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Factors Affecting Trans-Tasman Air Services Kissling, Christopher, Dr., Lincoln University, Resource Studies, Canterbury, New Zealand ABSTRACT:International civil aviation is circumscribed by a plethora of bilateral air service agreements between sovereign nations. In recent years there has been a marked trend to liberalise these agreements as well as moves to create multilateral common markets as appear to be emerging in Europe. Airline managements are being given opportunities to implement operational strategies once severely proscribed in confidential memoranda of understanding lying behind the public bilateral documents. In keeping with the philosophy of extending the Closer Economic Relations (CER) agreement, Australia and New Zealand have been exploring the ramifications of bringing trade in air services within the ambit of CER. This paper examines some of the factors affecting the trans Tasman civil aviation environment and discusses the implications of modifications to air services in and between Australia and New Zealand.

Tourism and Aviation Tourism is becoming big business in both the Australian and New Zealand economies. In 1988, 3.9% of GDP in New Zealand was derived from tourism with some 46.9% of that contribution derived from international visitors. Of New Zealand's exports, 13.82 per cent came from international tourism, up from 7.14% in 1984. Australians represented 350/0 of that market in 1990, down from almost half of all arrivals a decade earlier and reflecting the increasing diversity of origins in more distant markets for New Zealand tourism (Pearce 1990). The comparable 1990-91 figures for the contribution to the Australian economy from tourism is 5.4% with 29.6% of that representing the contribution of international visitors. Some 2,370,400 short term visitors came to Australia in 1991. Japan was the country of residence for 22%, New Zealand for 20% and UK, Ireland and Europe combined a further 230/0 (Bureau of Tourism Research 1992). Air travel is by far the dominant form of transport bringing people to South Pacific island nations and bridging the ocean which separates them, including continental island Australia. Just how dominant is air travel can be judged from the statistics which show that of all Australia's visitors, 99.58o/0 came by air (Bureau of Tourism

Research, 1992). Fast jet air travel is essential (Kissling, 1990). Trans Tasman air services represent perhaps the most important sector in the whole South Pacific network as these links join the two most populous countries. Surveys have shown that 12.8% of Australia's visitors had or would visit New Zealand as part of their trip (IVS 1990). Air travel accounts for 99.83% of passenger movements between the two countries. Third countries seeking to include Australia and New Zealand in their networks, invariably seek, but find difficult to acquire, traffic rights for the Tasman. New Zealand as a destination is a logical extension of their Australian services either as a beyond point or intermediate point. Smaller New Zealand benefits most from relative proximity to its larger neighbour and any Australasian tourist promotion exercises. Given the important role aviation plays in the tourist flows to from and between Australia and New Zealand, any proposals which may alter the regime circumscribing the conduct of trans-Tasman civil aviation potentially has prospects of producing far-reaching changes which will reshape the character of tourist movements. This study considers national and carrier interests and possible outcomes from policy and regulatory changes to civil aviation involving Tasman flight sectors.

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The Bases of International Civil Aviation

Bilateral air service agreements form the bases of any international air services. They outline the agreed elements which set the bounds for airline operations between two territories. A key task of bilateral negotiations is the determination of an equitable exchange of market value, usually measured by entry points or destinations (airports), traffic rights, market opportunity and accessibility, market potential and revenue potential. No standard format exists for negotiations but a framework has been established dating back to two important post-war conferences, The Chicago Conference of 1944 and the Bermuda Agreement of 1946 between the USA and Britain as well as subsequent more liberal developments commonly referenced as Bermuda II. The Chicago meeting distinguished five rights of access and/or traffic movements, conventionally referred to as the five "freedoms" of the air. These freedoms are: • 1st to fly across another sovereign territory without landing; • 2nd to land in another sovereign territory for technical purposes (such as re-fuelling); • 3rd to disembark passengers, mail and cargo from the airline's own state; • 4th to embark passengers, mail and cargo for the airline's home state; • 5th to embark, or disembark, passengers, mail and cargo for, or from, a third country. Subsequently it has become accepted there is a 6th freedom: the right to carry traffic between two foreign countries, with a stop in the airline's own state en route which in essence combines 3rd and 4th freedoms. Countries like Singapore which lie between major traffic generating regions such as Europe and Australasia, have continuously striven to exercise 6th freedom type services, whilst end-of-the-line countries like Australia and New Zealand, traditionally attempted to restrict such transit operations on the basis of so-called true origin/destination movements (TOD). Matters usually covered in the articles of a bilateral agreement include: • Definitions • An acknowledgement of the importance to both parties of the Chicago Convention when it is in force between them • Grant of Rights • Designation of Airlines • Description of Rights • Customs Article • Revocation or Suspension of Rights • Capacity to be Operated • Tariffs [once determined through IATA but now tend to either be controlled by the country of originating traffic, or left to airlines to decide on a commercial basis] • Exchange of Statistics • Registration of the Agreement with ICAO, where applicable

