Before airlines announced fare increases this week, international flights had already increased at about three times the rate of inflation since the pandemic.
By Susan Edmunds of RNZ
Air New Zealand says it will lift the cost of its domestic flights by $10, short-haul international by $20 and long-haul by $90 in response to a surge in jet fuel prices due to the Middle East war.
Qantas and Jetstar are also increasing their fares.
Economist Benje Patterson said it was hard to know whether the prices being passed on to customers were reasonable.
"At the end of the day, we've got a very, very volatile market in terms of pricing for that jet fuel.
"We know that we've not only had that massive spike in oil prices, but also the cost of refining, the margin on top of it has expanded significantly. And when you're looking at pricing for flights that are occurring in the future, we don't actually know how quickly that situation could moderate."
He said it was probably fair for airlines to try to recoup the additional fuel burden.
"But if we see that baked into the price of tickets over the long term, it's harder to justify… perhaps we would have been better to look at some sort of one-off, additional fuel charge rather than putting it into the ticket price itself. Because that would give an easier pathway to removal of it again."
He said it was not reasonable to apply a similar increase for flights in 12 months, unless the airline really believed that fuel prices would still be that much higher in a year's time. "Or they are opportunistically taking advantage of the situation to rebuild the bottom line.
"We do have to remember that at present Air New Zealand is struggling financially. Part of that was to do with the engine challenges. Part of that's because of weaker domestic demand, and this has only added to those problems.
"So, Air New Zealand was already looking at ways of improving its bottom line even before this came along. The reality is this has caught the airline at a very bad time when …they'd already announced some strategic cost-cutting programmes, and undoubtedly they were also looking at other ways that they could potentially close the gap that they hadn't yet announced."
He said it might prompt the airline to look at what sort of aircraft it was using, what routes and how frequently it was flying.
"There may even be some strategic decisions around the economics of particular airports that it is connecting up domestically at present.
"We get very emotive in New Zealand when we look at whether or not our town is serviced by Air New Zealand. It's a badge of honour, much like getting on the weather map is. But the reality is it's not a graphic design decision to put that dot. It's a really expensive, capital-intensive decision, and we are very fortunate that by and large, not everywhere, but most people are within a couple of hours of an airport that has really good flight frequency, and for a very sparsely populated, long country like New Zealand, that's pretty good, I think."
A limited difference to household budgets
Airline increases ticket prices due to uncertainties from the Middle East conflict. (Source: 1News)
Infometrics chief executive Brad Olsen said that, over the five years to 2020, international air prices had fallen nearly 17% – but increased 77% over the following five years. Domestic fares lifted 49%. The broader consumer price index was up 25% over that same period.
He said a $90 increase might only make a limited difference to a household already spending hundreds per flight on international fares.
Air NZ chief commercial officer Scott Wilkinson said, like households and other businesses, airlines had faced significant cost increases in the past decade.
"These include fuel, wages, aircraft parts and maintenance, as well as wider inflation across the economy. Airport and aviation system charges have also risen and are a core part of the cost of operating in New Zealand. For example, airport landing charges have increased by around 85 percent since 2019, while aircraft parts are up 47%.
"Since Covid, the aviation industry has also faced ongoing supply chain pressures and limited aircraft availability. Airfares are not fixed. They vary depending on route, season, capacity and how far in advance customers book.
"We work hard to keep airfares as affordable as possible. Since 2019, our average fare has increased by 32%, compared with our operating cost inflation of 40% over the same period."
Economist Shamubeel Eaqub said it would be unlikely that an airline could get away with a change in pricing that was out of step with the rest of the market because competition would push fares down again.
"The increase in jet fuel has been quite extraordinary... it has increased really fast. Their cost of doing business has gone up."
But Patterson said domestic prices were likely only to come down if the conflict was short-lived and there was competitive pressure from Jetstar.
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