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Keith Rankin: Transport Modes

Transport Modes

Keith Rankin, 5 September 2002

Two weeks ago I suggested that the airline industry was going through a transformation that would make it much like any other form of transport; for example like buses. Air New Zealand has travelled further down that road than its Goliath rival Qantas.

A better analogy than buses is passenger shipping, from inter-island ferries to inter-continental liners. In the 1960s the full-service model predominated, be it the Queen Elizabeth sailing from New York to Southampton, or the Wahine from Lyttleton to Wellington, or the Qantas V-jet. Then, in the 1970s, the global passenger shipping industry bifurcated into a basic sea-bus kind of operation on the one hand, and into a luxury cruise option on the other hand.

For long distance passenger shipping, the budget option turned out not to be a ship at all; it was a Boeing 747. Reduced service was only viable for journeys of 1 day or less. The 747 always had the potential to be more like a modern overnight passenger ferry than a full-service V-jet flight.

For the short-haul ferry market, the luxury option was tried, but was not viable. Full service ships like the Wahine and the Rangitira became just too expensive as labour costs climbed. This decade is proving to be, for aviation, the equivalent of the 1960s for passenger shipping.

There may be a small niche this century for a few luxury air carriers. Maybe Qantas could survive to 2050 and beyond by becoming the Cunard of the skies, specialising in long-distance first-class travel. I am sure there will be a market for luxury air travel. I am inclined to believe, however, that eventually Qantas will fall between the budget and the luxury stools, and, like Pan American, make way for others.

For the majority of us this century, air travel will be much like being on a roll-on roll-off ferry. Some of the same safety issues will have to be confronted. Air New Zealand is, this month, having to confront them sooner than expected. Systems failures and design short-comings, caused in part by cost-saving innovations, have led to a number of shipping tragedies that were worse than any air crash. For example the sinking of the Estonia in the Baltic, with the loss of over 900 lives; and the Doña Paz in the Philippines with 4,000 dead, more than the 11 September 2001 death toll. The route to sustainable low cost production is not without turbulence.

Does it make a difference if a transport operator is government owned?

Yes, but in some modes more than others. Actually, it turns out that rail is the transport mode that is most different from the others, thanks to the intimate relationship between the trains and the rails. Rail privatisation on the British model has been a total disaster. And it's only a matter of time before the New Zealand rail system is renationalised.

A passive government part-owner will let the other main owner make the key decisions, while limiting competition to protect its revenue. The goal will be to make monopoly profits. That's no solution.

But what about an activist government that is the full owner of, say, a railway? A private owner seeks to maximise its profits. An economically rational government will likewise seek to maximise the net revenue that accrues to it from its operation of the railway. But not all that revenue will be receipts from the customers of the railway. Part of the government's rail revenue will come in the form of taxes.

A cheap, well-managed, reliable and safe railway will generate growth in other parts of the economy. In the development jargon, the process is known as forward linkage. A cheap reliable and convenient rail service will both attract customers from other transport modes and facilitate business formation. The income and company taxes generated by those new and expanding businesses will be the additional revenue that makes a low price high volume railway strategy also a profit maximising strategy for government. A private operator following the same strategy may well fail, because any forward linkage activity would generate revenue only for the government, and not for the operator.

A private rail operator can only maintain profits over a long period of time by thwarting competition or avoiding costs. It cannot capture the full return of investments in improved track, trains, and services. So it will not invest much in improved track, trains, and services. Safety will be more compromised by financially stressed private operations than by government-owned and managed operations pursing a sustainable low-cost net revenue maximising strategy.

The logic that applies to Tranzrail can also be applied to Air New Zealand at present. If a government owned airline can invest in such a way that services become both cheaper and better (including better safety and reliability) then the bulk of the return on that investment can come from the taxes generated from forward linkage activities. Indeed the Government might even be able to maximise its total returns by running some or all of the transport modes it owns at a loss. (That may even be true for other government operations - eg Kiwibank - that have significant forward linkage potential.)

In most transport modes - including the air buses and air ferries of the future - operators will reduce their prices as a result of competitive pressure. Those forward linkage tax benefits will take place without the government having to own and actively manage the principal transport operations. Creating such competition between rival rail operators does not and cannot work, however.

It is up to government to ensure that all transport modes are run in such a way that all of the consequential revenues are accounted for. Private operators (like Tranzrail or Qantas) will not generally operate in such a way, because those operators themselves cannot capture many of the benefits that would accrue from a reliable no-frills transport sector.

© 2002 Keith Rankin

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