• • • • •

Provision for Consultation Disputes Termination of Agreement Date of Entry into Force A route Schedule or Annex setting out the routes to be operated. The conclusion of a bilateral air service agreement between two nations may not result in the designated carriers of either country actually exercising any routes and traffic rights contained in that agreement. The airlines concerned may not perceive sufficient commercial value in the terms and conditions attached to the bilateral. Indeed, Confidential Memoranda of Understanding (CMUs) may impose impossible conditions. Again, since the agreement is between two sovereign states, should the agreement of third party states be required to operate a service, bilateral agreements must also be concluded with those third party states in a consistent manner. Modern aircraft technology has almost made non-stop travel halfway round the world a possibility allowing overflying of wayports once considered essential, but the vast majority of long-haul routes still utilise at least one intermediate stop for which full traffic rights are highly desirable. For New Zealand, very much at the end of the line, intervening states can profoundly affect possible route structures and traffic rights for any New Zealand domiciled carrier. Bilateral air service agreements are negotiated between sovereign states. Ministries of Foreign Affairs usually lead these negotiations. In situations where a state only designates one carrier to operate its entitlements, and that carrier is state owned, the state's negotiating team takes note of the needs of the "flag" airline and a representative of that airline may form part of the negotiating team. Ministries of Civil Aviation also get into the act as they are the controlling authority for aviation in their country and the repository of statistical data invariably required in any bilateral agreement. New Zealand has long fitted this pattern.

Regulation vs Deregulation

In the late 1980s before the demise of Australia's domestic two airline policy, the goals of Australia's international aviation policy appeared to be: • to provide scheduled services to areas of the world of principal tourist, trade and political interest to Australia; • to secure Australian participation in such services; • to make international air travel more reliable, effective and affordable. New Zealand's policy was much the same but has moved from fierce protection of "flag" airline interests when Air New Zealand was totally Government owned, to a much more liberal stance when it comes to designation of airline's allowed to fly New Zealand entitlement. However, no two airlines substantially owned and effectively controlled by New Zealand interests have yet to compete for passenger services on the same international routes.

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The questions of substantial ownership and effective control have always loomed large in the negotiations for air service agreements, principally to ensure third party interests do not ride on the backs of local carriers. Increasingly, beneficial ownership is becoming more difficult to assess and many airlines lease aircraft rather than own them outright. Leasing complete with a foreign crew (wet leasing) still tends to be proscribed in bilateral air service agreements. Various motives for maintaining strict regulation of international aviation have been exercised by different countries over the years. They include: • promotion of consumer welfare; Q promotion of the welfare of the national "flag" carrier; ® maximisation of benefits flowing to government; • promotion of tourism; ® promotion of exports; • creation of employment opportunities for nationals; Q balance of payments considerations; ® defence benefits (war time use of peace time capacity); ® national prestige. There are many good reasons why a state may wish to protect the viability of its flag airline from unfair competition. However, policies which promote the welfare of a national airline will not necessarily maximise consumer welfare. The trade-offs have to be weighed. Even very miniscule countries like to have their own international airline (even if they do not own the aircraft used) in order that they have some insurance against total reliance upon outsiders supplying all their international air services, especially where such external interests have very different priorities and other parts of their networks exert greater lobbying power. There may be very important externalities (jobs, foreign exchange etc.) that require a higher cost solution than would be the case if open skies were declared. Those that argue for deregulation seek from the expected intensification of competition, very positive welfare gains for the consumers. They will discount the problems of surety of service long term especially if the providers they represent are large and powerful and capable of withstanding threats of new entrants or intense price wars to capture "market share". Small players, unless servicing highly specialised niche markets of little interest to mega carriers, will seek protection in conservative strict capacity sharing air service agreements with control of routes. On the other hand, the power players in international aviation will opt for as close to open skies as possible in the knowledge that their resources are sufficient fbr them to be successful competitors in such environments. Even so, producers' interests tend to be better served by conservative approaches to capacity and new entry whilst consumers' interests are best served by a liberal approach. That is so long as service is rendered and not lost through airline failures and network reorganisation bypassing certain places as has happened domestically in the USA and internationally in the island South Pacific.

