Back in June, Stuff published a report on regional airfares, focusing on the way that prices are affected by major events such as concerts and sports competitions. Now, I’m no airline economist, but I’ve got a general interest in transport pricing so I figured that it would be worth taking a look at the topic.
The point of the article seems to be that airplane tickets are higher during periods of high demand. That doesn’t seem too weird, but this guy in Nelson is absolutely ropeable at the thought:
Nelson man Steffan Eden is furious about Air NZ’s fares from Nelson to Auckland and return for the weekend of March 5 and 6 when Madonna will give her first New Zealand concert at the Vector Arena.
Fares that the previous weekend cost $79 are twice that at $159 on the weekend of the concert, an $89 fare rises to $169; and a $129 fare becomes $209…
“Look at the fares the weekends before and after the concert, they’re normal fares. Then on the concert weekend they’re virtually double. It’s quite blatant.”
Eden said the same thing happened when he wanted to go to the Cricket World Cup match between New Zealand and England on February 20. “I wanted to take my kids but didn’t in the end because of the cost,” he said.
The man quoted in the article seems to argue that these jumps up in fares are due to uncompetitive or discriminatory practices by Air NZ. By contrast, the airline says that the price increases are just due to cheaper tickets selling out faster:
An Air New Zealand statement said it has been experiencing high demand for flights into and out of Nelson that weekend due to both the New Zealand Masters Hockey Tournament which is being held in Nelson from February 28 to March 5 and the Madonna concert in Auckland.
“As you will appreciate, where there are major events on flights tend to sell out well in advance, with the cheaper fares selling out the fastest, so booking as early as possible is recommended.”
Now, as an economist I’m always wary of the potential for companies with few immediate competitors to exercise market power over their customers. But in this particular case, I don’t think that’s happening. What we are seeing is the normal, and in fact beneficial, working of supply and demand.
Let’s start with the supply side. Air NZ doesn’t have an infinite budget for airplanes and staff. It faces constraints. If it wanted to run more services between Nelson and Auckland on particular weekends of high demand, it would have to either:
- Pull airplanes off other regional routes, which would potentially satisfy Nelson’s demand but would in turn lead to similar stories about how unfair Air NZ was being to Napier or Timaru or what-have-you, or
- Buy extra airplanes and hire extra staff that would sit idle most of the time and fly only during a few periods of exceptionally high demand. This is superficially appealing, but it would mean an across-the-board increase in fares to pay for a bunch of empty planes.
So that’s the supply side. What about demand?
Air NZ has observed, correctly, that demand for flights is not constant over time. Simply put, more people want to fly at some time periods than during others. Airlines can respond to this in a few different ways. The first would be to keep prices constant, regardless of demand. This would turn air travel into a first-come-first served game, which is great if you always buy tickets months in advance but terrible if you have to take a last-minute trip for work or a medical emergency.
The second approach, which Air NZ may be using, is to charge higher prices during periods of higher demand. This may seem less fair, but it’s actually better for (almost) everyone. It means that airlines aren’t constantly booking out flights well in advance or misallocating resources in a futile attempt to give everyone a cheap flight. Travellers also benefit – they get a choice between paying more to travel at their preferred time or finding a cheaper fare at an off-peak time.
I fly for work on a semi-regular basis so I’ve noticed some of the patterns over time. Between 4-6pm, departure gates fill up with suit-wearing men and women headed home from their meetings in time for dinner. Not surprisingly, prices are highest at this time. Later on, prices drop, planes get a bit emptier, and the suits get replaced with casual clothes. By the end of the night, most of the people who want to get home have gotten there, and for a price that they’re willing to pay.
Occasionally, this means that somebody decides not to go to a Madonna concert. But that’s not a flaw with supply and demand – that’s how it’s supposed to work! If the man quoted in the Stuff article didn’t go, it’s only because someone who valued being there more bought the ticket instead.
Finally, I have to ask: Why are people outraged when the principles of supply and demand are applied to airfares? Perhaps it’s because we routinely ignore those principles everywhere else in our transport system.
As numerous economists have observed, we manage our roads like a Soviet supermarket. The price to use roads is set at a single, low value – i.e. NZ’s comparatively low petrol taxes – and thus people queue up for ages to drive on them every morning and evening. The same thing happens with parking, where we have regulated to make it abundant and free and ended up in a situation where people can never get enough parking.
In economic terms, there is no difference between this:
And this:
They are both situations in which scarce resources, including people’s time, are misallocated due to poorly-functioning price signals. So rather than asking “why don’t we price air travel as inefficiently as roads?”, we should ask “why don’t we price roads as efficiently as we price airfares?”
A failure to price roads efficiently badly distorts our supply decisions. We are forever pouring more asphalt and concrete that accommodates a few more slowly-moving cars at peak times and sits idle much of the rest of the time. By contrast, congestion pricing would allow us to avoid many of these expenditures by giving people an incentive to travel differently.
