Travellers to and from NZ face higher costs and businesses must choose how much they absorb. Photo / Getty
The rising cost of living and the return of inflation is hitting Kiwis hard. In a new Herald series, Inflation Nation, we explore the reasons and impacts of the price shock - and possible solutions. We also share some great life hacks on how you can save money and live more affordably.
Just as tourism and travel was showing signs of recovery from a crushing pandemic, price shocks are now challenging businesses - and consumers.
Already, Air New Zealand has increased its international fares by an average of 5 per cent across its network, a move announced before the dramatic surge in fuel prices resulting from Russia's invasion of Ukraine and coming in just as border restrictions ease and more people can travel.
The airline blamed the rising cost of fuel and the impact of inflation generally across all parts of the business.
At Air New Zealand, fuel costs were up 19 per cent to $174 million in the half-year to December 31 - again before the spike resulting from Putin's war on his neighbour.
Staff costs are also rising at the airline as it rehires crew and rebuilds its international network. The fuel bill, its second-biggest expense after labour, grows as it does more flying, including non-stop flights to New York later this year.
A rare public skirmish between the airline and a union this month over pay and conditions for longhaul crew shows the wage pressure is increasing.
Although it has some sharp promotional fares in the New Zealand market, Singapore Airlines has also put up others by between 4 per cent and 5 per cent this week.
Board of Airline Representatives executive director Justin Tighe-Umbers said soaring fuel prices and other cost increases couldn't have come at a worse time for carriers serving this market, and warned of air fare increases.
The price of jet fuel has rocketed by 82.3 per cent over the past year to $US132 a barrel ($195) and by 19.5 per cent over the past month.
"This price shock could not have come at a worse time for airlines flying to New Zealand, just as borders open up and the long road to recovery begins," said Tighe-Umbers.
"Already, airlines in this part of the world have been forced to announce increases in their ticket fares. Overseas airlines will have to do the same."
Fuel costs make up between 25 per cent and a third of costs on a flight, depending on the route. New Zealand, at the end of ultra-longhaul flights, is especially vulnerable.
The International Air Transport Association says all airlines that have some unhedged fuel demand (that includes Air NZ) will be directly impacted. This could mean broad increases in air fares.
The association says that at a time of already elevated inflation - running at 5.8 per cent in G7 countries in January - higher fares could reduce demand for air travel.
Rates for air cargo - critical for New Zealand trade and feeding into every part of the economy - are already close to record highs (120 per cent above pre-Covid levels), and the rising jet fuel price combined with loss of capacity are likely to push rates even higher, the association says.
Russia's war also has direct costs for airlines. Qantas and other airlines have had to change flight paths to avoid the conflict zones, adding time and costs (an estimated $20,000 an hour) to flights.
Last week Qantas warned that if fuel prices stayed at current levels, it would have no choice but to pass them on.
"It will have an impact on some levels of travel out there. If it moves further, for every $US4 on the barrel, it's another per cent that airfares have to improve by," group chief executive Alan Joyce told an AFR event.
Other airlines that had not hedged - contracted for fuel at lower prices - faced even bigger increases.
Flight Centre co-founder Graeme Turner told the business summit that flight prices could increase by 15 per cent, and then there are ground costs for tourists - land transport, hotels, food and attractions - where inflation is also hitting hard.
On every step of the journey, consumers are dealing with businesses at the leading edge of pandemic devastation and now desperate to rebuild damaged balance sheets.
A Stats NZ index of quarterly price increases shows international airfares rose (off a low base) by 64 per cent between December 2020 and the same month in 2021. Domestic fares went up 10.2 per cent.
Hotel Council Aotearoa strategic director James Doolan says his members are particularly susceptible to rapidly-increasing costs.
With borders shut to all overseas tourists for almost two years, there is a huge oversupply of hotel rooms in New Zealand, meaning individual businesses have no pricing power and cannot pass cost increases on to customers.
The average daily room rate was just $164 in February 2022, a decrease of 26 per cent compared with the same month in 2019. Pre-Covid, 55 per cent of overnight accommodation revenue came from international travellers.
Recovery would take years.
"Hotels are in the business of providing somewhere to live for travellers far from home. Cost increases that hurt everyday Kiwis are hurting hotels and other accommodation providers too."
Hotel restaurants are affected by rising food and alcohol costs as suppliers simply pass on their own cost increases. Fuel cost increases affect multiple parts of the supply chain.
Doolan said one of the largest inflationary pressures for hotels is rising labour costs, particularly in the 5-star and luxury segments.
Room rates will have to rise.
Those labour costs are actually much higher than hourly rates suggest, said Doolan.
Ultimately, widespread cost escalation was hurting New Zealand's ability to re-align the tourism industry towards "value over volume".
"Internationally, high-value tourists gravitate towards luxury hotels and restaurants, but these businesses have higher labour costs and lower operating margins than budget operators. Without solutions, rational investors will increasingly focus on the mid-tier and budget hospitality product, which are less exposed to increasing labour and food costs," said Doolan.
Government charges are also increasing.
Travellers to and from New Zealand will also face increases in charges imposed by the Government last year - something few Kiwis have had to contend with until recently.
The Customs Service and the Ministry for Primary Industries hiked the border processing levy (BPL). From last December, the BPL increased from $20.11 to $43.73 per airline passenger return trip, and from $21.06 to $36.72 per cruise passenger.
Tourism Industry Aotearoa says operators will be treading a fine line between attracting customers and covering their costs.
Labour shortages across New Zealand mean that employers have to offer attractive wages and conditions if they want to fill vacancies. Rising wages, along with increased costs in fuel and supply chain challenges, will inevitably push up prices for accommodation, passenger transport, tourism activities and attractions, said communications manager Ann-Marie Johnson.
However, after two years with no international visitors, tourism operators will be focused on rebuilding their businesses so will be "looking closely" at what they can do to attract both Kiwis and international travellers.
She said TIA was encouraging operators to aim for value over volume, with pricing levels that accurately reflect the value of the visitor experience.
Economic recovery is coming but won't solve structural problems.