Regional Fares and Fears

  

From the armchair of an airline enthusiast who has no experience working or managing an airline I thought I'd offer a few thoughts in the current debate about the cost of regional air services, particularly from a historical perspective which I believe throws light on the current situation.

The historical perspective and development of subsidised regional air services

Firstly, lets not forget that regional air services in New Zealand have historically struggled. In NAC days the air services to the regions, which were often operated as social services, were effectively subsidised by the main trunk services. Government regarded regional air service connectivity as essential and as such it was part of the NAC mandate which required the Corporation to offer services to the regions. While the timetabling wasn't great the principal of subsidising regional air services was seen to be in the national interest.

At the same a time economics was important. A common feature of newspaper reporting was NAC's and (later Air New Zealand's) losses made on services to the regional airports. When NAC moved from the DC-3 to Fokker Friendship these issues increased but again, timetabling that didn't suit local business people didn't help the economics. At times NAC looked at smaller commuter aircraft, such as the Britten-Norman Trislander, but apart from NAC using a 9-seat Britten-Norman Islander on services to Kaitaia and Whangarei while runway upgrades were under way there was no serious appetite for this.  

At the same time regional airports were often operated in partnership with the Government and local authorities being in 50-50% relationships. These partnerships enabled local authorities to upgrade their airports from DC-3 standards to offering the sealed, longer runways required by the Fokker Friendships. Local authorities were dependent on these subsidies and would have struggled to do these works as solely rate-payer funded projects.

At the same time the airways were controlled and monitored by a subsidised network of flight service stations and air traffic control centres around the country that were seen as a nationally essential service. Even then, the amount of air traffic would have made funding air traffic control services. , what we today.

Air services only gradually developed following World War II. The sophistication of the development of nav aids and radar was gradual enabling NAC to operate a more professional service that we take for granted today. Meanwhile, until the early 1980s New Zealand had an extensive rail and bus network for public transport operated by New Zealand Railways and its New Zealand Road Services bus system. This network was also subsidised. Now the trains and buses have largely gone and the aeroplane has become the regional bus or train. 

Major roading projects were developed including our urban motorways. Road transport has always been subsidised by a system of taxes, and especially by the dedicated fuel taxes.

The rise of 3rd Level Airlines

While domestically NAC was the mainplayer, there were always small operators who tried to operate VFR services. The 1960s, however, saw the development of two more major players, SPANZ and Mount Cook Airlines. SPANZ failed miserably being unable to operate on lean routes and being unable to compete on NAC's routes. Mount Cook survived and prospered by finding a niche in the tourist market where the national airline was not operating. In 1968 we our the first more sophisticated IFR third level airline in the form of Sky Travel (NZ). It was also a monumental failure, again due to the lean routes it was operating on and its inability to have a level playing field to compete with NAC. 

Sky Travel was followed in the 1970s by the likes of Air North and Capital Air Services. Capital AIr Services were able to get a foothold in Cook Strait services and then both it and Air North picked up uneconomic routes NAC dropped. Later the main players in this arena became Eagle Air, James Air and Air Central. Operating 10-seat Cessna 402s or Piper Chieftains they provided inter-regional connectivity and offered Cook Strait some alternate to Air New Zealand.

The game changer was the 1982 revision of the Air Services Licensing Act and Air Albatross who introduced 18-seat pressurised Swearingen Metroliners. Competition was now allowed if a need could be shown. Further turbo-props were to follow, with Eagle Air introducing Embraer Bandeirantes, Bell Air a Beech 99 and Air Central, Mitsubishi Mu2s. Following the collapse of Air Albatross a new airline was born, Air Nelson. These smaller airlines were now competing with Air New Zealand and at the same time providing what customers wanted, frequency and flights timed for when business people wanted to travel.

In the late 1980s Air New Zealand recognised this was the direction they needed to go and bought out Eagle Air and initially a 50% stake in Air Nelson before completing the buy out of Air Nelson. With Eagle Air initially using Bandeirantes and later Metroliners and Beech 1900s and Air Nelson initially using Metroliners and later Saabs and Bombardier Q300s regional aviation in New Zealand was revolutionised. There massive frequency increases. Air New Zealand owned Mount Cook Airlines started operating Hawker Siddeley 748s on traditionally operated Air New Zealand routes and the 748s were upgraded to ATR 72s. Regions now received an excellent regional air service.