What do you think about airfares – and transport pricing in general?
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i love reading your posts, Peter. because they give me a different point of view that I don’t agree on, but that I want to explore anyway. I don’t agree because it makes my belly feel funny to think that everything should be priced on supply and demand, not for any economic reason.
Funny though that we are more OK with pricing someone out of being able to eat than we are about pricing someone out of being able to travel down the southern motorway at rush hour.
Or pricing them out of housing by putting restrictions on how houses can be built in the existing city.
+1 -restricted in both directions “up and out’.
Peter there is a big difference between a road, or railway, busway…… compared to a Latvian bread line. The parking analogy is closer to the truth though.
It is the difference between what economists define as public goods versus private goods. If I buy and eat the bread then no-one else can -bread is a private good -it is exclusive. If I drive, walk, bike, bus, train down the transport corridor then up to the congestion point this does not stop anyone else using the same road, track, busway….. transport corridors are non-exclusive.
Transport corridors are about public decisions regarding urban form not private goods economics.
There is also a good reason why urban transport corridors should be kept below the congestion as much as possible. This is to ensure the abundance of developable land to prevent the escalation of site prices leading to property booms and housing unaffordability. Read Alain Bertaud regarding this. http://urbanizationproject.org/blog/alain-bertaud-cities-as-labor-markets#.Vba4dvmqqko
Note this is not about saying roads are better than other transport corridor options. Or that ‘out’ is better than ‘up’. I think if cities are building ‘up’ -say in Dominion road or somewhere else in Auckland then there should be mechanisms to increase the capacity of the ‘up’ areas transport corridors. Say by putting in a modern tram system or such like.
“If I buy and eat the bread then no-one else can -bread is a private good -it is exclusive. If I drive, walk, bike, bus, train down the transport corridor then up to the congestion point this does not stop anyone else using the same road, track, busway….. transport corridors are non-exclusive.”
No, it is just the same. I am using a part of the roadway and thus preventing others from using it; if enough of “me” use that road then no one else can get on at all. With the bread I could just as easily argue that I am only using part of the bread made that day and thus there is bread left for others.
You can argue roads are public goods up to the point where they are congested, but that isnt particularly helpful to the discussion as we are talking about congestion! When roads are congested they are definitely not public goods as they are both rivalrous and excludable. I have no doubt it is a good idea to prevent congestion developing in the roading network for all kinds of reasons. Pretty much the only way to successfully achieve that is via road pricing – so is your statement in favour of road pricing?
Genuine public goods and most transport corridors are examples of them below the congestion point and it is desirable that they be a public good i.e. non-rival and non-exclusive. The problem with treating public goods as private goods is it will result in market failure if you try to apply standard supply and demand solutions.
Pricing the corridor once it exceeds it congestion is a bodge solution. It has some merits but also some fish hooks. It transfers congestion to the ‘free’ uncongested corridors. There is no proof that the revenue gained from pricing to reduce traffic down to the congestion point in any way matches the capital or maintenance cost of the transport corridor.
In the end transport provision comes down to the choices we make publicly, through our systems governance.
Really you are just asserting that they be a public good. In terms of maintaining access into cities to enable the development of outlying regions, road pricing would be perfectly good at doing that and would allocate costs efficiently.
In practice however, what you are proposing doesnt exist in large cities and really isnt feasible – so hard to see what your point is.
What you are suggesting is that we continue to build roadspace even if any economic assessment shows negative net benefits – that doesnt really make any sense to me.
As for road pricing transfering congestion to unpriced roads – well that is a bodge of road pricing. The obvious answer to that is to have a comprehensive road pricing system with all roads priced.
Mathew W nowhere in the world does road pricing for the entire road network exist. It is just a Far Right wet dream. Even if it did exist. No transport system can be planned/built by the private sector in its entirety, like say bread production/consumption is.
No Sovereign State will devolve the power of compulsory purchase to private sector players, without that power any ‘private’ transport ROW would be incomplete, as holdout landowners would demand excessive payments far above the actual value of the land.
So whatever transport system is provided is based on public sector considerations -what the voter and taxpayer are prepared to design and pay for.
Transport is not a private good that was my point. Maybe road pricing can be used to pay for part of a system, maybe it can ease problems like localised congestion, maybe it can even up the playing field between different types of transport systems.
But lets not kid ourselves that the public good -transport system is the same in economic terms as private goods such as bread.
Yes, comprehensive road pricing hasn’t yet been implemented anywhere, no doubt about that. That doesnt mean it isnt a good idea. The reasons it hasnt been implemented is, until recently, it wasnt really feasible. The dutch were in the process of doing it but have put it on hold due to politics around it.
I absolutely agree roads not like bread in the sense that roads a far more complicated thing to price appropriately compared to bread. That doesnt mean it shouldnt be done however, and the same principle of allocation via pricing applies.
