Air freight subsidy extended for a month

Tuesday, 16 February 2021

A major subsidy for airlines has been extended for an extra month, with some arguing the Government has no option but to keep the multimillion-dollar scheme going until borders re-open.

Transport Minister ​Michael Wood said he has decided to extend the International Air Freight Capacity (Iafc) scheme by one month. It was originally slated to come to an end in March.

“The one month extension gives businesses that rely on airfreight and airlines certainty while the Government reviews its support for international air connectivity during the Covid-19 recovery.”

Stuff understands the Ministry of Transport is also talking to people in the freight industry and trying to pull together statistics on the hit to importers and exporters if the IAFC subsidy were to be removed.

**READ MORE:

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* A perfect storm at the ports: inside our freight and port delays

**

The subsidy was originally forecast to cost over $370 million from April 2020 to March of this year.

Infometrics economist ​Brad Olsen acknowledged it was an expensive subsidy and said it was fair to ask questions around its future, but also thought it was “undeniable” the scheme needed to continue.

“Air freight mobility does provide quite considerable and quite important support to actually ensuring that New Zealand isn’t too isolated down here in the bottom of the South Pacific.”

Subsidy likely to be extended

When our borders closed it didn’t just disrupt the flow of people, but the flow of goods including essential medical supplies.

About 80 per cent of goods were carried in the belly of passenger aircraft pre-Covid. The goods were effectively subsidised by international travellers who flew on those flights.

Now it’s the other way around. Flights carrying passengers are only one-third full of passengers so rely on a subsidy from Government to fly at all.

The Government does this through the IAFC by picking up the tab for flights where passenger demand doesn’t fully cover the cost of flying those planes.

​Board of Airline Representatives of New Zealand (Barnz) executive director ​Justin Tighe-Umbers said his organisation wanted the Government to provide greater certainty around the scheme.

Airlines making investment decisions now could plan their routes to New Zealand if the Government sent a clear signal the scheme would stay active until the end of the year.

“We’ve had the Prime Minister signal at the beginning of this year that the current border settings are likely to remain in place until the end of the year,” Tighe-Umbers said.

“On that basis we’d call for the IAFC to be extended for the rest of the year as well or at a minimum for six months.”

Road Transport Forum Chief Executive ​Nick Leggett said he’d be surprised if the subsidy wasn’t extended once the April deadline came up.

“It’s a very heavy subsidy to the tune of many millions of dollars a week.

“The issue would be if they withdrew that flights would be lost, but then the cost of freight - which has already gone up hugely - would skyrocket again and be felt far more heavily by the consumer.”

Keeping air links open

Before Covid-19 the country had direct air links to 44 different nations. After our borders closed this capacity halved to 22 - largely down to MiQ capacity which effectively limits the number of people who can enter this country to 10,000 per month.

This meant it was impractical for airlines to maintain a lot of previously-viable air links.

Tighe-Umbers said the number of air links to different destinations could halve again if the subsidy were removed.

“It’s not only the benefit of air cargo that it supports it’s also keeping pathways open for Kiwis returning home..[and] for businesses and people like that who still need to get overseas even when the borders are closed.”

It is hard to get those air links back once they’re lost. Tighe-Umbers drew comparisons with the global financial crisis where it took five years for air connectivity to be restored to pre-crisis levels.

“The danger for New Zealand is if the rest of the world is starting to open up as well airlines will repurpose those aircraft up to more viable routes like North America and Europe - where you’ve got much bigger catchment areas.

“It’s really important that we do everything we can to hang on to our air links here so that when we do start to recover its easy for an airline to dial them up.”

Phase two of the scheme saw Air New Zealand, Cathay Pacific, China Airlines, China Southern, Emirates and Malaysia Airlines successful in their bids.

Last week Cathay Pacific announced it would no longer be servicing New Zealand.

Tighe-Umbers said the subsidy effectively prevented airlines from making a loss on flights here and wasn’t available for “cash positive” flights where passenger revenues were high enough to cover the cost of them.

Olsen said it was even more important these air links be maintained now given the breakdown and delays in international shipping.

There was evidence airfreight had taken up the slack from shipping where exports were concerned. The value of goods exported by ship was down 0.5 per cent in 2020 while those exported by air rose 5.6 per cent - the highest amount exported since 2015.

“That highlights two important things there: one, we exported a whole bunch more stuff using air, but also that difference in the values tells you that the air freight as well is a real high value, high price sort of area,” Olsen said.

Leggett noted it was a major subsidy for just one mode of freight transport, but said it was difficult to conceive of another option to the subsidy.

“The problem when a Government intervenes like this is it’s easy to step up and subsidise but it’s quite hard to withdraw the government support.”