Why is it so expensive to fly domestic?

Read part two of this series, where we investigate our concentrated market, shed light on competition issues in the sector, and explain what Australia is doing to protect its consumers. In the final part, we share the stories of regional New Zealanders affected by our concentrated domestic airline industry.

Rare are the days now where you can snap up a $60 one-way ticket a month out from flying. Instead, tickets that cost hundreds of dollars are the new normal.

A recent Consumer investigation found the cost to catch one Air New Zealand domestic flight had nearly quadrupled, with other flights anywhere from 34% to 178% more expensive in July 2024 than when they were originally booked in 2019 and 2020.

Stats NZ data confirms an increase, with domestic fares up 47% from the start of 2019 to 2023.

It's more expensive than ever to fly domestic

Change in domestic airfare cost, seasonally adjusted

Problem is, the higher ticket prices aren’t just hitting consumers harder in the wallet, they’re affecting the connectivity of entire regions across Aotearoa. But what’s the reason?

The runway to pricier flights

Covid-19 and subsequent inflation wreaked havoc on domestic airline operators and their costs. When the threat of Covid diminished, pent-up demand for travel came to a crescendo, and inflation meant it was more expensive than ever for airlines to operate. Ticket prices rose in response to demand and to cover an inflated cost-base.

How we got here isn’t just a story of pandemics and inflation, though.

The pandemic arrived mere months after Jetstar had pulled its regional operations in Aotearoa in November 2019. With little competition on regional routes, Air New Zealand might have been free to increase the price of tickets on these routes however it liked. Our investigation into price increases revealed it was flights on regional routes that saw the biggest increases from 2019 and 2020 to July 2024.

Even in the face of market challenges, like recovering from Covid-19, inflation, and paying back a sizable loan from the government, our national flag carrier posted one of its highest ever profits last financial year – $412 million, following a $591 million loss the year before.

Despite Air New Zealand forecasting a smaller profit for the 2023-2024 financial year, there's still good reason to question whether prices are fair.

Air New Zealand said its costs have risen more than 30% since 2020, while its domestic airfares have only increased by 22% on average. Our selection of flight comparisons showed there are much larger increases at play here, so what accounts for the difference?

Pricing isn’t transparent enough

While it may be impractical to list each component of an airfare at the checkout, we think consumers deserve to know exactly what they’re paying for. Simply being presented with the whole price for a single ticket isn’t enough.

When you book a trans-Tasman flight with Jetstar or Air New Zealand, you can access a breakdown of the fees and charges included in your ticket. It’s not comprehensive, but it gives consumers some information about what they’re paying for.

The same can’t be said for domestic flights operated by the same carriers, despite Air New Zealand claiming its fares are completely transparent.

We asked Jetstar and Air New Zealand if they could tell us what ticket prices covered. Neither airline could give us exact figures when it came to any of the costs that make up their base fares.

Jetstar said its ticket prices “comprise several elements, including a base fare, applicable airport and government charges, taxes and/or levies.”

We pushed for more information on the base fare component. Jetstar only pointed to airline costs such as fuel, employees, planes and other equipment.

Air New Zealand cited similar costs, including food and beverage, aviation security and air navigation charges. It said supply and demand also played a part in ticket prices. However, it wouldn't reveal any costs in detail, citing commercial sensitivities.

If there’s little clarity around base fares, there’s even less around the supply and demand part of a ticket price, which can change at only a moment’s notice. This is called dynamic pricing.

Dynamic pricing or price gouging?

Dynamic pricing, also called surge pricing, refers to airlines' practice of varying the price of tickets based on demand. Customers booking in-demand flights pay more than customers who book earlier.

Jetstar confirmed it used dynamic pricing. A spokesperson said, “Our prices vary based on a range of factors, including the level of demand, peak periods like school holidays and whether bookings include optional extras … we’re committed to ensuring we offer consistently low fares and choice to our customers.”

Air New Zealand declined to comment on its use of dynamic pricing practices.

Some commentary suggests dynamic pricing gives customers more choice. But anyone who has had to book a plane ticket on short notice knows dynamic pricing appears to reduce choices rather than enable them. Instead of dynamic pricing providing consumers with options, we think it provides Air New Zealand with a chance to bump up profit margins.

Each route operated by the carrier has 14 levels of fares called classes. This information is published on a version of Air New Zealand’s website designed for travel agents rather than consumers.

The data on the site shows a basic fare from Auckland to Dunedin, with no add-ons or checked bags, can cost anywhere from $109 in class 1 to $520 in class 14. This is for the exact same flight.

Booking later could cost you nearly 4 times as much

Air New Zealand basic seat-only fare from Auckland to Dunedin

What’s more, fares become more expensive when they’re indirect routes.

A direct flight from Auckland to Wellington won’t ever cost you more than $460, but the top price for an indirect Dunedin to Rotorua flight is over $200 more expensive at $688. It’s worse for regional airports, with the most expensive seat from Gisborne to Hokitika, an indirect route, coming in at over $900.

You'll pay more for a last-minute regional flight

Air New Zealand basic seat-only fares on selected regional routes compared to a direct Auckland to Wellington fare

While indirect routes are more expensive to fly, the pricing in each class increases at nearly double the rate than pricing in a direct route.

It’s unclear just how much Air New Zealand is making from the prices of tickets in the higher classes, or whether the inflated prices are fair or reasonable. Without any transparency, there’s concern that this pricing behaviour could be considered price gouging.

Capitalising on desperation

Cath O’Brien, executive director of the Board of Airline Representatives New Zealand, an industry representative body, said dynamic pricing makes sure everyone can access airfares.

“If all tickets were sold for a fixed price, early on, that would mean no tickets would be for sale when people needed to travel for last moment reasons.”

O’Brien explained it also allows people to fly on short notice or for an emergency, even if it might cost a lot more money than if the ticket had been purchased months in advance.

We asked if, rather than making some tickets so expensive that only a desperate consumer would buy one, reserving portions of tickets could achieve the same goal.

"I think if some kind of restriction on ticket sales was introduced, that would disincentivise airlines to operate in New Zealand – which could have catastrophic market effects," O'Brien said.

We wondered how an airline might use (or misuse) the knowledge that there will always be consumers who are willing to pay anything for a ticket. Whether you want to visit your grandmother on her death bed or catch up with a relative you haven’t seen in a while, the potential for a carrier to exploit your willingness to pay by inflating prices beyond what is fair is a real concern.

Air New Zealand rejected this suggestion, and emphasised it prides itself on "doing the right thing for Kiwis." It pointed to its compassionate fare policy and its discounted fares during Cyclone Gabrielle.

Yet, because information about profit and pricing rationale isn’t public, consumers can’t know for sure if what they're paying is fair.

Is what you’re paying fair?

Legally, a business can charge whatever price it likes for a good or service. Price gouging, and other predatory and discriminatory pricing practices like dynamic or personalised pricing, aren’t illegal. If a trader isn’t misleading you, or likely to mislead you, they’re in the green.

But increases in air fares over recent years, dynamic pricing practices and a lack of competition on regional routes means New Zealanders can no longer tell what a fair deal is. To dispel this doubt, we need greater transparency into the pricing practices and rationale and profits of our largest airlines, Air New Zealand and Jetstar.

Consumer is calling for:

• mandated breakdowns of the costs in a ticket at the checkout

• disclosure about airlines’ use of dynamic pricing and profits

• a market study to give consumers and the industry clarity about the factors impacting competition including pricing and price gouging.