I dont know what far right political parties think about road pricing – I dont know who you are referring to but I doubt the European neo-nazis spend a lot of time thinking about road pricing. Road pricing is a policy that gets broad support from economists from a broad spectrum of political persuasions however, so I dont think this is a political left/right issue. Indeed our nominally centre right government stopped our nominally centre left council from implementing a (crude and incomplete) form of road pricing in Auckland.
Your other comments appear to be based on an assumption that road pricing implies the government selling roading assets and leaving provision of road infrastructure to the private sector. I certainly would not advocate that and agree that road infrastructure is critical to the country and should be government owned. The key thing is about bringing in effective market clearing pricing. There will need to be a mechanism for determining the need for new roading investment and implementing it. But this can be done by the government.
Note that we already have pricing of roads, it just isnt “smart”/ variable and doesn’t clear the market (prevent congestion).
If parking is “abundant and free” it has absolutely no similarity to consumer goods (including bread, which is what the second picture is selling) in Soviet Russia. The reason for queues in Soviet Russia was that consumer goods were rare (in fact, *rationed*).
If NZ were like Soviet Russia, petrol taxes would be lower, but we’d have nothing wider than a two-lane road.
PS Peter, if the laws of supply and demand are so wonderful, why was the USA forced to part-nationalise/impose controls over almost all of the major arms manufacturers in WW2? Hint – it had nothing to do with security/secrecy. Let’s just say price signals, left unattended, could have led to catastrophe.
Mate there’s no such thing as free parking. Only “free” parking.
deleted comment breach of guidelines: need actual argument and evidence not just boring and repeated rants about ideology.
“Roads and parking already work on a supply and demand basis. ”
Parking in certain locations (the CBD) but otherwise no. There is nothing anti car about road pricing. And certainly nothing anti “road transport” about it. All those critical things people do using the roads will benefit from road pricing.
“Roads and parking already work on a supply and demand basis. ” You’re funny!
Seriously though – Minimum Parking Requirements – council requirements requiring developers to supply a minimum number of car parks on their land – using scarce land (housing crisis anyone?) that they generally can’t on-charge the users of those carparks for, mean that statement is pretty much completely false.
If land is scarce why is 95% of it still grass/trees?
The location of the land matters. Why did I have to say that? More specifically, land costs money, it isn’t free. It is therefore scarce.
They certainly aren’t making it any more.
Actually, land is constantly being made. (Well, I guess “made” depends on your philosophical approach to cosmology)
$79 is actually really cheap for a Nelson-Auckland flight if you think about it. Nelson is too small/lacks facilities for jet aircraft so has to make do with smaller turboprop aircraft which don’t have the same capacity as jets and cost more per passenger as a result. It’s a bit like comparing a bus to a taxi.
Another issue which will be making life difficult, is the nature of aircraft operating costs, as they are a declining function of both aircraft size and distance flown. This is why Air New Zealand’s provincial sector struggles to make money, despite the high fares, and why fares on the main trunk are a lot cheaper than those on the provincial sectors.
Once we accept the logic of pricing for regional airfares, Uber’s variable rates and extending road pricing to private cars make sense. Of course then it also makes sense to have variable pricing for public transportation; Why would a bus ticket cost the same at 7:30am and at 11am?
Very much in favour of time variable PT pricing. Clearly the price off-peak should be considerably lower.
We already have time of day pricing on transit. It’s called a Super Gold card. Problem is that there are only two prices; 100% and 0%.
There’s a fundamental difference between the two types of trips: a commute at business hours should be accessible to all, at least until employers generalise flexi hours. People are somewhat entitled to have the ability to get to work in a reasonable time and reasonable fashion. I don’t think disadvantaging people who have no option to change their commute times is reasonable. This is why buses are subsidised, and not planes. I agree with your point on plane pricing though, very good article.
Yes- that’s what Singapore’s been doing and it’s been a great success: http://www.citylab.com/cityfixer/2014/07/singapores-early-morning-free-transit-program-has-been-a-huge-success/374909/, http://transport.asiaone.com/news/general/story/cheaper-monthly-pass-encourage-peak-travel
Busses and trains run at a loss in peak times here so how would you justify charging less at non peak times! Singapore is a City with population of 6 Million so TOTALLY non relevant to this little town.
the goal is to time-shift demand, and doing so may increase the total number of PT/transit users. I am not an transport economist who models such things, but the size of the city’s population is irrelevant here. What matters is encouraging more user of PT/transit so as to reduce congestion/pollution/deaths, improve our health, etc.
And roads run at a loss all the time. So why don’t we charge people to use them?
Now there’s a thought. The lower the BCR, the higher the charge. More RONS anyone?
I believe the following is also a particularly interesting question for applied economics in NZ: Should the taxpayer subsidise air connectivity to the provinces? I’m thinking in terms of Eaqub’s commentary on the decline of NZ’s rural cities, and whether improving connectivity to these areas is a good way to ensure that NZ remains diverse in sectors beyond the services-focus of Auckland, Wellington & Christchurch.
