Low-Fare Carriers Still Not Enough Competition for Major Airlines across the Tasman

December 22, 2008

(PhysOrg.com) -- The entry of low-fare carriers into the trans-Tasman routes between Australia and New Zealand do not threaten long-standing incumbent airlines, Qantas and Air New Zealand.

According the an article in The Australian Economic Review published by Wiley-Blackwell, low fare carriers like Virgin (Pacific) Blue and Emirates have yet to achieve large market share across the Tasman route despite offering lower prices.

The study entitled, “Competition and Competition Policy in the trans-Tasman Air Travel Market” reports on an empirical investigation of pricing and competition across the 29 trans-Tasman routes in the period after the entry of Pacific Blue and Emirates. It gives the reasoning behind the regulatory and judicial decisions in these and other markets where an established and dominant market is threatened by low cost competition.

“Air travelers have benefitted from the entry of low-cost carriers into some of the Tasman routes, not just from their own relatively low fares, but also from the pressure they put on the prices charged by the long-standing incumbent airlines. Despite the competitive pressure placed by these low-cost carriers, Qantas and Air New Zealand still retain 70 per cent of the market share”, said author Professor Tim Hazledine, head of Department of Economics at The University of Auckland.

In September of 2003, the Australian and New Zealand Government granted the ‘fifth freedom rights’ that allowed long-haul airlines to sell tickets between cities along their routes – leading to the entry of low-cost carriers into this formerly closed market.

“While air ticket prices are significantly lower with the increase of airlines along the Tasman routes, Qantas and Air New Zealand can still charge higher prices and still sell most of the tickets. This is because their status as national carriers with comprehensive local feeder networks, convenient schedules and memberships in the largest international alliances are attractive to the majority of travelers” said Professor Hazledine.

He added, “Air New Zealand and Qantas are still each other’s most important competitor on the Tasman, which is why it is important for the consumer that they continue to compete independently with each other.”

This paper is published in the December 2008 issue of The Australian Economic Review (Vol.41, Issue 4).

Provided by Wiley

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