Deregulation, the New Zealand Experience

Two years ago New Zealand deregulated its domestic airline services.

The official title of the Ministry of Transport was Regulatory Reform, but it amounted to the same thing. A tight system in which prospective airlines had to prove to the Air Licensing Authority that not only did they have the cash, the aircraft and the expertise to mount a service, but also a guaranteed demand from the public, was swapped for a system in which the main requisite was to show they had the ability to mount a safe operation.

The Ministry described it as a shift from “the quantitative to the qualitative”. Translated, that meant constraints came off the number of licenses issued, to be replaced in the traveller’s interests by highly competitive services.

Increased competition there has certainly been, though many of the older established operators question the ter;n “quality”.

In a pattern roughly parallelling the United States experience on a much smaller scale, the two years have seen the launching of 40 new passenger transport enterprises, scheduled and nonscheduled; a cut-price ticketing war and the sometimes spectacular disappearance of a number of operators, both old-established and post-deregulation.

Only recently however has another scenario emerged. It can best be described as signs that the heavyweights of the local industry are girding up for a fight which will leave few if any pickings for the small operators.

How this will go down with a Labour Government firmly committed to competition and a free marketplace remains to be seen. Suffice to say, the small airlines are more uneasy today than they were a year ago.

“The signs are building up and I’m certain there will be massive attempts to squeeze us out in a year or so,” says Malcolm Campbell. Campbell runs Eagle Airways, of Hamilton, the largest of the small provincial airlines.

But first, how does the deregulation system function?

Formerly, a company seeking to operate any flying services had to get either an air transport licence or an aerial work licence. The ATL stipulated whether services were to be scheduled, nonscheduled, air charter, air taxi or for scenic flights. The aerial work licence stipulated one or more: topdressing, liquid topdressing, spraying or miscellaneous.

Number, type and capacity of aircraft were specified.

Applicants had to prove that the demand existed for the proposed service and that it was “necessary and desirable in the public interest. ”

But the most formidable hurdle at the public hearing was the right of other operators to object and invariably they did, so that an adversary situation quickly developed. Very few applicants for instance succeeded in getting scheduled service licences on routes flown by Air New Zealand.

Under the new system which was introduced in two stages (December 1 , 1983 and April 1, 1984), this right of objection was abolished, and so was the requirement that an applicant had to prove that a public demand existed for the service. Licences were simplified into plain Air Transport or Aerial Work, with the holders given the right to respond to whatever openings there appeared to be on the market. An ATL holder may run taxi and joy rides, or scheduled services, with any number of aircraft, over any route – providing the Air Services Licensing Authority is notified.

Licences are categorized on maximum certified takeoff weight:

Category A – unlimited MCTOW; Category B – up to 7200 kg MCTOW; and Category C – up to 2500 kg MCTOW.

The authority must provide a licence if it is satisfied about safety and reliability, insurance, operational conditions, financial matters and “repute”.

At the beginning of April, 1984, when all-comers were first allowed to begin applying for licences under the deregulated system, there were 84 operators holding ATLs and 38 holding combined transport and aerial work licenses.

By early 1986, the total number licensed to provide transport services had risen to more than 260, the larger proportion being combined operators. Many aerial work operators including cooperatives that formerly required no licence at all had taken the opportunity of getting transport licences.

The ranks of the original 84 airlines and commuter services had been swelled by another 36 active operators, of which at least four scheduled airlines were completely new – with no previous aviation affinities.

Among the latter are Hercules Airlines, an Auckland-based freight operator running two Bristol Freighters and Newmans Airways, which flies two de Havilland Canada Dash 7s and will soon change to three Dash 8s.

Newmans Airlines provides a copybook example of just how smoothly the deregulated system works when approached by a group with ample reserves and expertise.

At the beginning of 1984, Newmans which is the biggest tour and charter bus company in the country, and a subsidiary of the giant TNL Group, was approaching a crunch point. It had failed in a bid to take over the Mount Cook Group (including Mount Cook Airlines) and says it was left in a situation where it could not obtain airline seats for all the tourists it brought into New Zealand.

So although it had no aviation experience, it decided to set up a substantial scheduled airline, largely in competition with Mount Cook, the second biggest airline after Air New Zealand.

The directors wanted a professional operation from the start, quality equipment and personnel and a launch in time for the next tourist season. It was prepared to spend the money which eventually amounted to nearly $40 million.

The licence application was lodged immediately, while orders were placed for two Dash 7s and the group’s special projects manager, Mr Eric Peter, was summoned home from Belize where he had been seconded to the United Nations.

Peter’s first job was to go head-hunting for experts. He brought in a Briton, Mr Dave Mannon, as flight operations consultant. Mannon, an old ICAO hand had had experience in setting up other airlines. He was followed by Mr Kel Sanders, an economist who had been working on tourism development in South America, and Captain Wes Stratton who had been flying the Dash 7 for Britain’s Brymon Airways – Stratton, a legendary name among pilots was to mark up his 30,000th flying hour with Newmans.

With engineers, they made an early start on compiling the all-important operations and engineering manuals which are at the heart of licencing applications.