Much cheaper to subsidise rail to regional centres
Thanks Peter. Honest question: Is this why, when more people use public transport, the fares rise?
For the same reason that if more people want vegemite the price increases. If there is more demand than supply then the price can increase without the total sales decreasing
“In economic terms, there is no difference between this: (a SH16 traffic jam) and this: (a latvian-bread-line)”
You’re right, but our political leaders and thus society always see the first as a sign of “success” or “progress” and the latter (or the western world equivalent: a lack of parking) as a “total failure”.
Politicians would nearly universally regard the former situation as “a good thing to have”TM – as that obviously shows a healthy, growing, prosperous economy- Yeah. Right.
They would generally regard the latter with extreme distaste – because its a sign of a “failing system”.
But given the choice they would invariably plump for more of (the former) over (the latter).
Because it looks like you’re making progress even when you’re not.
Until we as a society redefine our understanding of what “success” and “failure” in outcomes in the transport market are, any “market lead reforms” won’t actually help much to solve the actual underlying issues. All it will do is ensure some people grab more than a fair share of the road space (or the bread).
Which is probably why the roads first policy of the current Govt is not actually working very well after 7 years of governing.
Because its merely showing you can’t feed a growing vehicle population with enough roads, quickly enough, to avoid the queues.
It is just like the old Communist system – it could never supply enough bread, quickly enough, to its populations to avoid long queues there either.
And right now we have a problem with not enough housing for the people too, just like NZ had in the late ’40s and ’50s. Yet that is also seen as a “good thing” to have as well by some.
Rail WILL NEVER be effective in Auckland to more than a few who live near the tracks, there will NEVER be tracks to every destination. Auckland is a hilly geography too steep for trains with underground Geology of Basalt and other Rock which makes tunnelling very expensive, slow and arduous.
…which is why surface LRT is a great idea to increase the amount of PT available to people. In Melbourne the trams run on in the burbs and then link up with the rail networks to get somewhere if the rail network will get there faster or cheaper than laying a LRT route. Just because something is difficult a certain way doesn’t mean you shouldn’t try something else.
That’s absurd. Just about every road I drive on has a gradient suitable for tracks. You could run a railway up most of Sandringham, Dominion, and maybe even Great North Roads
You mean like the rest of planet isn’t like that also where people tend to live in numbers – get real.
In any case, the more people who don’t drive especially at peak times , the better off we *all* are
And just because you can’t imagine giving up being in a queue doesn’t mean that everyone else has the same lack of imagination.
And your position in the queue also benefits from all those who could have stood in the queue ahead of you – thus slowing your progress – but didn’t.
Rail will NEVER this. . ., Rail will NEVER that. . .! Spoken like a true naysayer. ‘NEVER’ is a very big little word, easy to say, much harder to substantiate. A bit like ‘ALWAYS’. How many times have we heard statements like “Road will ALWAYS be the dominant mode”, “Aucklanders will ALWAYS love their cars and NEVER want to use public transport”.
ALWAYS and NEVER only last as long as the mechanisms which sustain them. The real truth is that things can and do CHANGE. A good way to understand what CHANGE might be in store is to look at other developed countries which are further along the path of progress than we, and learn from them that ROADS are not being built so much these days, while RAIL is experiencing a major resurgence.
So I think there is a very good chance that Auckland will see more rail expansion, and more destinations connected, once the government which is currently impeding this wakes up to how out-of-date its transport policies are, and how out-of-kilter it is with progressive nations elsewhere in the world.
Of course it may take a new government to achieve this. The present government looks like it will NEVER CHANGE its policies and ALWAYS believe (wrongly) that MOAR ROADS will solve everything.
meteter, rail is effective now, so it is hard to agree with your claims. The simply observation of the boom in ridership this year [+22%] led by stations with bus connections disproves your claim that walk-up is the only source of riders.
However if you had said we do not take sufficient benefit from the already existing rail ROW in Auckland then you would get little objection. Happily this failure is being addressed.
You may be disappointed but the fact is that rail is becoming increasingly essential to everyone in Auckland, especially those who like to drive: All those millions of journeys on the rail network are people out of their cars and out of your way on the road.
The better question is how can we best continue to exploit this already thriving resource for the benefit of all? Extend it as we continue to improve what we already have looks like the best answer.
Plus of course the fact that almost everyone in Auckland lives within 3kms of a rail, busway or ferry station. A short 10min bike ride.
If we diverted the billions being spent on propping up the declining VKT to separated cycle lanes to connect residential areas to these stations, a lot more people could use those rapid (and congestion free!) networks.
When you say “NEVER” does that include the past? Like prior to 1950 when most people got around auckland on rails?
I wish this blog had a facility for approving other people’s comments.
+1 to that
+1 .. as well as a “dislike” button!
-1. It’s good to have people think through their reply and construct a sentence or two to add to the discourse rather than just hitting a like button as if this was just another LOL cat image parade.