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World Trends

There have been major changes in world aviation in the last decade and a half. Significantly, there has been a shift from protection of airlines to an emphasis on competition in the expectation that users in aviation markets will benefit. Deregulation of domestic markets has lead the way. The USA took early action in this respect and other nations, including New Zealand and Australia have followed, the latter only recently. Increasingly, the USA and home states of other major international airlines, such as Singapore, have sought liberalisation of the international market in aviation services. Further, the European Economic Community is moving rapidly towards the creation of a single aviation market covering all member states. This will profoundly influence the manner in which previous bilateral agreements between EEC member states and non-member states are reconsidered in the future. Multilateral aviation agreements, the stumbling block at Chicago, seem likely to become a feature in future international aviation agreements. Canada and the USA have opened the way for their own common market. Other trading blocs are likely to make similar moves if only to safeguard their negotiating position and retention of power in the international aviation market place. New Zealand has pressed Australia to move faster on liberalising trade in trans-Tasman air services having been the quicker in deregulating its domestic aviation market. Until Australia finished with its two-airline policy for domestic aviation, no real progress in deregulation of the international market and creation of a single market for Australia and New Zealand was possible. Recently a joint Australia and New Zealand study team investigated the "Costs and Benefits of a Single Australasian Aviation Market" (AGPS 1991). One of the options for liberalisation included trans-Tasman deregulation. The study concluded that "Trans-Tasman deregulation and restricted cabotage were both estimated to result in significant net welfare gains, with the gain from the former estimated at about $20 million and from the latter at about $27 million per year." (AGPS 1991, p 43) Trans Tasman airline services under the current regime are still kept mostly for Qantas and Air New Zealand. These two carriers operate a pool system on the main routes with both airline's using dual flight numbers (code sharing) to offer their company's product not necessarily on their own aircraft. That is both Qantas and Air New Zealand flights are on the same aircraft. Third party carriers, where they have access on a fifth freedom basis to a segment of this important market, largely confine their activities to Auckland/Sydney. There are no services out of Australia to Christchurch that go 'beyond' to either the Pacific Islands or North America. There are no services out of SE Asia or Japan that fly to Christchurch via Australian ports. Denial of trans Tasman traffic rights is a blocking strategy.

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It would not be of comparable benefit to New Zealand domiciled airlines compared to Australian ones if only Tasman sectors were opened to any Australian and New Zealand carrier with domestic sectors in each country remaining the exclusive preserve (cabotage) of the respective nationally based carriers. Such a limited deregulation would allow Australian carriers to access all New Zealand's international airports and main traffic generating centres, connecting them via eastern Australian gateways to many destinations in their larger domestic systems (Fig 1). Conversely, New Zealand carriers could only tap into the larger Australian market at existing international airports without benefit of gathering the feed traffic themselves from all points within the Australian domestic network. New Zealand's internal aviation network offers less prospect of on-carriage beyond existing international terminals. In effect, the Tasman international border acts like the USA-Canada border. Canada's major population centres are all located close to that border with little practical scope

geographically for linking several centres on the one service. However, USA airlines can collect or deposit passengers deep inside the USA in a manner not accorded Canadian carriers unless they fly a large number of Canada/USA city pair connections. Ansett is strategically well placed to take advantage of any meshing of the Australian and New Zealand aviation markets as it operates independently in both countries at present but could readily link the two operations into one network (Fig 2). No other domestic carrier in either country is, as yet, so favourably placed to take advantage of established domestic networks in both countries. That fact is possibly a stumbling block to the rapid formation of a single aviation market. To obtain comparable competition on an integrated network basis, there is however, no necessity for another Australian based carrier to enter an already over capacitated New Zealand market, nor for another New Zealand carrier such as Air New Zealand or Mount Cook to establish an Australian domestic operation. It is possible to retain the marketing clout of existing domestic operators in each country and permit them to integrate their