At the same time Ansett entered the New Zealand domestic airline market and operated regional services under the Tranzair and later Ansett New Zealand Regional brands. The introduction of competition bought down fares and the number of people flying skyrocketed. New Zealand became a country of fliers. The market was tough - Ansett collapsed and they were replaced by Qantas who used Origin Pacific to operate regional services. But the Australian airline saw they were having to subsidise regional air services from their main trunk operations and were unwilling to do this. So Origin Pacific collapsed and Qantas bowed out in favour of Jetstar who only offer main trunk routes.

Meanwhile, back in the national carrier camp things started to change in late 2014 when Air New Zealand announced it was going to close down the Eagle Air operation, the final flights being operated on 26 August 2016. This move led to Kaitaia, Whakatāne, Whanganui and Westport losing their Air New Zealand services as well as direct connections between Taupō and Wellington and between Hamilton and Palmerston North. With Bombardier Q300s replacing the Beech 1900s centres like Timaru, Hokitika and Taupo got a lesser service with flights not suitable for local business people.

Nonetheless people had got used to a good regional air service and quickly embraced the new services operated by Barrier Air, Air Chathams, Sounds Air and Originair. But there was a problem... Air New Zealand had been able to offer a broader range of cheap fares subsidising these across its entire network and people in the regions had enthusiastically embraced these. The regional airlines, however, without Air New Zealand's fallback of a wider network operating much larger aircraft, the much smaller operations and much smaller aircraft of the regional airlines were unable to offer the same extent of fares and have built their services by their reliability, timetabling and the personal touch these airlines all embody.

And then came Covid followed by the Russian invasion of Ukraine - and these events screwed everything up. Supply chains broke down, fuel prices sky-rocketed, the local economy suffered and  less people flew. Prices for everything increased and this put incredible pressure on the airlines and meanwhile people still howl for cheap fares.  

So lets look at our airlines

Barrier Air operates a fleet of six Cessna 208 Grand Caravans from Auckland to Kaitaia, Kerikeri, Great Barrier Island and Whitianga and from Great Barrier Island to North Shore and Tauranga. While they are non-pressurised they are eminently suitable for the routes they operate to. The Caravans are probably the most cost-efficient aircraft operating on New Zealand regional air services. Barrier Air has a unique issue in that its main route is to Great Barrier Island so every Friday the flights to the Barrier are largely full with the return being relatively empty. Its the opposite on Sundays. Aligned with this there is the busy summer season compared to the quiet winter season. These issues have to be factored into Barrier Air's pricing strategies. In 2021 CEO Grant Bacon told 3rd Level NZ, The financial numbers in a Part 125 operation can be mind boggling. Everything is 6 figures per month. Fuel, maintenance, staff -  they all equate to a massive number just to cover the basics. Since then prices have continued to spiral upwards.

Air Chathams operates a fleet of two ATR 72s and four passenger Saab 340s and one dedicated freighter Saab 340 from Auckland to Whakatāne, Whanganui and the Kāpiti Coast and from the Chatham Islands to Auckland, Wellington and Christchurch. They also do quite a bit of charter work in New Zealand and Tonga. In recent years Air Chathams retired its Convair and Metroliner fleet, the Convair being much more useful that the current ATR on the Chathams flights and the Metroliner being a much better fit to Whakatāne than the Saab being operated at present. A major issue for Air Chathams is the aquistion of aircraft at a reasonable price that are to operate on reasonably lean routes. There are no presurrised aircraft in production in the 18-35 seat range. Another issue are the landing fees at regional airports. A small airline can't be expected to cover the cost of maintaining the infrastructure of regional airports. Whakatāne is a good case study. The Metroliner schedule suited business traffic in and out as well as the leisure market. The larger Saab schedule doesn't suit local business traffic. In recent media coverage Duane Emeny said about the Whakatāne service,  [Air Chathams is] not all about making profits but at some point you need to ensure you are running a viable business with realistic growth prospects to justify the investment and hard work required to maintain it. Meanwile Whakatāne Mayor Victor Luca speaking on the Air Chathams service said, I know visitors use it, definitely tourists, but I would say most [local people don’t use it] as he questioned whether local ratepayers should pay for it.

