‘It’s just war’: What’s really behind the face-off between Air NZ and Auckland Airport

Thursday, 22 February 2024

• Airlines are facing higher costs from Auckland Airport, which is proposing a development Air NZ estimates will cost up to $8b.

• Air New Zealand has warned that could lead to fare increases that might make flying unaffordable for some people.

• One aviation commentator who has been involved with these discussions previously says it’s a symptom of a long-standing problem with the price-setting regulations, which need an overhaul.

When aviation commentator Irene King talks about “verbal warfare” breaking out between Air New Zealand and Auckland Airport, she’s not exaggerating.

On Wednesday, the two sides took the latest instalment in a long-running dispute public, trading blows via press release.

First, Air New Zealand said it had asked Commerce Minster Andrew Bayly for an urgent inquiry into airport regulation, which it said was failing to stop overspending on development work. It said those costs would end up passed on to passengers.

Auckland Airport has proposed what Air New Zealand says is a $7 billion to $8b development over 10 years.

“Air New Zealand agrees the airport needs redevelopment, but not at a cost that means some Kiwis can’t afford to fly,” said chief executive Greg Foran.

Then, Auckland Airport hit back, saying Air New Zealand was trying to circumvent the Commerce Commission review of airport price setting, currently under way. It said Air New Zealand’s estimate of the cost of the development was wrong and misleading.

“Air New Zealand has strong commercial incentives to oppose airport investment, both to protect its profit margins and its dominant position in the domestic market. Investment creates additional capacity that enables airline competition – which is good for customers and the cost of airfares.”

It said Air New Zealand wasn’t the only one with concerns about a lack of competitive pressure in air travel.

“New Zealand has one of the least competitive domestic markets in the world and we encourage the Government to follow Australia’s example and actively monitor fares and performance of the market to ensure it is working in the interests of consumers.”

While this latest dispute centres on the latest redevelopment work at Auckland Airport, King says tensions have existed since the late-1980s, when the airport was first corporatised.

She said it was made more complex by the fact that the airport would never directly feel the impact on customers from its pricing decisions.

“If [customers] complain, it’s about the airlines, that’s who they bought the ticket with. They don’t pay the airport company anything, so the customer using the airport facility never sees how much it costs them, but it’s built into the ticket.”

She said the airport was also incentivised to give priority to the parts of its business that gave it the best margin, such as the shopping areas.

But as the airports became bigger commercial entities, the charges for airlines grew. “The more money they put into capex, the airline costs start to ramp up. All the prices are running off the capital asset value. It’s not in a freely competitive market.

“The next tranche of investment is huge and we want it but the question is who pays? At the moment it’s you and I as the user of the terminal service who pays and the shareholders walk away with oodles and oodles of money, there’s no incentive in terms of efficient pricing.”

She said other countries, such as Britain and Singapore, had developed better models but in New Zealand “it’s just war”. “It’s just literally verbal combat between two warring factions. The debate has not shifted on and become any better or solved any of our issues since 1988.”

“This is about advancing what’s important to New Zealand and requires mature discussion which both parties would be able to have. But you have to have the right person with the right prescription to have that discussion. That’s not there at the moment.”

She said it would take policy makers or a minister with “intestinal fortitude” to find a different way. “The airlines and the airport companies are incapable of solving this one. I don’t know how many times Air New Zealand has complained… all we’ve got is more words in a regulatory regime. No one is right and no one is wrong but there is no leadership in how to resolve it… [Prime Minister Chris] Luxon should understand this beautifully.”

Luxon is the former chief executive of Air New Zealand.

Bodo Lang, a marketing expert at Massey University, said the public nature of the debate was not a good look for the airline.

He said people had noticed the significant rise in airfares since the pandemic.

“Against this backdrop, this public tussle about costs and potentially rising prices will be bad news for the Air New Zealand brand and, to a lesser extent, Auckland Airport.

“This is because travellers have a stronger relationship with the Air New Zealand brand and this is where most of the costs, and potentially profits, are likely to reside.”

But he said it was unlikely to change anything significantly because New Zealanders were loyal to the airline and had few alternatives for domestic travel.

“The financials of the Air New Zealand brand will likely remain largely unaffected. But the brand will take a minor hit.”

Foran said the Commerce Act offered alternatives for airline regulation.

“These include steps that require airports to negotiate with their customers on a commercial basis, go to arbitration if that fails, or the regulator can set the price and quality of their service.”

Commerce Minister Andrew Bayly said he was concerned by the increased charges the airport was proposing for airlines.

“Later this week I am meeting with Auckland Airport chief executive Carrie Hurihanganui, where I will express my concerns about the effect on the price of air tickets, and encourage the airport to constructively engage with airlines.

“The Commerce Commission is currently reviewing Auckland Airport’s proposed charges and will issue a draft report in May. Stakeholders, including airlines, will have the opportunity to submit on the commission’s interim assessment. The commission can also comment on the effectiveness of the type of regulation employed, and whether there is a case for moving to a stronger regime.

“I consider it appropriate to wait until the Commerce Commission has progressed its review. I will closely monitor this process.”