High airplane fares are in the media this week, as Air New Zealand is about to pay a special dividend after a 45% increase in profits. Some people have suggested that the airline should cut fares on regional routes instead. But how high are the fares, really?

The NZ Herald investigates the question of high fares in an article on airplane fares. As it turns out, their analysis is a quite good illustration of a central issue in transport evaluation – the value that people place on their travel time.

The Herald has compared the cost of Air New Zealand, Naked Bus and private car prices between North Island regional centres and Auckland or Wellington after Air NZ faced criticism this week for the price of its regional airfares. It found travellers could be paying more than 10 times more for the convenience of flying.

You’ll have to go read the article to see their summary table, but it looks as though airplane fares are generally competitive with the cost of driving – a bit higher on some routes, a bit lower on others. Intercity buses, on the other hand, can be up to ten times cheaper, but often take half a day to get to the destination.

The Herald finds that some people are willing to trade off time for money, but to my mind their examples don’t exactly prove that airfares are excessively high:

Massey University student Lauren Cornish is one of many who opt to drive because of what they see as unaffordable airfares.

The veterinary science student has been studying in Palmerston North city for six years but returns home to Auckland regularly.

In that time she has taken no more than five flights – instead opting for a seven-hour drive home more than 20 times.

“It is never economically viable to fly, ever,” she said. “If I get Grabaseat deals, they can be okay, but they are obviously very inflexible and it is still around $120.” Instead she pays $90 in petrol to drive one way.

Now, to me, spending $30 to save five hours in a car sounds like a fantastic deal! If I’m travelling on business, my time’s worth much more than that, so it’s highly economically viable to spend a bit more money on a plane ticket. However, there have been times when I’ve placed a lower value on my time – for example, when I was a student, I would go to great lengths to avoid spending my limited money. (Except on beer, for some reason.)

In short, comparing airfares to bus fares and the cost of driving doesn’t tell us much about whether Air New Zealand’s fares are too high, but it does nicely illustrate the way that different people may value travel time savings. For some people, it will make sense to spend more on airfares to save time; for other people with tighter budgets, cheap bus tickets are the way to go.

The important thing is that there are choices in the transport market. For intercity travel, different options are available to people who have different needs. But, oddly, we don’t offer a very good travel choices within our cities. In Auckland, it is easy to travel by car, which works well for people who prefer relatively fast, point-to-point travel and who can afford the up-front costs of owning a car. But much of Auckland is missing public transport, which is better for people who don’t want to (or can’t) pay the up-front costs of car ownership and don’t mind waiting for the bus. Similarly, we’ve made walking and cycling really hard, although walking is just about the only free travel option we’ve got.

In economese, the intercity travel market caters for heterogeneous preferences, but urban transport seems to have been planned on the assumption that we’ve all got the same preferences. So: what’s your value of time?

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  1. If she thinks that the cost of driving = the cost of petrol she’s mistaken.

    Another factor, though, is the convenience of having a car available at your destination.

    1. As a student (which she is), the cost of driving is much closer to the cost of petrol. I got around 12000km out of my first car, which I paid $440 for. I replaced the front brake pads (~$140) and replaced one tyre ($90). I didn’t have to renew the rego in the time I owned it, 3rd party insurance is very cheap. The first time it required any more maintenance than that, it was on to the next car ($800, got 34000km out of it, modestly higher maintenance costs, but not a lot, relative to the number of ks, and it was a lot more economical). As an adult, I now have better insurance, and do a lot more preventive maintenance (but ironically drive much less). And if you choose to drive a car under 7 or so years old, then you’re totally killing yourself with depreciation. But that is a choice.

      1. What James said, really. There are a lot of people for whom the depreciation their vehicle experiences is very low. There also a lot of people for whom depreciation is a large figure even when it sits in the garage. These things aren’t uniform, and averaging them across owners isn’t helpful.

  2. Interesting analysis. This year I’ve returned to study (“mature aged” at 32, apparently), and I’ve seen a huge swing in my priorities. Essentially I’m again in that place where you have no money and heaps of time! It actually feels like a huge luxury to be able to take as long as I need. In a way I guess that’s the whole idea of valuing the journey over the destination. It’s a choice I’m free to make, and I’m enjoying it.

    Where I’m not yet able to be so indulgent with how I spend my time is in the waiting. As well as going back to study, I’ve also just headed out of urban life to house sit for a friend, up in the Blue Mountains, west of Sydney. I can handle a long train ride, but what’s killing me is how few services there are. This again comes down to your point about choice. I feel free to choose a long train trip, but I’m not free enough to go whenever I like.

  3. As a contractor, I put a high value on my time. Any time spent stuck in congested traffic, or waiting for an infrequent PT service, is money wasted or time not spent with my family. So my mode of choice is either a motorcycle or bicycle, depending on distance and ferry sailings (as I live on the Shore and work in the city). The ability to cut through traffic, use bus/transit lanes, and park at work makes two wheels the way to go. But I’ll concede a more frequent PT service with faster travel times through more transit/bus lanes may swing the balance, particularly on a windy day. But I’m lucky – I live close enough to work for cycling to be feasible, and I am skilled enough to ride a motorcycle confidently. For those in far-flung suburbia, there is only a Hobson’s choice.