Congestion or overuse of public goods/services is a classic example of what some economists refer to as the “tragedy of the commons” . The system where anyone can use a publicly provided good or service for free or very cheaply works fine until there are too many people wanting to use the commons and therefore the resource is quickly depleted or, in the context of transport, congested
There was a day when the rail fare from A to B was a fixed amount, based on distance. Demand was managed by adding extra carriages or extra trains at busy times. Or by building extra track-capacity for those times when it would predictably be needed.
The cost of this extra infrastructure for intermittent use only, was borne by society as being in the interests of efficiency.
Likewise there would be spare locomotives kept ready-in-steam at strategic locations to provide speedy cover for any failures, and extra crossovers and signalling for this contingency – rather like the ‘hard-shoulder’ on motorways – a economically-unproductive extra but an aid to overall efficiency. These days we have ceased to provide this level of redundancy on our PT systems, but continue to provide it on our roads.
So where do we draw the line between providing a limited, price-regulated service (such as the “Skypath”!), and a cheap or free-to-use, generously-proportioned public-facility (such as the magnificent walkways through the Wynyard Quarter)? I don’t think the answer is that market-signals should dictate all the time. Perhaps with air-transport they should, but should the same apply on Rail? Road?? Cycleways?? Footpaths?? (Yes/No – tick as appropriate)
I agree with Peter Nunns assessment on the supply and demand on regional airfares.
Unfortunately, there are alot of people like Steffan Eden, who do not understand how Air New Zealand prices its airfares. As Peter said, it is based on supply and demand.
Air New Zealand works of a profit margin of 5% on costs, over it is financial year, so it has developed over the years, a very effective ‘yield management’ system that determines what fares it can sell, at what time, on what equipment (aircraft type), on what route.
The current ‘yield management’ system is very efficient, as it can tell Air New Zealand at any hour, what fare it can charge on each flight, on each day, so the airline can determine what aircraft type to use for any regional and main trunk services.
Aircraft type on regional air routes are operated by either 50 seater Q300 or 68 seater ATR72 aircraft. Both aircraft types are very economical (excluding crewing costs) for both Air Nelson and Mt Cook Airlines to operate under ‘Air New Zealand Link’ brand.
The most cost effective aircraft that is used on regional routes is the Q300, as it has 3 crew (2 pilots and 1 flight attendant) and this aircraft is used on low demand routes and/or services that have low passenger bookings. The ATR72 has 4 crew (2 pilots and 2 flight attendants) on high demand regional routes and/or services that have high passenger bookings.
When Steffen Eden comment appeared in Stuff, I check on Air New Zealand website and all direct services between Nelson and Auckland on 5 March 2016 where Q300 aircraft. A check today, shows all direct services except for 1 direct service, are operated by ATR72 aircraft. This means Air New Zealand has changed aircraft type to suit the strong demand for those people who want direct air travel between Nelson and Auckland for the Maddona concert on 5 March 2016.
I would like point out, that ‘Grabaseat’ fares are lead in fares for a service and Air New Zealand does not make any profit, as these fares are ‘sold’ at cost price. This means a Q300s operating on specific day of travel, departs with only 20 ‘Grabaseat’ seats sold, Air New Zealand is not making profit but it is covering the operating costs of that flight.
Despite the popular belief that Air New Zealand is making good profit on regional services, is a bit of myth. I am not saying Air New Zealand doesn’t make a profit on regional air services, it does a reasonable return/profit on regional routes, but it is not as high as what most people think.
People should not compare regional air services with main trunk services due to the different aircraft type used. Air New Zealand gets a better profit return, using a 178 seater A320 aircraft that has using a Q300 or ATR72.
I also would like to mentioned, that InterCity Group (operating InterCity, Newmans and Great Sights brands) also has a good ‘yield management’ system similar to Air New Zealand, that determines what fares can be sold on what days, on what routes and what services.
Naked Bus/Manabus has a ‘yield management’ system for it services but is not a sophisticated as Air New Zealand and InterCity Group systems.
Hotels also used ‘yield management systems to determined what room rate would be available on one what date for what room.
Uber uses a ‘yield management’ system to determine their fare pricing (which is not fair on the taxi drivers who have to work with fixed charges):-)
‘Yield Management’ systems work on a supply and demand basis.
With regards to local public transport systems like in Auckland, Wellington, Christchurch, etc, have contracted transport operators. There is no reason which respective regional councils, can not work on providing ‘Peak (7am to 9am and 4pm to 7pm)’ and ‘Off Peak (9am to 4pm and 7pm to 7am)’ fares, like what has been done in the past when local city councils use to own and operate their own public transport systems.
‘Tap N Go’ payments like HOP and Snapper can be programmed for ‘Peak/Off Peak’ times and fares.
