The trade war has begun with US President Donald Trump rolling out reciprocal tariffs – but the calculations are being questioned.
An economic slowdown triggered by the Donald Trump Administration tariffs might reduce demand for airfares and send prices down, an economist says.
But it’s too soon to say how the interplay of oil prices, exchange rates, supply chain issues, and consumer demand will turn out, Westpac’s chief economist KellyEckhold said today.
One key influence will be from reduced American demand for overseas travel likely to accompany any United States recession or downturn.
China and Southeast Asia, where several countries had large surpluses with the US and now faced major tariffs, were likely to be profoundly influenced by the change in trade policy.
And the US was a crucial tourist market, providing 14% of visitors to New Zealand in January this year, second only to Australia’s 38%.
“One of the features of the recovery that we’ve been seeing in the last six months or so is the recovery in tourism,” Eckhold said.
“Visitors from the US have been an important part of it.”
New Zealand had 371,000 visitor arrivals from the US in the January 2025 year, up by 24,000 from the year before, according to Stats NZ.
But the US was now the “poster child” for economic anxiety, Eckhold said.
Jet fuel
“Another downside effect could be with fuel costs. Oil prices have fallen really significantly. They’ve fallen faster than the exchange rate,” Eckhold said.
Brent crude was at US$64.05 today, down from US$74.77 a week earlier.
Jet fuel prices in US dollars have generally been falling slowly since September 2023 and late last month were down 7.8% on the previous year’s average, according to the International Air Transport Association.
Air New Zealand used some sustainable aviation fuel, made from products including animal fat and used cooking oil, blended with traditional fuel derived from fossil fuels.
But the greener fuel comprised a minority of what the airline consumed.
Aviation fees and levies varied by country but an Air France-KLM study last year found fuel costs accounted for 28.7% of its eight-hour transatlantic air fare price and 20.7% for an 85-minute domestic flight.
During the last major economic meltdown in autumn 2020, oil prices plunged as global consumer demand fell.
But oil prices, influencing jet fuel prices, would change drastically if the Middle East’s geopolitical situation shifted, Eckhold said.
A celebration after Syrian President Bashar al-Assad's Government collapsed in December. A major flare-up in Middle East conflicts could cancel out recent oil price falls. Photo / Daniel Berehulak, the New York Times
“There are lots of other factors. One missile in Iran’s direction could change the whole picture quite fast.”
Smith said falling oil prices would take some of the edge off upward pressure on airfares.
Exchange rate
Conventional thought suggested a country imposing tariffs made its domestic industry products more attractive to consumers, and its currency more valuable.
If that transpired, and the New Zealand dollar weakened against the greenback, airfares for Kiwi travellers would likely face upward pressure.
“We will be fairly sensitive to global demand and US demand in general,” Eckhold said.
“The New Zealand currency tends to act as a shock absorber,” Smith said.
The tariffs were generally bad news for a small trading nation, and the NZ dollar could bear the brunt of souring sentiment.
More tariffs
The tariffs imposed so far have been on goods, not services.
“For now, there won’t be an impact on airfares,” Smith said.
But there were no guarantees about that, and any tariffs on services exports would impact fares, unless Trump exempted air travel.
Eckhold said it was unlikely New Zealand lawmakers would impose tariffs on US imports.
“It would be pointless and very unwise given that Trump has indicated he will retaliate aggressively.”
New Zealand’s goods imports from the US are concentrated in the imported capital equipment and aerospace sectors, Smith said in a recent note.
He said US aircraft exports to New Zealand were valued at $1.528 billion last year.
Eckhold said if the US dollar strengthened and imported aircraft or components became more expensive, consumers might bear some of those costs.
Air New Zealand and several other airlines have faced supply chain challenges since the Covid-19 pandemic started.
If tariffs made trade in aircraft components more complicated or expensive, that would likely place upward pressure on airfares.
Stock’s shock start
Air New Zealand had a rough start to the day, with its share price down 7.44% shortly before noon.
“That could just be a catch-up from the significant falls in the equity markets after we closed on Friday,” Eckhold said.
He said the airline essentially provided a luxury service, and there may be concerns consumers will cut back on airfare spending instead of cutting back on essential goods.
He suggested some volatility for the airline was likely today.
“It could be entirely different by the time I finish calling,” he said during a phone interview.
Barely half an hour later, the airline had clawed back most of those early morning trading losses. Shortly before 3pm, it was trading at 58c, down 4.13%.
Bets on
With much volatility and complexity influencing air fares, Eckhold said reduced demand in a less bullish economy might be the deciding factor.
“If I was a betting man then I would say the demand factor may be more prevalent.”
Smith said airfares would most likely face more upward pressure in the short term, but more downward pressure in the medium term.
He said the tariff saga was “a moveable feast” and he urged people to keep monitoring events.