    1. “But I’m lucky – I live close enough to work for cycling to be feasible, and I am skilled enough to ride a motorcycle confidently.”

      Don’t write that off as luck; those are choices you’ve made. Others call it lucky when they need an excuse for not having the same.

  4. Top notch article. Interesting crafting too – it also presents an argument that this competition yields great results for consumers, as those three intercity options suit well for:

    1. Those with low value of time who have paid the sunk cost of a car.
    2. Those with high value of time who have income to actualize it.
    3. Those with low value of time but no car or restricted funds.

    You might imagine how they are served for intracity purposes- and the latter two are underserved. Interestingly the fourth category is those with high VoT but low resources. Typically there is no good intercity option for these folks. Intracity you might find them cycling past traffic.

    The other key factor is of course what you do as you travel. My VoT is high when I drive because I revile traffic. But it is low when I cycle because I am exercising and low when I PT because I twit/fb/read news.

    A complex topic but great insight into the adjacent markets.

      1. I agree, what you can do as you travel is a big one. I recently took an Intercity bus from Taupo to Wellington. Never again I hope! The ride was bumpy, the seat cramped and I found it too tiring to read with the page moving everywhere. Had I been on a train, however, it would have been a totally different story! I wouldn’t have minded if it took an hour longer even and cost twice the price, for the quality of service. In fact I’ve done several similarly long train journeys overseas and enjoyed them.

        1. Yes. I actually enjoy plane travel for that reason. It’s almost always smooth enough to read, and I can get some quality offline work or reading done. It isn’t lost time. That same time on a bus, or in a car as passenger is wasted.

    1. I think it’s more complex when you consider long distance travel.

      I, myself, rather like taking the bus if the trip is under say 6-8 hours (e.g. New Plymouth at most), because I get to read, unwind, and view scenery I don’t often see. In that case, I actually derive utility from the travel, not just the destination.

      However, around Auckland, utility is generated at home, at a social event, or at work. Any time spent getting between them is wasted, and thus I value it highly (and drive).

      1. I think what we’re learning here is that peoples’ utility functions can be quite different. A useful consideration for transport economists.

        1. Except that people’s stated preferences etc… and relying on self-aware and logical utility calculations… is fraught with danger

      2. But you only see it as wasted time because you cant do anything else. I look forward to my time on the ferry each morning because I can check my emails and news feeds. I look forward to cycling because it is something I enjoy doing and is good for me.

        Driving is the real zero sum game and I guess is why people in cars are so obsessed with eliminating mere minutes from a long journey. Unless it is a purely social road trip with friends, the time in the car is just dead time and often very stressful – probably why people in cars are so quick to get angry and attack each other.

        Especially when surrounded by all those other selfish people who also consider their car the only option and created all that traffic. In Auckland I would say that 95% of people on the road in cars have never even considered if there was another viable option.

        1. The only thing I can think of no one has mentioned regarding car travel and seeing it as “wasted”: Listening on a good stereo music you enjoy or some sort of inspirational talk etc. I used to enjoy this with an old car I had, but sadly my family car stereo sucks and is not worth listening to (could use iPhone etc I just realised, but fiddly/dangerous to operate while driving?). If you start with the right attitude and enjoy time out from people on a trip home from work, this can be considered useful by some, ready to face the family/wife/partner at home.

  5. Here are posts from HamiltonUrbanBlog on choice of mode between Taupo to Auckland, http://hamiltonurbanblog.co.nz/2014/08/taupo-%e2%80%93-auckland-travel-options/ and Tauranga to Auckland http://hamiltonurbanblog.co.nz/2014/07/tauranga-%e2%80%93-auckland-travel-options/
    People don’t drive to save money. It is more about the freedom of frequency and the ability to choice the departure time of each stage of your journey.
    But what does standout are the bus journey times, these busses are using the same infrastructure as the private motor vehicle yet there journey time is often double.

    1. Bus journey times are slower because:
      a) they stop en route, including refreshment/toilet stops;
      b) their timetables allow for some delays;
      c) their drivers’ hours are regulated;
      d) their acceleration and hill climbing are worse than cars’, so average open-road speeds are slower;

      – but, even so, in no cases are journey times double those of cars!

      1. Yes they are. I spent 9 hours getting to Ohakune on naked bus, none of the times I have ever driven have been more than 4.5

        1. None of the bus times in the Herald’s table are double those of cars, and Naked Buses are scheduled to do Auckland-Ohakune in 6 hours 20 minutes.

    2. Its the same with a lot of buses in Auckland. It takes 30 minutes from Mt Roskill shops to Civic Centre in a bus off peak, yet I can drive the same trip in less than 15 minutes. For a lot of people that extra 15 minutes doesn’t matter (e.g. students, elderly, unemployed); for me it is the single biggest factor in choosing a transport mode. I would like to see AT spending some serious time and/or money to bring those times closer together, it shouldn’t just be accepted that a bus should take twice as long.