Some years ago, American Airlines adopted a simplified air fare structure, essentially dropping yield management. Customers loved it. Everyone followed suit. A few months later American dropped it. Everyone followed suit. Massive computing power has not only made yield management possible, with air fares changing by the second, it has made it critical in an industry that is both labour and capital intensive, with unpredictable costs. If it was that important, the guy from Nelson could have seen Madonna (why?) and left the kids at home. The concert ticket was probably more than the air fare.
what do you mean uber is unfair on drivers. THey claim the price goes up during peak periods to encourage more drivers. So how can the extra yield not be passed to the driver, are they telling porkies/
If the demand is high, the competitive market will increase supply over time.
However if the market is not competitive, the monopoly can charge whatever they want without increasing supply.
In transport, if people have no good alternative that are as good, charging extra is evil.
Why subsidise waste?
If we take a step back, all transport subsidies are a fillip to preserve a 9 – 5 work existence that surely is approaching global redundancy. Digital communication allows us to access ideas and people and services in real time across continents. Our current land use regulations, transport subsidies, work place regulations all favour a practice that wastes existence – a daily congested commute. We end up having a debate about how to minimise the wastage. Rather than accept the costs of the commute, why not eliminate the need to commute in the first place?
We should be liberalising building restrictions across the city, to allow people to create new infrastructure for whatever might be coming. We don’t know what the future holds, but we shouldn’t be locking ourselves into a mode that accepts inherent waste.
In Southern California, bastion of the automobile, we have some freeways with the center lanes turned into demand-responsive toll + HOV lanes. Prices change dynamically so traffic can always go at at least, say, 45 mph.
It’s called “FastTrack” and it means if you’re willing to pay, or you carpool, you can always get where you want fast on a freeway with FastTrack installed.
I don’t like the way it’s implemented because you have to shell out for an expensive tracker device, even if you’re a car-pooler which means if you’re an occasional user it’s not convenient to take advantage of it. But if the system were implemented Northern-Gateway style with plate recognition I could see it working beautifully in Auckland! It’d kill two birds with one stone by allowing drivers willing to pay or carpool to get to their destination quickly as well as opening up opportunities for express bus services in the South and West.
The Mojave picture is cool. A more topical picture would be of the boneyard in Marana Arizona. In the Mojave picture what you’re seeing is a lot of military aircraft. You will notice some are broken. Those are aircraft covered by arms reduction treaties between the US and the Soviets or whatever they call themselves now. Chop a wing off a plane that’s large enough and the programme can be monitored by satellite. In Marana, the residents are mostly commercial aircraft no longer needed, i.e., excess capacity. There are hundreds of acres of perfectly good airplanes, mostly widebodies – 747, DC-10, 767, etc. – from airlines from around the world. An impressive sight. It’s cheaper to park them long-term than fly them. Can’t sell them because no one wants them, else they wouldn’t be there in the first place. Yield management is intended to eliminate this problem, among others.
“why don’t we price roads as efficiently as we price airfares”
We are pricing the aircraft, not the sky, and the price is set by the aircraft owner. Similarly, we price the vehicle, not the road, and the price is set by the vehicle owner.
It’s not different at all, on the contrary it’s exactly the same.
The sky is not scarce (yet) – and noone had to build and pay for the sky. But airport landing slots are scarce and they are priced. The point of the article is that scarcity is allocated via pricing in the case of the airline but not in the case of roads.
I do get the point Matthew, but with the exception of privately owned toll roads, road corridors are for the free and open movement of people, not just in cars, but on bike and on foot. If they were not made available in such a manner, the concept of freedom of movement would cease to exist, as most land outside the corridors is privately owned.
I would rather not see the day when movement outside your home is charged for, beyond what is required to maintain the infrastructure.
I totally agree that cyclists and pedestrians should be given free access to the road network – for them roads really are a public good (if we were all on bikes or on foot there really wouldnt be an issue with congestion). However I fail to see how this appeal to basic rights applies to driving around a 1 tonne + piece of heavy machinery?
You can actually fly anywhere in the world with a zero airfare – just own your own plane. Same with cars – own your own, and zero fare. But travel in an airline’s plane, or a taxi company’s car – you’re going to pay a fare.
So road use is currently charged the same as any other mode. To compare apples with apples, this article should really compare airline fares with taxi fares.
As I have pointed out, as far as I am aware airspace is not scarce yet so there are no congestion issues associated. It also doesnt require building or maintaining The actual built infrastructure associated with flying is airports. The landing slots are scarce and variable pricing for slots exists. Nonetheless, a major source of scarcity in air travel is available seats and these are priced. In road transport the critical point of scarcity in cities is the road space, but this isnt priced so as to clear the market. So it is a perfectly valid comparison. If you want to write a blog post comparing airlines with taxis, go right ahead. The author of this post has made a perfectly valid comparison.