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networks across the Tasman, Aircraft from each domestic carrier could be interchanged and then flown throughout both sub-systems concatenating demand at several ports and providing through services which could include sectors not currently serviced. Under this scenario, Compass Airlines could have used Air New Zealand aircraft on its Australian domestic sectors. This interchanging in effect is what the Ansett organisation would be doing under some unified management umbrella. Aircraft interchange between Qantas and Air New Zealand would achieve the same outcome. However, civil aviation regulations in the two countries would need to be aligned to enable such interchange of aircraft, removing the requirements for different operating procedures for exactly the same aircraft depending upon the country of registration. Integration of reservation systems is relatively simple. Where the Ansett organisation may be disadvantaged compared with an integrated rival Australasian network is where that rival network also includes a carrier or carriers with international traffic rights other than trans-Tasman. Such a consortium would be placed better to meet the

challenge of other international operators flying to Australia and New Zealand than a combined Ansett operation with no additional international rights unless the Ansett operation secured preferential agreements with foreign carriers for feed traffic. For Ansett to acquire international traffic rights would require Australia to move away from single designation of Qantas as its "national" carrier in bilateral air service agreements. New Zealand seems more willing to grant multiple designation so long as the necessary control of the carrier concerned is vested in New Zealand, which is not presently the case for Ansett New Zealand. Qantas may press harder still for rights to fly domestically in Australia, especially since recent new entrant, Compass Airlines, ran into liquidity problems and may not survive its present receivership. A single aviation market, open to all Australian or New Zealand controlled carriers, would pave the way for Qantas to fly trunk sectors with its B747 and B767 aircraft in both countries and join them to its other international services. This would amount to a third competing network of powerful proportions.

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Assuming Qantas is allowed to compete domestically in .Australia, and it integrated its operations with Air New Zealand, then the single aviation market for Australasia could be served by interlining or hubbing between Qantas and Air New Zealand in a form which would be able to withstand the competitive pressure of other mega carriers linking the Australasian market with the rest of the world. Qantas holds a significant but not a majority ~terest in Air New Zealand from the time the New Zealand Government divested itself of ownership. The Aust~dian Government may likewise divest itself of interests in both Qantas and Australia airlines. Qantas and Air New Zealand have developed code-sharing on Tasman services to avoid wasteful duplication of service. Closer integration of the two airlines even without substantial interlocking shareholding, cannot be discounted as both airline managements seek mutually beneficial operational cooperation. Historically they were joined in Tasman Empire Airways (T.E.A.L.). It can be expected that transTasman fares would tumble- to nearer the promotional fares now commonplace during the seasonal lows in traffic density if two strong rival networks are in competition. Without recourse to regulation, two main players may emerge within the Australasian market. One may be sure that foreign airlines presently operating to Australia and New Zealand with fifth freedom traffic rights across the Tasman will not want to relinquish those rights. Their governments will not remain passive when it comes to reviewing their Australian and New Zealand bilateral air service agreements. Australian and New Zealand designated carriers could be denied similar traffic rights witl~n Europe or North America as retatiatiom The creation of a single aviatJon market within Australasia does not necessarily ensure the reservation of transTasman traffic for Australasian operators. The most popular trans-Tasman sector, Auckland/ Sydney is likely to remain a highly competitive route with substantial over capacity from time to time. A counter to Auckland dominance as the New Zealand end of transTasman services might develop in a deregulated environment through the likely growth in use of smaller aircraft such as B737s for high frequency Tasman crossings between lesser ports. The smaller aircraft may more readily be assimilated into "thin" routes in the domestic networks of both countries.

Pre-boarding Customs m~d Immigration A:nyfreeing up of the market for trans-Tasman aviation services must take into consideration the application of customs and immigration requirements. Considerable operational advantage, and the prospect of more city pair links involving airports presently without customs and immigration facilities, would accrue if immigration and customs checks can be completed prior to boarding aircraft. This facilitation would be most beneficied where domestic terminals are not conti~maouswith international

terminals, as in the case of Sydney. Clearance in the originating country by otficers from the receiving country is the practice between Canada and the USA. This allows flights to use domestic terminals for easy onwards flights within the receiving country. One of the considerable benefits apart from. efficient use of existing domestic terminal space, is the savings in ground time for aircraft at intermediate points of call. Pre-boarding clearance at New Zealand airports wottld make it easier to operate a connecting capitals service such as Wellington-Canberra-Melbourne, or Auckland-SydneyMelbourne with other domestic cormections within Australia at the domestic terminal in Sydney. Likewise, clearance at Christchurch could help support ChristchurchSydney-Perth services. Pro-boarding clearance at Australian airports for transTasman services could be advantageous where a second New Zealand airport is to be served on a through service, such as Melbourne-Christchurch-Auckland.

