Brian Fallow: Two views of Tasman fares

As they weigh up whether to allow Air New Zealand and Qantas to merge their Tasman operations, Pete Hodgson and the Ministry of Transport now have the benefit of contradictory opinions from economists about the likely impact on fares.

But it seems they needn't worry about any potential transfer of wealth from the travelling public to the airlines.

The Treasury has patiently explained to them that in calculating the costs and benefits of such arrangements a dollar of extra profit for the airlines is every bit as good as a dollar left in the pockets of their customers.

Professor Tim Hazledine from Auckland University has crunched the numbers and concludes that:

* Routes on which Qantas competes with Air New Zealand tend to have fares around 20 per cent lower than those served by Air New Zealand alone.

* Emirates and Pacific Blue offer much lower fares - around 25 per cent lower - but have not achieved more than single-digit market shares overall.

* Which implies that they do not provide much competitive constraint on the pricing of the larger carriers.

* So that elimination of competition between Air New Zealand and Qantas would be likely to result in higher air fares.

The airlines have countered with their own expert, Dr Michael Tretheway.

His number-crunching leads him to the conclusion that the number of full service airlines on a route makes much less difference to fares than whether they (or it) have to compete with a low-cost carrier such as Pacific Blue.

The correlation between the degree of concentration in an aviation market and the level of fares is large, he concedes, but in his view spurious.

Market concentration (the combined market share of the largest players) on the Tasman routes declined between 2000 and 2006, and so did average fares.

But the decline in market concentration was due to the entry of Pacific Blue and Emirates, Tretheway argues, and it was the entry of those low-cost carriers and not the decline in market concentration that reduced fares.

He also points to the failure of Ansett Australia which resulted in a large increase in market concentration in the domestic Australian market. But while fares increased somewhat in the first few months, those increases were not sustainable and fares eventually fell to levels lower than they were before the demise of Ansett.

He attributes this to the presence and expansion of a low-cost carrier, Virgin Blue.

Who gets to decide which of these experts to believe?

Across the Tasman it is the Australian Competition and Consumer Commission.

In New Zealand it is not the ACCC's counterpart, the Commerce Commission, but former Transport Minister Pete Hodgson, to whom this hot potato has been delegated. He is to be advised in this not by the commission but the Ministry of Transport.

That is because of 20-year-old provisions in the Civil Aviation Act which were designed, in the words of a minister at the time, to ensure that Air New Zealand would not be "caught in the claws of the Commerce Act".

The proposed Tasman Networks Agreement sets up a mechanism for the two airlines to collude on capacity, scheduling and prices, and to divide up the revenues, on their Tasman routes. Only that, we are asked to believe, will staunch haemorrhagic (but commercially secret) losses on those routes the airlines are apparently suffering, despite respectable passenger load factors.

The implication is that fares will rise to a degree that more than offsets any resulting reduction in the number of bums on seats, so that the airlines' earnings rise.

The question is whether, in weighing the costs and benefits of the arrangement, the transfer of money from consumers to the airlines should count against the proposal.

The Treasury maintains it should not.

The only negatives that should be counted in this context are the profit forgone from passengers who don't travel because fares are now too high and the deadweight loss, that is, the extent to which the cost to consumers exceeds the gain to the airlines.

The purpose of competition law, as expressed in the Commerce Act, is "to promote competition in markets for the long-term benefits of consumers within New Zealand".

The Treasury officials gloss over the "within New Zealand" part. One of the complications in his case is that one of the airlines is Australian and of course many transtasman travellers are not New Zealanders.

But they do seize on the phrase "long-term".

"It does not say that [competition law] is there to help some consumers more than others, nor yet that it is there to help consumers only as they are engaged in the act of consuming a particular product at a particular time," they say.

After all, profits represent potential consumption of something else.

"Beyond the length of a phone call or a flight or a meal or when he or she steps outdoors, the long-term interests of any consumer in New Zealand depends on more than just the consumer surplus from just one product. It depends, indeed, on the level of personal wealth and overall wealth in the economy."

What is good for Air New Zealand, in short, is good for the country and for all of us.

This argument, by the way, does not rely on the fact that 80 per cent of the airline belongs to the Government. That fact, we are assured, is irrelevant to the Treasury's view of what is the appropriate regulatory test.

"Consumers' losses are not society's losses if producers are members of society and because producers' gains are likely to stimulate further economic gains."

Counter-intuitive as they may be, these views reflect the law.

The Commerce Commission, in considering whether to authorise mergers or price-fixing arrangements, is neutral as between whether benefits flow to consumers or producers.

What is controversial is that it applies a different test when looking at regulated industries such as gas or electric lines networks or airports.

In those cases the test is not the net public benefit, neutral as between consumers and producers, but rather the net benefit to users of the service alone.

The Government is expected to announce today the terms of reference for a review of the Commerce Act.

But it is more likely to focus on issues around the accountability of the Commerce Commission. The review is not expected to invite debate on the economic principles underpinning the law.