As for the way road transport currently works, you seem to be under a misapprehension. You say:
“I would rather not see the day when movement outside your home is charged for, beyond what is required to maintain the infrastructure.”
and also
“So road use is currently charged the same as any other mode. ”
But the current situation is not that only maintenance of infrastructure is charged for. The building of new infrastructure (and replacing of obselete infrastructure) is charged for in petrol taxes. If we only charged for maintenance we would not build any roads and so would not have built any roads.
In addition, with road pricing, there need not be any additional charging in aggregate, only a redistribution of charging from those who place little pressure on the infrastructure to those who do. So indeed road pricing would, for those who travel off peak, be closer to your ideal than the current situation. Currently off peak users are being charged for maintenance plus the provision of additional capacity that they dont need!
So in summary, there is no free lunch, stop pretending there is, and if you want the status quo you need to justify the subsidisation of peak users from off-peak users.
If you owned your own plane you would still pay runway facility fares.
But not motorways. Bicycles and pedestrians are banned from motorways.
The suggestion in Auckland is to price motorways and their on/off ramps, not local roads.
> They are both situations in which scarce resources, including people’s time, are misallocated due to poorly-functioning price signals.
Buried in here is a completely unjustified value judgement, though. The idea that roads should be priced high enough so that they aren’t congested assumes that people who have more money than time should be entitled to have the roads to themselves, and those who can’t afford uncongested travel should not be able to travel at all.
Pricing the roads doesn’t add to anyone’s choices at all: if the roads are unpriced, you can choose between cheap, congested travel, or none. If the roads are priced, you can choose between uncongested expensive travel, or none. When economists call for road pricing to manage demand, they’re imposing their value choices. It’s not a “misallocation” of resources, just a choice that economists – generally well-to-do – don’t like.
The current setup still allows everyone to travel, and congestion itself provides a disincentive to travel at peak times. What adds choice to the market is… literally adding choices. Modes of transport less subject to congestion, or that we can feasibly add more of in response to demand.
It depends a bit on the rest of picture Stephen. If we had a situation were all we had were the roads God gave us and they didnt require maintenance, and we couldn’t build any more, your value judgement framing would be fair (although in my opinion still misguided – Ill get to that). But we actually have a situation where people are charged to fund roads – through petrol taxes, RUCs, rates, taxes and vehicle licencing. We also have a situation where the lions share of road spending is on improving capacity. I think you can see where I am going with this – people are already being charged, but instead of those who place the most cost on the system – peak time users – paying more their share, we have massive cross subsidisation by off peak users. So the value judgement is about whether you get off peak users to subsidise peak users, or not. I know which side of that value judgement I come down on.
But even if it was the case that roads were costless, scarce and unable to be added to, road pricing would still be a good idea, to improve the efficiency of the road network. If we are worried about those in poverty being priced off the road, we can redistribute income via the tax and welfare system to the extent we are concerned. Indeed we could completely compensate everyone if we wanted to and we would still be better off!
And lets think about what road pricing will mean in practice. Congestion is a highly nonlinear phenomenon. In fact congested roads have less capacity than uncongested roads. In practice you will want to have a sort of factor of safety to prevent the system from being unstable so you might end up with 90% of the vehicle capacity with a massive increase in travel speed (say three times the speed). So all those higher value vehicles – buses, trucks, tradespeople, high occupancy vehicles etc. are suddenly made much more efficient. So the road based PT system will be hugely more efficient and indeed could/should be run without subsidy, and with the virtuous circle of improved frequency, reliability, speed and network effects, will be hugely more useful to large numbers of people.
So it is really a no brainer. The only discussion is around how much redistribution we want and that is a discussion we have anyway.
> We also have a situation where the lions share of road spending is on improving capacity.
That’s the flip-side of the same coin, of course. As you say, most of the charges to use the roads are to increase capacity, that is, to reduce congestion. So people are being charged for something they don’t necessarily want, at least at the price on offer – lower congestion.
It’s entirely reasonable to think that we should keep the existing roads we have, but that the price is just too high for roadway capacity expansions in existing cities.
“It’s entirely reasonable to think that we should keep the existing roads we have, but that the price is just too high for roadway capacity expansions in existing cities.”
Ok fair enough. It seems interesting that right at this moment the exact right amount of infrastructure exists no matter how much growth a city is likely to experience in the future, but lets take that as a given. You will also need to eventually replace the infrastructure (everything depreciates) but lets leave that aside for now.
Even if this is the case, as I pointed out, road pricing is still a better situation. If you are worried about those getting priced off the road, you can redistribute cash back to them. In the most extreme case you could say: route x at time x under road pricing is going to cost $5. Lets take everyone who would take this trip in a “no road pricing” world and give them all $5. 90% of those people will say – OK I will still travel and give you back my $5. The other 10% will say – actually I have better things to do with that $5, so I wont travel. So the market clears and everyone is better off.
And that would be fine if we had a funder (central government) that was as prepared to invest in offering alternatives as in eliminating congestion. However, the scales are massively tipped toward “solving” congestion – which of course is impossible in a successful city.