Sounds Air operates a mixture of Pilatus PC12s and Cessna Grand Caravans across Cook Strait and routes south of Blenheim to Christchurch and between Christchurch and Wanaka. They pulled their flights between Wellington and both Westport and Taupō at the end of 2024. As noted above, the Caravans are probably the most cost-efficient aircraft operating on New Zealand regional air services. The 9-passenger seat pressurised Pilatus PC12s, however are much more expensive to purchase and operate. They, however, have great passenger appeal. CEO Andrew Crawford, speaking at the end of the Taupō service said of the Sound Air network, Demand for flights was strong, costs were too high. "Decisions like this are not taken lightly. This has been a very tough call for management and our shareholders," he said. "We have done everything that we can to avoid cancelling these services." Crawford said the company could not pass on massive fare increases or have shareholders subsidise services indefinitely.

Originair operates three 18-seat British Aerospace Jetstreams between Wellington and both Nelson and Westport and from Nelson to Palmerston North and on to Hamilton. Originair is the only airline operating 18-seat commuter aircraft in New Zealand. It recently took over Sounds Air's services to Westport and Taupō but is now about the withdraw from Taupō and reducing the frequency to Westport. Originair's scheduling seems to favour leisure traffic rather the business traffic. The New Zealand regional market seems to small to do one or the other. Earlier this year CEO Robert Inglis told 3rd Level NZ The motor car is the key competitor where there isn’t a water barrier and with current operating costs we can’t compete with this especially for family travel. Unfortunately, just a reality we have to live with as with limited seat capacity aircraft, deep discounting is not a viable option.

Air New Zealand operates Bombardier Q300 and ATR 72s across its regional network. While the ATR 72s are relatively new the Bombardier Q300s are the last produced. Parts availability and supply chain issues are problematic with these aircraft. But a much bigger issue for Air New Zealand is the grounding of many its Boeing 787 Dreamliner or Airbus 320/321 Neo aircraft because of engine issues. The impact of this is huge on Air New Zealand and this impacts on the economics of the airline and its capacity to offer affordable fares. Air New Zealand's CEO Greg Foran recently told TV One News, "We're cognisant of prices and doing our best to keep costs down but we're dealing with some structural issues here." He said the company has experienced costs such as parts to keep planes going and landing fees. "Fuel tends to go up and down, we've obviously got labour... we're doing a reasonable job of managing that." “We do our very best to keep our prices as low as what we possibly can, appreciating that other stakeholders require us to make a moderate profit so we can continue to invest.” This last comment is important... it is not just about keep an air service going now - it is also having the capacity to replace aircraft in the future.

Some conclusions

It is clear that historically airports, airways and air services in New Zealand have been subsidised. 

Then comes in user pays... for airport infrastructure, Airways services and regulatory services. Its the airlines which have to largely wear these costs and when there is no competition. 

For example if you want to fly into Auckland International you have to accept their charges because there is no realistic alternative airport if the regional airline's passengers are connecting to other domestic or international flights. Regional airlines cannot be expected to be the major funder of regional airports that have to provide all the infrastructure for 1 to 3 scheduled movements a day.

Likewise, airlines just have to pay Airways services and regulatory services charges. They are a non-negotiable. Airlines have to lump them which means bumping up fares. These charges form a massive chunk of an airlines operating expenses.

Then there is depreciation. Airlines must constantly factor in aircraft replacements cost - aircraft don't fall out of the sky costing nothing. An airline must be able to operate profitably to ensure fleet replacement.   

Regional airlines are vulnerable to the value particularly of the US dollar while remaining again dependent on the international supply chain of fuel and parts. The costs of operating our fleet of regional aircraft is massive.

Finally, and perhaps one of the most important reason regional airlines have to be supported, is that they are the training ground for our larger airlines. So often our regional airlines invest heavily in their young pilots who see them snaffled by larger airlines.

The experiment with user pays hasn't worked. Our country is too small for a user pays model for airport infrastructure, provision of an airways network and the regulatory body provisions. Just as Government subsidises our roading and rail network so it needs to subsidise regional air services as is the norm in Australia and the United States.

Regional air services are essential for the regional economies for we are dependent on the regions for our nation's economic well-being. This has always been accepted Government. In the same way Government has also accepted that regional airport infrastructure is essential for connectivity and increasingly for medical emergencies, civil defence reasons and for when roads are cut as we have been reminded by several extreme weather events recently.

The United States, Australia and Canada all subsidise regional air services and connectivity. In New Zealand we need to do the same. 

The airlines are not crying poor for nothing. They are in a state of crisis. They want to offer fair regional air fares to ensure regional air connectivity. Instead they and the regions they serve are in a state of fear of cutting services and fleets.

It is time for Government to act - with urgency!