Aviation Economics

I made this graph today showing the real value per tonne of New Zealand exports and imports by air freight. The real values are calculated using the CPI.

Interesting that the value of imports per tonne are about twice those of exports. A lot of air-freighted imports are probably pharmaceuticals. Also interesting that the real value of exports per tonne has increased about 5x over the past 20 years while the value of imports has fluctuated but not really increased.

From Tyler Cowen, an interesting tradeoff:

When the alternatives are “fly” vs. “no fly,” however, enough days of “no fly” mean the end of the firm. That causes the airline to favor flight resumption before it is socially optimal to do so. The safer outcome — not flying — doesn’t involve higher revenue, as it often does, such as when the roller coaster manufacturer puts in seat belts to assuage nervous parents and thus boost demand.

On the other side of the ledger, I suspect the regulators won’t let the airlines charge market-clearing prices for the first week of resumed flights

There is some kind of discontinuity here — normal marginal improvements to safety should allow airlines to charge a bit more.

According to ATW, US budget airline Spirit is going to charge for carry-on luggage that can’t fit under a seat (as well as charging for checked luggage), and Ryanair is thinking about charging to use the toilet on short-haul flights.

Both are pursuing a relatively extreme ‘unbundling’ strategy, where services normally sold together for a single price (i.e. a seat on a plane and the ability to use the toilet) are now priced separately. When does it make sense to bundle and when should a business un-bundle, to maximise its profits?

If you are selling A and B, then you should bundle them if there are some people who want to pay a lot for A and not much for B, and some other people who want to pay a lot for B and not much for A. But you can’t distinguish which consumer is of which type, so you face a lot of variability in the demand for your products. You can reduce this variability by bundling A and B together and selling them both for a single price. There is less variability in the demand for the bundle than there is in the demand for A and B separately, so you can make more profits. (Roughly speaking the demand for the bundle is less elastic than the demand for A and B separately).

But does a seat on a plane and carry-on luggage have this feature? No — people who are willing to pay a lot for a seat are probably willing to pay a lot for their luggage too, and people who are not willing to pay much for a seat are not willing to pay much for luggage. By bundling them together you don’t really reduce any variability in demand, and so can’t extract more revenues. Better to un-bundle them and extract more revenue from those who want to bring baggage while also attracting customers who don’t want to pay much but are willing to give up their baggage.

There is relatively little data available about the New Zealand aviation sector from public sources. What is available is summarised in a report I wrote recently.

This report was produced as part of a project funded by the Foundation for Research, Science and Technology, and the Ministry of Tourism. We are working on it jointly with the Centre for Air Transport Research at Otago.

The main conclusion of the report is that, in contrast with what is available in Australia from the BTRE, for example, there is relatively poor public information about New Zealand aviation. This inhibits stakeholders (e.g. the tourism sector) from fully understanding New Zealand aviation. It is also likely to be an impediment to the development of more intense competition.

We are going to summarise and publish what public data is available — watch this space. The existing data is scattered over a number of different sources and so we are going to pull it together into one place which will at least make it easier to access.