As a society we have been so convinced that congestion is 1. a bad thing and 2. a thing that can be fixed, that we ignore what you rightly point out is the answer – an alternative transport network (or networks if you also include cycling and walking infrastructure). And that for me is really the guts of what this blog is about – rebalancing transport spending.
In saying that, the results even from cities with excellent alternative networks, Stockholm and Singapore, show that road pricing really is an answer to congestion. http://www.ted.com/talks/jonas_eliasson_how_to_solve_traffic_jams?language=en
Its probably unrelated to the point of this article, but I think the lack of competition is also a factor. If say Jetstar flew to Nelson (which they may soon do), there would be more incentive for each airline to add more flights to this route when busy to get a bigger slice of the pie. Without competition, Air New Zealand can just charge whatever they want, why would they add more flights.
Jimbo, it’s simplistic to think that the only competition to one airline is another airline. If time being there are bothe of the essence probably, yes. However, our hero could watch a live streaming of the Madonna concert. He could take a bus and ferry and another bus. Travel with friends. there are all sorts of options.
In both my work & volunteer activities the huge improvement in video conferencing and screen sharing technologies has greatly reduced the need to physically be there so I think a bigger challenger to AirNZ’s Regional Air Travel monopoly is ‘not travelling’ rather than other airlines. And if demand drops, the supply price will drop too.
Competition itself (or lack of) isn’t necessarily a factor. Yield/Revenue Management really is a pure Demand/Supply argument. If Jetstar did operate they might put on a few services, and if there was enough demand to fill up those and all the Air NZ services, the Air NZ pricing would be similar. Yield/Revenue management is about closely monitoring trends against a baseline of a similar event period and adjusting pricing down if bookings are slow (vs. the known baseline) or up if bookings increase. It doesn’t really matter if there is a competitor or not – if demand exceeds supply (regardless of the brand of supply) the price will be higher.
If there is no competition someone like Air NZ can safely price themselves above the market and perhaps choose only to fly people willing to pay $200 and above. It might be nice because you’d have a higher level of profit per seat but if the fare charged is above the cost margin (of say, $120), then you’re incurring an opportunity cost of every person who is willing to pay between $120 and $200 but doesn’t. So if you have spare seats it is beneficial for the supplier to charge as low a fare as possible (above cost). When demand exceeds supply however this flips on it’s head. If your plane is going to be full you want the most money out of every seat. If someone who would pay $200 can’t book because the last seat was taken by someone paying $120 then you’re incurring more opportunity costs…
When you get down to it though, “demand” is too simple a way to look at it. Within the demand you’ll have groups of people who are willing to pay $200+, $100-200, under $100 etc etc. So it depends on what people purchase tickets at what stage and with who. The competitor will however soak up people from each of the groups so Air NZ will not be able to charge as many seats at as high a price as they might like. The people who might have been willing to pay $200 could get a cheap deal with someone like Jetstar for $79, which would be incurring an opportunity cost to Jetstar. However if Jetstar price themselves below the market the demand will quickly occupy all the cheap supply and we’ll be back in the situation where Air NZ have the only supply available and can manipulate pricing to obtain the best result for themselves.
Let’s be realistic though, Yield Management is practised purely to maximise revenue for the airlines. The circumstantial spin offs about supply being available at short notice are good, but they are just coincidental.
While Air NZ does not have a direct airline competition, on several key routes the fare charged is bound by the availability of cheaper, albeit slower, transport, the travelling balancing time vs cost. For many, time is a high priority, hence the cost can rise; if too high, the aircraft ends up empty as everyone is on the bus. The lack of direct competition does make them higher than needed on average (varies by route, which in turn is driven by the demand on each route)
While another airline would bring down fares on longer routes where travel time or means are unacceptable for the vast majority, there will also be a lower limit to the fare. In regional NZ, this mostly comes down to airport fees, which are remarkably high. The interesting comparison will be when Jetstar starts flying to regional NZ, as they will be using the same aircraft type (Q300) on the same routes or similar as Air NZ, although they tend to aim for a different market sector. Odds are this will balance out near the lower end of the current Air NZ price range on the regional routes as it moves closer to an at-cost basis initially, but then back to making a healthy profit (healthy in business future-proofing, not excessive, sense). Some people think Air NZ operates the regions out of charity and national service; not true. Consider the way in which they defend their territory against any new player and the speed with which Eagle Air is being wound down due to no longer being profitable. This is not the sign of being unprofitable.
Airfares will come down with Jetstar starting those routes. Will this be sustained? Unlikely; both airlines will probably lower fares below sustainable to build customer mass. However, Air NZ fares will likely remain lower than current for the presence of the added airline, maybe not much, but lower. A bit like domestic mainline, both will end up comparable at points in the day and vary with time of day to suit demand. Less appealing time? Lower the fares to get more in at that slot and avoid an empty aircraft. Flying an empty aircraft makes no money, but the same applies for one not in use.