How the Recession Affected Air New Zealand

Recession defined by Investopedia (2010) is ‘a significant decline in activity across the economy, lasting longer than a few months. ’ With the fall of the US banking system in late 2007 came the recession which lasted all until the present day; we are now currently steadily recovering. But during the recession many countries suffered as did New Zealand, out of the companies that were affected, among them was Air New Zealand one of New Zealand’s biggest companies. The impacts of inflation causing raised CPI, the rise and fall of supply and demand, and unemployment are just some of the causes from recession.

These impacts have a huge shock on the society, such as the effects on the general people. Air New Zealand Ltd (2010) is an Auckland based, New Zealand owned airline which was originally incorporated in 1940 as Tasman Empire Airways Ltd (TEAL), then in 1965 the New Zealand government took ownership and thus renaming it to Air New Zealand. The airline was then largely privatised in 1989 until in 2001 it returned to a majority government ownership after a failed attempt at a merger with Ansett Australia.

In 1999 Air New Zealand successfully became a member of the Star Alliance global airline alliance. Gans, J. , King, S. , Stonecash, R. , Mankiw, G. , (2008) explains that the consumer price index (CPI) is the measure of the overall price of goods and services purchased by consumers from one year to the next, so as the CPI rises so does the expenditure of a household. In recent studies by Statistics NZ (n. d) it describes the steadily rising CPI since 2007 from just over 3,500,000 to a little over 3,800,000 present day.

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It also shows that the number of domestic flights have fallen from just over 3,750,000 in 2007 to around 3,300,000 present day with a slight rise of around 275,000 between 2008 and 2009, while international flights have been steady with 1,250,000 in 2007 until present day with a drop of nearly 500,000 during late 2008 and early 2009 but is now steadily rising. CPI is a measure of inflation, which Gans, J. , King, S. , Stonecash, R. , Mankiw, G. , (2008) defines as the rise in prices of goods and services in an economy over a period of time, so when the price level rises each unit of capital allows to buy fewer and fewer goods and services.

The effect of the recession means more expenses allowing less money for leisure causing the fall in flight passengers. Although CPI does not include the introduction of new goods, such as the introduction of the new and cheaper airline Jetstar, the figures above may not only be caused by recession but by competition too. During the recession Air New Zealand had many cut backs, one of the main cut backs was the amount of flights. Karen Goodger (2010) had quoted Air NZ link operator Air Nelson when he stated that Air New Zealand had cut back on flights during the recession and had not resumed since.

In recent studies, David Hargreaves (2009) shows that in the month of April there were 971,000 passengers, down 5. 7% from the same month the year before. It was because of the cut backs on flights that the prices increased, and because of the price increase there’s less demand, resulting in less flights. Gans, J. , King, S. , Stonecash, R. , Mankiw, G. (2008) states that in the law of demand it claims that, other things being equal, the quantity demanded of a good falls when the price of the good rises. Andy Booth, a businessman paid more than $800 for both his and his wife’s ticket to Wellington, he had called the price ‘immoral. (Karen Goodger 2010).

Gans, J. , King, S. , Stonecash, R. , Mankiw, G. , (2008) also states that in the law of supply it claims that, other things being equal, the quantity supplied of a good rises when the price of good rises. Taking into account both the law of supply and demand, Air New Zealand raising the prices means that the demand for flights decrease and the supply increases resulting in more seats and fewer customers, creating a surplus of goods. Another major crisis in Air New Zealand was the staffing, again during the recession Air New Zealand had to make a lot of workers redundant as they could no longer afford their salaries.

With the goal of doing everything to minimise the risk of job losses Air New Zealand freezes pay (2010) stated that Air New Zealand even had to freeze the pays of the staff that earn annually more than $80,000 effecting just under 10% of staff that is on top of the 280 job cuts that is scheduled. Gans, J. , King, S. , Stonecash, R. , Mankiw, G. , (2008) declares that this follows the theory of cyclical unemployment, which occurs when the economy does not have enough aggregate demand to provide jobs for the unemployed.

It’s when demand for goods decreases and less production is needed, resulting in needing fewer workers, meaning wages are tight and do not meet the equilibrium level, thus resulting in mass unemployment. With cyclical unemployment there are more unemployed workers than the amount of job vacancies so that even if all the vacancies are filled, there is still an excess amount of the unemployed. Because of the recession demand for goods and services will fall and supply will gradually increase, ultimately stores will lose in revenue, making jobs redundant.

Unemployment has a huge impact on the society as workers that are made redundant have families that are dependent on their wages, without it they may no longer afford their necessities putting their families through hardship; this could possibly put a big strain on relationships. Having no longer being able to pay for day to day supplies, individuals will eventually apply for a government supplement and go on the benefit. If there are more of the unemployed then there are job vacancies, then the number of individuals applying for the benefit will also increase, thus then creating a strain on the government.

As I would imagine, during the recession the government itself would also be going through hardship, and increasing numbers of applications for the benefit will only add to the financial crisis. This will then lead to the government not having enough money to pay for the unemployed, and would then need to make money in the form of increasing taxes or GST, thus creating a strain for the people of New Zealand as families are already only just getting by because of inflation and increasing CPI, to add on top of that the increase in tax or GST will only make it that much harder for average households.

This could then eventually cause more families to apply for additional support consequently creating a cycle leading the country, in the long run, into bankruptcy. As more passengers fly domestically rather than internationally my recommendation to Air New Zealand is to increase their domestic flight numbers and make them cheaper, and to decrease the amount international flights but bring the price up, so that individuals that do have the extra leisure money for travel, they can spend it without it costing a fortune and cheaper prices attract more customers.

Since majority of passengers fly domestically, Air New Zealand could also work together with several accommodation places in different areas to offer a package deal as it is easier for passengers to book without going through the hassle of finding accommodation when they arrive at their destination. As for job losses, I suggest pay cuts, more for those who earn more and less for those who earn less and to notify staff in advance about pay cuts. By following these simple steps we then wouldn’t be faced with unemployed individuals and with cheaper domestic flights, people can still have the holiday they wanted just a little closer to home.

References

http://www.stuff.co.nz/business/4081585/Air-NZ-plans-more-domestic-flights-and-bigger-planes

http://www.stuff.co.nz/nelson-mail/news/3444020/Air-NZ-fares-to-capital-too-high

http://www.stuff.co.nz/business/industries/2420321/Air-New-Zealand-freezes-pay

http://www.stuff.co.nz/business/2457106/Air-NZ-cuts-services

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