      1. I recently drove to the CBD in a work car for a work meeting (instead of just using PT and charging that to work). I found the journey time in the car to the city was indeed much quicker. However once I arrived in the city, I then wasted a lot of time trying to find a parking building that wasn’t fully occupied. Then I had to walk a significant distance from a distant parking building to my destination (since the ones close to my meeting venue were all fully occupied). I was surprised to discover that the overall door-to-door time was actually more or less on par with taking PT — even despite the fact that this episode occurred during the off-peak. I think when people compare PT times with car times they take the worst timing for PT and the best timing for private car and compare the two — even though it’s basically comparing apples to oranges.

  6. People need to how how costly it is to actually run smaller planes as well. A Beech 1900D can only pay itself off when they have at least 14 people on board the 19 seat plane. Regarding convenience, A person flying Nelson – Wellington can get to their destination in just 30 minutes compared to 5 and a half hours via ferry and car. Also, the woman complaining in the news about the lack of competition in Nelson has clearly not heard of Sounds Air. Who uses the Wellington – Nelson route also, they have a fixed rate no matter when you book.

    1. Beech 1900 is too small to really compete in seat discounting. People should remember they are in a safe and fast aeroplane, significantly operated by two flight crew and capable of on time service to meet connections in most weather conditions.

      Air NZ are buying more 68 seat ATR72’S for regional routes and are already flying them to airports previously operated by 50 seat Q300’s, as well as replacing 133 seat 737s with 170 seat A320s on main routes. Planes with more seats will likely result in more discounts.

  7. It was also completely ironic that John Key ‘spoke’ to AirNZ about reducing their prices, he being the one that sold it off claiming it was an investment. Either it’s run as a state owned asset at a loss, subsidised like the roads in NZ, or it’s run as a business, one that’s now only partially owned by the government, allowed to set fares as it sees fit. Personally if I was an investor I’d be complaining to the commerce commission about JK’s actions.

      1. I think it’s more complex than that. I’d suggest the Government’s input (as a shareholder) into AirNZ’s corporate activities should occur through the same channels as normal shareholders.

        This is a very very weird situation where the Government seems to be suggesting that AirNZ should lower regional fares and thereby reduce its profits. I don’t think it’s legal for AirNZ to take such advice onboard, and I’d love to know what the other shareholders (especially the ones who just bought shares sold by the Government) think about John Key even alluding to the need to lower fares.

        Frankly I think it’s extremely poor judgement for Key to have even spoken with AirNZ on the topic of fares. But hey, poor management seems to be a hallmark of this Government.

        1. As a shareholder with an extremely small stake in Air NZ, the political environment has some bearing on the operating environment, but i value the ability to retain customers and therefore deliver profits on an ongoing long term basis more. Price or more importantly yield management are important in achieving this. The negative publicity with being labelled as over priced and potential resulting decrease in brand value is much more worrying than words form a politician, whomever they may be.

          As has been noted the issues are complex, like most that are discussed on this blog. I doubt there is an easy answer that fits every situation.

        2. Agreed, all shareholders should talk to the company they own in the same way. But I’ve seen no suggestion that the government wants Air NZ to lower its profits, just to look at fares – they are certainly not the same thing!

  8. The value of time traveling also must be compared to the value of time at the destination. It’s OK to spend 18 hours on a bus if you will be at your destination for a month, but very different if you’re going for a weekend especially if you have limited time off.

    Then there are the economics of transportation. Terminal costs are essentially fixed costs while operation – moving the vehicle – is variable. The longer you are moving, the lower the marginal cost of each km. With terminal costs, what each end of the trip costs to build and maintain, are the key to overall cost. The cost between keeping a 777 at the airport aren’t much different from keeping an ATR-42; airlines have high terminal costs. People with a carport have very low terminal costs. So if the measure is $/km, airlines are going to look really expensive and the shorter and thinner the route, the more the ticket is likely to cost.

  9. Aircraft operating costs are a declining function of both aircraft size and distance; so for a given distance, a ATR72 (68 seats) will cost the same to operate (more or less) as two 30-seater aircraft, and a 30 seat Saab340 costs about the same to operate, I gather as a 19-seat Beechcraft. Small aircraft flying short distances cost a lot more per seat-mile to operate than larger aircraft, like B737s, flying longer distances.

  10. I’ve gone from Auckland to Palmerston North on Grab a Seat for $120 return ($60 one way) many times – I can’t imagine petrol could be any cheaper than that unless you drove a very efficient car – let alone the other costs of owing / driving a car. If however you factor in the costs of getting to and from the airport and the fact that you won’t have a car at the destination I could imagine driving being cheaper; I guess a decent PT network would be a better thing for the National government to look into?

    The Herald using individual cases in their stories as some form of evidence is becoming very embarrassing.

  11. Interesting that this posting does not mention the *missing* option of long-distance travel by train in this country. There are those of us for whom a long-distance train journey is far pereferable to bus or car, but it is a choice that has been largely removed from us. I believe what has happened to long-distance passenger rail is essentially a political and philosophical decision, made by those in various positions of influence who personally do not value this mode. I do not subscribe to the tired and trite mantra that “New Zealand does not have the population to sustain a good passenger rail system”.

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