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Thursday, January 27, 2011
An Auckland airport report estimates the airport corridor’s contribution to the economy for the next 20 years, but outrageously fails to even mention the future risks to the airline and tourism industries of higher oil prices and/or fuel shortages.
The report by Market Economics simplistically takes tourism and freight growth figures for past decades and projects these into the future. Based on these historic patterns it suggests a business as usual scenario where international and domestic travel will generate $17-24 billion by 2031, with a cumulative difference in growth between 2006 and 2031 of 19%.
But nowhere in the report -- I repeat nowhere -- is there any mention, let alone discussion, of the risks to the airline and tourism industries of rises in global oil prices in the next 20 years. As for the possibility of aviation fuel shortages, this is also completely beyond the pale for the report's authors.
Even under the "low growth" scenario, the protection is for the airport “corridor” to grow faster than the region by 10%. You will search in vain for any suggestion that there could be a no growth or negative growth scenario arising from a constrained world oil supply. And yet it was only in 2008 that scores of airlines went broke due to rapidly rising oil prices, and the numbers of tourists flying to New Zealand fell sharply.
These gaping holes in the analysis of the Auckland airport report mean it lacks any credibility. It seems to be following a trend evident in other recent reports -- for example a report by Venture Taranaki on the contribution of the oil and gas industry to the local and New Zealand economy, and the “head in the sand” approach of the government in its Energy Strategy and Defence White Paper. In all of these reports the impending oil shocks and possibility of fuel shortages are simply ignored.
There are dozens of credible reports available on which to base a more balanced approach.
Impacts of Oil Prices on New Zealand Tourism” by Susanne Becken, Mai Nguyen, and Aaron Schiff
Unlike the Airport report this paper provides a robust economic framework for understanding the effects of higher oil prices on New Zealand tourism.
The report makes the following cogent points:
1. In the tourism industry, the ability to substitute oil for other sources of energy is relatively low. This is particularly true in aviation, where the price of oil will continue to be a major cost driver for airlines and therefore a key determinant of the price of air travel for the foreseeable future. Recent efforts by Air New Zealand to use Jatropha as an aviation fuel may literally fall on stony ground. Jatropha a biofuel-producing plant once touted as a wonder-crop, is turning out to be much less dependable than first thought.
And there is zero prospect of electric planes.
The graph from the tourism report shows fuel costs as a percentage of commercial airlines’ operating costs and crude oil prices. Over the past decade, fuel has approximately doubled as a percentage of airline operating costs, in line with the change in oil prices over the same period. The close relationship between fuel costs and crude oil prices reflects the limited ability of airlines to reduce their fuel usage.
2. An examination of past oil shocks clearly demonstrate that countries that are net importers of oil have, and will experience lower incomes and other negative economic effects from higher oil prices.
3.Tourism is a luxury good and is therefore relatively income-elastic. Income changes have quite a large effect on the demand for international tourism, not only for trip generation, but also with respect to level of expenditure, length of stay and type of trip.
4.Long distance destinations are more dependent on high-income tourists than short haul destinations. There is a strong correlation between consumption spending in origin markets and tourist arrivals to New Zealand.
All of these factors, and many others identified in the tourism report, point to the New Zealand airline and tourism industries facing extremely turbulent times in the next 20 years. There is a very real chance that these industries will face zero or even negative growth in the years ahead. But investors or anyone alse reading the Auckland airport report will have no inkling of this possibility , and cannot help but be misled by its grossly ill-informed and over-optimistic projections.