government allowing a low cost outcome it is now faced with admitting a shareholder into Air New Zealand that will guarantee that the most cost-effective, economically efficient outcome eludes New Zealand. This is not clever at all but then the politicians on this issue have simply chosen to stumble along the politically easiest road – a dumb, ill-informed and emotionally-attached public driving such an equally intelligent response from Wellington.

Even if the government one day makes a notional profit on its share trades – which is by no means a certain outcome yet, as the Qantas purchase is of new shares, not the government’s – the politically inspired strategy Cullen and co have pursued is undoubtedly to New Zealand’s economic detriment. The economic cost will be in the form of the higher costs borne by all New Zealanders who use air transport – that will far exceed any silly little share price gain government may one day make.

As you would expect the economic vomit this deal throws up is being disguised determinedly by Air New Zealand itself with its new express service, cattle-class travel being for now a cheaper alternative. Actually there is no alternative – like it or lump it is the real offer. And we can expect there will be all manner of assurances that cut-price fares will remain – I’m sure they will in order to satisfy any threat of a wet bus ticket slap from our competition watchpuppy. That there will end up being only two such seats available per flight is of course for the future – when public grieving over how they’ve been diddled has died down.

Meanwhile an intense soft-selling PR spin of this protected monopoly will no doubt delude the most gullible of the public thus making the path to vindication for government and their lackey appointments to Air New Zealand management that much smoother. Throwing a crumb to “troublesome” Virgin Blue in the form of the pepsi and chips market is little more than doffing the cap of protectionist privilege in the part-time spirit that is competitive tokenism.

This is a tragedy, it is sheer economic policy incompetence, there is no public interest at heart, we have a blatant case of political expedience (for that read cowardice) combined with economic illiteracy delivering the worst economic outcome. What amazes me most is there was no political opposition to the government bailout in the first place. How far our parliament has moved over recent years from an elected body with some modicum of respect for the public good to a gabble of snivelling, crawly and cynical pork-barrelling vote-grabbers.

One year after getting a $1bn injection Air New Zealand needs another $550m and wants to suck a further $200m from gullible Kiwi investors next year in a rights issue – all to make it in a protected duopolistic, inevitably high fare market. If that is not a damming testimony of how impossible it is to run a small airline in a small market then New Zealanders are unlikely ever to take the decisions necessary to stop the economic vandalism of the type that is State-protected, management-cosy, economic welfare-inhibiting misuse of scarce resources.