Social objectives may appear on government's agenda for Air NZ

Friday 26th October 2001

International security requirements are now imposed at New Zealand airports for domestic flights. Absurdity reigns supreme under the new regime. On a recent flight from Wellington to Auckland I was required to divest myself of even my suit jacket so that it could be x-rayed. I had already packed my fountain pen in my suitcase to avoid it being confiscated. After all, the pen is mightier than the sword.

Having boarded my weapons-and-Waterman-free Air New Zealand flight, I was intrigued to be served a meal accompanied by metal cutlery. Knives and forks capable of killing were provided, along with a wine glass that would have made a handy throat slitter for a terrorist and a glass bottle that might serve as a cosh. So much for saving passengers from being slammed into the Beehive. Air safety New Zealand-style is illogical in its application.

To be fair, Air New Zealand is still a better domestic deal than Qantas for the business traveller. One can get a drink on the homegrown airline, the food is passable and the staff helpful and friendly. On the latter airline it is necessary to provide identification even to get on a flight. The staff and crew often seem unhappy. The food is a bit scanty and the journey is a dry old party.

When I asked one Qantas stewardess about how soon before the airline got a liquor licence for domestic routes, she bellowed my question down the aisle to the purser, whose reply was, "Dunno!" She then walked off without another word to me. And then there is the gaffe of showing a constant stream of video promotions for Australian travel destinations on an airline trying to build its New Zealand presence.

It remains to be seen whether standards will be kept up on Air New Zealand as an airline majority-owned by the government. Other airlines, such as Singapore International Airlines, are in a similar position, but remain highly regarded for their standards nonetheless. However, if 800 Air New Zealand staff are on the skids, then other things might slide as well.

Of more particular concern to shareholder (taxpayer) value in the airline would be whether it is required to perform social services such as maintaining unprofitable provincial routes that bean counters would simply eliminate. Air New Zealand has allegedly in the past cross-subsidised some of these feeder routes in the way it charges on main trunk journeys. Such a practice would imply higher prices for trunk route flyers. Whether doing this sort of thing adds to shareholder wealth is a moot point. Having "saved" Air New Zealand, the government may be tempted to add social objectives to the company's commercial goals, which could diminish eventual returns from selling out of the carrier in the future.

Competition concerns also arise. Richard Branson's Virgin Blue was knocking on the door and trying to get in to the transtasman and New Zealand domestic markets.

His discount airline got a cool reception from the government. Now that the same government has earmarked $885 million for majority ownership of Air New Zealand it may have a conflict of interest over allowing a cut-throat discounter like Virgin into our skies.

Mr Branson's aggressive pricing strategies would slice into Air New Zealand's margins in a price war that would reveal what the true costs of domestic and transtasman air travel could be. Otherwise we risk continuation of the effective duopoly we have suffered under Air New Zealand and variously Ansett, a Qantas-badged franchise and Qantas itself, wherein they tend to match each other's fares without necessarily intensifying price competition.

Consumers would benefit and the economy could get a boost from cheaper air travel, but Air New Zealand might not produce such a good return for taxpayers under such conditions. The government needs to clarify how it is going to deal with any potential conflict of interest, especially as its intercession is required to permit Virgin Blue to fly here. The same would apply to any other new-entrant foreign airline that wanted to compete with Air New Zealand.

The shock to the international aviation industry of world recession coupled with the events of September 11 has caused governments to intervene and front up with funds to bail out struggling operators. The Economist, long a trenchant critic of the industry, has attacked the provision of public monies without concomitant requirements for competition reforms and greater arising efficiencies. Governments have perhaps a unique but temporary opportunity in holding the pursestrings to force airlines to clean up their act.

Our own government is in a similar position, but whether it chooses to work for the public benefit and permit genuine competition to drive reforms here remains an open question.

In the meantime, discount airline share prices are on the rise while full-service operator stocks continue to languish, according to some investment websites.

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