Air N.Z. foresees ‘ruinous competition’ in fares war

Press, 14 April 1979, Page 11

Air N.Z. foresees ‘ruinous competition’ in fares war

’ The United States policy of “deregulating” airlines would eventually lead to “ruinous competition in an all-out war for survival,” said Mr N. R. Searle, Air New Zealand’s director of marketing, in a paper presented to the airline’s media forum in Auckland. Mr Searle warned that the policy could also lead to the elimination of some airlines and a “return” to higher fare structures. “Sooner or later both the airlines and the users will be the poorer,” he said. “Deregulation means a total absence of constraints in terms of fare setting so that purely economic laws of supply and demand can determine price. This is fine in theory, but in practice leads to price cutting in the competitive market-place to. such an extent that fares are filed which do not cover costs,” said Mr Searle. The effects of costs exceeding revenue had already been felt in North America, and “more than a dozen” major trans-At-lantic carriers had filed for increases of between 8 per cent and 15 per cent on incentive fares.

.Mr Searle said that although the incentive fares had increased traffic, the percentage of the other market segments had dropped into the lower yield bracket. “The overall result has been a sinking average yield,” he said.

Referring to the public’s expectation of lower fares, Mr Searle said: “It is inconceivable that air fares across the board can be reduced. Airlines and Air New Zealand face rising costs at least proportionate to world-wide inflationary trends.” A DC 10 aircraft which cost SI6M in 1973 now costs S32M, while a voltage indicator which cost 5290 in 1972 now costs 8637, he said. “Oportunities for greater productivity are almost exhausted although we are continually looking for ways to increase the passenger and cargo capacity of our aircraft.” Mr Searle said that seemingly dramatic new incentive fares were grasping public attention, but only a small percentage of people would ever be able to take advantage of them because of their "necessarily restrictive” nature. Meanwhile. the basic economy and first class fares were generally being increased.

“I repeat: the bulk of passengers through circumstances cannot use the low incentive fares, but still the public clamours for them and rejoices in

each announcement,” he said. “In time, we believe the consumer must rationalise this situation and accept the compromise.”

Mr Searle said that Air New Zealand was often charged with failing to take the initiative in fares.

“Geographically we are in a position where we are forced in many instances to react rather than be the trend-setter,” he said. “We are straddled by the mass population bases of Australia and America on one hand, and by the sparsely populated Pacific Islands on the other. “It is also relevant that there are only penguins behind us — and they rarely fly. We have had to

face reality and accept that we are not in a position to call the tune bn fare concepts which will be applicable in many market-places outside our direct control.”

Unfortunately, said Mr Searle, the public and industry in New Zealand would see confusion and complications during the next 18 months. Beyond that period there would probably be a simplification process. It was a pipe dream to think of cheap fares with no strings attached, he said. Another speaker at the forum, the airline’s director of international affairs (Mr D. F. Toms) also dismissed the possibility of a new era of low fares and increase in the number of travellers. “Let’s be careful about words like ‘low fares,’ ” he said. “There is no magic which suddenly reduces an airline’s, costs. And, whatever the zealots might say, airlines like ours have had to meet competition and we are not grossly inefficient.” Mr Toms said the general level of fares could not come down, especially in the face of rising costs.

“There’s a fair amount of optical illusion — trapdoors and mirrors — in all the ballyhoo about fares. Also a lot of inconvenience. discomfort and hidden costs for travellers and public authorities.” The new treaty provision being offered by the United States turned the old one upside down, he said.

“The orthodox says that both governments must approve new fares, but either can stop a fare it considers objectionable. But the new prepared American version says that governments should not intervene at all unless fares are ‘predatory’ or ‘discriminatory’ and even then, no fare can be disapproved unless both Governments say so,” said Mr Toms.

“That’s a pretty fair degree of freedom — especially as neither the Americans nor anybody else knows what ‘predatory’ means. The American and the British Governments have a sophisticated joint committee studying such matters, and they can’t define the word.” Mr Toms describes New Zealand as “a country caught between new Australian and American policies.” “We are not like Belgium or the Netherlands - there are no roads or railways connecting New Zealand to a vast hinterland, to support greatly increased numbers of flights between the United States of America and New Zealand.

“Even in New Zealand we have very limited capacity for instant tourist growth. There is a shortage of hotels. We are further hampered by an antiquated approach to foreign investment, and a travel tax which is harmful to the national economy. “Our only real hinterland is Australia. However, the Australians have simply refused to let us file the lowest fares from Australia to the United States and have cast doubt on permitting us to compete for traffic out of the States to Australia. “At the same time the Americans would like us to agree to ‘open slather’ between their country and New Zealand, but if the traffic on the routes is reduced by Joss of Australians, and cannot possibly be vastly increased through inward tourism, dumping of capacity by American carriers must carry enormous risks and very doubtful benefits for the country,” said Mr Toms.

In answer to suggestions that New Zealand might not be able to maintain an international airline, Mr C. W. Beresford, Air New Zealand’s general manager, corporate services, said the question should be whether the country could afford not to have its own flag carrier.

The airline had a total cumulative net profit to March 31, 1978, of 543.3 M.

“Of greater importance for New Zealand in view of our continuing balance-of-payments deficit is the established ability of this New Zealand-owned enterprise to earn foreign exchange from the international operation,” he said. The airline’s net earnings and savings of overseas funds had climbed from SI9M in 1970 to SIO3M last year.

“To have our own international airline is to have a link with the outside world owned and guided by this country’s needs, not dependent on the priorities and needs of other nations — their

economic, political or social stability, their whims or seasonal traffic loads,” said Mr Beresford.

Defending the airline’s domestic division against criticism that fares were too high, Mr M. A. Ransaen, general manager (commercial), said that, in real terms, domestic air fares had declined.

“Over the 10 years to March, 1978, the consumer price index (all groups) increased 159 per cent, whereas our average ‘normal’ domestic air fare rose 141 per cent, indicating that in real, constant dollar terms domestic air fares declined 7 per cent on average in that period. “Assuming that consumer prices for the year to March, 1979, will be about 11 per cent higher than the previous year, as seems likely, this means that our real, average domestic fares, in constant dollars, will be down by 2.4 per cent on last year’s levels.”

Captain A. C. Kenning, general manager (airline operations) said Air New Zealand was looking forward to developing a single, strong, and efficient airline from the base of the “two excellent previous airlines.” “The merger brought together management and technical skills without peer in New Zealand or in many parts of the world,” he said, “The result was a marriage, perhaps with one unwilling partner initially, but the honeymoon and consummation is proving to be full of surprises to both partners — mostly pleasant.”

LES BIOXHAM, travel editor, was one of 70 journalists from Australia and New Zealand who were guests of Air New Zealand in Auckland last week for the airline’s media forum. He reports on some of the papers presented. . .