Judas flies Air New Zealand duopoly

By Gareth Morgan

Friday 6th December 2002

The treasured national airline now has the spin doctors out in force, blitzing the media with a series of well-rehearsed fantasies about why New Zealanders should not worry about competition in the domestic skies.

The reasons are bizarre, to say the least. Try a couple ...

Apparently Air New Zealand thinks having an independent study done on the economics of its proposed cosy duopoly is sufficient to "prove" that national benefits outweigh the cost of loss of competition.

Independence is no protection against incompetence and it is guaranteed the work done is at best a partial analysis without any full evaluation of a full competitive-skies policy.

A hint of the lack of depth in this work came in chief executive Ralph Norris's babbling, designed to assuage public opinion before the Commerce Commission hearing. He holds that three failed attempts so far to sustain two competing full-service airlines proves that the duopoly model he's pushing is the best for New Zealand.

Of course it proves nothing of the sort. There's a myriad of possibilities trying just one and failing at that 50 times does not suggest there is only one option.

Probably the air operator one has to feel most sorry for in this government-sponsored carve-up is Origin Pacific. It looks as though it will end up as dog meat in the sweet little deal brokered between governments.

It's tragic that while maybe there is room for only one full-service airline, there is room for several Origin Pacific-style operations if only big, lumbering, non-viable, subsidised and protected Air New Zealand is put out of its misery.

Herein lies the fault with any economic analysis that simplistically concludes there is only one option a controlled carve-up by a protected cartel.

Finding the options is precisely what free markets do through a series of searches, failures and tribulations they end up with a sustainable outcome, until the next shock comes along.

The Qantas-Air New Zealand deal seeks to deny this process by lobbying public opinion with spurious national-interest arguments they know were the reason for the government's ill-considered intervention in the first place. These are the cynical manipulating ploys of politicised self-interest.

Mr Norris makes the claim that his way will be more "stable." Since when has stability been a precondition for national economic benefit?

The whole point about a competitive market is that it not be regulated to be stable any "stability," as Mr Norris fondly reveres, should come about only through finding the prices that equate the interests of willing passengers and willing air operators.

Stability of a legislated duopoly, as Mr Norris champions, promises a cosy permanence for the two airlines involved while consumers just get screwed.

Opening the market to all-comers will produce a final outcome that none of us can be certain about but it would be hoped it would not be Mr Norris's stable duopoly. His is a contrived anti-competitive charade.

Competitive markets accommodate innovation and productivity gains; protected ones do not. We may not gain two full-frequency airlines but then again we may. Mr Norris cannot tell us that.

An international airline marginally pricing excess capacity here may well be one element of an outcome with tenure. We simply do not know. But who cares what the final or intermediate form is?

The only objective should be that it is an outcome where consumers are not shafted.

What are the economic conditions where a competitive market can be eschewed rationally in favour of a cartel with its cost-plus price fixing? The tests are quite simple is there any reason competition cannot persist or are there externalities that affect (especially damage) net national economic benefit that are not factored into the private prices that prevail?

In the case of domestic skies and international landing rights it is hard to establish a case on either of the above grounds. Since the skies have been opened to unfettered international competition, there is no reason to presume it will not prevail. It has always been a heavily regulated duopolistic market at best.

Without a competitive benchmark we cannot possibly conclude that competition would not work.

There is a further dimension of this that makes one want to throw up. Mr Norris is a former chairman of the Business Roundtable, that champion of competition and rational economics. Here he is now asking us to believe that shutting out competition will not only be of benefit for his new paymasters but will also be in the "national interest."

He claims he is promoting simple "common sense" with his orchestrated taxpayer-funded PR campaign.

I've heard of religious conversions before but the set of arguments Mr Norris forwards are not only founded on sand but are so diametrically opposed to the arguments he sponsored in his roundtable role that his personal credibility has disappeared.

Roundtable members must be severely embarrassed I wonder why they don't say so. Business ethics is an issue I've addressed before. If two pieces of silver can buy the conversion of the roundtable's chairman and public silence is the response of his erstwhile colleagues, why should we wonder why so many hold businesspeople in such low esteem?

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