Meanwhile Peter extended his recruiting for 11 pilots and 11 first officers – they came from Papua New Guinea, Britain and the RNZAF – and engineering personnel. All staff unrated on the Dash 7 were sent to training schools at de Havilland Canada and Pratt & Whitney.

A team of 22 flight attendants were selected from 400 hopefuls. Newmans, with an eye on the major tourist source, is probably the only airline outside Japan where at least half the cabin crew speak fluent Japanese.

The cap on the management came with the appointment as chief executive of Mr Ken McDonald, then TAA’s livewire manager in NSW.

The company had to build its own airport at Glentanner, near Mt Cook, because the local airport was owned by its competitor.

Newmans launched its full service, Auckland/Rotorua/ Christchurch/Mt Cook, on February 28, 1985, a month ahead of schedule and just 35 weeks after the initial decision to set up the operation. Almost until the launch other airlines were saying it had no hope of flying on schedule.

According to Ken McDonald, it was the company which set the pace and not a day was lost on licencing procedures. “Civil Aviation co-operated with us all the way – they advised us continually on the manuals and let us know promptly if there was an error or modification needed in the texts. ”

Newmans began with a seat load capacity of 28 per cent. It was up to 35 in two weeks and is now rising comfortably through 60 per cent.

McDonald’s says its change to Dash 8s, at the end of this year, will be to give the airline greater flexibility in servicing both regular and charter routes.

A similar experience is cited by Hercules Airlines, the first of the entirely new companies to seek an ATL for scheduled services under the new regime. Hercules filed its application on the April 1 opening day and was in business at the end of June.

Hercules came together in a social sort of way when eight people including two former RNZAF pilots and Mr Ron Owen decided there was a niche in the air freight business. Owen’s company, Owen Air Motive had already successfully tendered through the Government Stores Board for two ex-RNZAF Bristol Freighters, plus a number of Hercules engines still with many hours left.

The group called in Mr Neil Randall, an engineer newly retired after 35 years with Air New Zealand who was also an experienced purchasing officer. Randall recalls the work on the manuals as time-consuming and expensive for the three flight crew and three engineers who worked on them, but has nothing but praise for the Auckland office of the Civil Aviation Division. “They advised us to feed them rough drafts as we produced them, which enormously facilitated any changes or amendments required. ”

The other important side of the licensing process, the examination of finances, was largely handled with affidavits and detailed depositions supplied by the company. They were accepted by Civil Aviation with little quibbling and approval conveyed to the licensing authority.

Hercules is now into profits, but Owen is wary about giving too much away because of what he sees as an intensely competitive situation, fuelled by what appears to be a well-established commercial “intelligence” network. Price under-cutting of the company’s twice-nightly return services from Auckland to Christchurch is a frequent occurrence.

Nevertheless, says Owen, Hercules is firmly established and “has tricks up its sleeves”. The company is looking at the trans-Tasman, which will necessitate new aircraft.

Not so fortunate among the early bird trio of scheduled airlines ”formed from scratch” when deregulation came in was East Air, a Napier-based company that flew a fairly extensive network on the eastern side of the North Island and to the Chatham Islands – at one stage it was negotiating the purchase of a BAe 748.

The company ceased flying abruptly late last year and its Piper Chieftain and Cessna 402 were repossessed. Comment could not be obtained from the principals, but other operators cite under-capitalisation and crippling loan servicing charges as high among its troubles.

Perhaps, predictably, criticism of the deregulation mechanism is much more widespread among older established aviation companies, many of whom, in fact, have taken advantage of the wider scope of the new licences.

Back in 1978, two pilots, Peter Roe and Liz Needham, purchased a small flying training school at Ardmore, Auckland’s main general aviation airport, about 30km south of the city. They were already established in air taxi work at the beginning of 1984 and obtained a new deregulated ATL.

First they mounted scheduled flights from Auckland to the outlying Great Barrier Island and then decided to switch to services between Auckland and the more populous northern city of Whangarei, in competition with Air New Zealand’s F27s and another small airline.

Roe describes his licensing experience as a nightmare. “Civil Aviation gave us no guidelines in compiling the manuals and couldn’t even suggest any. In the end we went to others who were flying the same aircraft and virtually copied their manuals. ”

The couple decided on a fairly upmarket service on their twice daily return run to Whangarei, a pressurised Cessna 421 crewed by two pilots with eight passengers. Roe claims that while his crews maintain meticulous operational standards, Civil Aviation’s monitoring of small airline operations – particularly in marginal weather approaches to airports – is “slack”.

The company, he says, has survived a bout of cut-price competition from other small airlines, and is profitable. “But it’s a knife-edged business – you’ve even got to watch your telephone bills. ”

Beneath the overlaying crust of Air New Zealand, its freight subsidiary Safe Air and the tourist-tailored Mount Cook Airlines, there were at the time of deregulation 13 smaller commuter-type airlines flying scheduled services, most of them in the North lsland and linking provincial cities with main centres. There were also 62 non-scheduled companies.

While theoretically there are now 260 licence holders who could mount scheduled flights, a January count shows the 13 had risen to 20, plus Newmans and Hercules. Three bodies are also talking of forming international air freight companies.

