Lost tourists sink alliance

By BRIAN FALLOW economics editor

The proposed alliance of Air New Zealand and Qantas would reduce international tourism, rather than increasing it as claimed, the Commerce Commission has found.

That conclusion knocked away a key part of the airlines' case, and contributed to their failure to persuade the commission that the alliance would benefit New Zealanders.

The airlines claimed that it would result in a net inflow of 60,000 tourists, compared with what would happen without it.

Underlying that forecast was an expectation that higher fares and fewer flights arising from the alliance would deter around 87,000 Australian and other foreign tourists from coming to New Zealand.

But that would be offset by an extra 50,000 that Qantas Holidays would muster - if given the incentive to do so - and 13,000 from more effective joint promotions.

The airlines also counted as a benefit the 85,000 New Zealanders who would holiday within the country rather than overseas because of the higher fares.

The commission's calculations showed a bigger effect from higher fares and reduced flight availability than the airlines forecast.

It believes 172,000 overseas tourists would be deterred from coming to New Zealand, offset by 39,000 from increased promotion on New Zealand as a destination.

And it believes the higher fares would deter 190,000 New Zealanders - 105,000 more than the airlines' estimate - from holidaying overseas.

The commission's acting chairwoman, Paula Rebstock, said the commissioners struggled to see the public benefit in New Zealanders being prevented from exercising their first choice for a holiday.

The commission believes only 14 per cent of New Zealanders deterred from overseas tourism would become domestic tourists, not 100 per cent as the airlines assumed.

It concludes that instead of a net gain of 60,000 tourists, there would be a net loss of 107,000.

And instead of a public benefit variously estimated at $66 million, $73 million and $133 million in models put up by the airlines, the commission put the figure at $2 million.

The airlines failed to overcome the commission's scepticism about the "war of attrition" they claim would result if the alliance were rejected.

It accepts that both airlines will increase capacity, but only in line with growth in the market.

The much more aggressive competitive behaviour implied by a "war of attrition" would not be rational behaviour, the commission believes, because it would incur costs that could not later be recouped unless the airlines believed that the survivor of such a war would be allowed to charge what it liked.

The commission accepts that there would be cost savings from the proposed alliance and benefits from Qantas doing more engineering and maintenance work in New Zealand.

But its $40 million all-up estimate of the arrangement's benefits is dwarfed by its $195 million estimate of the detriments arising from the loss of competition.

It puts the loss of allocative efficiency, in which reduced competition would lift fares and reduce flight availability, at $90 million by the third year of the alliance.

It costs the loss of productive efficiency, where reduced competition erodes incentives to keep costs down, at $55 million.

And the loss of dynamic efficiency, where the removal of competitive pressure reduces the incentive to innovate, is put at $50 million.

Commerce Commission final determination (full report)