Collusion or Competition? Inter-airline management agreements are likely to continue but perhaps in a less collusive market controiling manner than is presently observable. Doubtless it is w'ise airline management practice to share aircraft capacity rather than operate parallel services both of which have excessive capacity. It is also an astute management move to hub with carriers from other parts of the world at some convenient intervening way, oft such as Singapore or Honolulu rather than have national carriers from each country fight for market share against each other rather than third parties. It is unlikely, however, that the transTasman marketplace is going to remain a cosy arrangement for Qantas and Air New Zealand in the face of further Australasia based competition arising from creation of a single aviation market. Those two airlines may need to integrate their services even further to combat other competition. Interlining and hubbing will become more commonplace not to protect near monopoly situations, but to beat fierce competition.

Beyond Rights .Australia and New Zealand seem to be anticipating the creation of a single Australasian aviation market under the Closer Economic Relations (CER) agreement by liberalising the beyond rights they have granted each other. For instance, Air New Zealand can now fly the Tasman to Sydney en route to Los Angeles with full traffic rights on the Sydney/Los Angeles sector. In return, Qantas can fly the Tasman to Auckland en route to Los Angeles. This trend can be expected to cont'mue as it facilitates the cooperation these two carriers might reinforce should a singte aviation market regime come to pass.

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Linking in the Pacific Islands

Conclusion

Aid arguments could be used to let Pacific Island carriers trade in air services with better access to traffic than they now enjoy. They have traded "beyond rights" for New Zealand's carrier as they wish to enjoy stopover tourist business. New Zealand and Australia have not generally reciprocated by allowing the small Pacific island microstates beyond rights trans Tasman until quite recently. While Ansett managed some of the island based carriers there appeared to be a fear that somehow traffic rights between Cook Islands and USA with traffic rights between Cook Island - New Zealand or Cook Islands/New Zealand/Australia would be linked posing the threat of another Singapore type entrepot spiriting away what has been jealously regarded as the business of the metropolitan based carriers whose territories are the source of most of the island tourist traffic.

Interlining can ensure collaboration on multidestination fare regimes. It also helps mesh otherwise independent networks, paving the way for a c o m m o n aviation market. If the airline to airline operational coordination approach is used to integrate two or more airline networks, whilst still maintaining individual airline identities and distinct ownership, liberalisation of Tasman sectors may not necessarily witness formal airline mergers or takeovers in order to achieve the benefits. After this paper was prepared and presented, news stories broke in the media exploring the implications of the announcement of an Australian Federal Government inquiry into the airline industry as a precursor for creating a single aviation market involving Australia and New Zealand (Sunday Star, Auckland, 2 February). Possibilities of a c o m m o n border for Australia and New Zealand are under consideration. The Australian international airline Qantas, will be permitted to offer domestic services. Air New Zealand will press harder for more beyond rights from Australia. Various operational agreements and perhaps interlocking ownerships are doubtless in the process of being explored as management of carriers and beneficial owners of airlines both sides of the Tasman seek to protect and expand their airline's market share. Brown (1992) further explores some of these ideas of "Open Skies". The prospects of greater competition, more city pair connections and higher frequencies on trans Tasman services, linked effectively to beyond travel from both countries, augers well for passengers. It must be seen as very supportive of the growth in tourism traffic expected to occur through to the turn of the Century and beyond.

Promotion

Tourism to the South Pacific region can be boosted. A joint effort by all the states concerned can foster multi destination packaging. Tourists coming long distances out of Europe or from the east coast USA would welcome more stopover ports of call in their itineraries so long as they are not penalised by fare structures. Unfortunately, unless one airline calls at most ports, seldom do fare packages suit. Interlining is often discouraged as airlines scramble to retain or improve their market share. The deliberate integration of previously separate carrier networks can lead to integrated fare structures for more destinations with the marketing clout of the integrating carriers permeating the entire network.

References AGPS: Costs and benefits of a single Australasian aviation market, Australian Government Publishing Service, Canberra 1991.

Brown, L.: CER and "Open Skies" policy - the dinosaurs are under pressure. The Transportant 22, 2, 10-14 (1992) Bureau of Tourism Research, Canberra, 1992 pers com. quoting Australian Bureau of Statistics Arrivals 1991.

Kissling, C.C.: Management issues in Pacific island aviation and tourism. In Kissling, C., (ed.), Destination South Pacific: perspectives on island tourism, pp. 13-30. Centre des Hautes Etudes Touristiques, Aix-en-Provence 1990. Pearce, D.G.: Tourism, the regions and restructuring in New Zealand. The Journal of Tourism Studies 1, 2, 33-42 (1990) IVS: International Visitor Survey 1990, Bureau of Tourism Research, Canberra 1990.