The attrition rate among the smaller operators had perhaps not been as high as it could have been, though Charles Haywood, the managing director of the old established Nationwide Aviation, counts 14 substantial operators going out of business in the past three years. A precise gauge is difficult because a number of non-scheduled operators have moved in regular services, decided the going was too tough and pulled back to their former business.

Civil Aviation counted an 18% increase in scheduled airline passenger uplift in the first year of deregulation, but it was a year of marked gains by the big operators and probably reflected normal trends.

The area of most noticeable ferment has been across Cook Strait, between Wellington and the centres of Blenheim, Picton and Nelson. Here in the past year almost every second month saw a new operator start-up – and often one disappeared. Outdoor Aviation, a Wellington-based company recently spent $2. 6 million on two Cessna Caravans for the short hop.

The company failure which produced the most ripples was the bankruptcy just before Christmas of Air Albatross. With Nationwide Air and the Hamilton company Eagle Airways, Air Albatross provided what could be called the three main stanchions of the small airline business.

It provided a comprehensive service, Auckland/New Plymouth/Palmerston North/Wellington/Nelson, with a top notch fleet of three Fairchild Metroliners and two Cessna 402s. It was considered a good company with sound management and highly competitive. Unfortunately, one of its Cessnas was involved in a tragic crash that killed seven when the aircraft hit power lines in the Tory Channel while flying out of Picton last year.

Managing director, Mr Murray Turley, cited this as a primary reason for the airlines· problems. However, other operators suggest that heavy aircraft maintenance expenditure and Air Albatross’ willingness to slash fares where necessary may have contributed. At one stage it offered $50 Auckland/New Plymouth flights when the prevailing fare was $85.

So Nationwide’s Haywood and Eagle Airways’ Malcolm Campbell remain the two “old and bold” survivors among the largest of the small companies. Both were flying regular services before deregulation – Nationwide 12 years ago was the first to get a scheduled licence in direct competition with Air New Zealand services -and were not enthusiastic when deregulation was first mooted. Both agree they would not now turn back the clock, but they’d like to see changes in the system.

Haywood: New licences are issued willy-nilly and I don’t think applicants are screened in the way originally intended. Price cutting is taking whatever cream there was in the business. There are too many enthusiasts in business without enough capital. We’ll survive because we’ve built up our resources over 17 years and can roll with the ups and downs. A lot won’t.

Campbell: At least under the old system you had to have a reasonable sort of case and it was tested – sufficient gear, cash and the right personnel. Now Civil Aviation seems to have abdicated its responsibilities. It doesn’t look at financial criteria – if you have an aircraft and enough money to take a risk, you’ve got a licence.

Campbell, who is chairman of the Aviation Industry Association’s air transport division, also points to a problem that makes the New Zealand business particularly knife-edged. It is the crippling imposition of various taxes and levies which takes nearly 30% of all revenue earned, compared with 8% in the United States. It ranges from domestic travel taxes to meteorological charges and fuel taxes (11. 2 cents in every $1. 07 litre of Avgas).

In the background, Campbell, Haywood and others in the industry perceive a developing scenario which gives them more cause for concern.

Last year Air New Zealand won a drawn-out series of court and Commerce Commission battles allowing it to increase its stake in the Mount Cook Group from 33% to 77%. Its opponent in the bid to take over Mount Cook was Newmans. In effect, the takeover established two major blocks; the overwhelming Air New Zealand one and Newman, the latter still small in aviation but with very large resources.

Though Air New Zealand said Mount Cook Airlines would continue to operate independently, small operators suspected they would soon find themselves beneath two heavyweights tussling to cream off what they can from provincial services.

Some months later, Safe Air, a wholly owned Air New Zealand subsidiary that up until then had concentrated on freight services and engineering, announced it was embarking on commuter passenger services and was already evaluating three medium-sized commuter aircraft types (Jetstream, Beech 1900 and Metro 3) for operating on provincial services and possibly pioneering new routes.

Safe Air’s manager, Mr Ron Tannock, said the company’s Freighter aircraft would be retired early in 1986, leaving the cargo work to its Argosys.

”There is a need to move into a new area of commuter operations because the capital costs and the level of income in freight precludes a major commitment to cargo. We see this new role as a natural extension of existing activities and because of the existing infrastructure, we will be able to operate economically,” said Tannock.

He added that the move increased job security and was taken after a detailed and exhaustive study on the future role of Safe Air.

Campbell’s reaction to this is quite blunt. He recalls that a series of recent studies commissioned by Air New Zealand, and done by overseas consultants, all advised against the economics of Air New Zealand going into the light airline business.

“I believe they (Air New Zealand) are setting up Safe Air as a loss company to put others out of business,” says Campbell.

Australian Aviation put this to Air New Zealand’s public affairs director, Mr Bob Wallace, “It’s rubbish to suggest we are setting up a bloc- I think Ron Tannock’s rationale speaks for itself”, said Wallace.

He then quoted a remark by the airline’s chief executive, Mr Norman Geary, that the airline industry was both capital and labour intensive and economically “knife-edged”. A point equally echoed by Malcolm Campbell and Charles Haywood.