Regional trends in the airline industry

Benje Patterson has decided to have a look at domestic air travel – with reference to the entry of Jetstar in June 2009 (Infometrics link here).  Their entry, and the associated increase in competition in regional air routes, can be expected to have spillover benefits to the regional economies that are exposed to this:

According to data from Statistics New Zealand, the price of domestic air travel has risen by a mere 3.3 % over the past four years.  Over the same period general prices climbed by 8.8%, implying that the price of domestic air travel fell relative to most other expenses. This relative improvement to the affordability of domestic air travel has massively expanded the size of the domestic market by bringing flying within the budgets of a wider cross-section of society.

Air connectivity between geographically dispersed parts of New Zealand provides an economic enabling effect for entrepreneurial activity. In remote parts of the country, that do not have a location advantage, the availability of air travel helps create more efficient access to markets, people, ideas, and capital.

Even as the world becomes more digitally connected, there is still, at times, no substitute for face-to-face meetings, particularly in multilateral discussions between various parties. Efficient air connections can improve worker productivity by reducing downtime between meetings and freeing up more time to focus on other important tasks.

A similar pattern undeniably exists in domestic tourism.  Furthermore, the increase in competition has not just been on regional routes – the cost of travel to Australia has also seen a significant downward shift in recent years, as touched on previously.  Although there have been sizable changes in the utilization of these new, more competitive, airline services it will still be some time until the full impact is felt within the New Zealand economy.

  • Robbie

    Are we seeing a commensurate increase in passenger seat-miles? It’s only “massively expanded the size of the domestic market by bringing flying within the budgets of a wider cross-section of society”if we’re seeing more people fly more places more frequently.

    • Benje

      There has been an increase in passenger seat-kilometres. However, as pointed out in this article, underlying passenger numbers are a better measure of regional connectivity from an economic perspective in the domestic market. Passenger seat-kilometres are a metric used by the airline industry itself in financial reporting.

  • john small

    interesting. I guess dunedin & queenstown count as “regional” but there are lots of other regional routes where prices remain appalling.

    • Benje

      Hi John,

      Dunedin and Queenstown are typically included in definitions of main-trunk routes – as are Auckland, Hamilton, Wellington, and Christchurch.

      You are right there are many regional routes where prices are appalling – and AirNZ with first-mover advantage can continue charging those fares. However, there are also other regional centres where fares are reasonable – this is often in regional centres that are very close to main-trunk airports with price competition, as if price differentials get too much then people will jump in the car and drive 1-2 hours to a major airport.

      • john small

        Thanks Benje. that clears up my confusion as to how Jetstar could benefit regional routes that they don’t serve. Doesn’t it also imply a cost to consumers though? Driving 1-2hrs each way to the airport instead of using the closer one?

        • Benje

          Remember the consumer is rationally choosing to travel that 1-2hrs rather than take the flight from their local airport. The consumer believes that the cost saving from taking the flight from the further afield airport is large enough to compensate them for their travel time.
          Not everyone is in this position, some people would rather pay a couple of hundred bucks more to travel from their regional airport as they value the convenience or they feel that their time is worth more than spending a couple of extra hours downtime in a car.

          • http://www.tvhe.co.nz/ Will Taylor

            So really you are saying prices at regional airports close to major airports are set by limit pricing, i.e. they charge “price at nearest major airport + transport costs”. So people still incur the transport cost in a sense when they use their local airport.

            • Benje

              Definitely that is a way of looking at it. If there is a reasonable expectation that a significant cross-section of potential travelers will drive to another airport then this is a constraint on pricing. One example from when Jetstar flew Queenstown to Wellington was pricing on the Invercargill to Wellington route – the drive from Invercargill to Queenstown is around 2 hours. At that time, flights from Queenstown to Wellington started at around $69, while flights from Invercargill to Wellington started at $109 – despite AirNZ facing no direct competition out of Invercargill.