IATA Director General and CEO Tony Tyler on 2-Jul-2013 gave a wide ranging breakfast talk in Auckland, stressing the value of aviation to the New Zealand economy, pitching the Association's move towards an industry standard distribution system and seeking New Zealand Government support for IATA's position on the environment.
And, back on another traditional airline industry theme, saying Wellington Airport was "behaving badly", Mr Tyler called for greater regulatory oversight of the country's main gateway airports and air traffic management provider, Airways New Zealand, after they announced steep price increases.
IATA considered there was an issue with the rising cost of infrastructure to airlines in New Zealand. “New Zealand has taken a very light-handed approach to economic regulation and the results have not been satisfactory. Frankly, I think that the traveling public is suffering as a result”, Mr Tyler said.
New Zealand’s Commerce Commission said in Feb-2013 that the information disclosure regulatory regime under the Commerce Act had not limited the ability of Wellington International Airport (WIAL) to make excessive profits.
Wellington International Airport was found to be making excessive returns
According to the commission, WIAL will make a return of between 12.3% and 15.2% between 2012 and 2017 compared to the 7.1% - 8% return that the commission considered appropriate for the airport. As a result, it said, WIAL is likely to collect between NZD38 million and NZD$69 million (USD53.5 million) more than it needs to make a reasonable return over the five year period.
The excessive profits are largely attributable to WIAL valuing its land higher than the commission believed it should and the airport targeting a higher return than appropriate for its circumstances.
Auckland International Airport (AIA) was found by the commission to be making an appropriate rate of return, but Mr Tyler said IATA considered the evaluation criteria for assets and reasonable return “paint a picture that is very different from reality”.
In addition, while WIAL was found to be breaching the commission’s guidelines, the regulators lacked the authority to take action. In the case of Auckland there was no process to agree on the relevant criteria for important elements such as the cost of capital to determine an appropriate rate of return, Mr Tyler said.
“Intense competition keeps airline fares in check. But a much stronger hand of government is needed for infrastructure providers than exists today.”
The Airport Authority Act requires airports to consult with airlines to set pricing regimes every five years, but they are not bound by the consultation process and are free to set prices as they see fit.
“Certainly this should evolve to a structure that forces airports and their airline customers to reach fair commercial agreements,” Mr Tyler said.
Mr Tyler concluded that: "The Commerce Commission clearly found that Wellington airport was behaving badly. But it did not have the teeth to do anything about it. And in the case of Auckland, there is no process to agree on the relevant criteria for important elements such as the cost of capital."
Addressing his predominantly business audience, he emphasised to them that, "as members of New Zealand’s business community you have some skin in the game,.. Connectivity is the lifeblood of the New Zealand economy. Anything that makes connectivity more expensive than it needs to be is a knock on competitiveness."
Similarly, air navigation services provider Airways New Zealand announced on 01-Jul-2013 that it would increase fees by 10.6%, rising to 15.7% by 2015.
“This is a big problem for airlines and a departure from the partnership built-up since corporatisation. It certainly does not reflect the industry’s focus on managing costs and improving efficiency,” Mr Tyler said, adding that Airways New Zealand was risking its reputation built on effective collaboration with airlines over the past decade.
Airlines were willing to pay for increased efficiencies, but pricing decision must be negotiated through agreement, “rather than a heavy handed decision by an infrastructure provider enjoying a monopoly position”, he said.
“This may be another clear case where the hand of government – protecting the national interest – needs to be felt a bit more strongly by requiring consultation leading to agreement.”
There was an immediate response from the ANC provider. Airways New Zealand told Radio New Zealand that it was surprised by Mr Tyler’s criticism, saying it had suspended non-vital infrastructure investments during the global financial crisis to help keep costs down for airlines.
The majority of the fee increase was reportedly required to fund replacement infrastructure over the next three years worth NZD97 million (USD75 million), most of which had been approved by airlines.
Mr Tyler also dipped into the more arcane areas of airline distribution. He observed, "there is something unusual in airline distribution. If you buy an Apple computer from the Apple website or an Apple re-seller, you get the same range of products. But with air travel products you are more likely to have a richer shopping experience on the airline’s website than you will when buying via a travel agent.
"Let me give you a quite well-known example. Air New Zealand is famous for its many innovations – one of which is the Sky Couch. It’s a product that no other airline offers. You can buy it on their website. But it is very difficult to purchase through a travel agent."
The reason is down to decades of evolution of travel agency sales and – what under Mr Tyler's predecessor became IATA's bête noire: the global distribution systems. Under the new administration this offensive has converted into establishing an alternative which, the airlines hope, will give them the ability to sell ancillaries ("merchandise") more effectively. Where the current system, over which airlines have no control, focuses on pricing, the proposed new standard would open the door to a win-win system.
"IATA’s raison d'être is to set global industry standards. We do it in many areas from safety to e-ticketing. And we are working to set the standards for a New Distribution Capability – or NDC – that is based on XML messaging standards. I admit, the name and description of this initiative are not the most engaging. But what the standard could enable for future travellers is very exciting."
Not everybody agrees, notably some of the GDSs and large corporate operations, but the NDC is certainly gaining traction.
And then there is the environment – a major milestone with ICAO later this year
Mr Tyler stressed the importance of industry attempts to take serious steps to address concerns about global emissions: "As a responsible industry, airlines are doing everything possible to help governments in their difficult task. A month ago at our Annual General Meeting, airlines overwhelmingly agreed to a resolution on market-based measures that should support their efforts. The industry sent a clear signal to governments that we would prefer a mandatory off-setting scheme as a single measure to manage emissions growth over the 2020 baseline. We see it as the simplest, fastest and most cost-effective solution. And airlines went a step further to agree principles for how to most equitably share that cost.
"This is a ground-breaking agreement – ahead of all other industries at the global level. There is still some work to do in turning the principles into practical applications – particularly ensuring as much fairness as possible between fast growing airlines in emerging markets and those growing more slowly in mature markets. But I am confident that will come.
"The focus is now on ICAO. The environment will be at the top of the agenda at the ICAO Assembly in September. And I hope that we can count New Zealand among the states supporting the industry position."
This will be another controversial event, with always the background threat of unilateral action by the European Commission. The Commission was forced to back down from its bullying position last year when retaliation threatened to undermine other aviation objectives of the EU, but a failure in Montreal in September will reopen calls for independent action.
- ETS and the airlines: the EU’s looming enforcement nightmare
- ETS and the airlines: Part II The EU follows the tabloid herd
Mr Tyler concluded: "Infrastructure, distribution and sustainability are only a sampling of the many challenges facing aviation. Getting them right will help build a solid platform for the future growth of connectivity – something that I am sure is close the hearts of all New Zealanders. Economically, aviation bridges the gap with your many trading partners and makes it possible for visitors to see the wonders of Aotearoa. And it plays a huge role in New Zealand’s national psyche – facilitating the tradition of the “big OE”, linking Polynesian families and helping Kiwis explore and experience the world."
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