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Flying here and flying there: tracking air fares in the CPI

This article looks at how domestic and international air fares have changed since 1981.

Introduction

In 1978, National Airways Corporation (NAC) – New Zealand’s primary operator of domestic air services – merged with its international counterpart Air New Zealand (formerly Tasman Empire Airways Limited), becoming the first New Zealand carrier to offer both international and domestic air services.

Domestic air fares were added to the consumers price index (CPI) basket in 1975, followed by international air fares in 1981. Since 1981, domestic air fares have increased roughly in line with the CPI, whereas Kiwi travellers venturing abroad today enjoy international air fares that are not much higher than they were three decades ago.

Domestic air transport

Since their introduction to the CPI basket, domestic air fares have risen 238 percent over the 29 years to the June 2010 quarter – an average annual increase of 4.3 percent. Figure 1 shows domestic air fares increased slightly less from the March 1981 to June 2010 quarters than all goods and services that comprise the CPI basket did on average. Figure 2 shows domestic air fares rose 12.8 percent less than the rate of inflation, as measured by the CPI, from the March 1981 to June 2010 quarters.

In 1987, Ansett New Zealand began services on New Zealand’s main-trunk domestic routes. From the June 1987 to the September 1988 quarters, domestic air fares fell 16.8 percent. After a year, however, domestic air fares rose sharply, increasing 34.9 percent from the June 1989 quarter to the December 1990 quarter. During this time, Air New Zealand was privatised by the Government.

Over the next decade to the year 2000, domestic air fares continued to increase, but at a lesser rate. Then the two years to the June 2002 quarter saw domestic air fares climb 24.7 percent. During this time, Ansett New Zealand was sold to Tasman Pacific Airlines, rebranded as Qantas under a franchise agreement, and then collapsed. Air New Zealand also ran into financial difficulties and was re-nationalised under a rescue plan that involved the Government taking a majority stake.

From the June 2002 to the March 2003 quarters, domestic air fares fell 14.7 percent. Over this period, JetConnect, flying under the Qantas brand, began servicing main-trunk routes and tourist destinations. Air New Zealand started offering cheaper domestic fares when  introducing an online booking system. Over the following three-and-a-half years, domestic air fares rose 37.6 percent, reaching their peak in the September 2006 quarter.

In 2007, Air New Zealand, followed by Qantas, reduced domestic air fares. These fare cuts, coupled with Pacific Blue’s entry into the domestic market, saw air fares fall 11.3 percent from the September 2006 quarter to the March 2008 quarter.

Qantas’ low-cost carrier, Jetstar, entered the market in 2009. Domestic air fares have now fallen 13.0 percent since their peak and are at levels last seen in 2004. With Pacific Blue announcing that they will exit the New Zealand domestic market in mid-October 2010, domestic air fares are once again under the spotlight.

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International air transport

Unlike domestic air fares, international air fares are not much more expensive now than when they were added to the CPI basket in 1981. International air fares have increased a modest 22.9 percent since the March 1981 quarter – an average annual increase of 0.7 percent. This is in stark contrast to the overall CPI, which rose 288 percent over the same time period – an average annual increase of 4.7 percent. Consequently, international air fares have fallen in price relative to the overall rate of CPI inflation, meaning they have now fallen 68.3 percent in real terms (as figure 2 shows).

In the five years before Government relaxed restrictions on foreign investment in domestic airlines in 1986, international air fares rose 69.5 percent. In the year that followed, air fares fell 28.0 percent (from the December 1986 quarter to the December 1987 quarter). However, during the four-and-a-half years to the June 1992 quarter, international air fares rose 27.8 percent. During this time, the Government privatised Air New Zealand and further deregulated the airline industry.

In 1995, Air New Zealand established a low-cost operator, Freedom Air, in response to the launch of Kiwi Air’s discount flights between secondary airports in New Zealand and Australia. Fares fell 10.8 percent over the year to the September 1996 quarter. Kiwi Air experienced financial difficulties and collapsed later that year.

From the December 2002 to December 2005 quarters, international air fares fell 17.5 percent. This fall coincided with the introduction of online booking systems and revamped fare structures introduced by Air New Zealand, as well as Pacific Blue’s entry to the trans-Tasman market.

International air fares rose slightly over the next three years, with prices typically showing seasonal peaks in the December quarter of each year. The two quarters following the December 2008 quarter saw air fares fall 28.5 percent to their lowest point since the June 1981 quarter. This fall was influenced by the global financial crisis and by fuel prices falling from their peak in 2008. While prices for international air fares have risen since then, they are still only at levels seen in the March 1982 quarter.

Figure 1

Graph, Domestic and international air transport and the CPI

 

Figure 2

Graph, Domestic and international air transport real series

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