How rising costs are reshaping New Zealand’s regional air links

Source: Radio New Zealand

Explainer – Regional airlines across New Zealand are warning key air links are under growing pressure, as rising fuel and operating costs force tough decisions.

Westport is the latest town at risk of losing its only air connection and industry leaders warn it might not be the last.

Here’s what’s happening.

What changes have regional airlines made?

Originair is poised to scrap its Westport to Wellington route, unless it gets more government support, leaving the town without flights.

Air Chathams has introduced a $20 fuel surcharge per ticket citing “recent events in the Middle East impacting global fuel markets”.

Golden Bay Air chief executive Richard Molloy said his airline had reduced the number of flights between Tākaka and Wellington in May.

The airline was also the first recipient of a loan from the government’s $30 million package supporting struggling regional routes.

Sounds Air cut two routes and sold six aircraft last year with managing director Andrew Crawford warning that might not be the end of cuts.

Since the Covid-19 pandemic he said small airlines had been grappling with “spiralling, absolutely out of control costs”.

“Airways, airports, fuel, parts, finance, everything. Since Covid it’s just been an absolute nightmare trying to keep the costs under control in regional aviation,” Crawford said.

“The pressure on these airlines is extreme. Regional aviation in this country has been decimated and there’s more to come, I would say, if things keeps going like this.”

How much extra pressure is coming from fuel price rises?

Barrier Air chief executive Grant Bacon said the conflict in the Middle East had prompted sharp price shocks for regional airlines – sometimes with very little notice.

“After receiving a 95 cents per litre increase [last week] we have now also received a 12 cent increase… so it just goes on and on. Funny enough, I’ve just received another notification email from BP stating potentially more price rises. I’m too scared to open it,” he said.

“The issue is we sell tickets months in advance and we price in fuel and we consider perhaps that the fuel may increase, it may decrease and it’s a game of averages. But when you’re talking a 60 percent move in one bound it is certainly difficult to cope with.”

Molloy said fuel price rises so far equated to about $15 extra per passenger on an average Wellington to Tākaka Golden Bay Air flight.

Airlines simply could not rely on customers to pay that, he said.

“There’s a subtle equation there with fares and demand. Obviously if you increase your fares then eventually you will start to lose potential bookings,” he said.

Sounds Air managing director Andrew Crawford said he expected fuel prices would eventually double.

“This is a big problem what’s going on here – big problem. And I don’t think we’ve quite got the brunt of it yet,” he said.

Why do regional links matter?

Bacon said regional airlines, like Barrier Air, not only carried passengers and leisure tours, they also carried “freight, medical supplies, doctors, passengers that are visiting Auckland in order to receive treatment such as ongoing chemotherapy”.

“These links are just vital to communities,” he said.

Ruatoki resident Lisa Rua said she had been flying from Whakatane to Auckland for treatment of a pelvic mesh injury.

She had taken the trip about six times in the past year and could not imagine what she would do without flights.

“Driving is definitely not an option and I haven’t got a family member who is able to do that for me either… It would definitely be very difficult for my recovery if I can’t catch a plane,” she said.

“It is our only in and out of the area unless we catch a bus, which if you’re not well is not really a good option.”

New Zealand Airports Association chief executive Billie Moore said there had been a trend towards larger aircraft in New Zealand, making it harder for regional routes to be commercially viable.

“That’s why you saw some time ago, for instance, Air New Zealand withdrawing their Beechcraft fleet. Some of those routes were then picked up by smaller regional airlines.

“That overall trend – most major airlines moving to larger aircraft – means that the role of these smaller operators around New Zealand becomes more and more critical. They’re the only ones flying the types of planes that are going to work for these kinds of routes,” she said.

“What you need is a system that allows those larger airlines to grow, to support whatever regional networks they can, but also allows smaller operators to continue operating efficient fleets that serve regional New Zealand.

“At the moment that is getting harder and harder.”

What government support is available for regional airlines?

The Regional Connectivity Fund provided $30 million in concessionary loans to allow some regional airlines to consolidate debt, refinance loans and invest in aircraft maintenance or upgrades.

Associate Minister of Transport James Meager said the fund, announced last August, was designed to “stabilise the regional sector” and give airlines more headroom.

Moore said it took a lot of work and commitment from senior ministers to get off the ground but it was not a perfect fix for the current pressures.

“While the loan funding will be extremely useful and valued by these airlines, as they look to try and restructure some of their operations, it’s not going to deal with the ongoing operational cost and making some of these routes more commercial,” she said.

“There may well be points where the economics of it all make it too hard for some of these routes to operate.”

Golden Bay Air said it was yet to receive lending it had secured.

“We’re still going through the quite considerable due diligence attached to that being approved. But look, it will be good timing for sure,” Molloy said.

Bacon said the Regional Connectivity Fund appeared to be “incredibly slow moving”.

“I wouldn’t want to rely on continuity of services based on that package at this time… And I wouldn’t want to get into debt to fund loss-making routes,” he said.

What more support do airlines want?

Bacon said the most effective support would be relief from government-imposed costs.

“Probably the most valuable thing that the government could do… is that we need to see some relief on levies such as airways charges and also CAA levies,” he said.

It might also be time for the government to consider ongoing subsidies to keep regional routes operating, Bacon said.

“Overseas that’s a very regular occurrence especially in North America, Canada, a lot of routes in Europe. We bought an airplane from France a couple of years ago from an operator and that airplane was 100 percent subsidised – and they were servicing an island probably not too dissimilar to one of our main routes, which is Great Barrier Island,” he said.

Moore said that also made sense to the New Zealand Airports Association.

“Intervention now shouldn’t be seen as a point of failure but we should recognise that we’ve had a lot of decades of success where we haven’t had to intervene with government funding.

“We’re at the point now where we should think carefully about how to make sure the system is resilient for the future,” she said.

“Most countries provide some kind of foundation of support for regional routes. And there’s a reason for that.”

However, Molloy said longer-term support should focus on reducing compliance and airport costs rather than directly subsidising routes.

“For us what the government has done is quite fitting over the longer term. From our perspective the route should be inherently viable and the government – by reducing sort of compliance costs, limiting landing fees – these kind of things are more appropriate measures rather than underwriting certain routes.”

What is the government planning?

Meager said the government was doing a lot of work to try to reduce cost pressures across the board.

Criticism the Regional Connectivity Fund was slow was probably fair, he said.

“With increasing pressure on prices with the conflict in Iran it’s timely that we’ve got that fund but it’s also timely that we look at what other things we can do to support regional connectivity,” he said.

While that was unlikely to include cuts to Civil Aviation Authority levies or airways charges, Meager said he had tasked the authority with a wider rules reform programme “to make sure that we aren’t putting any unnecessary regulation and costs on the aviation sector”.

“We’re looking at what the range of options are depending on how long this conflict goes.

“So in a similar way that ministers are looking at what are the triggers and scenarios for interventions on the fuel price, similarly for me in the aviation sector what are the triggers for intervention when routes are at risk particularly routes to vulnerable areas?

“We’ll be considering those options in the coming few days or weeks and making some decisions as things change.”

As the part-owner of some airports, the government was continuing to invest in capital upgrades and maintenance “to make sure that they are viable and continue to operate”, Meager said.

“I understand the arguments for more intervention. At the moment, where we are placed is that we prefer to make investments around infrastructure.”

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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand

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